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, 2000
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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
WIDEPOINT 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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ZMAX CORPORATION
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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 1,
2000; 12,984,913 shares of common stock, $.001 par value per share.
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WIDEPOINT CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 (audited) 1
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,325,503 $ 4,226,434
Accounts receivable,
net of allowance of $71,635 and $110,000, respectively 3,004,113 5,548,123
Prepaid expenses and other assets 360,075 394,554
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Total current assets 5,689,691 10,169,111
Property and equipment, net 711,494 705,445
Intangible assets, net 9,778,205 10,114,400
Other assets 74,130 -
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Total assets $ 16,253,520 $ 20,988,956
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,745,137 $ 3,230,698
Current portion of capital lease obligation 28,244 27,149
Current portion of long term debt 912,662 1,000,000
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Total current liabilities 2,686,043 4,257,847
Long-term capital lease obligation, net of current portion 42,165 54,260
Long-term debt 1,898,336 1,833,436
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Total liabilities 4,626,544 6,145,543
Commitments and contingencies (Note 6)
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,
12,984,913 and 12,949,913 shares issued and
outstanding as of June 30, 2000 and December 31, 1999, respectively 12,985 12,950
Stock warrants 280,000 280,000
Deferred compensation (85,587) (120,587)
Additional paid-in capital 41,931,483 41,763,268
Accumulated deficit (30,511,905) (27,092,218)
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Total shareholders' equity 11,626,976 14,843,413
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Total liabilities & shareholders' equity $ 16,253,520 $ 20,988,956
============= ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Professional services $ 3,566,045 $ 6,376,516 $ 7,524,947 $ 11,291,378
Software 10,122 702,215 36,074 893,998
------------ ------------ ------------ ------------
Total revenue 3,576,167 7,078,731 7,561,021 12,185,376
Operating expenses:
Cost of sales - Professional services 1,918,976 2,744,862 4,110,841 5,167,508
Cost of sales - Software 3,680 19,808 18,400 39,733
Research and development - 112,255 - 280,170
Sales and marketing 499,390 670,346 1,166,814 1,217,326
General and administrative 2,386,033 2,142,846 5,133,985 3,968,420
Depreciation and amortization 223,166 414,294 478,109 821,202
------------ ------------ ------------ ------------
Income (loss) from operations (1,455,078) 974,320 (3,347,128) 691,017
Other income (expenses):
Interest income 28,951 31,315 62,901 68,578
Interest expense (66,955) (2,387) (135,461) (4,497)
Other - (131) - (2,990)
------------ ------------ ------------ ------------
Net income (loss) $(1,493,082) $ 1,003,117 $(3,419,688) $ 752,108
============ ============ ============ ============
Basic net income (loss) per share $ (0.11) $ 0.08 $ (0.26) $ 0.06
============ ============ ============ ============
Basic weighted average shares outstanding 12,984,913 12,949,913 12,973,164 12,949,913
============ ============ ============ ============
Diluted net income (loss) per share $ (0.11) $ 0.08 $ (0.26) $ 0.06
============ ============ ============ ============
Diluted weighted average shares outstanding 12,984,913 12,972,653 12,973,164 13,034,804
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,493,082) $ 1,003,117 $ (3,419,688) $ 752,108
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 250,775 429,146 576,581 844,873
Changes in assets and liabilities
Accounts receivable 837,882 (1,337,302) 2,544,010 (2,059,847)
Prepaid expenses and other assets (30,558) (83,660) (39,651) (232,475)
Accounts payable and accrued expenses (110,636) 470,532 (1,485,561) 511,736
------------- ------------- ------------- ------------
Net cash provided by (used in) operating activities (545,619) 481,833 (1,824,309) (183,605)
------------- ------------- ------------- ------------
Net cash used in investing activities:
Purchases of property and equipment (86,464) (31,156) (167,631) (112,231)
------------- ------------- ------------- ------------
Net cash used in investing activities (86,464) (31,156) (167,631) (112,231)
------------- ------------- ------------- ------------
Net cash provided by (used in) financing activities
Net borrowings (payments) on long-term obligations (70,693) 25,740 91,009 17,199
------------- ------------- ------------- ------------
Net cash (used in) provided by financing activities (70,693) 25,740 91,009 17,199
------------- ------------- ------------- ------------
Net increase (decrease) in cash (702,776) 476,417 (1,900,931) (278,637)
------------- ------------- ------------- ------------
Cash, beginning of period 3,028,279 3,766,072 4,226,434 4,521,126
------------- ------------- ------------- ------------
Cash, end of period $ 2,325,503 $ 4,242,489 $ 2,325,503 $ 4,242,489
============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
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WIDEPOINT 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
WidePoint Corporation (formerly known as ZMAX Corporation; the "Company"), as
of December 31, 1999, 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, 2000, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
On November 6, 1996, the Company acquired all of the outstanding shares
of Century Services, Inc. ("CSI"), a Maryland corporation. On December 14,
1998, the Company acquired all the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), an Illinois corporation. On October 1, 1999, ZMAX
acquired all of the outstanding shares of Parker Management Consultants, Inc.
("PMC"), a Delaware corporation. In December 1999, the Company established a
new subsidiary, WidePoint Corporation ("WidePoint-Subsidiary") which effective
in January 2000 began to substantially provided all of the Company's services.
On May 25, 2000, the shareholders of the Company voted to approve the
amendment of the Company's Certificate of Incorporation to change the name of
the Company from ZMAX Corporation to WidePoint Corporation. Effective June 26,
2000, the trading symbol for the Company's Common Stock on the NASDAQ SmallCap
Market was changed from "ZMAX" to "WDPT" as a result of the change in the
Company's corporate name from ZMAX Corporation to WidePoint Corporation. On
June 30, 2000, the Company merged CSI, Eclipse, and WidePoint-Subsidiary into
the Company, with the Company being the surviving entity in such mergers. As
of June 30, 2000, the Company had operations in Maryland, Illinois, Minnesota,
Texas and Ohio. The accompanying consolidated financial statements include the
accounts of the acquired entities since their respective dates of acquisition.
All significant inter-company amounts have been eliminated.
NATURE OF OPERATIONS
During 1998 and 1997, the Company's revenues were derived primarily from
millennium services, being the primary business of CSI at the time of its
acquisition by the Company. In December 1998, the Company expanded its
operations through the acquisition of Eclipse. Eclipse performs management and
information systems consulting services. In October 1999, the Company again
expanded its operations through the acquisition of PMC. PMC also performs
management and information systems consulting services.
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During 1999, the Company began to implement an intentional shift in its
business mix away from millennium services and into management and information
systems consulting, with a specific focus on the Internet. In conjunction with
this shift to e-business, the Company further consolidated its operations by
merging many of its subsidiaries into itself and changing its corporate name
to further highlight these changes within the Company. The Company currently
specializes in providing strategic and technical expertise in the realm of
e-business and during the period ended June 30, 2000, had no revenues related
to millennium services.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology; 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; the integration of acquired businesses;
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.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for purposes of these consolidated financial
statements. The Company maintains cash and cash equivalents with various major
financial institutions. At June 30, 2000 and December 31, 1999, cash and cash
equivalents included $1,363,104 and $2,867,950, respectively, of investments
in overnight sweep accounts. At times, cash balances held at financial
institutions were in excess of federally insured limits. The Company places
its temporary cash investments with high-credit, quality financial
institutions, and as a result, the Company believes that no significant
concentration of credit risk exists with respect to these cash investments.
REVENUE RECOGNITION
Revenue on time-and-materials contracts is recognized based upon hours
incurred at contract rates plus direct costs. Revenue on fixed-price contracts
is 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 near the period-end 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
June 30, 2000 and December 31, 1999, unbilled accounts receivable totaled
$3,900 and $198,773, respectively.
SIGNIFICANT CUSTOMERS
For the three and six months ended June 30, 2000, no customer
individually represented more than 10% of revenue. For the three months ended
June 30, 1999, two customers individually represented 16% and 12%,
respectively, of revenue. During the six months ended June 30, 1999, two
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customers individually represented 14% and 10%, respectively, 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 and governments. As of June 30, 2000, one customer individually
represented 13% of accounts receivable. As of June 30, 1999, one customer
individually represented 12% of accounts receivable.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under SFAS No.109, deferred tax assets and liabilities are computed
based on the difference between the financial statement and income tax bases
of assets and liabilities using the enacted marginal tax rate. SFAS No. 109
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.
EARNINGS PER SHARE
SFAS No. 128 "Earnings per share" requires dual presentation of basic
and diluted earnings 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 in the three month and six month periods
ending June 30, 1999 that were subject to cancellation agreements have been
included in either the basic or diluted calculation. The calculation of the
basic and diluted weighted average shares is shown below:
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<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARE CALCULATIONS
Weighted average shares of common stock
Outstanding 12,984,913 12,977,797 12,973,164 13,047,505
Less: Average number of cancelable shares
common stock outstanding - (27,884) - (97,592)
----------- ----------- ----------- -----------
Basic weighted average shares outstanding 12,984,913 12,949,913 12,973,164 12,949,913
Treasury stock effect of options and warrants - 22,740 - 84,891
Diluted weighted average shares outstanding 12,984,913 12,972,653 12,973,164 13,034,804
=========== =========== =========== ===========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 requires companies
to report any changes in revenue recognition as a cumulative change in
accounting principle in accordance with Accounting Principles Board Opinion
20, "Accounting Changes." The SEC subsequently issued SAB 101A, "Amendment:
Revenue Recognition in Financial Statements," which delayed implementation of
SAB 101 until the Company's second fiscal quarter of 2000 and SAB 101B, which
delays the implementation date of SAB 101 until no later than the Company's
fourth fiscal quarter of 2000. The Company is currently in the process of
evaluating the impact, if any, SAB 101 will have on its financial position or
results of operations.
During 1998, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires a
business enterprise, based upon a management approach, to disclose financial
and descriptive information about its operating segments. Operating segments
are components of an enterprise about which separate financial information is
available and regularly evaluated by the chief operating decision maker(s) of
an enterprise. Under this definition, the Company operated as a single segment
for all periods presented.
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3. DEBT:
PROMISSORY NOTE PAYABLE
In conjunction with the PMC acquisition, the Company issued a $3.0
million note payable to the sole shareholder of PMC. This $3.0 million note
payable accrues interest at a rate of 6 percent per annum. The principal
payments are due in $1.0 million installments on October 1, 2000, 2001 and
2002. Interest payments related to this note are due on a quarterly basis
commencing on December 31, 1999. The Company has imputed interest on this note
at 8.5 percent and as a result, has recorded a discount on the promissory note
payable of approximately $167,000. This discount is being amortized on the
effective interest method over the term of the note. As of June 30, 2000,
approximately $65,000 of this discount had been amortized.
4. STOCK SUBJECT TO CANCELLATION:
In September 1995, the Company entered into stock cancellation
agreements with certain stockholders that provided for the cancellation of
775,808 shares of Company 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
shares were returned to the Company and canceled in April 1999.
5. STOCK WARRANTS:
On September 20, 1999, the Company entered into a two-year agreement to
engage an international investment banking firm to provide investment banking,
merger and acquisition and strategic planning services. In conjunction with
the hiring of that firm, the Company issued that firm a warrant to purchase
200,000 shares of Company common stock at $2.75 per share, an amount that
exceeded the stock's closing sale price on that date. The Company used the
Black-Scholes option pricing model to value this warrant and it was determined
to have a fair value of approximately $140,000, which is being recognized
ratably over the term of the agreement. This deferred compensation has been
reflected as a separate component of stockholders' equity and as of June 30,
2000, approximately $54,500 of expense had been recognized related to the
issuance of this stock purchase warrant.
On October 1, 1999, the Company issued a warrant to purchase 200,000
shares of Company common stock at $5.00 per share, an amount that exceeded the
stock's closing sale price on that date, as part of the PMC acquisition. The
Company used the Black-Scholes option pricing model to value this warrant at
approximately $140,000. This value has been reflected as part of stock
warrants in the stockholders' equity section of the consolidated balance sheet
and has been included as part of the Company's purchase accounting for the PMC
acquisition.
6. COMMITMENTS AND CONTINGENCIES:
LITIGATION
In December 1999, a third-party complaint was filed against PMC by a
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former client of PMC. The complaint alleged, among other things, breach of
contract pertaining to an Enterprise Resource Planning implementation. In the
complaint, the former client is seeking approximately $10.0 million in total
damages. The complaint relates to work completed prior to the Company's
acquisition of PMC and, under the terms of the agreements under which the
Company acquired PMC, the sole shareholder of PMC has indemnified the Company
against damages related to this complaint. The sole shareholder of PMC has
engaged legal counsel and intends to vigorously defend against this complaint.
In the opinion of management, the Company will not incur a material loss
related to this legal matter.
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 consolidated financial statements.
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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, 1999.
The information set forth below includes forward-looking statements.
Certain 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
WidePoint Corporation (formerly known as ZMAX Corporation; the
"Company") focuses on acquiring, building and operating companies in the
information technology ("IT") industry. In 1996, the Company acquired all of
the outstanding shares of Century Services, Inc. ("CSI"), a corporation that
provided re-engineering and information processing services to users of
large-scale computer systems. In December 1998, the Company acquired all of
the outstanding shares of Eclipse Information Systems, Inc. ("Eclipse"), a
corporation that provides IT consulting services through several practice
areas focused in distributed client server technologies. In October 1999, the
Company acquired all of the outstanding shares of Parker Management
Consulting, Ltd. ("PMC"), a corporation that provides IT consulting services
focused in Enterprise Resource Planning ("ERP"). During 1999, the Company
established a new subsidiary named WidePoint Corporation
("WidePoint-Subsidiary"). During the first half of 2000, the Company
substantially consolidated all of the Company's IT services into this
subsidiary. Further, in June 2000, the Company merged CSI, Eclipse and
WidePoint-Subsidiary into the Company, with the Company being the surviving
entity in such mergers. In conjunction with such mergers, the Company changed
its corporate name from ZMAX Corporation to WidePoint Corporation and changed
the trading symbol for its common stock on the NASDAQ SmallCap Market from
"ZMAX" to "WDPT."
As a result of the acquisition by the Company on October 1, 1999, of all
the outstanding capital stock of PMC, the results of operations of PMC are
included in the financial statements of the Company from that date of
acquisition. Prior to that acquisition, PMC was a privately held company with
its headquarters located in Laurel, Maryland. A further description of this
transaction is set forth in the Company's Form 8-K/A filed on December 15,
1999, with the Securities and Exchange Commission ("SEC").
As a result of the acquisition by the Company on December 14, 1998, of
all the outstanding capital stock of Eclipse, the results of operations of
Eclipse are included in the financial statements of the Company from that date
of acquisition. Prior to that acquisition, Eclipse was a privately held
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company with its headquarters located in Oakbrook, Illinois. A further
description of this transaction is set forth in the Form 8-K/A filed on March
1, 1999, with the SEC.
As a result of the acquisition by the Company on November 6, 1996, of
all the outstanding stock of CSI, the results of operations of CSI were
included in the financial statements of the Company from that date of
acquisition. Through 1999, CSI marketed millennium services to a variety of
commercial and governmental organizations.
During the first six months of 2000, the Company has substantially
integrated all of the services of its subsidiaries into the Company. During
the next 12 months, the Company intends to make investments in the expansion
and further development of additional IT services and markets, as well pursue
other potentially synergistic acquisitions. In view of these changes, the
Company believes the historical period-to-period comparisons of its financial
results are not necessarily indicative of future performance. Specifically, as
the Company increases its investments in other IT services, it will incur
training, salary and other costs prior to the recognition of related revenues.
In addition, a significant portion 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.
For the three-month period ended June 30, 2000, the Company's revenues
decreased by $3.5 million to $3.6 million as compared to $7.1 million for the
three-month period ended June 30, 1999. For the six month period ended June
30, 2000, the Company's revenues decreased by $4.6 million to $7.6 million as
compared to $12.2 million for the six month period ended June 30, 1999. For
each of the three-month period and the six month period ended June 30, 2000,
no revenues were generated by CSI's millennium services as compared to $3.9
million and $6.1 million, or 55% and 50% of revenues, respectively, for the
three-month period and the six month period ended June 30, 1999. The overall
decrease in revenues during each of the three-month period and the six month
period ended June 30, 2000 was partially offset by increased non-millennium
services. As a result of this significant and planned shift in the Company's
revenues away from millennium services and into other IT services, the Company
believes the period-to-period comparisons of its financial results are not
indicative of future performance.
The Company's current cost structure consists 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 future quarters.
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 related to salaries and benefits, the Company must
effectively manage these costs to achieve profitability. In addition, certain
of the Company's projects may be priced on a fixed fee basis. The
profitability on an individual fixed fee project depends upon completing the
project within the estimated number of staff hours and within the agreed upon
time frame. To date, the Company has typically been able to maintain its
operating margins through efficiencies achieved completing fixed fee projects
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within budget, by offsetting increases in consultant salaries with increases
in consultant fees, and by effectively managing general overhead costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------
REVENUES. Revenues for the three month period ended June 30, 2000, were
$3.6 million, a decrease of approximately $3.5 million, as compared to
revenues of $7.1 million for the three month period ended June 30, 1999. The
decrease in revenues was primarily attributable to decreased sales from
millennium services and staff augmentation services that were not offset by
revenues from the Company's intentional shift to project-based E-value chain
services.
GROSS PROFIT. Gross profit for the three month period ended June 30,
2000, was $1.7 million, or 46% of revenues, a decrease of $2.6 million over
gross profit of $4.3 million, or 61% of revenues, for the three month period
ended June 30, 1999. The decline of gross profit was attributable to lower
margins associated with the introduction of new web enabled services, lower
margins traditionally on IT consulting services as compared to the higher
margins associated with millennium services and software, and a cost overrun
associated with a fixed price project that was accounted for in accordance
with Company policy.
RESEARCH AND DEVELOPMENT. There were no research and development
expenses for the three month period ended June 30, 2000, which represented a
decrease of $0.1 million, as compared to $0.1 million, or 2% of revenues, for
the three month period ended June 30, 1999. The Company has terminated its
research and development activities as it has shifted its focus from its
millennium services and software towards project-based IT consulting services.
SALES AND MARKETING. Sales and marketing expenses for the three month
period ended June 30, 2000, were $0.5 million, or 14% of revenues, a decrease
of $0.2 million, as compared to $0.7 million, or 9% of revenues, for the three
month period ended June 30, 1999. The decrease in sales and marketing expenses
for the three months ended June 30, 2000 was primarily attributable to the
release of sales personal associated with the Company's CSI subsidiary which
primarily performed most of the Company's prior millennium services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended June 30, 2000, were $2.4 million, or 67% of revenues,
an increase of $0.2 million, as compared to $2.1 million, or 30% of revenues,
incurred by the Company for the three month period ended June 30, 1999. The
increase in general and administrative expenses for the three month period
ended June 30, 2000 was primarily attributable to increases in non-billable
staff and training cost associated with the intentional shift of the Company's
services from millennium services and into management and information systems
consulting.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three month period ended June 30, 2000, were $0.2 million, or 6% of
revenues, a decrease of $0.2 million, as compared to $0.4 million of such
expenses, or 6% of revenues, incurred by the Company for the three month
period ended June 30, 1999. The decrease in depreciation and amortization
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expenses for the three month period ended June 30, 2000 was primarily
attributable to the write-off of certain intangible assets associated with the
Company's discontinued millennium services during the fourth quarter of 1999.
OTHER INCOME (EXPENSE). Interest income for the three month period ended
June 30, 2000, was $29,000, or 1% of revenues, a decrease of $2,000 as
compared to $31,000, or 1% of revenues, for the three month period ended
June 30, 1999. The decrease in interest income for the three month period
ended June 30, 2000 was primarily attributable to lesser amounts of cash
available for investment in overnight sweep accounts. Interest expense for the
three month period ended June 30, 2000 was $67,000. Interest expense for the
three months ended June 30, 1999 was $2,000. The increase in interest expense
for the three months ended June 30, 2000 was primarily attributable to the
issuance of a $3.0 million promissory note with an imputed interest rate of
8.5% per annum which has been included as part of the purchase price paid by
the Company in conjunction with its acquisition of PMC in October 1999.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
As a result of the above, the EBITDA loss for the quarter ended June 30, 2000
was $1.2 million. This represents an increased loss in EBITDA of $2.6 million
as compared to the EBITDA of $1.4 million for the quarter ending June 30,
1999.
NET INCOME (LOSS). As a result of the above, the net loss for the three
month period ended June 30, 2000, was $1.5 million as compared to the net
income of approximately $1.0 million for the three months ended June 30, 1999,
which represents a difference of approximately $2.5 million.
SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1999.
REVENUES. Revenues for the six month period ended June 30, 2000, were
$7.6 million, a decrease of approximately $4.6 million, as compared to
revenues of $12.2 million for the six month period ended June 30, 1999. The
decrease in revenue was primarily attributable to decreased sales from
millennium services and staff augmentation services that were not offset by
revenues from the Company's intentional shift to project-based E-value chain
services.
GROSS PROFIT. Gross profit for the six month period ended June 30, 2000,
was $3.4 million, or 45% of revenues, a decrease of $3.6 million over gross
profit of $7.0 million, or 51% of revenues, for the six month period ended
June 30, 1999. The decline of gross profit was attributable to lower margins
associated with the introduction of new web enabled services, lower margins
traditionally on IT consulting services as compared to the higher margins
associated with millennium services and software, and a cost overrun
associated with a fixed price project that was accounted for in accordance
with Company policy.
RESEARCH AND DEVELOPMENT. There were no research and development
expenses for the six month period ended June 30, 2000, which represented a
decrease of $0.3 million, as compared to $0.3 million, or 2% of revenues, for
the six month period ended June 30, 1999. The Company has terminated its
research and development activities as it has shifted its focus from its
millennium services and software towards project-based IT consulting services.
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SALES AND MARKETING. Sales and marketing expenses for the six month
period ended June 30, 2000, were $1.2 million, or 16% of revenues, a decrease
of less than $0.1 million, as compared to $1.2 million, or 10% of revenues,
for the six month period ended June 30, 1999. The decrease in sales and
marketing expenses for the six month period ended June 30, 2000 was primarily
attributable to the release of sales personal associated with the Company's
CSI subsidiary which primarily performed most of the Company's prior
millennium services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six month period ended June 30, 2000, were $5.1 million, or 67% of revenues,
an increase of $1.2 million, as compared to $4.0 million, or 33% of revenues,
incurred by the Company for the six month period ended June 30, 1999. The
increase in general and administrative expenses for the six month period ended
June 30, 2000 was primarily attributable to increases in non-billable staff
and training cost associated with the intentional shift of the Company's
services from millennium services and into management and information systems
consulting.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six month period ended June 30, 2000, were $0.5 million, or 7% of
revenues, a decrease of $0.3 million, as compared to $0.8 million of such
expenses, or 7% of revenues, incurred by the Company for the six month period
ended June 30, 1999. The decrease in depreciation and amortization expenses
for the six months ended June 30, 2000 was primarily attributable to the
write-off of certain intangible assets associated with the Company's
discontinued millennium services during the fourth quarter of 1999.
OTHER INCOME (EXPENSE). Interest income for the six month period ended
June 30, 2000, was $63,000, or 0.1% of revenues, a decrease of $6,000 as
compared to $69,000, or 0.1% of revenues for the six month period ended June
30, 1999. The decrease in interest income for the six months ended June 30,
2000 was primarily attributable to lesser amounts of cash available for
investment in overnight sweep accounts. Interest expense for the six months
ended June 30, 2000 was $135,000. Interest expense for the six months ended
June 30, 1999 was $4,000. The increase in interest expense for the six months
ended June 30, 2000 was primarily attributable to the issuance of a $3.0
million promissory note with an imputed interest rate of 8.5% per annum which
has been included as part of the purchase price paid by the Company in
conjunction with its acquisition of PMC in October 1999.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
As a result of the above, the EBITDA loss for the six months ended June 30,
2000 was $2.9 million. This represents an increased loss in EBITDA of $4.4
million as compared to the EBITDA of $1.5 million for the six months ending
June 30, 1999.
NET INCOME (LOSS). As a result of the above, the net loss for the six
months ended June 30, 2000, was $3.4 million as compared to the net income of
approximately $0.8 million for the six months ended June 30, 1999, which
represents a difference of approximately $4.2 million.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has, since inception, financed its operations and capital
expenditures through the sale of stock, seller notes, convertible notes,
convertible exchangeable debentures and the proceeds from the exchange offer
and exercise of the warrants related to the convertible exchangeable
debentures. Cash used in operating activities for the quarter ended June 30,
2000, was approximately $0.5 million as compared to cash provided by operating
activities of $0.5 million for the quarter ended June 30, 1999. The increase
in cash used in operations during the second quarter of 2000 was primarily a
result of the net loss from the Company's operations and a decrease in
accounts payable and accrued expenses related to the termination of the
Company's millennium operations. Capital expenditures on property and
equipment were less than $0.1 million for the quarters ended June 30, 2000,
and 1999.
As of June 30, 2000, the Company had net working capital of
approximately $3.0 million. The Company's primary source of liquidity consists
of approximately $2.3 million in cash and cash equivalents and approximately
$3.0 million of accounts receivable. The Company's current liabilities include
$1.7 million in accounts payable and accrued expenses and the current portion
of a note payable of $0.9 million due October 1, 2000 related to the PMC
acquisition.
The market for the Company's products is expanding and the Company's
business environment is characterized by rapid technological changes. In 1999,
the Company began to shift away from millennium services and has substantially
consolidated its current subsidiaries into one operating company. The Company
requires substantial working capital to fund the future growth of its
business, particularly to finance accounts receivable, sales and marketing
efforts, 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 for new product and service 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 of the market 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 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 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
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statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 and the emerging
services market, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 25, 2000.
The following person was elected by the following votes to serve as a
Class III director of the Board of Directors for the ensuing three year period
or until his successor is elected and qualified:
Name Votes For Votes Withheld
---- --------- --------------
James Ritter 6,985,070 49,163
At the Company's Annual Meeting, the stockholders approved the proposed
amendment to the Company's Certificate of Incorporation to change the name of
the Company to WidePoint Corporation. Such proposal was approved by a vote of
9,987,958 shares for and 33,807 shares against, with 12,468 shares abstaining.
At the Company's Annual Meeting, the stockholders ratified the selection
of Arthur Andersen LLP as the independent accountants for the Company for the
current fiscal year. Such proposal was approved by a vote of 6,993,817 shares
for and 17,925 shares against, with 22,491 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
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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 14, 2000 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
