<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
Amendment No. 1 to Form 8-K filed on October 18, 1999 (Date of earliest event
reported was October 1, 1999)
ZMAX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 000-23967 52-2040275
- ---------------------------- ------------ -----------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
20251 Century Boulevard, Germantown, MD 20874
- ---------------------------------------- ----------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (301) 353-9500
--------------
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Current Report on Form
8-K, filed on October 18, 1999, as set forth in the pages attached hereto:
Item 7(a) - Financial Statements
Item 7(b) - Pro Forma Financial Information
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZMAX CORPORATION
December 15, 1999 By: /s/ MICHAEL C. HIGGINS
------------------------
Michael C. Higgins
President
<PAGE> 2
The Current Report on Form 8-K of ZMAX Corporation (the
"Registrant"), dated October 1, 1999, and filed on October 18, 1999, reported
the acquisition by the Registrant of 100% of the issued and outstanding shares
of capital stock of Parker Management Consultants, Ltd., a Delaware corporation
("Parker"), through (i) the payment to the sole shareholder of Parker of up to
$1,500,000 in cash, subject to post-closing adjustments; (ii) the issuance to
the sole shareholder of Parker of a three-year promissory note in the principal
amount $3,000,000; and (iii) the issuance to the sole shareholder of Parker of a
warrant to purchase 200,000 shares of the Company's common stock, par value
$.001 per share (the "Common Stock"), for the purchase price of $5.00 per share.
Item 7 of the report stated that the following financial information would be
filed not later than 60 days after the date on which the Form 8-K was required
to be filed: (i) the financial statements required under Item 7(a) of Form 8-K
and Rule 3-05(b) of Regulation S-X and (ii) the pro-forma financial information
required under Item 7(b) of Form 8-K and Article 11 of Regulation S-X. The
purpose of this amendment is to file such financial statements and information.
Item 7. Financial Statements, Proforma Financial Information and Exhibits.
<TABLE>
<CAPTION>
a. Financial Statements of Parker. The following historical financial statements of Parker are attached hereto:
------------------------------
(1) Financial Statements of Parker: Page
------------------------------ ----
<S> <C>
Report of Independent Accountants....................................................................................... 1
Balance Sheets as of June 30, 1999 (Unaudited),
December 31, 1998 and 1997......................................................................................... 2
Statements of Income for the six months ended June 30, 1999 and 1998
Unaudited), and the years ended December 31, 1998 and 1997......................................................... 3
Statements of Changes in Shareholder's Equity for the six months
ended June 30, 1999 (Unaudited), and the years ended
December 31, 1998 and 1997........................................................................................ 4
Statements of Cash Flows for the six months ended June 30, 1999 and
1998 (Unaudited), and the years ended December 31, 1998 and 1997................................................... 5
Notes to Financial Statements........................................................................................... 6
b. Pro Forma Financial Information. The following pro forma financial information is attached hereto:
-------------------------------
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1999 (Unaudited) ........................................ 15
Pro Forma Condensed Consolidated Statements of Operations for the six months ended June 30, 1999
(Unaudited)....................................................................................................... 16
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1998
(Unaudited)........................................................................................... 17
Notes to Condensed Consolidated Pro Forma Financial Statements (unaudited)................................. 21
</TABLE>
<PAGE> 4
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 (UNAUDITED), AND DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Parker Management Consultants, Ltd., and Affiliate:
We have audited the accompanying combined balance sheets of Parker Management
Consultants, Ltd., and Affiliate (a Delaware Corporation) as of December 31,
1998 and 1997, and the related combined statements of income, changes in
shareholders' equity, and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Parker Management
Consultants, Ltd., and Affiliate as of December 31, 1998 and 1997, and the
results of their combined operations and their combined cash flows for the years
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Vienna, Virginia
November 9, 1999
<PAGE> 6
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
COMBINED BALANCE SHEETS
AS OF JUNE 30, 1999 (UNAUDITED), AND DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
JUNE 30 DECEMBER 31
------------- ---------------------------
1999 1998 1997
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 241,640 $ 246,208 $ 163,442
Accounts receivable, net of allowance of $17,037, $17,037, and $0 589,052 869,756 526,732
Note receivable 292,964 - -
Prepaid and other current assets 11,477 5,757 104
---------- ---------- ----------
Total current assets 1,135,133 1,121,721 690,278
FIXED ASSETS, net 21,981 20,481 14,147
OTHER ASSETS 6,289 80,474 79,260
---------- ---------- ----------
Total assets $1,163,403 $1,222,676 $ 783,685
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 70,129 $ 309,862 $ 216,175
Accrued expenses 122,786 181,981 55,755
Deferred revenue 70,060 - -
Deferred income tax liability - 52,200 89,200
Other current liabilities 39,971 63,400 89,364
---------- ---------- ----------
Total current liabilities 302,946 607,443 450,494
---------- ---------- ----------
Total liabilities 302,946 607,443 450,494
---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Parker Management Consultants, Ltd., common stock,
$0.01 stated value; 15,000 shares authorized; 1,900,
1,900, and 1,300 shares issued and outstanding as of
June 30, 1999, December 31, 1998 and 1997,
respectively 19 19 13
IDC Systems, Ltd., common stock, no par value; 1,500
shares authorized; 800 shares issued and outstanding as
of June 30, 1999, December 31, 1998 and 1997 - - -
Additional paid-in capital 32,989 32,989 2,995
Retained earnings 827,449 582,225 330,183
---------- ---------- ----------
Total shareholders' equity 860,457 615,233 333,191
---------- ---------- ----------
Total liabilities and shareholders' equity $1,163,403 $1,222,676 $ 783,685
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
<PAGE> 7
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30 DECEMBER 31
------------------------------ -----------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Service $ 2,372,326 $ 2,290,764 $ 4,430,490 $ 2,304,975
Product - - - 2,058,000
----------- ----------- ----------- -----------
2,372,326 2,290,764 4,430,490 4,362,975
OPERATING EXPENSES:
Cost of service revenue 1,583,673 1,544,378 3,161,480 2,031,765
Cost of product revenue - - - 1,965,213
Sales and marketing 89,437 81,954 207,310 222,399
General and administrative 227,751 258,209 609,553 359,820
Depreciation and amortization
3,848 4,104 8,105 8,217
----------- ----------- ----------- -----------
1,904,709 1,888,645 3,986,448 4,587,414
INCOME (LOSS) FROM OPERATIONS 467,617 402,119 444,042 (224,439)
OTHER (EXPENSE) INCOME (53) 5,180 5,383 112,080
----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for
income taxes 467,564 407,299 449,425 (112,359)
PROVISION (BENEFIT) FOR INCOME TAXES 149,340 76,752 133,683 (56,490)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 318,224 $ 330,547 $ 315,742 $ (55,869)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
<PAGE> 8
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
PARKER MANAGEMENT
CONSULTANTS, LTD. IDC SYSTEMS, LTD.
COMMON STOCK COMMON STOCK
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- -------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 1,300 $ 13 800 $ -
Net income - - - -
----- --------- --- ----
BALANCE AT DECEMBER 31, 1997 1,300 13 800 -
Sale of stock 600 6 - -
Distributions to IDC owner - - - -
Net income - - - -
----- --------- --- ----
BALANCE AT DECEMBER 31, 1998 1,900 19 800 -
Distributions to IDC owner (unaudited) - - - -
Net income (unaudited) - - - -
----- --------- --- ----
BALANCE AT JUNE 30, 1999 (unaudited) 1,900 $ 19 800 $ -
===== ========= === ====
</TABLE>
<TABLE>
<CAPTION>
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 2,995 $ 386,052 $ 389,060
Net income - (55,869) (55,869)
--------- --------- ---------
BALANCE AT DECEMBER 31, 1997 2,995 330,183 333,191
Sale of stock 29,994 - 30,000
Distributions to IDC owner - (63,700) (63,700)
Net income - 315,742 315,742
--------- --------- ---------
BALANCE AT DECEMBER 31, 1998 32,989 582,225 615,233
Distributions to IDC owner (unaudited) - (73,000) (73,000)
Net income (unaudited) - 318,224 318,224
--------- --------- ---------
BALANCE AT JUNE 30, 1999 (unaudited) $ 32,989 $ 827,449 $ 860,457
========= ========= =========
</TABLE>
<PAGE> 9
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 318,224 $ 330,547
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 3,848 4,104
Conversion of account receivable to note receivable (292,964) -
Deferred income tax liability (52,200) (69,200)
Changes in assets and liabilities:
Accounts receivable, net 280,704 (489,972)
Prepaid and other current assets (5,720) 24,676
Other assets 74,185 (28,009)
Accounts payable (239,733) 154,321
Accrued expenses (59,195) (55,755)
Deferred revenue 70,060 -
Other current liabilities (23,429) 28,478
--------- ----------
Net cash provided by (used in) operating
activities 73,780 (100,810)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (5,348) (12,942)
--------- ----------
Net cash used in investing activities (5,348) (12,942)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock - 30,000
Distributions to owner (73,000) (43,700)
--------- ----------
Net cash used in financing activities (73,000) (13,700)
--------- ----------
NET (DECREASE) INCREASE IN CASH (4,568) (127,452)
CASH, beginning of year 246,208 163,442
--------- ----------
CASH, end of year $ 241,640 $ 35,990
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ - $ 94
========= ==========
Cash paid for income taxes $ 85,344 $ 8,100
========= ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 315,742 $ (55,869)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 8,105 8,217
Conversion of account receivable to note receivable - -
Deferred income tax liability (37,000) (63,410)
Changes in assets and liabilities:
Accounts receivable, net (343,024) 124,811
Prepaid and other current assets 21,142 (5,075)
Other assets (28,009) (21,991)
Accounts payable 93,687 (97,274)
Accrued expenses 126,226 (16,908)
Deferred revenue - -
Other current liabilities (25,963) 76,193
--------- ---------
Net cash provided by (used in) operating
activities 130,906 (51,306)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (14,440) -
--------- ----------
Net cash used in investing activities (14,440) -
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock 30,000 -
Distributions to owner (63,700) -
--------- ---------
Net cash used in financing activities (33,700) -
--------- ---------
NET (DECREASE) INCREASE IN CASH 82,766 (51,306)
CASH, beginning of year 163,442 214,748
--------- ---------
CASH, end of year $ 246,208 $ 163,442
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 94 $ 3,189
========= =========
Cash paid for income taxes $ 8,100 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
<PAGE> 10
PARKER MANAGEMENT CONSULTANTS, LTD., AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 (UNAUDITED), AND DECEMBER 31, 1998 AND 1997
1. ORGANIZATION:
Parker Management Consultants, Ltd. ("Parker" or the "Company"), was
incorporated in 1993 under the laws of the state of Delaware.
The Company performs management and information systems consulting services.
Prior to 1998, the Company also sold certain hardware and software products to
its customers. Included in these combined financial statements are the operating
results of IDC Systems ("IDC"), a company incorporated in 1993 under the laws of
the state of Delaware and wholly owned by Ken Parker, the majority shareholder
of the Company. IDC has a contract with one customer and acts as a pass-through
organization for which Parker provides subcontracting services. IDC was included
as part of the sale to ZMAX (see Note 11) and thus has been combined for
purposes of these combined financial statements. IDC is an "S" corporation for
income tax purposes, and as a result, the tax effects of its earnings and losses
are not included in these financial statements.
The Company's operations are subject to certain risks and uncertainties,
including, among others, rapidly changing technology and markets, current and
potential competitors with greater financial, technical, and marketing
resources, reliance on certain significant customers and dependence on key
management personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet as of June 30, 1999, and the
accompanying combined statements of operations and cash flows for the six months
ended June 30, 1998 and 1999, are unaudited. The unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair presentation of such
financial statements. The data disclosed in the notes to the financial
statements for these periods is unaudited. The results of operations for the six
months ended June 30, 1999, are not necessarily indicative of the results for
the entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting
<PAGE> 11
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues from time-and-materials contracts are recognized based on fixed hourly
rates for direct labor hours expended plus specified direct costs. Revenues from
fixed-price contracts are recognized on the percentage-of-completion method,
with costs and estimated profits recorded as work is performed. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, and estimated
profitability, including final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Revenue from product sales are recognized upon shipment. Revenue
from maintenance and support service is recognized evenly over the term of the
support agreement.
SIGNIFICANT CUSTOMERS
During 1998, three customers individually represented 25, 21, and 18 percent of
revenue, respectively. During 1997, two customers individually represented 39
and 12 percent of revenue, respectively. During the six months ended June 30,
1999, three customers individually represented 40, 24, and 10 percent of
revenue, respectively. Due to the Company's business and the relative size of
certain contracts, the loss of any single significant customer could have a
material adverse effect on the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. As of December 31,
1998, cash equivalents consisted of funds in money market accounts.
DEFERRED REVENUE
In the event that the Company receives payment for services prior to the
completion of those services, the Company defers such revenues until properly
recognizable under the stated revenue recognition policies described above.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets and liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. SFAS No. 109
<PAGE> 12
requires that the net deferred tax asset be reduced by a valuation allowance if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the net deferred tax asset will not be realized.
3. FIXED ASSETS:
Fixed assets are carried at cost and depreciated over their estimated useful
lives, ranging from three to seven years, using the straight-line method.
Capital leases and leasehold improvements are depreciated using the
straight-line method over their estimated useful lives or the term of the lease,
whichever is shorter.
Fixed assets as of June 30, 1999, and December 31, 1998 and 1997, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -------------------------
1999 1998 1997
----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and office equipment $ 22,327 $ 22,327 $ 7,888
Computer equipment and software 28,786 23,438 23,437
-------- -------- --------
51,113 45,765 31,325
Accumulated depreciation and amortization (29,132) (25,284) (17,178)
-------- -------- --------
Net fixed assets $ 21,981 $ 20,481 $ 14,147
======== ======== ========
</TABLE>
4. NOTE RECEIVABLE
During late 1996, the Company loaned $40,000 to Congressional Air, Ltd., an
independent third party, with interest accruing at 8.0 percent per annum. Under
the terms of the loan, payment of the loan would be payable in 60 equal monthly
payments of principal and interest once notice was given by the Company to
Congressional Air, Ltd. In February 1999, the loan, including interest, was
transferred from Congressional Air, Ltd., to Parker Aero, Ltd., a related party.
Again, payment of the loan was not required until requested by the Company.
Due to the inherent uncertainty regarding the collectibility of this loan and
its eventual forgiveness by management in September 1999, this asset was written
off during 1996 and interest income was never recorded on this loan.
In June 1999, the Company entered into a note receivable for $299,786 with one
of its customers that was having difficulty paying the balance owed to the
Company. This note accrues interest at 10.0 percent per annum and is being paid
in monthly installments of $30,000. As a result of this transaction, $299,786
was transferred from accounts receivable to a note receivable during 1999.
5. SPLIT-DOLLAR LIFE INSURANCE POLICY
During December 1995, the Company entered into a split-dollar life insurance
policy with
<PAGE> 13
Lincoln Benefit Life and a shareholder of the Company. Under this
insurance policy, the Company was required to pay the annual premiums of $25,000
to the insurance company to insure the shareholder. Meanwhile, the policy was
owned by the shareholder, but the Company was assigned an interest in the policy
equal to its cash outlay for the premiums.
The Company paid $75,000 in premiums through December 31, 1998; however, in
February 1999, the Company released its assignment in the policy to the
shareholder for $5. Prior to the release of the assignment, the Company recorded
the lesser of the cash surrender value of the policy or the Company's interest
in the policy as an asset on its books, with the difference recorded as a
general and administrative expense. Upon release of the assignment, the Company
recorded a loss of $74,995 within other income on the income statement for the
difference between the cash surrender value and the sale price.
6. COMMON STOCK:
COMMON STOCK ISSUANCES
The Company has 15,000 shares of common stock authorized with a par value of
$0.01. As of December 31, 1997, there were 1,300 shares of common stock
outstanding, all of which were held by various members of the Parker family.
During early 1998, Ken Parker purchased an additional 600 shares of common stock
for $30,000, bringing the total outstanding shares of common stock as of
December 31, 1998 to 1,900. As of July 1, 1998, all the outstanding shares of
common stock were transferred from the members of the Parker family to The
Westmont Non-Grantor Trust.
RETIREMENT OF COMMON STOCK
In April 1996, the Company issued 138 shares of common stock, approximately 10
percent of the Company's outstanding stock at the time, to Jade Planet, Inc.
("Jade"), in exchange for 96 shares of Jade common stock, approximately 50
percent of Jade's outstanding stock at the time. In November 1996, Jade ceased
operations and the Company repurchased and retired its 138 shares of common
stock for $10,000, concurrently a loss of $10,000 was recognized on the
investment.
7. PROFIT-SHARING PLAN:
The Company has a 401(k) tax deferred savings plan for the benefit of
substantially all employees. The plan provides for contributions by employees
and allows the Company to make a discretionary contribution. In March 1999, the
Company amended this plan to provide for a matching employer contribution of 50
percent of the employees first 6 percent of contributions. During 1997 and 1998,
the Company did not make a discretionary contribution. For the six months ended
June 30, 1999, the Company made contributions of $23,288.
<PAGE> 14
8. TAXES:
The income tax provision (benefit) for the years ended December 31, 1997 and
1998, is composed of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
Income tax provision (benefit):
Current-
Federal $ 139,746 $ 4,543
State 30,937 2,377
--------- ---------
170,683 6,920
--------- ---------
Deferred-
Federal (30,395) (48,666)
State (6,605) (14,744)
--------- ---------
(37,000) (63,410)
--------- ---------
$ 133,683 $ (56,490)
========= =========
</TABLE>
The provision for income taxes results in effective rates that differ from the
federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Statutory federal income tax rate 35.0% 35.0%
Effect of graduated rates (3.5) (10.6)
State income taxes, net of federal tax benefit 4.6 4.6
Other 2.2 2.2
---- ----
38.3% 31.2%
==== ====
</TABLE>
The deferred tax assets (liabilities) consist of the following as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Write-off of note receivable $ 15,200 $ 15,200
Accruals and reserves 11,390 6,580
Prepaid insurance - 7,866
--------- ---------
Total deferred tax assets 26,590 29,646
--------- ---------
Deferred tax liabilities:
Deferred revenues (68,828) (114,571)
Depreciation (7,200) (4,275)
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C>
Prepaid insurance (2,762) -
--------- ---------
Total deferred tax liabilities (78,790) (118,846)
--------- ---------
Net deferred tax liability $ (52,200) $ (89,200)
========= =========
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
The Company has entered into an agreement with Parker Aero, Ltd. ("Parker
Aero"), an enterprise wholly owned by Ken Parker. Parker Aero provides
transportation services to the Company for business travel. The Company paid a
total of $64,434 and $58,279 for the years ended December 31, 1998 and 1997,
respectively, to Parker Aero for business travel for Company personnel. The
Company also had a note receivable from Parker Aero, which is described in Note
4.
Jennifer Parker, a shareholder of the Company, provides marketing services to
the Company in the capacity of an independent contractor. She is the sole
employee of Parker Marketing, an entity that has entered into an oral agreement
with the Company to provide marketing services. According to the agreement,
Parker Marketing is to be paid $40,000 per year plus a discretionary commission
for marketing services provided. The Company incurred approximately $48,846 and
$26,923 in consulting expenses for services rendered by Parker Marketing for the
years ended December 31, 1998 and 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has various leasing arrangements for office space, equipment, and
vehicles. Rental expense related to operating leases was approximately $83,532,
$89,935, $48,556 and $44,153 for the years ended December 31, 1998 and 1997, and
the six months ended June 30, 1999 and 1998, respectively.
The future minimum lease obligations under operating leases as of December 31,
1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 OPERATING LEASES
----------- ----------------
<S> <C>
1999 $29,629
2000 9,844
2001 507
2002 -
--------
Total $39,980
========
</TABLE>
LITIGATION
In February 1999, the Company reached a settlement with a subcontractor related
to work
<PAGE> 16
performed in 1997 and 1998 wherein the Company was required to pay
approximately $44,000 and was released from all liability related to the work
performed by the subcontractor.
In March 1999, the Company reached a settlement with a company for which it had
acted as a subcontractor related to work performed in 1996 and 1997. Under the
terms of the settlement, Parker received approximately $73,500. In each instance
described above, the Company recognized revenues and expenses equal to the
ultimate amounts of the settlements at the time the work was performed.
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company, and adequate provision for any potential losses has been
made in the accompanying combined financial statements.
CONTRACTUAL COMMITMENTS
The Company periodically enters into contractual commitments that extend beyond
one year or into different calendar years and occasionally offers warranties for
its services. In the opinion of management, an adequate provision has been made
for any potential liabilities arising from warranty or other contractual
obligations.
11. SUBSEQUENT ACQUISITION:
On October 1, 1999, ZMAX acquired all the issued and outstanding common stock of
Parker in exchange for $1.5 million in cash, a $3.0 million promissory note, and
a warrant to purchase 200,000 shares of ZMAX common stock at $5.00 per share. On
October 1, 1999, ZMAX also acquired all the outstanding stock of IDC for
$10,000.
<PAGE> 17
PARKER MANAGEMENT CONSULTANTS, LTD.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed combined balance sheet under the
heading "Pro Forma ZMAX and Parker" gives effect to the acquisition of Parker
Management Consultants, Ltd., and Affiliate ("Parker"), for cash, including
estimated direct acquisition costs of $225,000, of approximately $1.735 million
(of which $150,000 is potentially subject to post-closing adjustments), a
$3,000,000 promissory note payable, and a warrant to purchase 200,000 shares of
ZMAX common stock at $5.00 per share, as if the acquisition had occurred on June
30, 1999.
The unaudited pro forma condensed combined statements of operations for the six
months ended June 30, 1999 under the heading "Pro Forma ZMAX and Parker" also
gives effect to the Parker acquisition as if it had occurred on January 1, 1998.
The unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1998 give effect to (a) the Eclipse Information Systems, Inc.
("Eclipse") acquisition under the heading "Pro Forma ZMAX and Eclipse" and (b)
the acquisition of Parker under the heading "Pro Forma ZMAX, Eclipse and Parker"
as if each had occurred on January 1, 1998.
The Eclipse and Parker acquisitions have been accounted for by the purchase
method of accounting. The purchase price has been allocated on a preliminary
basis to the assets and liabilities acquired based upon the estimated fair value
of such assets and liabilities.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. This information should be read in conjunction with the notes
included herein, the Parker Management Consultants, Ltd. and Affiliate Financial
Statements included herein, the Eclipse Information Systems Inc. Financial
Statements filed on Form 8-K on March 1, 1999, and the ZMAX consolidated
financial statements included in the Company's Form 10-Q for the quarter ended
June 30, 1999 and Form 10-K for the year ended December 31, 1998.
In the opinion of management of ZMAX Corporation, all adjustments have been made
that are necessary to present fairly the unaudited pro forma condensed combined
consolidated statements. The unaudited pro forma condensed combined consolidated
financial statements do not purport to represent what the combined Company's
results of operations or financial position actually would have been had this
transaction occurred on the dates specified, or to project the combined
Company's results of operations or financial position for any future period or
date. Because the
<PAGE> 18
entities were not under common control or management, historical consolidated
results may not be comparable to, or indicative of, future performance.
<PAGE> 19
ZMAX CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Historical
ZMAX Parker
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,242,489 $ 241,640
Accounts receivable 4,605,506 589,052
Prepaid expenses and other asset 308,383 11,477
------------ ------------
Total current assets 9,156,378 842,169
Property, plant and equipment, net 598,791 21,981
Intangible assets, net 8,886,654 -
Other assets 85,582 299,253
------------ ------------
Total assets $ 18,727,405 $ 1,163,403
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,107,810 $ 192,915
Current portion of note payable - -
Deferred revenue - 70,060
Current portion of capital lease
obligations 33,832 -
Other current liabilities - 39,971
------------ ------------
Total current liabilities 2,141,642 302,946
Note payable, net of current portion - -
Capital lease obligations, net of current
portion 53,602 -
------------ ------------
Total liabilities 2,195,244 302,946
Stockholders' equity:
Common stock 13,117 19
Stock warrants 704,000 -
Additional paid-in capital 41,059,101 32,989
Accumulated deficit (25,244,057) 827,449
------------ ------------
Total stockholders' equity 16,532,161 860,457
------------ ------------
Total liabilities and stockholders'
equity $ 18,727,405 $ 1,163,403
============ ============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Pro Forma ZMAX and
Adjustments Parker
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ (1,510,000)(A) $ 2,974,129
Accounts receivable - 5,194,558
Prepaid expenses and other asset - 319,860
------------ ------------
Total current assets (1,510,000) 8,488,547
Property, plant and equipment, net - 620,772
Intangible assets, net 3,895,043 (B) 12,781,697
Other assets - 384,835
------------ ------------
Total assets $ 2,385,043 $ 22,275,851
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 225,000(C) $ 2,525,725
Current portion of note payable 1,000,000(D) 1,000,000
Deferred revenue - 70,060
Current portion of capital lease
obligations - 33,832
Other current liabilities - 39,971
------------ ------------
Total current liabilities 1,225,000 3,669,588
Note payable, net of current portion 1,880,000(D) 1,880,000
Capital lease obligations, net of current
portion - 53,602
------------ ------------
Total liabilities 3,105,000 5,603,190
Stockholders' equity:
Common stock (19)(E) 13,117
Stock warrants 140,500 (E) 844,500
Additional paid-in capital (32,989)(E) 41,059,101
Accumulated deficit (827,449)(E) (25,244,057)
------------ ------------
Total stockholders' equity (719,957) 16,672,661
------------ ------------
Total liabilities and stockholders'
equity $ 2,385,043 $ 22,275,851
============ ============
</TABLE>
<PAGE> 20
ZMAX CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Historical
ZMAX Parker
<S> <C> <C>
Revenues
Professional services $ 11,291,378 $ 2,372,326
Software 893,998 -
------------ ------------
Total revenues 12,185,376 2,372,326
Operating Expenses:
Cost of revenues-Professional
services 5,167,508 1,583,673
Cost of revenues-Software 39,733 -
Research and development 280,170 -
Sales and marketing 1,217,326 89,437
General and administrative 3,968,420 227,751
Amortization and depreciation 821,202 3,848
------------ ------------
Income from operations 691,017 467,617
Other income (expense):
Interest income 68,578 -
Interest expense (4,497) -
Other (2,990) (53)
------------ ------------
Net income before income tax expense 752,108 467,564
Income tax expense - 149,340
Net income $ 752,108 $ 318,224
============ ============
Basic net income per share $ 0.06
============
Diluted net income per share $ 0.06
============
Shares used in computing basic net income per share 12,949,913
============
Shares used in computing diluted net income per share 13,034,804
============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Pro Forma ZMAX and
Adjustments Parker
<S> <C> <C>
Revenues
Professional services $ - $ 13,663,704
Software - 893,998
------------ ------------
Total revenues - 14,557,702
Operating Expenses:
Cost of revenues-Professional
services - 6,751,181
Cost of revenues-Software - 39,733
Research and development - 280,170
Sales and marketing - 1,306,763
General and administrative - 4,196,171
Amortization and depreciation 129,835(F) 954,885
------------ ------------
Income from operations (129,835) 1,028,799
Other income (expense):
Interest income - 68,578
Interest expense (120,000)(G) (124,497)
Other - (3,043)
------------ ------------
Net income before income tax expense (249,835) 969,837
Income tax expense (149,340)(H) -
Net income $ (100,495) $ 969,837
============ ============
Basic net income per share $ 0.07
============
Diluted net income per share $ 0.07
============
Shares used in computing basic net income per share 12,949,913
============
Shares used in computing diluted net income per share 13,034,804
============
</TABLE>
<PAGE> 21
ZMAX CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
ZMAX Eclipse (I) Adjustments
------------ ------------ ---------------
<S> <C> <C> <C>
Revenues $ 9,916,276 $ 8,065,851 $ -
Operating Expenses:
Cost of revenues 3,478,982 4,738,238 -
Research and development 473,362 - -
Sales and marketing 1,190,548 294,958 -
General and administrative 3,515,391 1,984,758 (40,000)(J)
Employee stock compensation 534,384 238,108 -
Amortization and depreciation 1,268,338 84,770 275,290 (K)
------------ ------------ ------------
Income (loss) from operations (544,729) 725,019 (235,290)
Other income (expense):
Interest income 270,337 - -
Interest expense (9,140) (29,133) -
Other 821 - -
------------ ------------ ------------
Net income (loss) before income tax expense (282,711) 695,886 (235,290)
Income tax expense - 5,359 (5,359)(L)
------------ ------------ ------------
Net income (loss) $ (282,711) $ 690,527 $ (229,931)
============ ============ ============
Basic net income (loss) per share $ (0.03)
------------
Diluted net income (loss) per share $ (0.03)
------------
Shares used in computing basic net income (loss) per share 10,638,680
------------
Shares used in computing diluted net income (loss) per share 10,638,680
------------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
ZMAX and Historical
Eclipse Parker
------------ ------------
<S> <C> <C>
Revenues $ 17,982,127 $ 4,430,490
Operating Expenses:
Cost of revenues 8,217,220 3,161,480
Research and development 473,362 -
Sales and marketing 1,485,506 207,310
General and administrative 5,460,149 609,553
Employee stock compensation 772,492 -
Amortization and depreciation 1,628,398 8,105
------------ ------------
Income (loss) from operations (55,000) 444,042
Other income (expense):
Interest income 270,337 5,383
Interest expense (38,273) -
Other 821 -
------------ ------------
Net income (loss) before income tax expense 177,885 449,425
Income tax expense - 133,683
------------ ------------
Net income (loss) $ 177,885 $ 315,742
============ ============
Basic net income (loss) per share $ 0.01
------------
Diluted net income (loss) per share $ 0.01
------------
Shares used in computing basic net income (loss) per share 12,259,502
------------
Shares used in computing diluted net income (loss) per share 12,259,876
------------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
ZMAX,
Pro Forma Eclipse and
Adjustments Parker
---------------- -------------
<S> <C> <C>
Revenues $- $ 22,412,617
Operating Expenses:
Cost of revenues - 11,378,700
Research and development - 473,362
Sales and marketing - 1,692,816
General and administrative - 6,069,702
Employee stock compensation - 772,492
Amortization and depreciation 259,670(F) 1,896,173
------------ ------------
Income (loss) from operations (259,670) 129,372
Other income (expense):
Interest income - 275,720
Interest expense (240,000)(G) (278,273)
Other - 821
------------ ------------
Net income (loss) before income tax expense (499,670) 127,640
Income tax expense (133,683)(H) -
------------ ------------
Net income (loss) $ (365,987) $ 127,640
============ ============
Basic net income (loss) per share $ 0.01
------------
Diluted net income (loss) per share $ 0.01
------------
Shares used in computing basic net income (loss) per share 12,259,502
------------
Shares used in computing diluted net income (loss) per share 12,259,876
------------
</TABLE>
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(A) Reflects the cash payment of $1,510,000 to former Parker shareholders, of
which $150,000 was placed into escrow and is subject to post-closing
adjustments.
(B) Reflects the excess purchase price paid by ZMAX over the fair value of the
Parker net assets acquired.
(C) Reflects the accrual of estimated direct costs related to the acquisition.
(D) Reflects the issuance of a $3.0 million note payable to the former Parker
shareholders. The note has a stated interest rate of 6.0% with interest
payable quarterly. Three principal payments of $1.0 million each are due
on October 1, 2000, 2001 and 2002. For presentation purposes the note has
been discounted to reflect an 8.0% effective interest rate.
(E) Reflects the issuance of a warrant to purchase 200,000 shares of ZMAX
Common Stock at $5.00 per share to former Parker Shareholders, net of the
elimination of historical equity balances of Parker.
(F) Reflects amortization of the excess of cost over the fair value of the net
assets acquired over the estimated weighted average life of 15 years for
the Parker acquisition.
(G) Reflects additional interest expense to be incurred related to the $3.0
million note payable issued to the former Parker shareholders at an
effective interest rate of 8.0%.
(H) Reflects the reduction in provision for income taxes resulting from the
effect of ZMAX's net operating loss carryforwards to offset Parker's net
income.
(I) Historical statements for Eclipse are through December 14, 1998 which was
the date the Eclipse acquisition was completed. Subsequent to completion
of the acquisition, all financial reporting data is included in the
historical ZMAX data.
(J) Reflects prospective reductions in salary and bonuses to the prior owners
and key executives of Eclipse as agreed upon in their employment
agreements.
(K) Reflects amortization of the excess of cost over the fair value of the net
assets acquired over the estimated weighted average life of 25 years for
the Eclipse acquisition.
<PAGE> 23
(L) Reflects reduction in provision for income taxes resulting from the
termination of Eclipse's status as an S Corporation and the effect of
ZMAX's net operating loss carryforwards.
