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 SEPTEMBER 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 000-23967
ZMAX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2040275
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
20251 CENTURY BLVD. GERMANTOWN, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 353-9500
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of November 1,
1998; 11,729,714 shares of common stock, $.001 par value per share.
ZMAX CORPORATION
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Operations for the three and six
months ended September 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the three and six
months ended September 30, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 4,431,530 $ 6,405,084
Accounts receivable 2,735,146 1,067,258
Prepaid and other assets 95,666 81,506
-------------- --------------
Total current assets 7,262,342 7,553,848
Property, plant & equipment (net) 282,661 277,981
Intangible assets (net) 3,159,725 4,033,265
Other assets 5,193 4,983
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Total assets $ 10,709,921 $ 11,870,077
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 860,733 $ 826,117
Current portion of long term debt - 539,541
Contract deposits 297,671 926,039
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Total current liabilities 1,158,404 2,291,697
Commitments and contingencies (Note 4)
Shareholders' equity
Preferred stock, $0.001 par value,
10,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.001 par value,
50,000,000 shares authorized,
11,729,714 shares issued and
outstanding as of September 30, 1998
and December 31, 1997, 479,801 shares
subject to Cancellation Agreements
as of September 30, 1998 and December
31, 1997. (Note 3). 11,729 11,729
Paid in capital 35,280,104 35,280,105
Retained earnings (25,740,316) (25,713,454)
-------------- --------------
Total shareholders' equity 9,551,517 9,578,380
Total liabilities & shareholders' equity $ 10,709,921 $ 11,870,077
============== ==============
The accompanying notes are an integral part of these balance sheets.
1
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
(unaudited) (unaudited)
Revenues $ 2,581,139 $ 451,291 $ 6,608,242 $ 512,041
Operating expenses:
Cost of sales 755,387 226,188 2,065,210 283,332
Research and development 120,652 - 332,274 -
Sales and marketing 298,090 243,315 839,636 896,464
General & administrative 734,766 875,043 2,645,398 3,069,598
Depreciation & amortization 327,527 280,284 953,408 651,937
Income (loss) from operations 344,717 (1,173,539) (227,684) (4,389,290)
Other income (expenses):
Interest income 55,483 13,805 198,036 121,893
Interest expense - (188,008) 1,990 (1,228,695)
Other income (expenses) 20,663 (879) 796 (101,103)
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Net income (loss) before income taxes 420,863 (1,348,621) (26,862) (5,597,195)
Income taxes benefit - - - -
------------- ------------- ------------- -------------
Net income (loss) $ 420,863 $ (1,348,621) $ (26,862) $ (5,597,195)
============= ============= ============= =============
Basic net income (loss) per share $ 0.04 $ (0.23) $ (0.00) $ (1.10)
============= ============= ============= =============
Basic weighted average shares outstanding 11,249,913 5,978,973 10,325,913 5,079,169
============= ============= ============= =============
Diluted net income (loss) per share $ 0.04 $ (0.23) $ (0.00) $ (1.10)
============= ============= ============= =============
Fully diluted weighted average shares
outstanding 11,250,287 5,978,973 10,325,913 5,079,169
============= ============= ============= =============
The accompanying notes are an integral part of these balance sheets.
2
ZMAX CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 420,863 $ (1,348,621) $ (26,862) $ (5,597,195)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization expense 327,527 228,094 953,408 651,937
Amortization of deferred financing costs - 161,464 - 388,564
Amortization of discount on Notes and
Debentures - - - 591,408
Stock compensation expense - - - 547,500
Non-cash interest expense on promissory
note - - - 8,904
Loss on conversion of promissory note - - - 101,442
Changes in assets and liabilities
Accounts receivable (236,509) - (1,667,888) -
Prepaid expenses and other assets 33,634 (1,341,481) (14,370) (1,482,564)
Accounts payable and accrued expenses (324,910) 665,481 34,675 1,248,168
Deferred income taxes - 52,190 - -
Contract deposits (405,400) 1,000,000 (628,369) 1,000,000
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Net cash used in operating activities $ (184,795) $ (582,873) $ (1,349,405) $ (2,541,836)
------------- ------------- ------------- -------------
Net cash used in investing activities:
Purchase of property and equipment (9,663) (3,279) (84,608) (257,542)
Purchase of software - - - (767,379)
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Net cash used in investing activities $ (9,663) $ (3,279) $ (84,608) $ (1,024,921)
------------- ------------- ------------- -------------
Net cash provided by financing activities
Proceeds from the issuance of common stock - - - 105,000
Net (payments) borrowings on long-term
obligations - (256,789) (539,541) 131,054
------------- ------------- ------------- -------------
Net cash (used in) provided by financing
activities - $ (256,789) $ (539,541) $ 236,054
------------- ------------- ------------- -------------
Net decrease in cash $ (194,458) $ (842,941) $ (1,973,554) $ (3,330,703)
------------- ------------- ------------- -------------
Cash, beginning of period $ 4,625,988 $ 2,354,407 $ 6,405,084 $ 4,842,169
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Cash, end of period $ 4,431,530 $ 1,511,466 $ 4,431,530 $ 1,511,466
============= ============= ============= =============
The accompanying notes are an integral part of these balance sheets.
3
ZMAX CORPORATION AND SUBSIDIARY
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, 1997, and the notes
thereto included in the Annual Report on Form 10-K filed by the Company with
the Securities and Exchange Commission. The results of operations for the
three and nine months ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998. The
common stock of ZMAX is currently listed on the SmallCap Market of the
National Association of Securities Dealers, Inc. ("NASD") Automated Quotation
System ("NASDAQ").
NATURE OF OPERATIONS
On November 6, 1996, ZMAX acquired 100% of the outstanding common stock
of Century Services, Inc. ("CSI"), a Maryland corporation. CSI was a privately
held company formed on December 13, 1995 to perform computer re-engineering
services with a focus on providing a solution to the Year 2000 problem. For
financial reporting purposes, the acquisition has been treated as a
recapitalization of CSI.
Prior to the CSI transaction, ZMAX's activities consisted of efforts to
establish a new business and raise capital. The operations of CSI consisted of
activities to obtain financing, to acquire and develop its proprietary Year
2000 software re-engineering tools and methodologies, and to market its
services to potential customers. Since the acquisition of CSI, the Company has
been focused on the computer software re-engineering market. The Company
generated its first revenues during 1997. The Company must continue to be
successful in selling its services and recognizing those services as revenue
in order to achieve growth, profitability, and success in the marketplace.
There is no guarantee that the Company will continue to be successful in
selling its services and developing or acquiring new services to market in the
future. The Company may require additional funds that may not be available to
it.
The failure of the Company's Year 2000 methodology to function properly
or the existence of significant errors or bugs following completion of
millennium conversions could necessitate significant expenditures by the
Company to remedy the problem. The consequences of failures, errors or bugs
could materially and adversely affect the Company's business, operating
results and financial condition.
4
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain and undeveloped
markets for millennium services, current and potential competitors with
greater financial, technological, production and marketing resources, the need
to develop additional products and services, limited protection of proprietary
information, the risk of third party claims of infringement, potential
contract liability related to the Company's access to key aspects of
customer's computer systems, dependence upon strategic alliances, the need for
additional technical personnel, dependence on key management personnel,
dependence on significant customers, management of growth, uncertainty of
future profitability and possible fluctuations in financial results. In
addition, there are risks associated with the market activity in ZMAX stock.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
considered cash equivalents for the purpose of these financial statements.
REVENUE RECOGNITION
Revenues on time-and-materials contracts are recognized based upon hours
incurred at contract rates plus direct costs. Revenues on fixed-price
contracts are recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated losses are
recognized as soon as they become known. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Unbilled accounts receivable on time and materials contracts represent
costs incurred and gross profit recognized during the period presented but not
billed until the following period. Unbilled accounts receivable on fixed-price
contracts consists of amounts incurred which are not yet billable under
contract terms. At September 30, 1998, unbilled accounts receivable totaled
approximately $1,874,000, of which approximately $1,740,000 was billed during
October 1998.
SIGNIFICANT CUSTOMERS
For the nine months ended September 30, 1998, sales to three customers
represented 51%, 15% and 14% of total revenues. As of September 30, 1998, 76%
and 15% of the outstanding receivable balances are owed to the Company by two
customers.
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
5
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized.
EARNINGS (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" which requires dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that occurs if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the Company. Options and warrants to purchase shares of Common
Stock were not included in the computation of loss per share as the effect
would be antidilutive.
The treasury stock effect of options to purchase 1,844,000 shares of
common stock and warrants to purchase 140,800 shares of common stock were
included in the computation of income per share as the effect was dilutive.
Outstanding shares subject to cancellation agreements are not included in the
calculation of income or loss per share.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These statements become effective
for the Company's 1998 financial statements. The adoption of these new
pronouncements did not impact the Company's results of operations, financial
position or cash flows.
3. STOCK SUBJECT TO CANCELLATION
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
ZMAX common stock. In March 1997, 296,007 of these shares were returned to the
Company and canceled. An additional 479,801 shares are subject to cancellation
but had not been returned to the Company for cancellation as of September 30,
1998. The Company is currently undertaking action to have the shares canceled.
4. COMMITMENTS AND CONTINGENCIES:
SETTLEMENT AGREEMENT
In October 1998, the Company, its subsidiary (CSI), certain stockholders
of the Company and an employee of the Company entered into a settlement
agreement. The stockholders were the former sole stockholders of CSI prior to
November 6, 1996, at which time ZMAX acquired all the outstanding shares of
CSI in a transaction accounted for as the recapitalization of CSI. The
6
employee had asserted a claim that the stockholders had agreed to compensate
the employee for services rendered in connection with the recapitalization and
subsequent financing of CSI by ZMAX. No such compensation had been paid or
accrued as of September 30, 1998. In recognition of the employee's previous
and continued service to the Company, the parties have entered into an
agreement to resolve this matter..
Under the terms of the settlement agreement, the stockholders have
agreed to transfer an aggregate of 180,000 shares of ZMAX Common Stock to the
Company. In turn, the Company has agreed to issue such shares to the employee
in satisfaction of all claims that the employee may have had against the
stockholders or the Company and its subsidiary. The shares of ZMAX Common
Stock to be issued by the Company to the employee are restricted and subject
to forfeiture and must be returned to the Company in the event that the
employee breaches certain non-competition provisions contained in the
settlement agreement. The term of the non-compete is one year.
LITIGATION
On April 17, 1997, Alan L. Levine and Canadian Petroleum Corporation
filed suit in the Third Judicial district Court of Salt Lake County, Utah
against the Company (f/k/a Mediterranean Oil Corp., f/k/a Pandora, Inc.) and
John Does. The complaint alleges various common law claims arising from the
alleged untimely failure to remove legends restricting the transferability of
shares of the Company's common stock that had been issued by the Company in
payment of legal fees incurred. The plaintiffs have computed damages in the
approximate amount of $87,000. The Company believes the complaint is without
legal merit and intends to vigorously defend itself. In the opinion of
management, resolution of this matter will not have a material adverse effect
upon the financial position of future operating results of the Company.
The Company is periodically a party to disputes arising from normal
business activities. In the opinion of management, resolution of these matters
will not have a material adverse effect upon the financial position or future
operating results of the Company, and adequate provision for any potential
losses has been made in the accompanying financial statements.
7
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, 1997.
The information set forth below includes forward-looking statements
relating to projected results that may differ from actual results. Some
factors that could cause results to differ materially from those projected in
the forward-looking statements are set forth below. Readers are cautioned not
to put undue reliance on forward-looking statements. The Company disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI.
Prior to this transaction, ZMAX had no operations and its activities consisted
of efforts to establish or acquire a new business and to raise capital. CSI
was a privately held company formed on December 13, 1995. For financial
reporting purposes, the acquisition has been treated as a recapitalization of
CSI with CSI as the acquirer (a reverse acquisition).
CSI markets software re-engineering and millennium services to a variety
of commercial and government organizations. In the next 12 months, the Company
intends to make additional investments in the further development and
marketing of CSI's software re-engineering and millennium services. CSI
anticipates a toolset for validation and verification of certain software
languages will be available for licensing to end-users in the fourth quarter
of 1998. In addition, the Company currently intends to pursue acquisitions in
the information technology industry that will complement CSI.
In view of the development costs relating to CSI's millennium 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. Specifically, as CSI increases its workforce in order
to meet the future demand for its re-engineering and millennium services, it
will incur training, salary and other costs prior to the recognition of
related revenues. In addition, most of CSI's revenues are expected to be
derived from a relatively small number of large-scale, comprehensive projects.
Consequently, CSI's revenues and operating results may be subject to
substantial variations in any given year and from quarter to quarter.
The Company believes some demand for CSI's millennium services may
continue to exist for some time after the year 2000, although this demand will
diminish significantly over time and will eventually disappear. However, the
Company's proprietary computer software tools may be used in conversion and
re-engineering projects unrelated to Year 2000 compliance. The Company plans
8
to pursue business opportunities unrelated to the millennium problem in the
information services market and to develop products and services to take
advantage of these opportunities, such as migrating a client's software
application from a mainframe to a client-server environment. However, there
can be no assurance that the Company will be able to successfully expand its
business beyond the millennium conversion market. The failure to diversify and
develop additional products and services could materially and adversely affect
the Company's business, operating results and financial condition.
Most of the Company's current cost structure is fixed. Expenses consist
primarily of the salaries and benefits paid to the Company's technical,
marketing and administrative personnel and benefits, travel, promotions and
trade show expenses, office expenses and other general overhead costs. The
amortization and depreciation expenses relate to property and equipment and
intangible assets. As a result of its plan to expand its operations and to
offer a wider range of information services, the Company expects these costs
to increase.
Margins for the Company's millennium services business may depend upon
the volume of service because a significant portion of the Company's cost
structure is fixed. Most of the Company's millennium conversion projects are
expected to be priced on a fixed fee basis. Therefore, the profitability of an
individual project may depend upon completing the project within the estimated
number of staff hours and within the agreed time frame.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
REVENUES. Revenues for the three month period ended September 30, 1998,
were approximately $2,581,000, an increase of approximately $2,130,000 over
revenues of approximately $451,000 for the three month period ended September
30, 1997. The increase in revenues during the third quarter of 1998 was a
result of increased sales activity of Year 2000 remediation and consulting
services by CSI during this period.
GROSS PROFIT. Gross profit for the three months ended September 30, 1998
was approximately $1,826,000, or 71% of revenues, an increase of approximately
$1,601,000 over gross profit of approximately $225,000, or 50% of revenues,
for the three months ended September 30, 1997. The increase in gross
profitability during the three months ended September 30, 1998 was a result of
increased efficiencies and productivity gains realized from the Company's
workforce, management, and proprietary methodologies and tools.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended September 30, 1998, were approximately $120,000, or 5% of
revenues. No research and development expenses were incurred in the three
months ended September 30, 1997. The Company initiated efforts during the
first nine months of 1998 to refine its Year 2000 toolset and to prepare the
toolset for potential licensing to end-users. The Company anticipates a
validation and verification tool for certain mainframe languages will be
available in the fourth quarter of 1998.
9
SALES AND MARKETING. Sales and marketing expenses for the three months
ended September 30, 1998 were approximately $298,000, or 12% of revenues, an
increase of approximately $55,000, from approximately $243,000 of such
expenses, or 54% of revenues, for the three months ended September 30, 1997.
The increase in sales and marketing expenses for the three months of 1998 was
primarily attributable to commission expenses related to increased sales
revenue and further investments in marketing efforts related to the Company's
services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1998 were approximately $735,000, or 29% of
revenues, a decrease of approximately $140,000, as compared to approximately
$875,000 of such expenses, or 194% of revenues, incurred by the Company for
the three months ended September 30, 1997. The decrease in general and
administrative expenses for the three months ended 1998 was primarily
attributable to a decrease in professional and consulting expenses related to
the Company's corporate financing and registration expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended September 30, 1998 were approximately $328,000, or
13% of revenues, an increase of approximately $48,000, as compared to
approximately $280,000 of such expenses, or 62% of revenues, incurred by the
Company for the three months ended September 30, 1997. The increase in
depreciation and amortization expenses for the three months ended 1998 were
primarily attributable to an increase in depreciable assets and intangibles.
OTHER INCOME (EXPENSE). Interest income for the three months ended
September 30, 1998 was approximately $55,000, or 3% of revenues, an increase
of approximately $41,000 of such interest income, as compared to approximately
$14,000, or 4% of revenues, for the three months ended September 30, 1997. The
increase in interest income for the three months ended September 30, 1998 was
primarily attributable to greater amounts of cash. There was no interest
expense for the three months ended September 30, 1998. Interest expense for
the three months ended September 30, 1997 was approximately $188,000. The
decrease in interest expense for the three months ended September 30, 1998 was
primarily attributable to the elimination of interest related to the
amortization of the deferred financing costs.
INCOME FROM OPERATIONS. Income from operations, excluding depreciation
of approximately $328,000, for the three months ended September 30, 1998 was
approximately $672,000, an increase of approximately $1,511,000, as compared
to the loss from operations excluding depreciation and amortization of
approximately $839,000 for the three months ended September 30, 1997 (excludes
approximately $280,000 in depreciation and amortization).
NET INCOME (LOSS). As a result of the above, the net income for the
three months ended September 30, 1998 was approximately $421,000, or 17% of
revenues, an increase of approximately $1,769,000, as compared to the net loss
of approximately $1,348,000 for the three months ended September 30, 1997.
10
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues for the nine months ended September 30, 1998, were
approximately $6,608,000, an increase of approximately $6,096,000 over
revenues of approximately $512,000 for the nine months ended September 30,
1997. The increase was attributable to increased sales activity of Year 2000
remediation and consulting services by CSI during the nine months of 1998 as
compared to the nine months of 1997.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1998,
was approximately $4,543,000 or 69% of revenues, an increase of approximately
$4,314,000 over gross profit of approximately $229,000, or 45% of revenues,
for the nine months ended September 30, 1997. The increase was attributable to
increased sales activity and greater realized economies of scale and
efficiencies made by the Company during the nine months of 1998 as compared to
the nine months of 1997 during which the Company had just commenced
operations.
RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
months ended September 30, 1998, were approximately $332,000, or 5% of
revenues. No research and development expenses were incurred in the nine
months ended September 30, 1997. The Company initiated efforts during the nine
months of 1998 to refine its Year 2000 toolset and to prepare the toolset for
potential licensing to end-users.
SALES AND MARKETING. Sales and marketing expenses for the nine months
ended September 30, 1998 were approximately $840,000, or 13% of revenues, a
decrease of approximately $56,000, from the approximately $896,000 of such
expenses, or 175% of revenues, for the nine months ended September 30, 1997.
The decrease in sales and marketing expenses for the nine months of 1998 was
primarily attributable to a non-recurring severance charge that occurred
during the second quarter of 1997 which was partially offset by increased
commission expenses related to increased revenue and further investments in
marketing efforts related to the Company's services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine months ended September 30, 1998 were approximately $2,645,000, or 40% of
revenues, a decrease of approximately $425,000, as compared to approximately
$3,070,000 of such expenses, or 600% of revenues, incurred by the Company for
the nine months period ended September 30, 1997. The decrease in general and
administrative expenses for the nine months of 1998 was primarily attributable
to a decrease in professional and consulting expenses related to the Company's
corporate financing and registration expenses.
OTHER INCOME (EXPENSE). Interest income for the nine months ended
September 30, 1998 was approximately $198,000, or 3% of revenues, an increase
of approximately $76,000 as compared to approximately $122,000 of such
interest income, or 24% of revenues, for the nine months ended September 30,
1997. The increase in interest income for the nine months of 1998 was
primarily attributable to greater amounts of cash. Interest expense for the
nine months ended September 30, 1998 was approximately ($2,000), a decrease of
approximately $1,231,000 as compared to approximately $1,229,000 of such
interest expense for the nine months ended September 30, 1997. The decrease in
interest expense for the nine months of 1998 was primarily attributable to the
11
elimination of interest expense related to the amortization of the deferred
financing costs and the amortization of a discount on the convertible notes.
The convertible notes were converted into common stock in April 1997.
INCOME FROM OPERATIONS. Income from operations, excluding depreciation
and amortization of approximately $953,000, for the nine months ended
September 30, 1998 was approximately $726,000, an increase of approximately
$4,463,000, as compared to the loss from operations excluding depreciation and
amortization of approximately $3,737,000 for the nine months ended September
30, 1997 (excludes approximately $652,000 in deprecation and amortization).
NET INCOME (LOSS). As a result of the above, the net loss for the nine
months ended September 30, 1998 was approximately $27,000, a decrease of
approximately $5,570,000, as compared to the net loss of approximately
$5,597,000 for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since inception, financed its operations and capital
expenditures through the sale of stock, convertible notes, convertible
exchangeable debentures and the proceeds from the exchange offer and exercise
of the warrants related to the convertible exchangeable debentures. Cash used
in operations during the quarter ended September 30, 1998 was approximately
$185,000, as compared to approximately $583,000 during the quarter ended
September 30, 1997. The decrease in cash used in operations during the third
quarter of 1998 was primarily a result of the generation of gross profit.
Capital expenditures were approximately $10,000 for the quarter ended
September 30, 1998, as compared to approximately $3,000 during the quarter
ended September 30, 1997. The increase in capital expenditures during 1998 is
related primarily to the ongoing purchase requirements of computer equipment
for Company personnel.
As of September 30, 1998, the Company had working capital of
approximately $6,100,000. The Company's primary source of liquidity consists
of approximately $4,400,000 in cash and cash equivalents and approximately
$2,700,000 of contract receivables.
The market for the Company's products is expanding and the Company's
business environment is characterized by rapid technological changes. The
Company requires substantial working capital to fund its business,
particularly to finance accounts receivable, sales and marketing efforts,
research and development, and capital expenditures. The Company currently has
no commitments for capital expenditures. The Company's future capital
requirements will depend on many factors including the rate of revenue growth,
if any, the timing and extent of spending to support research and development,
technological changes and market acceptance of the Company's services. The
Company believes that its current cash position is sufficient to meet its
capital expenditure and working capital requirements for the near term;
however, the growth and technological change make it difficult for the Company
to predict future liquidity 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
12
additional debt or equity capital. There can be no assurance that additional
financing, if required, will be available on acceptable terms, if at all.
OTHER
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased
prices of products and services sold.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company is an information technology ("IT") corporation which is in
the business of performing evaluation, testing and re-engineering services in
providing solutions to the Year 2000 problem. The Company owns, markets,
utilizes and licenses the use by others of its proprietary Year 2000 software
re-engineering tools and methodologies. The Company's management believes that
its operating and information systems are Year 2000 compliant. The Company
expects no material impact on its operating and information systems from the
Year 2000 issue.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and
profitability. Actual results may differ materially from projected or expected
results due to changes in the demand for the Company's products and services,
uncertainties relating to the results of operations, the Company's ability to
implement its provider deployment model, its lengthy sales cycle, dependence
on its major customers, risks associated with rapid technological change and
the emerging services market, potential fluctuations in quarterly results, its
dependence on sole and limited source suppliers and fluctuations in component
pricing and 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.
13
PART II. OTHER INFORMATION
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
11 - Computation of Net Income Per Share
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZMAX Corporation
Date: November 13, 1998 /s/MICHAEL C. HIGGINS
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Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer