SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 000-23967
ZMAX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of August 2,
1999; 12,949,913 shares of common stock, $.001 par value per share.
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ZMAX CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II. OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,242,489 $ 4,521,126
Accounts receivable, net 4,605,506 2,545,659
Prepaid expenses and other assets 308,383 127,952
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Total current assets 9,156,378 7,194,737
Property and equipment, net 598,791 477,870
Intangible assets, net 8,886,654 9,740,217
Other assets 85,582 33,538
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Total assets $ 18,727,405 $ 17,446,362
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,107,810 $ 1,596,074
Current portion of capital lease obligation 33,832 35,519
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Total current liabilities $ 2,141,642 $ 1,631,593
Long-term capital lease obligation, net of current portion 53,602 34,716
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Total liabilities 2,195,244 1,666,309
Commitments and contingencies (Note 4)
Shareholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.001 par value, 50,000,000 shares authorized,
12,949,913 and 13,117,214 shares issued and outstanding as of
June 30, 1999 and December 31, 1998, respectively, none and
167,301 shares subject to cancellation agreements
as of June 30, 1999 and December 31, 1998, respectively 13,117 13,117
Additional paid-in capital 41,763,101 41,763,101
Accumulated deficit (25,244,057) (25,996,165)
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Total shareholders' equity 16,532,161 15,780,053
Total liabilities & shareholders' equity $ 18,727,405 $ 17,446,362
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
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ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Professional services $ 6,376,516 $ 2,502,779 $ 11,291,378 $ 4,027,103
Software 702,215 - 893,998 -
------------- ------------- ------------- -------------
Total revenues 7,078,731 2,502,779 12,185,376 4,027,103
Operating expenses:
Cost of sales - Professional services 2,744,862 843,015 5,167,508 1,309,823
Cost of sales - Software 19,808 - 39,733 -
Research and development 112.255 83,935 280,170 211,622
Sales and marketing 670,346 276,037 1,217,326 541,546
General and administrative 2,142,846 853,527 3,968,420 1,910,632
Depreciation and amortization 414,294 304,239 821,202 625,881
Income (loss) from operations 974,320 142,026 691,017 (572,401)
Other income (expenses):
Interest income 31,315 87,121 68,578 142,552
Interest expense (2,387) 8,845 (4,497) 1,990
Other (131) (3,987) (2,990) (19,867)
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Net income (loss) $ 1,003,117 $ 234,005 $ 752,108 $ (447,726)
============= ============= ============= =============
Basic net income (loss) per share $ 0.08 $ 0.02 $ 0.06 $ (0.05)
============= ============= ============= =============
Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 9,849,913
============= ============= ============= =============
Diluted net income (loss) per share $ 0.08 $ 0.02 $ 0.06 $ (0.05)
============= ============= ============= =============
Diluted weighted average shares outstanding 12,972,653 11,488,002 13,034,804 9,849,913
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
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ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,003,117 $ 234,005 $ 752,108 $ (447,726)
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 429,146 304,239 844,873 625,881
Changes in assets and liabilities
Accounts receivable (1,337,302) (1,091,327) (2,059,847) (1,431,379)
Prepaid expenses and other assets (83,660) (67,951) (232,475) (48,004)
Accounts payable and accrued expenses 470,532 201,555 511,736 359,586
Customer deposits - (204,478) - (222,968)
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Net cash provided by (used in) operating activities 481,833 (623,957) (183,605) (1,164,610)
------------- ------------- ------------- -------------
Net cash used in investing activities:
Purchases of property and equipment (31,156) (20,565) (112,231) (74,945)
------------- ------------- ------------- -------------
Net cash used in investing activities (31,156) (20,565) (112,231) (74,945)
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities
Net borrowings (payments) on long-term obligations 25,740 (274,193) 17,199 (539,541)
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Net cash (used in) provided by financing activities 25,740 (274,193) 17,199 (539,541)
------------- ------------- ------------- -------------
Net increase (decrease) in cash 476,417 (918,715) (278,637) (1,779,096)
------------- ------------- ------------- -------------
Cash, beginning of period 3,766,072 5,544,703 4,521,126 6,405,084
------------- ------------- ------------- -------------
Cash, end of period $ 4,242,489 $ 4,625,988 $ 4,242,489 $ 4,625,988
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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ZMAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the financial statements of ZMAX
Corporation ("ZMAX" or the "Company"), as of December 31, 1998, and the notes
thereto included in the Annual Report on Form 10-K filed by the Company. The
results of operations for the three and six months ended June 30, 1999, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
NATURE OF OPERATIONS
On November 6, 1996, ZMAX Corporation ("ZMAX" or the "Company"), which
was then a shell company listed on the OTC Bulletin Board, acquired 100% of
the outstanding common stock of Century Services, Inc. ("CSI"), a Maryland
corporation. CSI was a privately held company formed on December 13, 1995, to
perform computer re-engineering with a focus on providing a solution to the
Year 2000 problem.
For financial reporting purposes, this acquisition was treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).
Accordingly, the historical financial statements of ZMAX prior to November 6,
1996, are the historical financial statements of CSI. The accompanying
consolidated financial statements include all of the accounts of CSI and the
accounts of ZMAX since the acquisition on November 6, 1996. On December 14,
1998, ZMAX acquired Eclipse Information Systems, Inc. (" Eclipse"). The
accompanying consolidated financial statements include the accounts of Eclipse
since the date of acquisition. All significant inter-company amounts have been
eliminated.
During 1998, the Company's revenue was derived primarily from Year 2000
services. The Company also began licensing a Year 2000 software tool during
1998; however, such licensing revenue was not significant in 1998. In December
1998, the Company expanded its operations through the acquisition of Eclipse.
Eclipse performs management and information systems consulting services.
Eclipse also resells certain hardware and software products to its customers.
While the Company's revenue in 1998 was primarily derived from its Year
2000 or "millennium" services there can be no assurance that the Company will
be successful in diversifying through acquisitions and developing additional
post-Year 2000 services. Further, the failure of the Company's Year 2000
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methodology and tools to function properly or the existence of significant
errors or problems following completion of millennium conversions or other
associated Year 2000 work performed by the Company could necessitate
significant expenditures by the Company to remedy the problem. The
consequences of failures, errors or problems could materially and adversely
affect the Company's business, operating results and financial condition.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain markets for
millennium services, current and potential competitors with greater financial,
technological, production and marketing resources, reliance on certain
significant customers, the need to develop additional products and services,
limited protection of proprietary information, the risk of third party claims
of infringement, potential contract liability related to the Company's access
to key aspects of customers computer systems, dependence upon strategic
alliances, the need for additional technical personnel, dependence on key
management personnel, management of growth, uncertainty of future
profitability and possible fluctuations in financial results. The Company may
also require additional capital that may not be available to it. In addition,
there are risks associated with the market activity in ZMAX common stock.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for the purpose of these financial statements.
REVENUE RECOGNITION
Revenues on time-and-materials contracts are recognized based upon hours
incurred at contract rates plus direct costs. Revenues on fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated losses are
recognized as soon as they become known. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Unbilled accounts receivable on time-and-materials contracts represent
costs incurred and gross profit recognized during the period presented but not
billed until the following period. Unbilled accounts receivable on fixed-price
contracts consists of amounts incurred that are not yet billable under
contract terms. At June 30, 1999 and December 31, 1998, unbilled accounts
receivable totaled approximately $1,040,284 and $410,178, respectively.
Revenue from the sale of perpetual and term software licenses is
recognized at the time of delivery and acceptance of software products by the
customer, provided that collection is probable. Maintenance revenue that is
bundled with an initial license fee is deferred and recognized ratably over
the maintenance period. Amounts deferred for maintenance are based on the fair
value of equivalent maintenance services sold separately. The American
Institute of Certified Public Accountants issued Statement of Position 97-2
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"Software Revenue Recognition" ("SOP 97-2"), which superceded Statement of
Position 91-1 "Software Revenue Recognition." SOP 97-2 provides additional
guidance with respect to multiple element arrangements; returns, exchanges,
and platform transfer rights; resellers; services; funded software development
arrangements; and contract accounting. The Company recognizes revenue in
accordance with SOP 97-2 and Statement of Position 98- 9, "Modification of SOP
97-2. Software Revenue Recognition. With Respect to Certain Transitions".
Prior to 1998, the Company had no revenue from the license of software. For
the three and six months ended June 30, 1999 software revenues were, $702,215
and $893,998, respectively.
SIGNIFICANT CUSTOMERS
For the three months ended June 30, 1999, two customers individually
represented 16% and 12% of revenue. For three months ended June 30, 1998,
three customers individually represented 31%, 18% and 14% of revenue,
respectively. For the six months ended June 30, 1999, two customers
individually represented 14% and 10% of revenue, respectively. Due to the
nature of 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist of cash and cash equivalents and accounts receivable. Accounts
receivable includes amounts due from relatively large companies in a variety
of industries. As of June 30, 1999, one customer individually represented 12%
of accounts receivable. As of December 31, 1998, two customers individually
represented 16% and 13% of accounts receivable.
INCOME TAXES
The Company accounts for income taxes in accordance with 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 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.
BASIC AND DILUTED NET GAIN PER SHARE
Basic income or loss per share includes no dilution and is computed by
dividing net income or loss by the weighted average number of common shares
outstanding for the period. Diluted income or loss per share includes the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Outstanding shares
subject to cancellation agreements have not been included in either the basic
or diluted calculation. The calculation of the basic and diluted weighted
average shares is shown below:
6
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ZMAX CORPORATION AND SUBSIDIARY
CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARE CALCULATIONS
Weighted average shares of common stock
Outstanding 12,977,797 11,729,714 13,047,505 10,329,714
Less: Average number of cancelable shares
common stock outstanding (27,884) (479,801) (97,592) (479,801)
------------- ------------- ------------- -------------
Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 9,849,913
Treasury stock effect of options and warrants 22,740 238,089 84,891 -
Diluted weighted average shares outstanding: 12,972,653 11,488,002 13,034,804 9,849,913
============= ============= ============= =============
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 has had no impact on the Company's results of
operations, financial position or cash flows.
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
("SOP 98-1"). SOP 98-1 requires the Company to capitalize internal computer
software costs once the capitalization criteria of the SOP are met. SOP 98-1
is effective January 1, 1999, and is applied to all projects in progress upon
the initial application of the SOP. The adoption of SOP 98-1 has not had a
material impact on the Company's results of operations, financial position, or
cash flows.
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3. STOCK SUBJECT TO CANCELLATION
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
ZMAX common stock. In March 1997, 296,007 of these shares were returned to the
Company and canceled. An additional 312,500 shares were returned to the
Company and canceled in December 1998. The remaining 167,301 were returned to
the Company and canceled in April 1999.
4. COMMITMENTS AND CONTINGENCIES:
LITIGATION
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 financial statements.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
OVERVIEW
ZMAX Corporation ("ZMAX" or the "Company") focuses on acquiring,
building and operating companies in the information technology ("IT")
industry. In 1996, the Company acquired all of the stock of Century Services,
Inc. ("CSI"). In December 1998, the Company acquired all of the stock of
Eclipse Information Systems, Inc. ("Eclipse").
On December 14, 1998 ZMAX acquired all of the outstanding capital stock
of Eclipse. The results of operations of Eclipse are included in the financial
statements of ZMAX from the date of acquisition. Eclipse markets IT consulting
services to a variety of commercial companies through a series of technology
practices that specialize in delivering solutions focused in distributed
client server environments. Eclipse provides services in ERP packaged
solutions, internet & intranet solutions, network solutions, client server
solutions, and AS/400 solutions.
On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI.
Prior to this transaction, ZMAX had no operations and its activities consisted
of efforts to establish or acquire a new business and to raise capital. CSI
was a privately held company formed on December 13, 1995 which specializes in
assisting business organizations and government agencies with what has become
popularly known as the "Year 2000" problem ("Y2K"). For financial reporting
purposes, the acquisition was treated as a recapitalization of CSI with CSI as
the acquirer (a reverse acquisition).
CSI markets Y2K services to a variety of commercial and government
organizations. The Company believes some demand for CSI's Y2K services may
continue to exist after the Year 2000, although this demand will diminish
significantly over time and will eventually disappear. However, CSI's
proprietary computer software tools may be used in conversion projects
unrelated to Y2K work. CSI plans to pursue business opportunities unrelated to
the Y2K problem in the information services market and to develop products and
services to take advantage of these opportunities, such as migrating a
client's software application from a mainframe to a client-server environment.
With the recent acquisition of Eclipse, the Company believes synergistic
benefits may be realized as the two organizations further develop additional
services and technologies together.
Through December 31, 1998, the Company's revenues were generated
primarily from CSI's consulting and conversion fees and software sales related
to Y2K services. With the acquisition of Eclipse and its plans to continue to
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diversify, the Company's future revenues will be less concentrated on Y2K
products.
In the next 12 months, the Company intends to continue to integrate the
services of Eclipse's with that of CSI's and other potentially synergistic
acquisitions. Further, the Company intends to expand the services of both
subsidiaries through the opening of other offices in key geographic markets.
In the six months ended June 30, 1999 the Company opened new offices in
Minneapolis, Detroit, and Boston and performed initial analysis on several
other cities. The Company also intends to make additional investments in the
expansion and further development of additional IT services and markets. In
view of these investments the Company believes the period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. Specifically, as
the Company increases its investments in non-Y2K services, it will incur
training, salary and other costs prior to the recognition of related revenues.
In addition, a large percentage of the Company's revenues are expected to be
derived from a relatively small number of large-scale, comprehensive projects.
Consequently, the Company's revenues and operating results may be subject to
substantial fluctuations in any given year and from quarter to quarter.
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30,
1998
REVENUES. Revenues for the quarter ended June 30, 1999, were
approximately $7,079,000, an increase of approximately $4,576,000 over
revenues of approximately $2,503,000 for the quarter ended June 30, 1998. The
increase in revenues during the second quarter of 1999 was a result of
increased sales activity of Y2K services as compared to 1998, revenues
generated from the licensing of the Company's proprietary software tool during
the second quarter of 1999, and additional IT consulting revenues generated
from the Company's acquisition of Eclipse in December 1998. For the quarter
ended June 30, 1999, Y2K services represented 55% of revenues as compared to
100% for Year 2000 services for the quarter ended June 30, 1998. The remaining
revenues for the quarter ended June 30, 1999 relate to IT consulting services
and software sales.
GROSS PROFIT. Gross profit for the quarter ended June 30, 1999, was
approximately $4,314,000, or 61% of revenues, an increase of approximately
$2,654,000 over gross profit of approximately $1,660,000, or 67% of revenues,
for the quarter ended June 30, 1998. The increase in gross profitability
during the quarter ended June 30, 1999, was a result of increased revenues;
however, the decrease in gross profit as a percentage of revenue is a result
of increased IT consulting work as part of the Eclipse acquisition. IT
consulting typically has lower margins than Y2K services.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
quarter ended June 30, 1999, were approximately $112,000, or 2% of revenues,
an increase of approximately $28,000, from approximately $84,000, or 3% of
revenues, for the quarter ended June 30, 1998. The Company initiated efforts
in the fourth quarter of 1998 to market a validation and verification toolset
that the Company developed using aspects of the Company's VISION 2000TM
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toolsuite. The Company continues to incur research and development expenses as
it modifies, enhances, and updates this tool.
SALES AND MARKETING. Sales and marketing expenses for the quarter ended
June 30, 1999, were approximately $670,000, or 10% of revenues, an increase of
approximately $394,000, from approximately $276,000 of such expenses, or 11%
of revenues, for the quarter ended June 30, 1998. The increase in sales and
marketing expenses for the second quarter of 1999 was primarily attributable
to the acquisition of Eclipse, commission expenses related to increased sales
revenue, and further investments in marketing efforts related to the Company's
services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended June 30, 1999, were approximately $2,143,000, or 30% of
revenues, an increase of approximately $1,289,000, as compared to
approximately $854,000 of such expenses, or 34% of revenues, incurred by the
Company for the quarter ended June 30, 1998. The increase in general and
administrative expenses for the quarter ended June 30, 1999 was primarily
attributable to general and administrative expenses associated with the
on-going operations of Eclipse and the costs associated with the opening of
the Minneapolis, Boston, and Detroit offices. The Company anticipates
additional investments will be made as it expands its presence throughout the
United States with new offices and acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the quarter ended June 30, 1999, was approximately $414,000, or 6% of
revenues, an increase of approximately $110,000, as compared to approximately
$304,000 of such expenses, or 12% of revenues, incurred by the Company for the
quarter ended June 30, 1998. The increase in depreciation and amortization
expense for the three months ended 1999 was primarily attributable to an
increase in depreciable assets and intangibles associated with the acquisition
of Eclipse.
OTHER INCOME. Interest income for the quarter ended June 30, 1999, was
approximately $31,000, or 1% of revenues, a decrease of approximately $56,000
as compared to approximately $87,000, or 3% of revenues, for the quarter ended
June 30, 1998. The decrease in interest income for the quarter ended June 30,
1999 was primarily attributable to lesser amounts of cash available for
investment during 1999.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION)
As a result of the above, EBITDA for the quarter ended June 30, 1999 was
approximately $1,388,000. This represented an increase of approximately
$942,000 as compared to EBITDA of approximately $446,000 for the quarter
ending June 30, 1998.
NET INCOME. As a result of the above, net income for the quarter ended
June 30, 1999, was approximately $1,003,000, or 14% of revenues, an increase
of approximately $769,000, as compared to net income of approximately
$234,000, or 9% of revenues, for the quarter ended June 30, 1998.
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FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1998
REVENUES. Revenues for the six months ended June 30, 1999, were
approximately $12,185,000, an increase of approximately $8,158,000 over
revenues of approximately $4,027,000 for the six months ended June 30, 1998.
The increase in revenues during the first half of 1999 was a result of
increased sales activity of Y2K services as compared to 1998, revenues
generated from the licensing of the Company's proprietary software tool during
the first half of 1999, and additional IT consulting revenues generated from
the Company's acquisition of Eclipse in December 1998. For the six months
ended June 30, 1999, Y2K services represented 50% of revenues as compared to
100% for the six months ended June 30, 1998. The remaining revenues for the
six months ended June 30, 1999 were related to IT consulting services.
GROSS PROFIT. Gross profit for the six months ended June 30, 1999, was
approximately $6,978,000, or 57% of revenues, an increase of approximately
$4,261,000 over gross profit of approximately $2,717,000, or 67% of revenues,
for the six months ended June 30, 1998. The increase in gross profit during
the six months ended June 30, 1999, was a result of increased revenues;
however, the decrease in gross profit as a percentage of revenue is a result
of increased IT consulting work as part of the Eclipse acquisition. IT
consulting typically has lower margins than Y2K services.
RESEARCH AND DEVELOPMENT. Research and development expenses for the six
months ended June 30, 1999, were approximately $280,000, or 2% of revenues.
Research and development expenses for the six months ended June 30, 1998, were
approximately $212,000, or 5% of revenues. The Company initiated efforts in
the fourth quarter of 1998 to market a validation and verification toolset
that the Company developed using aspects of the Company's VISION 2000TM
toolsuite. The Company continues to incur research and development expenses as
it modifies, enhances, and updates this tool.
SALES AND MARKETING. Sales and marketing expenses for the six months
ended June 30, 1999, were approximately $1,217,000, or 10% of revenues, an
increase of approximately $675,000, from approximately $542,000 of such
expenses, or 13% of revenues, for the six months ended June 30, 1998. The
increase in sales and marketing expenses for the first half of 1999 was
primarily attributable to the acquisition of Eclipse, commission expenses
related to increased sales revenue, and further investments in marketing
efforts related to the Company's services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six months ended June 30, 1999, were approximately $3,968,000, or 33% of
revenues, an increase of approximately $2,058,000, as compared to
approximately $1,911,000 of such expenses, or 47% of revenues, incurred by the
Company for the six months ended June 30, 1998. The increase in general and
administrative expenses for the six months ended 1999 was primarily
attributable to general and administrative expenses associated with the
on-going operations of Eclipse and the costs associated with the opening of
the Minneapolis, Boston, and Detroit offices. The Company anticipates
additional investments will be made as it expands its presence throughout the
United States with new offices and acquisitions.
12
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1999, was approximately $821,000, or 7% of
revenues, an increase of approximately $195,000, as compared to approximately
$626,000 of such expenses, or 16% of revenues, incurred by the Company for the
six months ended June 30, 1998. The increase in depreciation and amortization
expenses for the six months ended 1999 was primarily attributable to an
increase in depreciable assets and intangibles associated with the acquisition
of Eclipse.
OTHER INCOME. Interest income for the six months ended June 30, 1999,
was approximately $69,000, or 1% of revenues, a decrease of approximately
$74,000 as compared to approximately $143,000, or 4% of revenues, for the six
months ended June 30, 1998. The decrease in interest income for the six months
ended June 30, 1999 was primarily attributable to lesser amounts of cash
available for investment during 1999.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION)
As a result of the above, EBITDA for the six months ended June 30, 1999 was
approximately $1,512,000. This represented an increase of approximately
$1,458,000 as compared to EBITDA of approximately $54,000 for the six months
ending June 30, 1998.
NET INCOME. As a result of the above, net income for the six months
ended June 30, 1999, was approximately $752,000, or 6% of revenues, an
increase of approximately $1,200,000, as compared to the net loss of
approximately $448,000, or 11% of revenues, for the six months ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since its inception, financed its operations and
capital expenditures through the sale of stock, convertible notes, convertible
exchangeable debentures and the proceeds from the exchange offer and exercise
of the warrants related to the convertible exchangeable debentures. Cash
generated in operations during the quarter ended June 30, 1999, was
approximately $482,000, as compared to approximately $(624,000) cash used in
operations for the quarter ended June 30, 1998.
Capital expenditures were approximately $31,000 for the quarter ended
June 30, 1999, as compared to approximately $21,000 during the quarter ended
June 30, 1998. The increase in capital expenditures during 1998 is related
primarily to the ongoing purchase requirements of computer equipment for
Company personnel and expenditures relating to new offices and infrastructure
improvement projects.
As of June 30, 1999, the Company had working capital of approximately
$7,014,000. The Company's primary source of liquidity consists of
approximately $4,242,000 in cash and cash equivalents and approximately
$4,606,000 of accounts receivable.
The market for the Company's products is expanding and the Company's
business environment is characterized by rapid technological changes. The
Company requires substantial working capital to fund its business,
particularly to finance accounts receivable, sales and marketing efforts,
13
<PAGE>
research and development, and capital expenditures. The Company currently has
no commitments for capital expenditures. The Company's future capital
requirements will depend on many factors including the rate of revenue growth,
if any, the timing and extent of spending to support research and development,
technological changes and market acceptance of the Company's services. The
Company believes that its current cash position is sufficient to meet its
capital expenditure and working capital requirements for the near term;
however, the growth and technological change make it difficult for the Company
to predict future liquidity requirements with certainty. Over the longer term,
the Company must successfully execute its plans to generate significant
positive cash flows if it is to sustain adequate liquidity without impairing
growth or requiring the infusion of additional funds from external sources.
Additionally, a major expansion, such as would occur with the acquisition of a
major new subsidiary, might also require external financing that could include
additional debt or equity capital. There can be no assurance that additional
financing, if required, will be available on acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of products and services sold.
The preparation of financial statements in conformity with generally
accepted accounting 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.
The Company is an information technology ("IT") corporation which is in
the business of performing evaluation, testing and re-engineering services in
providing solutions to the Year 2000 problem. The Company owns, markets,
utilizes and licenses the use by others of its proprietary Year 2000 software
re-engineering tools and methodologies. The Company's management believes that
its operating and information systems are Year 2000 compliant. The Company
expects no material impact on its operating and information systems from the
Year 2000 issue.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's products and services,
uncertainties relating to the results of operations, dependence on its major
customers, risks associated with rapid technological change, potential
fluctuations in quarterly results, its dependence on key employees and other
risks and uncertainties affecting the technology industry generally. The
Company disclaims any intent or obligation to up-date publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.
Most of the Company's current cost structure is fixed. Expenses consist
primarily of the salaries and benefits paid to the Company's technical,
marketing and administrative personnel. Amortization and depreciation expenses
14
<PAGE>
relate to property, equipment and intangible assets. As a result of its plan
to expand its operations through internal growth and acquisitions the Company
expects these costs to increase in absolute dollars, while decreasing as a
percentage of revenue.
The Company's profitability depends upon both the volume of revenues
from professional and consulting services and software sales and the Company's
ability to manage costs. Because a significant portion of the Company's cost
structure is fixed, the Company must effectively manage these costs to achieve
profitability. In addition, certain of the Company's projects are priced on a
fixed fee basis. The profitability on an individual fixed fee project depends
upon the completion of the project within the budgeted number of staff hours
and within the agreed upon time frame. To date, the Company has been able to
maintain its operating margins through efficiencies achieved by the use of the
Company's proprietary software tools, by completing fixed fee projects within
budget, and by effectively managing general overhead costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
The Company's Annual Meeting of Stockholders was held on May 21, 1999.
The following three persons were elected by the following votes to serve
as Class II directors of the Board of Directors for three years or until their
successors are elected and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Steve L. Komar 6,755,740 52,985
James T. McCubbin 6,755,740 52,985
Stockholders approved the increase in the number of shares of Common
Stock of the Company for issuance under the Company's 1997 Incentive Stock
Option Plan by 1,300,000 shares from a prior total of 1,700,000 shares to a
new total of 3,000,000 shares. Such proposal was approved by a vote of
4,636,295 shares for and 193,786 shares against, with 6,875 shares abstaining.
Stockholders ratified the selection of Arthur Anderson LLP as the
independent accountants for the Company for the current fiscal year. Such
proposal was approved by a vote of 6,804,280 shares for and 2,445 shares
against, with 2,000 shares abstaining.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibit is filed herewith:
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
NONE
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: August 11, 1999 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
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