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 MARCH 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 000-23967
ZMAX CORPORATION
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
-------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
--------------
-------------------------------------------------------------------------
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 May 1,
2000; 12,984,913 shares of common stock, $.001 par value per share.
<PAGE>
ZMAX CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000
(unaudited) and December 31, 1999 1
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 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 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,028,279 $ 4,226,434
Accounts receivable, net of allowance of $110,000 3,841,995 5,548,123
Prepaid and other assets 329,517 394,554
------------- -------------
Total current assets 7,199,791 10,169,111
Property and equipment, net 690,847 705,445
Intangible assets, net 9,945,661 10,114,400
Other assets 74,130 -
------------- -------------
Total assets $ 17,910,429 $ 20,988,956
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,855,773 $ 3,230,698
Current portion of note payable 1,000,000 1,000,000
Current portion of capital lease obligation 27,800 27,149
------------- -------------
Total current liabilities 2,883,573 4,257,847
Note payable, net of current portion 1,877,238 1,833,436
Capital lease obligation, net of current portion 47,060 54,260
------------- -------------
Total liabilities 4,807,871 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 March 31, 2000 and December 31, 1999, respectively. 12,985 12,950
Stock warrants 280,000 280,000
Deferred compensation (103,087) (120,587)
Additional paid-in capital 41,931,483 41,763,268
Retained earnings (29,018,823) (27,092,218)
------------- -------------
Total shareholders' equity 13,102,558 14,843,413
Total liabilities & shareholders' equity $ 17,910,429 $ 20,988,956
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Revenues $ 3,984,854 $ 5,106,645
Operating expenses:
Cost of sales 2,206,585 2,442,571
Research and development - 167,916
Sales and marketing 667,425 546,980
General & administrative 2,747,952 1,825,574
Depreciation & amortization 254,943 406,908
------------- -------------
Loss from operations (1,892,051) (283,304)
Other income (expenses):
Interest income 33,953 37,263
Interest expense (68,507) (2,110)
Other - (2,859)
------------- -------------
Net loss before income taxes (1,926,605) (251,010)
------------- -------------
Income tax expense - -
------------- -------------
Net loss $ (1,926,605) $ (251,010)
============= =============
Basic and diluted net loss per share $ (0.15) $ (0.02)
============= =============
Basic and diluted weighted average shares outstanding 12,961,543 12,949,913
============= =============
</TABLE>
The accompanying notes are an integral part of these consoloidated statements.
2
<PAGE>
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,926,605) $ (251,010)
Adjustments to reconcile loss to net cash
Depreciation and amortization expense 264,504 415,727
Amortization of deferred compensation 17,500 -
Amortization of discount on notes payable 43,802 -
Changes in assets and liabilities
Accounts receivable 1,706,128 (722,545)
Prepaid expenses and other assets 65,037 (148,814)
Other assets (74,130) -
Accounts payable and accrued expenses (1,374,925) 41,204
------------- -------------
Net cash used in operating activities $ (1,278,689) $ (665,438)
------------- -------------
Net cash used in investing activities:
Purchase of property and equipment (81,168) (81,075)
------------- -------------
Net cash used in investing activities $ (81,168) $ (81,075)
------------- -------------
Net cash provided by (used in) financing activities
Net payments on long-term obligations (6,548) (8,541)
Net proceeds from the exercise of options 168,250 -
------------- -------------
Net cash provided by (used in) financing activities $ 161,050 $ (8,541)
------------- -------------
Net decrease in cash $ (1,198,155) $ (755,054)
------------- -------------
Cash, beginning of period $ 4,226,434 $ 4,521,126
------------- -------------
Cash, end of period $ 3,028,279 $ 3,766,072
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
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, 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 months ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
On November 6, 1996, ZMAX Corporation, a shell company ("ZMAX" or the
"Company"), acquired 100 percent of the outstanding common stock of Century
Services, Inc. ("CSI"), a Maryland corporation. On December 14, 1998, ZMAX
acquired Eclipse Information Systems, Inc. ("Eclipse"), an Illinois
corporation. On October 1, 1999, ZMAX acquired Parker Management Consultants,
Inc. ("PMC"), a Delaware corporation. As of March 31, 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
intercompany amounts have been eliminated.
NATURE OF OPERATIONS
During 1998 and 1997, the Company's revenue was derived primarily from
millennium services, the primary business of CSI at the time of its
acquisition. 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.
During 1999, the Company began to shift away from millennium services
and into management and information systems consulting, with a specific focus
on the Internet. ZMAX currently specializes in providing strategic and
technical expertise in the realm of e-business and during the period ended
March 31, 2000 had no revenues related to millennium services.
In conjunction with the Company's shift to e-business, the Company has
established a new subsidiary, WidePoint, Corporation ("WidePoint"), an
operating company. The Company intends to consolidate the operations of CSI,
Eclipse and PMC into the WidePoint subsidiary and expects to change the name
of the Company from ZMAX to WidePoint.
4
<PAGE>
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 March 31, 2000 and December 31, 1999, cash and cash
equivalents included $2,522,781 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
March 31, 2000 and December 31, 1999, unbilled accounts receivable totaled
$39,959 and $198,773, respectively.
SIGNIFICANT CUSTOMERS
During the three months ended March 31, 2000, two customers individually
represented 11% and 10%, respectively, of revenue. During the three months
ended March 31, 1999, two customers individually represented 16% 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.
5
<PAGE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit
risk consist of cash and cash equivalents and accounts receivable. Accounts
receivable includes amounts due from relatively large companies in a variety
of industries. As of March 31, 2000, two customers represented 24% and 10%,
respectively, of accounts receivable. As of March 31, 1999, no customers
individually represented more than 10 percent 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.
BASIC AND DILUTED NET LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 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. The treasury stock effect of options and warrants
to purchase 2,983,500 and 1,678,300 shares of common stock outstanding at
March 31, 2000 and 1999, respectively, has not been included in the
calculation of the net loss per share as such effect would have been
antidilutive. Outstanding shares subject to cancellation agreements have not
been included in either the basic or diluted calculation for the three month
period ended March 31, 1999. During the three month period ended March 31,
2000, there were no outstanding shares subject to cancellation agreements. As
a result of these items, the basic and diluted loss per share for all periods
presented are identical.
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 March 31, 2000,
approximately $43,000 of this discount had been amortized.
6
<PAGE>
4. 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.
5. STOCK WARRANTS
On September 20, 1999, the Company entered in a two-year agreement to
engage an international investment banking firm to provide investment banking,
mergers and acquisitions and strategic planning services. In conjunction with
the hiring of this firm, the Company issued them a stock warrant to purchase
200,000 shares of ZMAX 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 stock 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
March 31, 2000, approximately $37,000 of expense had been recognized related
to the issuance of this stock warrant.
On October 1, 1999, the Company issued a stock warrant to purchase
200,000 shares of ZMAX 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 stock 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
former client. 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 purchase agreement, the sole
shareholder of PMC, has indemnified the Company against damages related to the
complaint. The sole shareholder of PMC has engaged 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.
7
<PAGE>
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
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 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. ("EIS"), 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") with the intent of consolidating all of the
Company's IT services into this subsidiary in 2000. Further, it is the intent
of the Company at its Annual Meeting of Shareholders in May 2000 to vote upon
a motion to change the name of the Company from ZMAX to WidePoint.
On October 1, 1999, ZMAX acquired all of the outstanding capital stock
of PMC. The results of operations of PMC are included in the financial
statements of ZMAX from the date of acquisition. Prior to the 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").
On December 14, 1998, ZMAX acquired all of the outstanding capital stock
of Eclipse. The results of operations of EIS are included in the financial
statements of ZMAX from the date of acquisition. Prior to the acquisition,
Eclipse was a privately held company with its headquarters located in
8
<PAGE>
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. Eclipse markets IT
consulting services to a variety of commercial companies through a series of
technology practices that specialize in delivering solutions focused in
distributed client server environments. Eclipse provides services in ERP
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.
Through 1999, CSI marketed millennium services to a variety of commercial and
governmental organizations. In 2000, CSI plans to further develop its
expertise with large scale systems in Enterprise Application Integration
("EAI") and market those services through the Company's WidePoint operating
subsidiary.
In the next 12 months, the Company intends to integrate the services of
PMC, Eclipse, and CSI into WidePoint and pursue other potentially synergistic
acquisitions. Further, the Company intends to expand the services of all of
its subsidiaries through the opening of other offices in key geographic
markets. Additionally, the Company intends to make investments in the
expansion and further development of additional IT services and markets. In
view of these investments, the Company believes the period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. Specifically, as
the Company increases its investments in other IT services, it will incur
training, salary and other costs prior to the recognition of related revenues.
In addition, most 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 quarter ended March 31, 2000, the Company's revenues decreased
$1.1 million to $4.0 million as compared to $5.1 million for the quarter ended
March 31, 1999. For the quarter ended March 31, 2000 no revenues were
generated by CSI's millennium services as compared to $2.1 million or 42% of
revenues for the quarter ended March 31, 1999. The decrease in revenues during
the quarter ended March 31, 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 necessarily meaningful and should not be relied upon
as an indication of future performance.
Most of 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.
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
9
<PAGE>
of the Company's projects are 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 within budget, by
offsetting increases in consultant salaries with increases in consultant fees,
and by effectively managing general overhead costs.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1999
REVENUES. Revenues for the three months ended March 31, 2000, were $4.0
million, a decrease of approximately $1.1 million, or 22%, as compared to
revenues of $5.1 million for the three month period ended March 31, 1999.
However, non-millennium services increased 33% from $3.0 million for the three
months ended March 31, 1999 to $4.0 million for the three months ended March
31, 2000. The 33% increase in non-millennium services for the three months
ended March 31, 2000 was primarily attributable to increased sales of web
enabled services and revenues generated by the Company's PMC subsidiary.
GROSS PROFIT. Gross profit for the three months ended March 31, 2000,
was $1.8 million, or 45% of revenues, a decrease of $0.9 million over gross
profit of $2.7 million, or 52% of revenues, for the three months ended March
31, 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 a cost overrun associated with a
fixed price project that was accounted for in accordance with Company policy.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended March 31, 2000, were $0.7 million, or 17% of revenues, an increase of
$0.2 million, as compared to $0.5 million, or 11% of revenues, for the three
months ended March 31, 1999. The increase in sales and marketing expenses for
the first three months of 2000 was primarily attributable to further
investments in marketing efforts related to the Company's new services and the
cost associated with the development of sales and marketing materials for the
Company's WidePoint subsidiary.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended March 31, 2000, were $2.7 million, or 69% of revenues, an
increase of $0.9 million, as compared to $1.8 million, or 36% of revenues,
incurred by the Company for the three months ended March 31, 1999. The
increase in general and administrative expenses for the three months ended
March 31, 2000 was primarily attributable to increases in management,
infrastructure, and training costs associated with the consolidation of the
Company's separate business units into a new operating company and the cost
associated with the shift away from millennium services and into management
and information systems consulting.
10
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended March 31, 2000, were $0.3 million, or 6% of
revenues, a decrease of $0.1 million, as compared to $0.4 million of such
expenses, or 8% of revenues, incurred by the Company for the three months
ended March 31, 1999. The decrease in depreciation and amortization expenses
for the three months ended March 31, 2000 was primarily attributable to the
write-off of certain intangible assets associated with the Company's
millennium services during the first quarter of 1999.
OTHER INCOME (EXPENSE). Interest income for the three months ended March
31, 2000, was $34,000, or 0.9% of revenues, a decrease of $3,000 as compared
to $37,000, or 0.7% of revenues for the three months ended March 31, 1999. The
decrease in interest income for the three months ended March 31, 2000 was
primarily attributable to lesser amounts of cash available for investment in
overnight sweep accounts. Interest expense for the three months ended March
31, 2000 was $69,000. Interest expense for the three months ended March 31,
1999 was $2,000. The increase in interest expense for the three months ended
March 31, 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 March 31, 2000
was $1.6 million. This represents an increased loss in EBITDA of $1.7 million
as compared to the EBITDA of $0.1 million for the quarter ending March 31,
1999.
NET INCOME (LOSS). As a result of the above, the net loss for the three
months ended March 31, 2000, was $1.9 million, an increase of approximately
$1.7 million, as compared to the net loss of approximately $0.2 million for
the three months ended March 31, 1999.
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 March 31,
2000, was approximately $1.3 million as compared to approximately $0.7 million
for the quarter ended March 31, 1999. The increase in cash used in operations
during the first 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 payment of year-end bonuses and various other costs
related to the establishment of the Company's new operating subsidiary,
WidePoint. Capital expenditures on property and equipment were $0.1 million
for the quarters ended March 31, 2000, and 1999.
As of March 31, 2000, the Company had working capital of approximately
$4.3 million. The Company's primary source of liquidity consists of
approximately $3.0 million in cash and cash equivalents and approximately $3.8
million of accounts receivable. The Company's current liabilities include $1.9
11
<PAGE>
million in accounts payable and accrued expenses and the current portion of a
note payable of $1.0 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 is in the process
of consolidating its current subsidiaries and establishing a new operating
subsidiary named WidePoint. The Company requires substantial working capital
to fund these events as well as 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 make it difficult for the Company to predict future
liquidity requirements with certainty. Over the longer term, the Company must
successfully execute its plans to generate significant positive cash flows if
it is to sustain adequate liquidity without impairing growth or requiring the
infusion of additional funds from external sources. Additionally, a major
expansion, such as would occur with the acquisition of a major new subsidiary,
might also require external financing that could include additional debt or
equity capital. There can be no assurance that additional financing, if
required, will be available on acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of 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.
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.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
PART II. OTHER INFORMATION
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: May 15, 2000 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040257
<NAME> ZMAX CORPORATION
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,028,279
<SECURITIES> 0
<RECEIVABLES> 3,951,995
<ALLOWANCES> 110,000
<INVENTORY> 329,517
<CURRENT-ASSETS> 7,199,791
<PP&E> 777,035
<DEPRECIATION> 86,188
<TOTAL-ASSETS> 17,910,429
<CURRENT-LIABILITIES> 2,883,573
<BONDS> 0
0
0
<COMMON> 12,985
<OTHER-SE> 13,089,573
<TOTAL-LIABILITY-AND-EQUITY> 17,910,429
<SALES> 3,984,854
<TOTAL-REVENUES> 9,984,854
<CGS> 2,206,585
<TOTAL-COSTS> 2,206,585
<OTHER-EXPENSES> 3,670,320
<LOSS-PROVISION> (1,892,051)
<INTEREST-EXPENSE> 68,507
<INCOME-PRETAX> (1,926,607)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,926,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,926,607)
<EPS-BASIC> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
