<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 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
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Commission file number 000-23967
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of October 1,
1999; 12,949,913 shares of common stock, $.001 par value per share.
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ZMAX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the three and nine
months ended September 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 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II. OTHER INFORMATION
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Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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</TABLE>
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,474,618 $ 4,521,126
Accounts receivable, net 5,848,940 2,545,659
Prepaid expenses and other assets 255,512 127,952
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Total current assets 10,579,070 7,194,737
Property and equipment, net 653,478 477,870
Intangible assets, net 8,630,363 9,740,217
Other assets 25,230 33,538
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Total assets $ 19,888,141 $ 17,446,362
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,291,156 $ 1,596,074
Current portion of capital lease obligation - 35,519
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Total current liabilities 2,291,156 1,631,593
Long-term capital lease obligation, net of current portion 61,341 34,716
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Total liabilities 2,352,497 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
September 30, 1999 and December 31, 1998, respectively, none and
167,301 shares subject to cancellation agreements
as of September 30, 1999 and December 31, 1998, respectively 12,950 13,117
Additional paid-in capital 41,763,268 41,763,101
Accumulated deficit (24,240,574) (25,996,165)
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Total shareholders' equity 17,535,644 15,780,053
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Total liabilities & shareholders' equity $ 19,888,141 $ 17,446,362
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
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ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Professional Services $ 8,052,063 $ 2,581,139 $ 19,343,441 $ 6,608,242
Software - - 893,998 -
------------ ------------ ------------ ------------
Total revenue 8,052,063 2,581,139 20,237,439 6,608,242
Operating expenses:
Cost of sales - Professional Services 3,610,179 755,387 8,777,687 2,065,210
Cost of sales - Software - - 39,733 -
Research and development 17,635 120,652 297,805 332,274
Sales and marketing 635,852 298,090 1,853,178 839,636
General and administrative 2,309,181 734,766 6,277,601 2,645,398
Depreciation and amortization 430,097 327,527 1,251,299 953,408
------------ ------------ ------------ ------------
Total operating expenses 7,002,944 2,236,422 18,497,303 6,835,926
------------ ------------ ------------ ------------
Income (loss) from operations 1,049,119 344,717 1,740,136 (227,684)
Other income (expenses):
Interest income 40,922 55,483 93,031 198,036
Interest expense (471) - (7,794) 1,990
Other (14,541) 20,663 1,764 796
------------ ------------ ------------ ------------
Total other income (expenses) 25,910 76,146 87,001 200,822
------------ ------------ ------------ ------------
Income (loss) before income taxes $ 1,075,029 $ 420,863 $ 1,827,137 $ (26,862)
Income taxes 71,546 - 71,546 -
------------ ------------ ------------ ------------
Net income (loss) $ 1,003,483 $ 420,863 $ 1,755,591 $ (26,862)
============ ============ ============ ============
Basic net income (loss) per share $ 0.08 $ 0.04 $ 0.14 $ (0.00)
============ ============ ============ ============
Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 10,325,913
============ ============ ============ ============
Diluted net income (loss) per share $ 0.08 $ 0.04 $ 0.14 $ (0.00)
============ ============ ============ ============
Diluted weighted average shares outstanding 12,989,865 11,250,287 13,001,077 10,325,913
============ ============ ============ ============
</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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,003,483 $ 420,863 $ 1,755,591 $ (26,862)
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 430,097 327,527 1,251,299 953,408
Changes in assets and liabilities
Accounts receivable (1,243,434) (236,509) (3,303,281) (1,667,888)
Prepaid expenses and other assets 113,223 33,634 (127,560) (14,370)
Accounts payable and accrued expenses 183,346 (324,910) 695,082 34,675
Customer deposits - (405,400) - (628,369)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 486,715 (184,795) 271,131 (1,349,405)
----------- ----------- ----------- -----------
Net cash used in investing activities:
Purchases of property and equipment (201,868) (9,663) (282,120) (84,608)
----------- ----------- ----------- -----------
Net cash used in investing activities (201,868) (9,663) (282,120) (84,608)
----------- ----------- ----------- -----------
Net cash used in financing activities
Net payments on long-term obligations (52,718) - (35,519) (539,541)
----------- ----------- ----------- -----------
Net cash used in financing activities (52,718) - (35,519) (539,541)
----------- ----------- ----------- -----------
Net increase (decrease) in cash 232,129 (194,458) (46,508) (1,973,554)
----------- ----------- ----------- -----------
Cash, beginning of period 4,242,489 4,625,988 4,521,126 6,405,084
----------- ----------- ----------- -----------
Cash, end of period $ 4,474,618 $ 4,431,530 $ 4,474,618 $ 4,431,530
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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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 nine months ended September 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. On October 1, 1999, ZMAX acquired Parker Management Consultants,
Ltd. ("Parker"). The accompanying consolidated financial statements do not
include the accounts of Parker as the acquisition occurred subsequent to the
reporting period.
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. The
acquisition of Parker in October 1999 continued this operational expansion as
Parker also performs management and information consulting services. This
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continues the Company's shift away from a millenium services based business.
The Company has announced that as of January 1, 2000, the three current
wholly-owned subsidiaries will become one operating company name "WidePoint".
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
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, business integration,
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 because it has historically been
thinly traded and due to a concentration of ownership within in a limited number
of shareholders.
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.
Asset impairment
The Company anticipates that it may have an asset impairment during the
fourth quarter of 1999 related to its Y2K related intangible assets under the
guidelines of SFAS No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-Lived Assets to be Disposed of". This impairment will occur because
of the shift in the Company's business and the resulting impairment of certain
assets which will no longer be used. It's anticipated this write-off will be
between $1.0 and $2.0 million during the fourth quarter of 1999.
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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 consist of amounts incurred that are not yet billable under contract
terms. At September 30, 1999 and December 31, 1998, unbilled accounts receivable
totaled approximately $196,694 and $410,178, respectively.
Significant Customers
For the three months ended September 30, 1999, two customers
individually represented 23% and 10% of revenue. For three months ended
September 30, 1998, three customers individually represented 51%, 15% and 14% of
revenue. 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, or state, federal, or other national governments. As of September
30, 1999, two customers individually represented 32% and 12% of accounts
receivable. As of September 30, 1998, two customers individually represented 76%
and 15% 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 Income (Loss) 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
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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. The treasury stock effect of options and warrants to purchase
1,788,300 and 1,984,800 shares of common stock outstanding at September 30, 1999
and 1998, respectively, has not been included in the calculation of the net loss
per share as such effect would be anti-dilutive. 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:
ZMAX CORPORATION AND SUBSIDIARY
CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average share calculations
- -----------------------------------
Weighted average shares of common stock
Outstanding 12,949,913 11,729,714 13,014,974 10,805,714
Less: Average number of cancelable shares
common stock outstanding - (479,801) (65,061) (479,801)
----------- ----------- ----------- -----------
Basic weighted average shares outstanding 12,949,913 11,249,913 12,949,913 10,325,913
Treasury stock effect of options and warrants 39,952 374 51,164 -
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding: 12,989,865 11,250,287 13,001,077 10,325,913
=========== =========== =========== ===========
</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
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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 was 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.
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.
5. STOCK WARRANTS
The Company presently has stock warrants to purchase 340,800 shares of common
stock outstanding. 140,800 of these warrants remain outstanding from the
exchange of the convertible debentures which occurred in November 1997. These
warrants have an exercise price of $8.00 per share and expire during the fourth
quarter of 1999. On September 20, 1999, the Company issued stock warrants to
purchase 200,000 shares of common stock at $2.75, s per share amount that
exceeded the stock's trading price on that date, to an international investment
banking firm they have hired to provided investment banking, mergers and
acquisitions and strategic planning services.
6. SUBSEQUENT EVENT
On October 1, 1999, ZMAX acquired all of the outstanding common stock of Parker
and one of its affiliates for $1.5 million in cash, a $3.0 million promissory
note and a stock warrant to purchase 200,000 shares of ZMAX common stock at
$5.00 per share.
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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.
The information set forth below includes forward-looking statements
relating to projected results that may differ from actual results. Some factors
that could cause results to differ materially from those projected in the
forward-looking statements are set forth below. Readers are cautioned not to put
undue reliance on forward-looking statements. The Company disclaims any intent
or obligation to update publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.
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"). In October 1999, the Company acquired all
of the stock of Parker Management Consulting, Ltd. ("Parker") and one of its
affiliates.
On October 1, 1999 ZMAX acquired 100% of the issued and outstanding
capital stock of Parker, through the payment of up to $1,500,000 in cash, 10% of
which is held in escrow subject to post-closing adjustments, the issuance of a
three-year note in the principal amount of $3,000,000 with interest payable
quarterly at 6%, and the issuance of a warrant to purchase 200,000 shares of the
Company's common stock at $5.00 per share. The results of operations of Parker
are not included in the financial statements of ZMAX as the acquisition occurred
subsequent to the close of the quarter. Parker markets IT consulting services
that specialize in delivering Enterprise Resource Planning ("ERP") solutions to
a variety of commercial companies.
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 on distributed client
server environments. Eclipse provides services in ERP packaged solutions,
internet and 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
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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 Y2K services may continue to
exist after the Year 2000; however, the Company is not presently anticipating
for any such revenues into 2000 and beyond. 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 acquisitions of Eclipse and Parker,
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 acquisitions of Eclipse and Parker, along with its
plans to continue to diversify, the Company's 1999 revenues have been less
concentrated on Y2K products and commencing in 2000, the Company expects its
business will be entirely focused on information services.
In the next three months, the Company intends to integrate the services
of Eclipse's and Parker's with that of CSI's. The Company intends to operate the
three current wholly-owned subsidiaries, effective January 1, 2000, through one
operating company to be named "WidePoint". WidePoint will be a wholly-owned
subsidiary of ZMAX. WidePoint's primary services will focus on three core
practices: Enterprise Resource Planning ("ERP"), Enterprise Application
Integration ("EAI"), and Internet Application Integration ("IAI") services. The
Company also intends to expand the geographic reach of WidePoint through the
opening of other offices in key markets or through other acquisitions. In the
nine months ended September 30, 1999 the Company has opened new offices in
Minneapolis, Detroit, and Boston. The acquisition of Parker adds Houston as an
additional office. Parker's Laurel, Maryland office will be integrated into
CSI's Germantown, Maryland office. Further, it is the intent of the Company in
the Spring of 2000 to ask the stockholders to vote upon and approve the change
of the Company's name from ZMAX to WidePoint, at which time the Company will
change its stock symbol and institute a new corporate identity program to
integrate the new name.
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.
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RESULTS OF OPERATIONS
For the Quarter Ended September 30, 1999 Compared to the Quarter Ended September
30, 1998
Revenue. Revenue for the quarter ended September 30, 1999, was
approximately $8,052,000, an increase of approximately $5,471,000 over revenue
of approximately $2,581,000 for the quarter ended September 30, 1998. The
increase in revenue during the third quarter of 1999 was a result of increased
sales activity of independent validation and verification consulting services,
general IT consulting services generated from the acquistion of Eclipse, and
increases in sales of services related to the Company's new internet development
services as compared to the Company's limited Y2K service offerings available
during the quarter ended September 30, 1998.
Gross profit. Gross profit for the quarter ended September 30, 1999, was
approximately $4,442,000, or 55% of revenues, an increase of approximately
$2,616,000 over gross profit of approximately $1,826,000, or 71% of revenues,
for the quarter ended September 30, 1998. The increase in the gross profit
during the quarter ended September 30, 1999, was a result of increased revenues;
however, the decrease in gross profit as a percentage of revenue is a result of
increased non-Y2K related IT consulting work. IT consulting typically has lower
margins than Y2K services.
Research and development. Research and development expenses for the
quarter ended September 30, 1999, were approximately $18,000, or 0.2% of
revenues, a decrease of approximately $103,000, from approximately $121,000, or
5% of revenues, for the quarter ended September 30, 1998. The Company initiated
efforts in the third quarter of 1998 to market a validation and verification
toolset that the Company developed using aspects of the Company's VISION
2000(TM) toolsuite. The Company was successful in marketing the toolset through
the second quarter of 1999, but is currently incurring only minimal
expenditures in research and development of the toolsuite at this time.
Sales and marketing. Sales and marketing expenses for the quarter ended
September 30, 1999, were approximately $636,000, or 8% of revenues, an increase
of approximately $338,000, from approximately $298,000 of such expenses, or 12%
of revenues, for the quarter ended September 30, 1998. The increase in sales and
marketing expenses for the third 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
expanding services.
General and administrative. General and administrative expenses for the
quarter ended September 30, 1999, were approximately $2,309,000, or 29% of
revenues, this represents an increase of approximately $1,574,000, as compared
to approximately $735,000 of such expenses, or 28% of revenues, for the quarter
ended September 30, 1998. The increase in general and administrative expenses
for the quarter ended September 30, 1999 was primarily attributable to expenses
associated with the on-going operations of Eclipse and the costs associated with
the continued investments and operational expenses associated with the recently
opened
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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 September 30, 1999, was approximately $430,000, or 5% of
revenues, an increase of approximately $102,000, as compared to approximately
$328,000 of such expenses, or 13% of revenues, for the quarter ended September
30, 1998. The increase in depreciation and amortization expense for the three
months ended September 30, 1999 was primarily attributable to an increase in
depreciable assets and intangibles associated with the acquisition of Eclipse.
Other income (expense). Other income (expense) for the quarter ended
September 30, 1999, was approximately $26,000, or 0.3% of revenues, a decrease
of approximately $50,000 as compared to approximately $76,000, or 3% of
revenues, for the quarter ended September 30, 1998. The decrease in other income
for the quarter ended September 30, 1999 was primarily attributable to lesser
amounts of cash available for investment during the quarter ended September 30,
1999.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
As a result of the above, the EBITDA for the quarter ended September 30, 1999,
was approximately $1,479,000. This represented an increase of approximately
$807,000 as compared to the EBITDA of approximately $672,000 for the quarter
ended September 30, 1998.
Net income (loss). As a result of the above, the net income for the
quarter ended September 30, 1999, was approximately $1,003,000, or 12% of
revenues, an increase of approximately $582,000, as compared to the net income
of approximately $421,000, or 16% of revenues, for the quarter ended September
30, 1998.
For the Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenue. Revenue for the nine months ended September 30, 1999, was
approximately $20,237,000, an increase of approximately $13,629,000 over revenue
of approximately $6,608,000 for the nine months ended September 30, 1998. The
increase in revenue during the first nine months of 1999 was a result of
increased sales activity of Y2K services as compared to 1998, revenue generated
from the licensing of the Company's proprietrary software tool during the first
half of 1999, and additional IT consulting revenues generated from the Company's
acquisition of Eclipse in December 1998.
Gross profit. Gross profit for the nine months ended September 30, 1999,
was approximately $11,420,000, or 56% of revenues, an increase of approximately
$6,877,000 over gross profit of approximately $4,543,000, or 69% of revenues,
for the nine months ended September 30, 1998. The increase in gross
profitability during the nine months ended September 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
13
<PAGE> 15
acquisition. IT consulting typically has lower margins than Y2K services.
Research and development. Research and development expenses for the nine
months ended September 30, 1999, were approximately $298,000, or 2% of revenues.
Research and development expenses for the nine months ended September 30, 1998,
were approximately $332,000, or 5% of revenues. The Company initiated efforts in
the third quarter of 1998 to market a validation and verification toolset that
the Company developed using aspects of the Company's VISION 2000(TM) toolsuite.
The Company was successful in marketing the toolset through the second quarter
of 1999, but is currently incurring minimal expenditures in research and
development of the toolsuite at this time.
Sales and marketing. Sales and marketing expenses for the nine months
ended September 30, 1999, were approximately $1,853,000, or 9% of revenues, an
increase of approximately $1,013,000, from approximately $840,000 of such
expenses, or 13% of revenues, for the nine months ended September 30, 1998. The
increase in sales and marketing expenses during the nine months ended September
30, 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
nine months ended September 30, 1999, were approximately $6,278,000, or 31% of
revenues, an increase of approximately $3,632,000, as compared to approximately
$2,645,000 of such expenses, or 40% of revenues, for the nine months ended
September 30, 1998. The increase in general and administrative expenses for the
nine months ended September 30, 1999 was primarily attributable to general and
administrative expenses associated with the continued investments and
operational expenses associated with the recently opened 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 expenses
for the nine months ended September 30, 1999, were approximately $1,251,000, or
6% of revenues, an increase of approximately $298,000, as compared to
approximately $953,000 of such expenses, or 15% of revenues, for the nine months
ended September 30, 1998. The increase in depreciation and amortization expenses
for the nine months ended September 30, 1999 was primarily attributable to an
increase in depreciable assets and intangibles associated with the acquisition
of Eclipse.
Other income (expense). Other income for the nine months ended September
30, 1999, was approximately $87,000, or 0.4% of revenues, a decrease of
approximately $114,000 as compared to approximately $201,000, or 3% of revenues,
for the nine months ended September 30, 1998. The decrease in other income for
the nine months ended September 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 nine months ended September 30, 1999
was approximately $2,991,000.
14
<PAGE> 16
This represented an increase of approximately $2,258,000 as compared to EBITDA
of approximately $726,000 for the nine months ending September 30, 1998.
Net income (loss). As a result of the above, the net income for the nine
months ended September 30, 1999, was approximately $1,756,000, or 9% of
revenues, an increase of approximately $1,782,000, as compared to the net loss
of approximately $27,000, or 0.4% of revenues, for the nine months ended
September 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
from operations during the quarter ended September 30, 1999, was approximately
$487,000 as compared to approximately $185,000 of cash used in operations for
the quarter ended September 30, 1998.
Capital expenditures were approximately $200,000 for the quarter ended
September 30, 1999, as compared to approximately $10,000 during the quarter
ended September 30, 1998. The increase in capital expenditures during 1999 is
related primarily to the ongoing purchase requirements for computer equipment
for Company personnel in new offices and infrastructure improvement projects.
As of September 30, 1999, the Company had working capital of
approximately $8,288,000. The Company's primary source of liquidity consists of
approximately $4,475,000 in cash and cash equivalents and approximately
$5,849,000 of account receivable.
On September 20, 1999, the Company entered into an agreement with
Pennsylvania Merchants Group ("PMG") to provide investment banking, mergers and
acquisitions, and strategic planning services. PMG is an international
investment banking firm that specializes in high technology and emerging growth
companies. The term of the agreement is for two years and PMG will be
compensated $5,000 per month, plus a one time grant of a warrant to purchase
200,000 shares of ZMAX Common Stock at $2.75 per share. The warrant is not
exercisable until September 20, 2000.
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, 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
15
<PAGE> 17
requirements with certainty. Over the longer term, the Company must successfully
execute its strategy 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
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 service 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
16
<PAGE> 18
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 generate high 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
ITEM 4. VOTE
No matters were submitted to a vote of the registant's shareholders
during the third quarter of 1999.
17
<PAGE> 19
PART II. OTHER INFORMATION
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
On October 15, 1999, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting its acquisition on October 1, 1999, of
Parker Management Consultants, Ltd., a Delaware corporation.
18
<PAGE> 20
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: November 15, 1999 /s/ MICHAEL C. Higgins
----------------------
Michael C. Higgins
President
/s/ JAMES T. MCCUBBIN
----------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
19
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