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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
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 May 1,
1999; 12,949,913 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 - March 31, 1999
(unaudited) and December 31, 1998 1
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,766,072 $ 4,521,126
Accounts receivable,
net of allowance of $0 and $17,160, respectively 3,268,204 2,545,659
Prepaid expenses and other assets 253,213 127,952
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Total current assets 7,287,489 7,194,737
Property and equipment 509,282 477,870
Intangible assets 9,246,966 9,740,217
Other assets 80,274 33,538
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Total assets $ 17,124,011 $ 17,446,362
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,533,274 $ 1,596,074
Current portion of capital lease obligation 30,951 35,519
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Total current liabilities 1,564,225 1,631,593
Long-term capital lease obligation, net of current portion 30,743 34,716
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Total liabilities 1,594,968 1,666,309
Commitments and contingencies (Note 4)
Shareholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
none issued and outstanding - -
Common stock, $0.001 par value, 50,000,000 shares authorized,
13,117,214 and 13,117,214 shares issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively, 167,301
shares subject to cancellation agreements
as of March 31, 1999 and December 31, 1998 13,117 13,117
Additional paid-in capital 41,763,101 41,763,101
Accumulated deficit (26,247,175) (25,996,165)
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Total shareholders' equity 15,529,043 15,780,053
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Total liabilities & shareholders' equity $ 17,124,011 $ 17,446,362
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The accompanying notes are an integral part of these balance sheets.
1
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
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1999 1998
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(unaudited)
Revenues $ 5,106,645 $ 1,524,324
Operating expenses:
Cost of revenues 2,442,571 466,808
Research and development 167,916 127,687
Sales and marketing 546,980 265,509
General & administrative 1,825,574 1,057,105
Depreciation & amortization 406,908 321,642
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Loss from operations (283,304) (714,427)
Other income (expenses):
Interest income 37,263 55,431
Interest expense (2,110) (6,855)
Other (2,859) (15,880)
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Net loss $ (251,010) $ (681,731)
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Basic and diluted loss per share $ (0.02) $ (0.08)
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Basic and diluted weighted average shares outstanding 12,949,913 8,449,913
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The accompanying notes are an integral part of these statements.
2
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
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1999 1998
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(unaudited)
Cash flows from operating activities:
Net loss $ (251,010) $ (681,731)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation and amortization expense 415,727 321,642
Changes in assets and liabilities
Accounts receivable (722,545) (340,052)
Prepaid expenses and other assets (148,814) 19,947
Accounts payable and accrued expenses 41,204 158,032
Customer deposits - (18,490)
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Net cash used in operating activities $ (665,438) $ (540,652)
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Cash flows from investing activities:
Purchase of property and equipment (81,075) (54,381)
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Net cash used in investing activities $ (81,075) $ (54,381)
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Cash flows used in financing activities
Payments on long-term obligations (8,541) (265,348)
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Net cash used in financing activities $ (8,541) $ (265,348)
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Net decrease in cash $ (755,054) $ (860,381)
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Cash, beginning of period $ 4,521,126 $ 6,405,084
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Cash, end of period $ 3,766,072 $ 5,544,703
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The accompanying notes are an integral part of these statements.
3
ZMAX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, ORGANIZATION, AND NATURE OF OPERATIONS:
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the financial statements of ZMAX
Corporation ("ZMAX" or the "Company"), as of December 31, 1998, and the notes
thereto included in the Annual Report on Form 10-K filed by the Company. The
results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
NATURE OF OPERATIONS
On November 6, 1996, ZMAX Corporation ("ZMAX" or the "Company"), which
was then a shell company listed on the OTC Bulletin Board, acquired 100% of
the outstanding common stock of Century Services, Inc. ("CSI"), a Maryland
corporation. CSI was a privately held company formed on December 13, 1995, to
perform computer re-engineering with a focus on providing a solution to the
Year 2000 problem.
For financial reporting purposes, this acquisition was treated as a
recapitalization of CSI with CSI as the acquirer (a reverse acquisition).
Accordingly, the historical financial statements of ZMAX prior to November 6,
1996, are the historical financial statements of CSI. The accompanying
consolidated financial statements include all of the accounts of CSI and the
accounts of ZMAX since the acquisition on November 6, 1996. On December 14,
1998, ZMAX acquired Eclipse Information Systems, Inc. (" Eclipse"). The
accompanying consolidated financial statements include the accounts of Eclipse
since the date of acquisition. All significant inter-company amounts have been
eliminated.
During 1998, the Company's revenue was derived primarily from Year 2000
services. The Company also began licensing a Year 2000 software tool during
1998; however, such licensing revenue was not significant in 1998. In December
1998, the Company expanded its operations through the acquisition of Eclipse.
Eclipse performs management and information systems consulting services.
Eclipse also resells certain hardware and software products to its customers.
While the Company's revenue in 1998 was primarily derived from its Year 2000
or "millennium" services there can be no assurance that the Company will be
successful in diversifying through acquisitions and developing additional
post-Year 2000 services. Further, the failure of the Company's Year 2000
methodolgy and tools to function properly or the existence of significant
errors or problems following completion of millennium conversions or other
associated Year 2000 work performed by the Company could necessitate
4
significant expenditures by the Company to remedy the problem. The
consequences of failures, errors or problems could materially and adversely
affect the Company's business, operating results and financial condition.
The Company's operations are subject to certain risks and uncertainties,
including among others, rapidly changing technology, uncertain markets for
millennium services, current and potential competitors with greater financial,
technological, production and marketing resources, reliance on certain
significant customers, the need to develop additional products and services,
limited protection of proprietary information, the risk of third party claims
of infringement, potential contract liability related to the Company's access
to key aspects of customers computer systems, dependence upon strategic
alliances, the need for additional technical personnel, dependence on key
management personnel, management of growth, uncertainty of future
profitability and possible fluctuations in financial results. The Company may
also require additional capital that may not be available to it. In addition,
there are risks associated with the market activity in ZMAX common stock.
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 that are not yet billable under
contract terms. At March 31, 1999, unbilled accounts receivable totaled
approximately $351,291.
Revenue from the sale of perpetual and term software licenses is
recognized at the time of delivery and acceptance of software products by the
customer, provided that no significant vendor obligations remain and that
collection is probable. Maintenance revenue that is bundled with an initial
license fee is deferred and recognized ratably over the maintenance period.
Amounts deferred for maintenance are based on the fair value of equivalent
maintenance services sold separately. The American Institute of Certified
Public Accountants issued Statement of Position 97-2 "Software Revenue
Recognition" ("SOP 97-2"), which superceded Statement of Position 91-1
"Software Revenue Recognition." SOP 97-2 provides additional guidance with
respect to multiple element arrangements; returns, exchanges, and platform
transfer rights; resellers; services; funded software development
5
arrangements; and contract accounting. The Company recognizes revenue in
accordance with SOP 97-2 and Statement of Position 98- 9, "Modification of SOP
97-2. Software Revenue Recognition. With Respect to Certain Transitions".
Prior to 1998, the Company had no revenue from the license of software.
SIGNIFICANT CUSTOMERS
For the three months ended March 31, 1999, two customers individually
represented 16% and 10% of revenue. For three months ended March 31, 1998,
three customers individually represented 27%, 24% and 21% 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. As of March 31, 1999, no customers individually represented
more than 10% of accounts receivable.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
marginal tax rate. SFAS No. 109 requires that the net deferred tax asset be
reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized.
BASIC AND DILUTED NET LOSS PER SHARE
Basic income or loss per share includes no dilution and is computed by
dividing net income or loss by the weighted average number of common shares
outstanding for the period. Diluted income or loss per share includes the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The treasury stock
effect of options and warrants to purchase 1,678,300 and 1,587,800 shares of
common stock outstanding at March 31, 1999 and 1998, respectively, has not
been included in the calculation of the net loss per share as such effect
would be anti-dilutive. Outstanding shares subject to cancellation agreements
have not been included in either the basic or diluted calculation. As a
result, the basic and diluted loss per share for all periods presented are
identical. The calculation of the basic and diluted weighted average shares is
shown below:
6
ZMAX CORPORATION AND SUBSIDIARY
CALCULATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
(UNAUDITED)
Three Months
Ended March 31,
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1999 1998
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(unaudited)
WEIGHTED AVERAGE SHARE CALCULATIONS
Weighted average shares of common stock
Outstanding 13,117,214 8,929,714
Less: Average number of cancelable shares
common stock outstanding (167,301) (479,801)
Basic weighted average shares outstanding 12,949,913 8,449,913
Treasury stock effect of options and warrants - -
Diluted weighted average shares outstanding: 12,949,913 8,449,913
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NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 has had no impact on the Company's results of
operations, financial position or cash flows.
In March 1998, the AICPA issued Statement of Position 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
("SOP 98-1"). SOP 98-1 requires the Company to capitalize internal computer
software costs once the capitalization criteria of the SOP are met. SOP 98-1
is effective January 1, 1999, and is applied to all projects in progress upon
the initial application of the SOP. The adoption of SOP 98-1 has not had a
material impact on the Company's results of operations, financial position, or
cash flows.
7
3. STOCK SUBJECT TO CANCELLATION
In September 1995, ZMAX entered into stock cancellation agreements with
certain stockholders that provided for the cancellation of 775,808 shares of
ZMAX common stock. In March 1997, 296,007 of these shares were returned to the
Company and canceled. An additional 312,500 shares were returned to the
Company and canceled in December 1998. The remaining 167,301 were returned to
the Company and canceled in April 1999.
4. COMMITMENTS AND CONTINGENCIES:
LITIGATION
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.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The information set forth below includes forward-looking statements
relating to projected results that may differ from actual results. Some
factors that could cause results to differ materially from those projected in
the forward-looking statements are set forth below. Readers are cautioned not
to put undue reliance on forward-looking statements. The Company disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
ZMAX Corporation ("ZMAX" or the " Company") focuses on acquiring,
building and operating companies in the information technology ("IT")
industry. In 1996, the Company acquired all of the stock of Century Services,
Inc. ("CSI"). In December 1998, the Company acquired all of the stock of
Eclipse Information Systems, Inc. ("Eclipse").
On December 14, 1998 ZMAX acquired all of the outstanding capital stock
of Eclipse. The results of operations of Eclipse are included in the financial
statements of ZMAX from the date of acquisition. Eclipse markets IT consulting
services to a variety of commercial companies through a series of technology
practices that specialize in delivering solutions focused in distributed
client server environments. Eclipse provides services in ERP packaged
solutions, internet & intranet solutions, network solutions, client server
solutions, and AS/400 solutions.
On November 6, 1996, ZMAX acquired all of the outstanding stock of CSI.
Prior to this transaction, ZMAX had no operations and its activities consisted
of efforts to establish or acquire a new business and to raise capital. CSI
was a privately held company formed on December 13, 1995 which specializes in
assisting business organizations and government agencies with what has become
popularly known as the "Year 2000" problem ("Y2K"). For financial reporting
purposes, the acquisition was treated as a recapitalization of CSI with CSI as
the acquirer (a reverse acquisition).
CSI markets Y2K services to a variety of commercial and government
organizations. The Company believes some demand for CSI's Y2K services may
continue to exist after the Year 2000, although this demand will diminish
significantly over time and will eventually disappear. However, CSI's
proprietary computer software tools may be used in conversion projects
unrelated to Y2K work. CSI plans to pursue business opportunities unrelated to
the Y2K problem in the information services market and to develop products and
services to take advantage of these opportunities, such as migrating a
client's software application from a mainframe to a client-server environment.
9
With the recent acquisition of Eclipse, the Company believes synergistic
benefits may be realized as the two organizations further develop additional
services and technologies together.
Through December 31, 1998, the Company's revenues were generated
primarily from CSI's consulting and conversion fees and software sales related
to Y2K services. With the acquisition of Eclipse and its plans to continue to
diversify, the Company's future revenues will be less concentrated on Y2K
products.
In the next 12 months, the Company intends to integrate the services of
Eclipse's with that of CSI's and other potentially synergistic acquisitions.
Further, the Company intends to expand the services of both subsidiaries
through opening other offices in key geographic markets. In the first quarter
the Company opened new offices in Minneapolis and Detroit and performed
initial analysis on several other key cities. The Company also intends to make
additional 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 non-Y2K
services, it will incur training, salary and other costs prior to the
recognition of related revenues. In addition, a large percentage of the
Company's revenues are expected to be derived from a relatively small number
of large-scale, comprehensive projects. Consequently, the Company's revenues
and operating results may be subject to substantial fluctuations in any given
year and from quarter to quarter.
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER ENDED MARCH 31,
1998
REVENUE. Revenue for the quarter ended March 31, 1999, were
approximately $5,107,000, an increase of approximately $3,583,000 over revenue
of approximately $1,524,000 for the quarter ended March 31, 1998. The increase
in revenue during the first quarter of 1999 was a result of increased sales
activity of Year 2000 services as compared to 1998, revenue generated from the
licensing of the Company's proprietrary software tool during the first quarter
of 1999, and additional IT consulting revenues generated from the Company's
acquisition of Eclipse in December 1998. For the quarter ended March 31, 1999,
Year 2000 services and IT consulting services represented 42% and 58% of
revenues, respectively as compared to 100% for Year 2000 services for the
quarter ended March 31, 1998.
GROSS PROFIT. Gross profit for the quarter ended March 31, 1999, was
approximately $2,664,000, or 52% of revenues, an increase of approximately
$1,607,000 over gross profit of approximately $1,057,000, or 69% of revenues,
for the quarter ended March 31, 1998. The increase in gross profitability
during the quarter ended March 31, 1999, was a result of increased revenues;
however, the decrease in gross profit as a percentage of revenue is a result
of increased IT consulting work resulting from the Eclipse acquisition. IT
consulting typically has lower margins than Y2K services.
10
RESEARCH AND DEVELOPMENT. Research and development expenses for the
quarter ended March 31, 1999, were approximately $168,000, or 3% of revenues.
Research and development expenses for the quarter ended March 31, 1998, were
approximately $128,000, or 8% of revenues. The Company initiated efforts in
the fourth quarter of 1998 to market a validation and verification toolset
that the Company developed using aspects of the Company's VISION 2000TM
toolsuite. The Company continues to incur research and development expenses as
it modifies, enhances, and updates this tool.
SALES AND MARKETING. Sales and marketing expenses for the quarter ended
March 31, 1999, were approximately $547,000, or 11% of revenues, an increase
of approximately $281,000, from approximately $266,000 of such expenses, or
17% of revenues, for the quarter ended March 31, 1998. The increase in sales
and marketing expenses for the first quarter of 1999 was primarily
attributable to the acquisition of Eclipse, commission expenses related to
increased sales revenue, and further investments in marketing efforts related
to the Company's services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
quarter ended March 31, 1999, were approximately $1,826,000, or 36% of
revenues, an increase of approximately $769,000, as compared to approximately
$1,057,000 of such expenses, or 69% of revenues, incurred by the Company for
the quarter ended March 31, 1998. The increase in general and administrative
expenses for the quarter ended 1999 was primarily attributable to general and
administrative expenses associated with the on- going operations of Eclipse
and the costs associated with the opening of the Minneapolis and Detroit new
offices. The Company anticipates additional investments will be made as it
expands its presence throughout the United States with new offices and
acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the quarter ended March 31, 1999, was approximately $407,000, or 8% of
revenues, an increase of approximately $85,000, as compared to approximately
$322,000 of such expenses, or 21% of revenues, incurred by the Company for the
quarter ended March 31, 1998. The increase in depreciation and amortization
expenses for the three months ended 1999 was primarily attributable to an
increase in depreciable assets and intangibles associated with the acquisition
of Eclipse.
OTHER INCOME (EXPENSE). Interest income for the quarter ended March 31,
1999, was approximately $37,000, or 1% of revenues, a decrease of
approximately $18,000 as compared to approximately $55,000, or 4% of revenues,
for the quarter ended March 31, 1998. The decrease in interest income for the
quarter ended March 31, 1999 was primarily attributable to lesser amounts of
cash available for investment during 1999.
EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION)
As a result of the above, the EBITDA for the quarter ended March 31, 1999 was
approximately $124,000. This represented an increase of approximately $517,000
as compared to negative EBITDA of approximately $(393,000) for the quarter
ending March 31, 1998.
NET INCOME (LOSS). As a result of the above, the net loss for the
quarter ended March 31, 1999, was approximately $251,000, or 5% of revenues,
an increase of approximately $431,000, as compared to the net loss of
11
approximately $682,000, or 45% of revenues, for the quarter ended March 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since its inception, financed its operations and
capital expenditures through the sale of stock, convertible notes, convertible
exchangeable debentures and the proceeds from the exchange offer and exercise
of the warrants related to the convertible exchangeable debentures. Cash used
in operations during the quarter ended March 31, 1999, was approximately
$665,000, as compared to approximately $541,000 for the quarter ended March
31, 1998. The increase in cash used in operations during the first quarter of
1999 was primarily a result of increases in accounts receivable associated
with revenue growth in the first quarter of 1999 partially offset by smaller
operating losses.
Capital expenditures were approximately $81,000 for the quarter ended
March 31, 1999, as compared to approximately $54,000 during the quarter ended
March 31, 1998. The increase in capital expenditures during 1998 is related
primarily to the ongoing purchase requirements of computer equipment for
Company personnel.
As of March 31, 1999, the Company had working capital of approximately
$5,723,000. The Company's primary source of liquidity consists of
approximately $3,766,000 in cash and cash equivalents and approximately
$3,268,000 of accounts receivable.
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
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.
12
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 key employees and other risks and uncertainties affecting the
technology industry generally. The Company disclaims any intent or obligation
to up-date publicly these forward-looking statements, whether as a result of
new information, future events or otherwise.
Most of the Company's current cost structure is fixed. Expenses consist
primarily of the salaries and benefits paid to the Company's technical,
marketing and administrative personnel. Amortization and depreciation expenses
relate to property, equipment and intangible assets. As a result of its plan
to expand its operations through internal growth and acquisitions the Company
expects these costs to increase in absolute dollars, while decreasing as a
percentage of revenue.
The Company's profitability depends upon both the volume of service and
the Company's ability to manage costs. Because a significant portion of the
Company's cost structure is fixed, the Company must effectively manage these
costs to achieve profitability. In addition, certain of the Company's projects
are priced on a fixed fee basis. The profitability on an individual fixed fee
project depends upon the completion of the project within the budgeted number
of staff hours and within the agreed upon time frame. To date, the Company has
been able to maintain its operating margins through efficiencies achieved by
the use of the Company's proprietary software tools, by completing fixed fee
projects within budget, and by effectively managing general overhead costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
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 (Loss) Per Share
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
On December 29, 1998, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting its acquisition on December 14, 1998,
of Eclipse Information Systems, Inc. On March 1, 1999, the Company filed
an amendment to that Form 8-K setting forth historical and pro forma
financial information relating to that acquisition.
14
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 1, 1999 /s/MICHAEL C. HIGGINS
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Michael C. Higgins
President
/s/JAMES T. MCCUBBIN
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James T. McCubbin
Vice President - Principal Financial
and Accounting Officer