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 December 29, 1998 (Date of earliest event
reported was December 14, 1998)
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 December 29, 1998, 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
Dated: March 1, 1999 By: /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
<PAGE>
The Current Report on Form 8-K of ZMAX Corporation (the "Registrant"),
dated December 14, 1998, and filed on December 29, 1998, reported the
acquisition by the Registrant of 100% of the issued and outstanding shares of
capital stock of Eclipse Information Systems, Inc., an Illinois corporation
("Eclipse"), through the issuance of 1,700,000 shares of the Company's common
stock, par value $.001 per share, and the payment of up to $1,450,000 in cash,
subject to post-closing adjustments, to the shareholders of Eclipse. 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.
a. FINANCIAL STATEMENTS OF ECLIPSE. The following historical
financial statements of Eclipse are attached hereto:
<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS OF ECLIPSE: PAGE
<S> <C>
Report of Independent Accountants ....................................................._1_
Balance Sheets as of September 30, 1998 (Unaudited),
December 31, 1997 and 1996 .........................................................._2_
Statements of Income for the nine months ended September 30, 1998 and 1997
(Unaudited), and the years ended December 31, 1997 and 1996 ........................._3_
Statements of Changes in Shareholder's Equity for the nine months ended
September 30, 1998 (Unaudited), and the years ended December 31, 1997
and 1996 ............................................................................_4_
Statements of Cash Flows for the nine months ended September 30, 1998 and
1997 (Unaudited), and the years ended December 31, 1997 and 1996 ...................._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 September 30, 1998
(Unaudited) .................. ......................................................_13_
Pro Forma Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1998 (Unaudited) ................................................_14_
<PAGE>
Pro Forma Condensed Consolidated Statements of Operations for the Year Ended
December 31, 1997 (Unaudited) ......................................................._15_
Notes to Condensed Consolidated Pro Forma Financial Statements (unaudited) ............_16_
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eclipse Information Systems, Inc.:
We have audited the accompanying balance sheets of Eclipse Information
Systems, Inc. (an Illinois Corporation) as of December 31, 1997 and 1996, and
the related statements of income, changes in shareholder's equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Eclipse Information Systems,
Inc., as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles. 1
Washington, D.C. ARTHUR ANDERSEN LLP
February 18, 1999
1
<PAGE>
ECLIPSE INFORMATION SYSTEMS, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), AND DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
September 30 December 31,
------------ --------------------------
1998 1997 1996
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,250 $ 7,615 $ 48,922
Accounts receivable 1,329,429 551,521 297,607
Other current assets 41,698 17,537 -
------------ ------------ ------------
Total current assets 1,393,377 576,673 346,529
FIXED ASSETS, NET 234,315 166,269 101,940
OTHER ASSETS 28,344 20,800 700
------------ ------------ ------------
Total assets $ 1,656,036 $ 763,742 $ 449,169
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 421,706 $ 255,065 $ 168,191
Line of credit 300,000 - -
Current portion of capital lease obligations 34,766 27,672 16,811
------------ ------------ ------------
Total current liabilities 756,472 282,737 185,002
------------ ------------ ------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 43,715 52,830 42,546
------------ ------------ ------------
Total liabilities 800,187 335,567 227,548
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 stated value, 1,000,000
shares authorized, 125,315, 119,049, and
101,191 shares issued and outstanding as of
September 30, 1998, December 31, 1997 and 1996,
respectively 125,315 119,049 101,191
Paid-in capital 642,576 410,734 -
Retained (deficit) earnings 87,958 (101,608) 120,430
------------ ------------ ------------
Total shareholders' equity 855,849 428,175 221,621
------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,656,036 $ 763,742 $ 449,169
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
ECLIPSE INFORMATION SYSTEMS, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30 December 31
--------------------------- --------------------------
1998 1997 1997 1996
------------ ------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Service $ 5,868,506 $ 3,241,658 $ 4,850,530 $ 2,436,692
Product 119,564 296,313 529,549 922,641
------------ ------------ ------------ ------------
5,988,070 3,537,971 5,380,079 3,359,333
OPERATING EXPENSES:
Cost of service revenue 3,480,555 1,973,758 2,980,495 1,502,916
Cost of product revenue 84,686 229,163 403,685 852,894
Sales and marketing 215,172 54,433 75,957 47,427
General and administrative 1,478,584 1,035,871 1,296,672 713,072
Employee stock compensation (Note 6) 238,108 428,592 428,592 -
Depreciation and amortization 62,983 36,186 45,782 19,808
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 427,982 (220,032) 148,896 223,216
OTHER INCOME (EXPENSE):
Interest expense, net (18,453) (6,246) (7,619) 865
Other income (expense) 396 (4,718) (4,717) (22,528)
------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes 409,925 (230,996) 136,560 201,553
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES 5,359 3,006 8,598 8,727
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 404,566 $ (234,002) $ 127,962 $ 192,826
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ECLIPSE INFORMATION SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Retained
------------------------- Paid-In (Deficit)
Shares Amount Capital Earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 114,419 $ 114,419 $ 86,772 $ (72,396) $ 128,795
Retirement of common stock (13,228) (13,228) (86,772) - (100,000)
Net income - - - 192,826 192,826
BALANCE AT DECEMBER 31, 1996 101,191 101,191 - 120,430 221,621
Stock issuance 17,858 17,858 410,734 - 428,592
Distributions - - - (350,000) (350,000)
Net income - - - 127,962 127,962
BALANCE AT DECEMBER 31, 1997 119,049 119,049 410,734 (101,608) 428,175
Stock issuance (unaudited) 6,266 6,266 231,842 - 238,108
Distributions (unaudited) - - - (215,000) (215,000)
Net income (unaudited) - - - 404,566 404,566
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED) 125,315 $ 125,315 $ 642,576 $ 87,958 $ 855,849
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ECLIPSE INFORMATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED), AND THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
September 30 December 31
--------------------------- --------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 404,566 $ (234,002) $ 127,962 $ 192,826
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 62,983 36,186 45,782 19,808
Stock compensation expense 238,108 428,592 428,592 -
Loss on disposal of fixed assets - - - 22,848
Changes in assets and liabilities:
Accounts receivable (777,908) (168,887) (253,914) (184,522)
Other assets (31,705) (14,435) (37,637) 18,348
Accounts payable and accrued expenses 166,641 74,822 86,874 58,050
------------ ------------ ------------ ------------
Net cash provided by operating
activities 62,685 122,276 397,659 127,358
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (112,043) (41,324) (72,156) (30,921)
------------ ------------ ------------ ------------
Net cash used by investing activities (112,043) (41,324) (72,156) (30,921)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 300,000 - - -
Capital lease obligation (21,007) (12,360) (16,810) -
Retirement of common stock - - - (100,000)
Distributions to shareholders (215,000) - (350,000) -
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 63,993 (12,360) (366,810) (100,000)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 14,635 68,592 (41,307) (3,563)
CASH, beginning of year 7,615 48,922 48,922 52,485
------------ ------------ ------------ ------------
CASH, end of year $ 22,250 $ 117,514 $ 7,615 $ 48,922
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 18,554 $ 7,352 $ 9,853 $ 220
============ ============ ============ ============
Cash paid for income taxes $ 2,964 $ - $ - $ 5,646
============ ============ ============ ============
SUPPLEMENTAL NONCASH DISCLOSURE:
Assets acquired under capital lease obligations $ 18,986 $ - $ 37,955 $ 59,357
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ECLIPSE INFORMATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998, AND DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
Eclipse Information Systems, Inc. ("Eclipse" or the "Company"), was
incorporated in April 1990 under the laws of the state of Illinois. The
Company performs management and information systems consulting services. The
Company also resells certain hardware and software products to its customers.
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 balance sheet as of September 30, 1998, and the accompanying
statements of operations and cash flows for the nine months ended September
30, 1997 and 1998, 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 nine months
ended September 30, 1998, are not necessarily indicative of the results to be
expected for the entire fiscal year.
CHANGE IN FISCAL YEAR
During 1996, the Company changed its fiscal year-end from May 31 to December
31.
USE OF ESTIMATES
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.
REVENUE RECOGNITION AND CONCENTRATIONS OF CREDIT RISK
Revenue from time-and-materials contracts is recognized based on fixed hourly
rates for direct labor hours expended plus specified direct costs. Revenue
from fixed-price contracts is 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
6
<PAGE>
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.
Prior to 1997, the Company developed and marketed a software product. In
February 1997, the Company transferred certain assets and liabilities and all
rights to the software to a third party. The purchaser was assigned all
existing license agreements and assumed any obligations thereunder. The
purchaser agreed to support existing installations and honor all existing
maintenance agreements in effect as of January 1, 1997. The Company is not
required to update, enhance or otherwise support the software product. The
Company recognized revenue on this software product upon delivery to the
customer. Maintenance agreements required the Company to provide technical
support. Maintenance revenue was recognized ratably over the term of the
agreement, which was generally one year. For the year ended December 31, 1996,
the Company recognized $96,070 and $24,850 of license and maintenance revenue,
respectively.
As of and for the nine months ended September 30, 1998, two customers
individually represented approximately 32 and 18 percent of accounts
receivable and approximately 27 and 44 percent of revenues, respectively. As
of and for the year ended December 31, 1997, two customers individually
represented approximately 49 and 21 percent of accounts receivable and
approximately 26 and 52 percent of revenue, respectively. As of and for the
year ended December 31, 1996, two customers individually represented
approximately 19 and 15 percent of accounts receivable and approximately 24
and 27 percent of revenue, respectively.
Unbilled accounts receivable on time-and-materials contracts represent costs
incurred and gross profit recognized near the period-end but not billed until
the following period. Unbilled accounts receivable on fixed-price contracts
consist of amounts incurred which are not yet billable under contract terms.
At September 30, 1998, and December 31, 1997 and 1996, unbilled accounts
receivable totaled $120,965, $61,632, and $25,823, respectively.
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,
1997, cash equivalents consisted of funds in money market accounts.
DEPRECIATION AND AMORTIZATION
Fixed assets are stated at cost. Depreciation and amortization is provided on
an accelerated method based upon the estimated useful lives of 7 years for
furniture and equipment and 5 years for computer equipment and software.
Property acquired under capital leases are amortized straight-line over the
shorter of the respective useful life or lease term.
7
<PAGE>
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.
On June 1, 1996, the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. As of May 31, 1995, the Company had
net operating loss ("NOL") carryforwards of $142,727. Such NOL carryforwards
were fully utilized on the Company's final C Corporation tax return for its
taxable year ended May 31, 1996. The provision for income taxes for the year
ended December 31, 1996, reflects the benefit from the realization of this
deferred tax asset that had previously been fully reserved and reflects the
Company's status as in S corporation subsequent to May 31, 1996. As an S
corporation, the Company does not pay corporate income taxes on its taxable
income. Instead, the shareholders are liable for individual income taxes on
their respective shares of the Company's taxable income. Accordingly, there is
no provision for Federal income taxes subsequent to May 31, 1996. The Company
is taxable in certain states that do not recognize S Corporation status.
Included in accounts payable and accrued expenses as of September 30, 1998 and
December 31, 1997 and 1996, were net deferred tax liabilities of $13,827,
$8,715 and $3,081, primarily related to the Company's modified accrual basis
of accounting for income tax purposes. Eclipse's S corporation status was
terminated in connection with the Company's merger with ZMAX Corporation
("ZMAX")(Note 8).
3. FIXED ASSETS:
Fixed assets as of September 30, 1998, and December 31, 1997 and 1996, consist
of the following:
<TABLE>
<CAPTION>
September 30 December 31,
------------ ---------------------------
1998 1997 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Furniture and office equipment $ 74,352 $ 34,739 $ 18,169
Computer equipment and software 286,996 195,580 102,039
------------ ------------ ------------
361,348 230,319 120,208
Accumulated depreciation and amortization (127,033) (64,050) (18,268)
------------ ------------ ------------
Net fixed assets $ 234,315 $ 166,269 $ 101,940
============ ============ ============
</TABLE>
4. LINE OF CREDIT:
In June 1998, the Company entered into a $500,000 credit agreement with a
bank. Interest is due monthly on the unpaid principle balance at the lender's
prime rate plus one percent (9.25 percent as of September 30, 1998). Available
borrowings under the line of credit are based on the Company's accounts
receivable, subject to certain limitations, and all borrowings are guaranteed
8
<PAGE>
by two of the Company's shareholders. The line is secured by substantially all
of the assets of the Company and expires in Jun 1999. As of September 30,
1998, the balance due under the line of credit was $300,000. All borrowings
were repaid in December 1998.
5. 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 the Company may elect to make a discretionary contribution. The Company
made discretionary contributions of $112,500, $99,648, and $49,830 for the
nine months ended September 30, 1998, and the years ended December 31, 1997
and 1996, respectively.
6. COMMON STOCK:
COMMON STOCK ISSUED TO EMPLOYEES
In July 1997 and January 1998, the Company issued 17,858 and 6,266 shares of
common stock, respectively, to employees of the Company as consideration for
services rendered. The fair value of these shares has been recorded as
compensation expense in the accompanying financial statements.
RETIREMENT OF COMMON STOCK
In February 1996, the Company repurchased and retired 13,228 shares of common
stock from a shareholder for $100,000. These shares had originally been
purchased by the shareholder for $100,000 in 1994.
7. COMMITMENTS AND CONTINGENCIES:
STOCK PURCHASE AGREEMENT
In July 1997, the shareholders of the Company entered into a Stock Purchase
Agreement (the "Shareholder Agreement") whereby the transfer of shares of
Eclipse common stock was restricted. Under the terms of the Shareholder
Agreement, all shareholders of the Company are required to be employees. In
the event of the termination of the employment of a shareholder for cause, the
remaining shareholders shall purchase all of the shares then owned by the
terminated employee at a price equal to the Book Value per share, as defined
in the Shareholder Agreement.
Any shareholder wishing to transfer stock to a third party must give the
remaining shareholders written notice and 60 days to first purchase their
pro-rata portion of the shares subject to transfer. The remaining shareholders
may purchase the shares subject to transfer at the lower of the purchase price
and terms offered by the proposed transferee or the Agreed Value of the common
stock, as adjusted periodically, as defined in the Shareholder Agreement. Any
shares not purchased by the remaining shareholders within 60 days of notice
are permitted to be transferred to the third party.
9
<PAGE>
Upon the death of a shareholder, the remaining shareholders are required to
purchase their pro-rata portion of the deceased's shares using the proceeds
from life insurance maintained on the deceased, at a price equal to the Agreed
Value of the common stock, as adjusted periodically, as defined in the
Shareholder Agreement. In the event that the proceeds from the life insurance
are not sufficient to purchase the shares at the price prescribed in the
Shareholders Agreement, the remaining shareholders will be required to pay the
difference between the aggregate purchase price and the insurance proceeds.
The life insurance policies are held by a trust and premiums are paid by the
Company. Any proceeds from such policy that are in excess of the aggregate
purchase price of the deceased shareholders stock will be returned to the
Company.
The Shareholder Agreement terminated upon the merger of the Company with ZMAX.
PERFORMANCE SHARE PLAN
In January 1998, the Company adopted the Eclipse Performance Share Plan. Under
the terms of the Performance Share Plan, each new participant receives 1,000
Performance Shares. The initial participants were selected by the Board of
Directors. Thereafter, the Board of Directors or plan participants nominate
new participants subject to the approval of a majority of the shareholders.
Additional Performance Shares are awarded at the discretion of the Board of
Directors. There is no value or voting rights assigned to Performance Shares.
The Performance Shares are used only to determine ratios for the distribution
of profit-sharing and sale of business bonuses.
The Company may make annual discretionary profit-sharing contributions to the
Performance Share Plan. In the event that the Company enters into an agreement
to sell the Company or substantially all of the assets of the Company, an
amount equal to 10 percent of the proceeds from the sale less any liabilities
of the Company is allocated to the Plan. Any profit-sharing bonus or sale of
business bonus is allocated to plan participants in the ratio of each
participant's Performance Shares to the total number of Performance Shares. In
connection with the merger of the Company with ZMAX in December 1998 (Note 8),
10 percent of the proceeds were allocated to the Performance Share Plan and
distributed to participants. The Performance Share Plan was terminated in
connection with the merger.
LEASES
The Company leases office space and equipment under operating leases that
expire on various dates through December 2001. The Company also leases various
pieces of computer and office equipment under capital leases that expire
through December 2001.
The future minimum lease obligations under operating and capital leases as of
December 31, 1997, are as follows:
10
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<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31 LEASES LEASES
----------- ---------- ----------
<S> <C> <C>
1998 $ 137,915 $ 36,584
1999 141,105 36,584
2000 123,780 11,684
2001 120,600 11,684
---------- ----------
Total $ 523,400 96,536
==========
Less- Amounts representing interest (16,034)
----------
$ 80,502
==========
</TABLE>
Subsequent to December 31, 1997, the Company entered into an operating lease
and a capital lease related to a new office. The operating lease requires
monthly payments of $1,744 and expires July 2003. The capital lease requires
monthly payments of principal and interest of $500 and expires in May 2003.
Rent expense for the nine months ended September 30, 1998, and the years ended
December 31, 1997 and 1996, was $94,508, $31,893, and $26,685, respectively.
8. SUBSEQUENT ACQUISITION:
On December 14, 1998, ZMAX acquired all of the issued and outstanding common
stock of Eclipse in exchange for 1,700,000 shares of ZMAX common stock and
$1,450,000 in cash.
11
<PAGE>
Pro Forma CONDENSED COMBINED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
The following unaudited Pro Forma condensed combined consolidated balance
sheet under the heading "Pro Forma ZMAX and Eclipse" gives effect to the
acquisition of Eclipse Information Systems, Inc. ("Eclipse"), for cash of
approximately $1.9 million (including direct acquisition costs of $425,000)
and 1,700,000 shares of ZMAX common stock, as if the acquisition had occurred
on September 30, 1998.
The unaudited pro forma condensed combined consolidated statements of
operations for the nine months ended September 30, 1998 under the heading "Pro
Forma ZMAX and Eclipse" gives effect to the Eclipse acquisition as if it had
occurred on January 1, 1997. The unaudited Pro Forma condensed combined
consolidated statements of operations for the year ended December 31, 1997
under the heading "Pro Forma ZMAX and Eclipse" also gives effect to the
Eclipse acquisition as if it had occurred on January 1, 1997. The unaudited
Pro Forma condensed combined consolidated statements of operations also gives
effect to (i) the termination of Eclipse's S Corporation income tax status in
connection with the merger and to (ii) reductions in salary and bonuses to the
prior owners and key employees of Eclipse to the extent the owners and key
employees have agreed prospectively to such reductions.
The Eclipse acquisition has been accounted for by the purchase method of
accounting. The purchase price has been allocated on a preliminary basis to
the assets acquired based upon the estimated fair value of such assets.
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, Eclipse Information Systems Inc. Financial
Statements and notes thereto included herein and the ZMAX Consolidated
Financial Statements and notes thereto included in the Company's Form 10-Q for
the quarter ended September 30, 1998 and Form 10-K for the year ended December
31, 1997.
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 entities were not under common control or
management, historical combined consolidated results may not be comparable to,
or indicative of, future performance.
12
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ZMAX CORPORATION
Pro Forma CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Pro Forma ZMAX AND
ZMAX ECLIPSE ADJUSTMENTS ECLIPSE
------------- ------------- ------------- -------------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 4,431,530 22,250 $ (1,450,000) (A) $ 3,003,780
Accounts receivable 2,735,146 1,329,429 - 4,064,575
Prepaid expenses and other assets 95,666 41,698 - 137,364
------------- ------------- ------------- -------------
Total current assets 7,262,342 1,393,377 (1,450,000) 7,205,719
Property and equipment, net 282,661 234,315 - 516,976
Intangible assets, net 3,159,725 - 8,168,900 (B) 11,328,625
Other assets 5,193 28,344 - 33,537
------------- ------------- ------------- -------------
Total assets $ 10,709,921 $ 1,656,036 $ 6,718,900 $ 19,084,857
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 860,733 421,706 425,000 (C) $ 1,707,439
Line of credit - 300,000 - 300,000
Current portion of capital lease obligations - 34,766 - 34,766
Customer deposits 297,671 - - 297,671
------------- ------------- ------------- -------------
Total current liabilities 1,158,404 756,472 425,000 2,339,876
Capital lease obligations, net of current portion - 43,715 - 43,715
------------- ------------- ------------- -------------
Total liabilities 1,158,404 800,187 425,000 2,383,591
Stockholders' equity:
Common stock 11,729 125,315 (123,615) (D) 13,429
Additional paid-in capital 35,280,104 642,576 6,505,473 (D) 42,428,153
Accumulated deficit (25,740,316) 87,958 (87,958) (D) (25,740,316)
------------- ------------- ------------- -------------
Total stockholders' equity 9,551,517 855,849 6,293,900 16,701,266
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 10,709,921 $ 1,656,036 $ 6,718,900 $ 19,084,857
============= ============= ============= =============
</TABLE>
13
<PAGE>
ZMAX CORPORATION
Pro Forma CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Pro Forma ZMAX AND
ZMAX ECLIPSE ADJUSTMENTS ECLIPSE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,608,242 $ 5,988,070 - $ 12,596,312
Operating Expenses:
Cost of revenues 2,065,210 3,565,241 - 5,630,451
Research and development 332,274 - - 332,274
Sales and marketing 839,636 215,172 - 1,054,808
General and administrative 2,645,398 1,478,584 (30,000) (F) 4,093,982
Employee stock compensation - 238,108 - 238,108
Amortization and depreciation 953,408 62,983 255,278 (E) 1,271,669
------------- ------------- ------------- -------------
Loss from operations (227,684) 427,982 (225,278) (24,980)
Other income (expense):
Interest income (expense) 200,026 (18,453) - 181,573
Other 796 396 - 1,192
------------- ------------- ------------- -------------
Net loss before income taxes (26,862) 409,925 (225,278) 157,785
Income tax expense - 5,359 (5,359) (G) -
------------- ------------- ------------- -------------
Net loss $ (26,862) $ 404,566 $ (219,919) $ 157,785
============= ============= ============= =============
Basic net loss per share $ (0.00) $ 0.01
============= =============
Diluted net loss per share $ (0.00) $ 0.01
============= =============
Shares used in computing basic net loss
per share 10,325,913 12,025,913
============= =============
Shares used in computing diluted net loss
per share 10,325,913 12,026,287
============= =============
</TABLE>
14
<PAGE>
ZMAX CORPORATION
Pro Forma CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Pro Forma ZMAX AND
ZMAX ECLIPSE ADJUSTMENTS ECLIPSE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,425,360 $ 5,380,079 $ - $ 6,805,439
Operating Expenses:
Cost of revenues 667,098 3,384,180 - 4,051,278
Sales and marketing 1,110,655 75,957 - 1,186,612
General and administrative 4,148,421 1,296,672 (270,000) (F) 5,175,093
Employee stock compensation - 428,592 - 428,592
Amortization and depreciation 1,008,864 45,782 340,371 (E) 1,395,017
------------- ------------- ------------- -------------
Loss from operations (5,509,678) 148,896 (70,371) (5,431,153)
Other income (expense):
Interest income (expense) (1,228,665) (7,619) - (1,236,284)
Other (7,468,356) (4,717) - (7,473,073)
------------- ------------- ------------- -------------
Net loss before income taxes (14,206,699) 136,560 (70,371) (14,140,510)
Income tax expense - 8,598 (8,59) (G) -
------------- ------------- ------------- -------------
Net loss $(14,206,699) $ 127,962 $ (61,773) $(14,140,510)
============= ============= ============= =============
Basic and diluted net loss per share $ (2.58) $ (1.96)
============= =============
Shares used in computing basic and
diluted net loss per share 5,502,668 7,202,668
============= =============
</TABLE>
15
<PAGE>
NOTES TO UNAUDITED Pro Forma CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(A) Reflects the cash payment of $1,450,000 to former Eclipse shareholders.
(B) Reflects the excess purchase price paid by ZMAX over the fair value of
the Eclipse net assets acquired.
(C) Reflects the accrual of estimated direct costs related to the
acquisition.
(D) Reflects the issuance of 1,700,000 shares of ZMAX Common Stock to former
Eclipse Shareholders, net of the elimination of historical equity
balances of Eclipse.
(E) Reflects amortization of the excess of the purchase price paid by ZMAX
over the fair value of the Eclipse net assets acquired over the
estimated weighted average life of 25 years.
(F) Reflects prospective reductions in salary and bonuses to the prior
owners and key employees of Eclipse as agreed upon.
(G) 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.
16
