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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1999.
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 (I.R.S. Employer
incorporation or organization) Identification No.)
20251 Century Blvd., Germantown, MD 20874
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(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (301) 353-9500
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
Indicate by check mark 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
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The aggregate market value of the registrant's Common Stock, par value
$.001 per share, held as of March 27, 2000 by non-affiliates of the registrant
was approximately $46,172,633 based on the average bid and asked prices of the
Common Stock on such date.
As of March 27, 2000, the registrant had 12,984,913 shares of its Common
Stock issued and outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's
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knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-K is incorporated
by reference from the registrant's definitive proxy statement or amendment
hereto which will be filed not later than 120 days after the end of the fiscal
year covered by this report.
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ITEM 1. BUSINESS
INTRODUCTION
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 next Annual Meeting of
Shareholders in May 2000 to vote upon a motion to change the name of the Company
from ZMAX to WidePoint.
BUSINESS STRATEGY
The Company believes the current market for IT services is rapidly changing and
expanding due primarily to the Internet's opportunities and challenges. The
influence of the Internet, in our opinion, offers significant opportunities for
growth in the IT services marketplace.
In order to capitalize on the Internet revolution, the Company evolved itself
from a Year 2000 strategic solutions provider through only CSI to an e-value
chain solutions provider through its acquisitions of EIS and PMC, its
transformation of CSI's core business and its establishment of WidePoint. The
e-value chain encompasses internal and external Business to Business ("B2B") and
Business to Customer ("B2C") operations, core Enterprise Resource Planning
("ERP") systems as the backbone of the e-value chain, B2B vendor/supplier facing
systems, and B2B/B2C customer facing systems.
The Company is focusing on three strategic service areas that will support the
Company's goal of becoming a premier supplier of e-value chain solutions to the
mid-market. These three strategic service areas are e-technologies, Enterprise
Application Integration ("EAI") and Enterprise Resource Planning
("ERP").
The Company's e-technologies practice specializes in providing strategic,
technical and creative expertise in every realm of e-business. The Company
carefully balances strategy, creativity and technology to develop an e-solution
that makes the most business sense for the Company's clients now and in the
future. The strategic acquisition of EIS in December 1998 gave the Company the
resources and expertise to peruse this lucrative area of Internet consulting.
Since its acquisition, EIS has been strategically focused on e-business
solutions. The Company's core expertise, both professionally and technically,
has been expanded to create a critical mass of experienced and qualified
e-business consultants.
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The Company's EAI practice specializes in providing application integrations
solutions across an entire enterprise. This integration includes all software
packages which are utilized within an enterprise, being both internally created
and externally licensed software packages, on virtually any hardware platform.
The Company is utilizing the internal expertise of the professional and
technical staff of CSI in focusing on the EAI solutions marketplace.
The Company's ERP practice specializes in providing enterprise resource planning
for the entire e-value chain, from Supply Chain Management ("SCM") to Customer
Relationship Management ("CRM"). The acquisition of PMC has strategically
positioned the Company to focus on the ERP area.
To support its targeted growth plans, the Company's business strategy
incorporates seeding internal growth with focused sales and marketing and
selecting potential acquisitions that can supplement and expand the Company's
skills base and regional exposure. The Company believes that a strong regional
presence and focused sales and marketing effort enable the Company to service
larger national accounts that may generate greater revenues.
The Company's ability to expand successfully by internal development and
strategic acquisitions depends on many factors, including the identification and
acquisition of proper businesses and successful strategic sales and marketing
efforts. Any difficulties encountered in the expansion of the Company through
internal development and/or acquisition could have an adverse impact on the
Company's revenues and operating results.
CLIENTS
The Company's client list includes an expanding number of companies that are
ready to take advantage of the Internet and e-value chain to change the way they
conduct business. The client base of the Company is located predominately
throughout North America, together with periodic clients in Europe. The Company
has noteworthy experience and expertise in the successful completion of projects
in the following industries: manufacturing, consumer product goods/retail,
direct marketing, healthcare and state government areas.
Historically the Company derived, and may in the future derive, a significant
percentage of its total revenues from a relatively small number of clients.
During 1999, two customers individually represented 12 and 11 percent of
revenues for that year. During 1998, three customers individually represented
41, 18, and 11 percent of revenues for that year. 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.
MARKETING AND SALES
The Company focuses its sales and marketing efforts on mid-market corporations
with significant IT budgets and requirements. While the Company performs work
for companies in many various industries, the majority of the Company's revenues
for 1999 were derived from
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contracts and projects with state governments, manufacturing clients, consumer
product goods/retail clients and healthcare corporations.
The Company markets its solutions through its direct sales force and alliances
with a number of strategic partnerships. The direct sales force is responsible
for providing highly responsive quality service and ensuring client satisfaction
with the Company's services. The Company's strategic partnerships provide the
Company with additional access to potential clients that would have otherwise
been more difficult for the Company's direct sales force to penetrate without
such strategic partnerships.
COMPETITION
The market for the services that the Company provides is highly competitive,
includes a large number of competitors and is subject to rapid change. The
primary competitors of the Company include participants from a variety of market
segments, including publicly and privately held firms, "Big Five" accounting and
consulting firms, systems consulting and implementation firms, application
software firms, service groups of computer equipment companies, and other
general management consulting firms. Increasingly, companies from foreign
countries are also targeting this market.
INTELLECTUAL PROPERTY
The Company's intellectual property primarily consists of methodologies
developed for use in ERP Implementations and e-Technologies. The Company does
not have any patents and relies upon a combination of trade secrets, copyright
and trademark laws, and contractual restrictions to establish and protect its
ownership of its proprietary methodologies and exclusive rights to its software
tool suite. The Company generally enters into nondisclosure and confidentiality
agreements with its employees, partners, independent sales agents and clients.
As the number of competitors providing services similar to the services of the
Company increases, the likelihood of similar tools and methodologies being used
by competitors increases. Although the Company's methodologies have never been
subject to an infringement claim, there can be no assurance that third parties
will not assert infringement claims against the Company in the future, that the
assertion of such claims will not result in litigation, or that the Company
would prevail in such litigation or be able to obtain the license for the use of
any allegedly infringed intellectual property from a third party on commercially
reasonable terms. Further litigation, regardless of its outcome, could result in
substantial cost to the Company and divert management's attention from the
Company's operations. Although the Company is not aware of any basis upon which
a third party could assert an infringement claim against the Company, any
infringement claim or litigation against the Company could materially adversely
affect the Company's business, operating results and financial condition.
PERSONNEL
As of December 31, 1999 the Company had 191 full time employees including 26
persons in sales, 126 persons in operations and 39 persons in management and
administration. The
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Company also employs consultants and temporary employees.
The Company believes that its future success will depend in part on its
continued ability to attract and retain highly skilled managerial, technical,
sales and support personnel. There can be no assurance that the Company will be
able to continue to attract and retain personnel necessary for the development
of its business. The Company generally does not have employment contracts with
its key employees. However, the Company does have confidentiality and
non-disclosure agreements with many of its key employees. None of the Company's
employees is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are good.
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ITEM 2. PROPERTIES.
The principal executive office of the Company is located at 20251 Century
Boulevard, Germantown, Maryland 20874, in approximately 13,000 square feet
through a sublease that expires September 30, 2000. The Company's annual rent
for the property in 1999 was $88,013.00. The Company also pays its pro rata
share of increases in real estate taxes and operating expenses for this office.
The Company is currently negotiating an extension of its current sublease for
this office.
At December 31, 1999, the Company leased and maintained sales and support
offices in more than six locations in the United States. The aggregate annual
rental expense for the Company's six other branch offices was approximately
$220,286.25 in 1999. For additional information regarding the Company's lease
obligations, see Note 9 of "Notes to Consolidated Financial Statements. "
The Company anticipates entering into leases for new facilities and potentially
expanding its current facilities to accommodate the expected continued growth of
the Company. The Company believes that it can obtain the additional facilities
required to accommodate its projected needs without difficulty and at
commercially reasonable prices, although no assurance can be given that it will
be able to do so.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings except as
described below.
In December 1999, a third-party complaint was filed against PMC by a former
client. The complaint alleges, among other things, breach of contract pertaining
to the implementation by PMC of an enterprise resource planning software
application first provided by Oracle Corporation. In the complaint, the former
client is seeking approximately $10.0 million in total damages from PMC and
Oracle Corporation. The complaint relates to work completed by PMC prior to the
acquisition of PMC by the Company. Under the terms of the purchase agreement
under which the Company acquired PMC, the former sole shareholder of PMC has
indemnified the Company against damages related to this complaint. The former
sole shareholder of PMC has retained and paid for legal counsel to defend PMC
and intends to vigorously defend PMC against this complaint. In the opinion of
management, the Company will not incur a material loss related to this legal
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS.
No matters were submitted to a vote of the registrant's shareholders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "ZMAX" and the Frankfurt and Berlin exchanges under the symbol "ZMX".
From August 20, 1996 to May 18, 1998 the Company's Common Stock was quoted on
the NASD OTC Bulletin Board under the symbol "ZMAX". Prior to August 20, 1996
the Company's Common Stock was traded on the NASD OTC Bulletin Board under the
trading symbols of "MEDO" and "ORYX.
The stock prices listed below, which have been adjusted for a 1 for 80 reverse
stock split of the Company's Common Stock as of August 27, 1996, represent the
high and low closing bid prices of the Common Stock for each of the periods
indicated:
1999 High Low
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First Quarter $ 3.38 $ 1.94
Second Quarter 3.63 2.03
Third Quarter 4.19 2.25
Fourth Quarter 5.94 3.25
1998 High Low
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First Quarter $ 8.11 $ 5.06
Second Quarter 10.63 5.03
Third Quarter 7.19 2.75
Fourth Quarter 5.25 2.63
As of March 27, 2000 there were 162 holders of record of the Common
Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends to
continue this policy for the foreseeable future. ZMAX plans to retain earnings
for use in its business. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors of the Company and will be dependent
on ZMAX's results of operations, financial condition, contractual and legal
restrictions and any other factors deemed to be relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION.
The tables below presents selected historical financial data of ZMAX. The ZMAX
historical data for the years ended December 31, 1999, 1998, 1997 and 1996 are
derived from the historical financial statements of ZMAX Corporation as audited
by Arthur Andersen LLP, included elsewhere in this Form 10-K.
On September 30, 1999, ZMAX acquired Parker Management Consulting, Ltd. ("PMC"),
a Delaware corporation. The accompanying financial data include the accounts of
PMC since the date of acquisition. 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.
On December 14, 1998, ZMAX acquired Eclipse Information Systems, Inc. ("EIS"),
an Illinois corporation. The accompanying financial data include the accounts of
EIS since the date of acquisition. A further description of this transaction is
set forth in the Company's Form 8-K/A filed on March 1, 1999 with the Securities
and Exchange Commission.
On November 6, 1996, ZMAX, which was then a shell company listed on the OTC
Bulletin Board, acquired Century Services, Inc. ("CSI"), a Maryland corporation.
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 acquiror (a reverse acquisition). Accordingly, the
historical financial statements of ZMAX prior to the November 6, 1996 are the
historical financial statements of CSI. The accompanying selected financial data
include all of the accounts of CSI and ZMAX for the period from the acquisition
on November 6, 1996, through December 31, 1999. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto included elsewhere herein.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996
------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 27,196,125 $ 9,916,276 $ 1,425,360 $ -
Cost of revenues 12,140,007 3,478,982 667,098 -
Research and development expense 325,651 473,362 - -
Sales and marketing expense 2,617,117 1,190,548 1,110,655 228,803
General and administrative expense 9,701,672 3,515,391 4,148,421 1,069,681
Employee stock compensation expense - 534,384 - -
Impairment of long-term assets 1,703,825 - - -
Depreciation and amortization 1,817,329 1,268,338 1,008,864 193,533
------------ ------------ ------------ ------------
Loss from operations (1,109,476) (544,729) (5,509,678) (1,492,017)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 161,123 270,337 137,814 14,248
Interest expense (76,296) (9,140) (1,366,479) (7,125,386)
Other (33,756) 821 (7,468,356) (2,903,600)
------------ ------------ ------------ ------------
Net loss before income taxes (1,058,405) (282,711) (14,206,699) (11,506,755)
Income taxes 37,648 - - -
------------ ------------ ------------ ------------
Net loss $ (1,096,053) $ (282,711) $(14,206,699) $(11,506,755)
============ ============ ============ ============
Basic and diluted loss per share $ (0.08) $ (0.03) $ (2.58) $ (13.45)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 12,949,913 10,638,680 5,502,668 855,712
============ ============ ============ ============
OPERATING AND OTHER DATA
Revenues $ 27,196,125 $ 9,916,276 $ 1,425,360 $ -
Cost of revenues 12,140,007 3,478,982 667,098 -
Gross margin 55.3% 64.9% 53.2% -
EBITDA(1) 2,411,678 1,257,993 (4,500,814) (1,298,484)
EBITDA margin 8.9% 12.7% (315.8%) -
DECEMBER 31,
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1999 1998 1997 1996
------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,226,434 $ 4,521,126 $ 6,405,084 $ 4,842,169
Working capital 5,911,264 5,563,144 5,262,151 2,725,534
Total assets 20,988,956 17,446,362 11,870,077 8,592,042
Total liabilities 6,145,543 1,666,309 2,291,697 8,172,254
Accumulated deficit (27,092,218) (25,996,165) (25,713,454) (11,506,755)
Total stockholders' equity 14,843,413 15,780,053 9,578,380 419,788
Notes to Selected Consolidated Financial and Operating Data:
(1) EBITDA (earnings before interest, taxes, depreciation and amortization,
and certain one-time charges), while not a measure under generally
accepted accounting principles ("GAAP"), is a standard measure of
performance in many industries. EBITDA should not be considered in
isolation or as an alternative to net income (loss), income (loss) from
operations, cash flows from operating activities, or any other measure of
performance under GAAP.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
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 next 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, MD. 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 EIS.
The results of operations of EIS are included in the financial statements of
ZMAX from the date of acquisition. Prior to the acquisition, EIS was a privately
held company with its headquarters located in Oakbrook, IL. A further
description of this transaction is set forth in the Form 8-K/A filed on March 1,
1999, with the SEC.
EIS 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. EIS provides services in ERP
solutions, internet and intranet solutions, network solutions, client server
solutions, and AS/400 solutions.
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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,
EIS, 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 year ended December 31, 1999, the Company's revenues increased by more
than 174% from approximately $9.9 million in 1998 to approximately $27.2 in
1999. Previously in 1998, approximately 96% of the Company's revenues, or
approximately $9.5 million, were generated from CSI's millennium services.
However, in 1999, the Company realized a greater amount of revenues from its
non-millennium IT services, which amounted to approximately $14.7 million, or
55% of revenues, in 1999 as compared to only approximately $400,000, or 4% of
revenues, in 1998. As a result of this significant and intended 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 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.
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 completing the project within the estimated 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, by offsetting increases in consultant salaries with
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increases in consultant fees, and by effectively managing general overhead
costs.
RECENT DEVELOPMENTS
PMC ACQUISITION:
On October 1, 1999, the Company acquired all of the issued and outstanding
capital stock of PMC for $1.5 million in cash, subject to post-closing
adjustments, the issuance of a $3.0 million, three year promissory note and the
issuance of a warrant to purchase 200,000 shares of the Company's common stock
for $5.00 per share. The Company incurred approximately $233,000 in direct
acquisition expenses related to the PMC acquisition. The Company also entered
into non-compete and employment agreements with certain members of the PMC
management team. As of the acquisition date, the purchase price for this
acquisition has been allocated as follows:
Cash acquired...................................................................$ 523,763
Accounts receivable............................................................. 529,406
Note receivable................................................................. 256,875
Other assets.................................................................... 35,452
Intangible assets............................................................... 3,754,144
Liabilities assumed and direct acquisition costs................................ (696,085)
---------------
$ 4,403,555
==============
In the PMC acquisition, the Company issued a warrant to purchase 200,000 shares
of the Company's common stock at an exercise price of $5.00 per share, which
amount exceeded the market price of the Company's common stock on that date. The
Company used the Black-Scholes option pricing model to value this stock purchase
warrant, which was estimated to have a fair value of approximating $140,000 at
the time of issuance. This value has been reflected as part of stock warrants in
the stockholders' equity section of the Company's consolidated balance sheet and
has been included as part of the Company's purchase accounting for the PMC
acquisition.
The purchase price allocation for PMC is subject to adjustment for changes in
estimates and the settlement of certain contingencies. The resolution of these
matters is not expected to have a material impact on the Company's financial
condition or its results of future operations.
PENNSYLVANIA MERCHANT GROUP:
On September 20, 1999, the Company entered into a two-year agreement with
Pennsylvania Merchant Group ("PMG") to assist with investment banking, strategic
planning, and mergers and acquisition services. During such two-year period, the
Company will pay PMG the amount of $5,000 per month plus approved expenses.
Additionally, the Company issued to PMG a warrant to purchase 200,000 shares of
Company common stock at an exercise price of $2.75 per share, which amount
exceeded the market price of the Company's common stock on that date. The
Company used the Black-Scholes option pricing model to value this stock purchase
warrant,
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which was determined to have a fair value of $140,000 at the time of issuance
and is being recognized ratably over the two-year term of the agreement. The
appropriate ratable portion of this value has been reflected as a separate
component of stockholders' equity. As of December 31, 1999, $19,413 of expense
had been recognized related to the issuance of this stock purchase warrant to
PMG.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to the Year ended December 31, 1998
Revenues. Revenues for the year ended December 31, 1999, were
approximately $27.2 million, an increase of $17.3 million, over revenues of
approximately $9.9 million for the year ended December 31, 1998. The 174%
increase in revenues in 1999 was primarily attributable to increased sales of
millennium services by CSI, the inclusion of EIS results for the entire year,
the introduction of web enabled services by EIS, and the revenue generated by
PMC from the date of acquisition.
Gross profit. Gross profit for the year ended December 31, 1999, was
$15.1 million, or 56% of revenues, an increase of $8.7 million over gross profit
of $6.4 million, or 65% of revenues, for the year ended December 31, 1998. The
overall dollar value increase was attributable to increased revenues during 1999
as compared to 1998. The decline of gross profit as a percentage of revenues was
attributable to lower margins associated with the introduction of new web
enabled services and the increased revenues of EIS and PMC that traditionally
have had lower margins as compared to the millennium services of CSI.
Research and development. Research and development expenses for the year
ended December 31, 1999, were $0.3 million, or less than 1% of revenues as
compared to $0.5 million, or 5% of revenues, for the year ended December 31,
1998. The Company has reduced its research and development expenses in 1999 as
it has shifted its focus from its millennium services towards IT consulting
services.
Sales and marketing. Sales and marketing expenses for the year ended
December 31, 1999 were $2.6 million, or 10% of revenues, as compared to $1.2
million, or 12% of revenues, for the year ended December 31, 1998. The $1.4
million increase in sales and marketing expenses for the year ended December 31,
1999, was primarily attributable to increased commission expenses incurred as a
result of increased revenues, an increased sales force associated with the
acquisitions, and further investments in marketing efforts during the year. The
decrease as a percentage of revenues was primarily attributable to greater
economies of scale realized by the consolidation of the Company's operating
units during 1999.
General and administrative. General and administrative expenses for the
year ended December 31, 1999 were $9.7 million, or 36% of revenues, as compared
to $3.5 million, or 35% of revenues, for the year ended December 31, 1998. The
$6.2 million increase in general and administrative expenses in 1999 were
primarily attributable to increases in management and infrastructure costs and
professional and consulting expenses associated with the consolidation of
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the Company's separate business units into a new operating company in 1999.
Interest income (expense). Interest income for the year ended December
31, 1999 was $0.2 million, a decrease of $0.1 million or 50%, as compared to
interest income of $0.3 million for the year ended December 31, 1998. The
decrease in interest income in 1999 was primarily attributable to lesser amounts
of invested cash. Interest expense for the year ended December 31, 1999 was $0.1
million, an increase of $0.1 million or 100%, as compared to no material
interest expense for the year ended December 31, 1998. The increase in interest
expense in 1999 was primarily attributable to the issuance of a $3.0 million
promissory note as part of the purchase price paid in conjunction with the
acquisition of PMC in October 1999.
EBITDA. (earnings before interest, taxes, depreciation, amortization, and
certain one-time charges). As a result of the above, EBITDA for the year ended
December 31, 1999 was $2.4 million. This represented an increase of $1.1 million
as compared to an EBITDA of $1.3 million for the year ended December 31, 1998.
The loss from operations for the year ended December 31, 1999 included a
one-time charge of $1.7 million incurred in connection with the Company's
write-off of certain intangible assets associated with its millennium services
which are being discontinued in the future. This write-off was the result of the
shift in the Company's business model away from millennium services toward IT
services which rendered certain of the Company's intangible assets related to
millennium services completely impaired and with no further useful life under
the provisions of Statements of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for the Long-Lived
Assets to be Disposed of." The loss from operations for the year ended December
31, 1998, included a one-time employee stock compensation charge of
approximately $0.5 million which resulted from the contribution of shares of
Company common stock to the Company by certain stockholders and the re-issuance
of that stock to an employee as consideration for services.
Net income (loss). As a result of the above, the net loss for the year
ended December 31, 1999 was $1.1 million, an increase of $0.8 million, as
compared to the net loss of $0.3 million for the year ended December 31, 1998.
Net income, excluding the one-time charge for the year ended December 31, 1999
was $0.6 million. Net income, excluding the one-time charge for the year ended
December 31, 1998, was $0.3 million.
Year Ended December 31, 1998 Compared to the Year ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998, were $9.9
million as compared to revenues of $1.4 million for the year ended December 31,
1997. The $8.5 million increase in revenues was primarily attributable to
increased sales of millennium services by CSI during 1998 as compared to 1997.
To a lesser extent, the increased revenues during 1998 were attributable to the
Company's first license of its proprietary millennium software and the revenue
generated by EIS since its acquisition by the Company on December 14, 1998.
Gross profit. Gross profit for the year ended December 31, 1998, was $6.4
million, or 65% of revenues, over gross profit of $0.7 million, or 53% of
revenues, for the year ended December 31, 1997. This $5.7 million increase was
attributable to increased revenues and greater realized
17
economies of scale and efficiencies during 1998 as compared to 1997, during
which the Company had just commenced operations.
Research and development. Research and development expenses for the year
ended December 31, 1998, were $0.5 million, or 5% of revenues. No research and
development expenses were incurred during the year ended December 31, 1997. The
Company initiated efforts during 1998 to refine its millennium toolset and to
prepare the toolset for potential licensing to end-users. In the fourth quarter
of 1998, the Company entered into its first licensing agreement for the toolset.
Sales and marketing. Sales and marketing expenses for the year ended
December 31, 1998 were $1.2 million, or 12% of revenues, as compared to$1.1
million of such expenses, or 78% of revenues, for the year ended December 31,
1997. The increase of $0.1 million in sales and marketing expenses for the year
ended December 31, 1998 was primarily attributable to increased commission
expenses and further investments in marketing efforts in 1998. These increases
were partially offset by a reduction in severance costs incurred in the year
ended December 31, 1997.
General and administrative. General and administrative expenses for the
year ended December 31, 1998 were $3.5 million, or 35% of revenues, as compared
to $4.1 million of such expenses, or 291% of revenues, for the year ended
December 31, 1997. The decrease of $0.6 million in general and administrative
expenses in 1998 was primarily attributable to a decrease in professional and
consulting expenses.
Interest income (expense). Interest income for the year ended December
31, 1998 was $0.3 million as compared to $0.1 million of such interest income
for the year ended December 31, 1997. The increase of $0.2 million in interest
income in 1998 was primarily attributable to greater amounts of invested cash.
The Company had no material interest expense for year ended December 31, 1998.
Interest expense for the year ended December 31, 1997 was $1.4 million. The
decrease in interest expense in 1998 was primarily attributable to repayment of
the Company's long-term debt and the elimination of interest expense related to
the amortization of the deferred financing costs and the discount on the
Company's convertible notes.
EBITDA (earnings (loss) before interest, taxes, depreciation, amortization,
and certain one-time charges). As a result of the above, EBITDA for the year
ended December 31, 1998 was $1.3 million. This represented an increase of $5.8
million as compared to negative EBITDA of $4.5 million for the year ended
December 31, 1997. The loss from operations for the year ended December 31, 1998
included a one-time charge of $0.5 million for employee stock compensation. This
charge related to the contribution of shares of Company common stock to the
Company by certain stockholders and the re-issuance of that stock to an employee
as consideration for services. This transaction was not dilutive and did not
impact the Company's cash flows or financial position and may result in a future
tax benefit for the Company.
Net income (loss). As a result of the above, the net loss for the year
ended December 31, 1998 was $0.3 million, a decrease of $13.9 million, as
compared to the net loss of approximately
18
$14.2 million for the year ended December 31, 1997. Net income, excluding the
one-time charge for the year ended December 31, 1998, was $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has, since inception, financed its operations and capital
expenditures through the sale of common stock, convertible notes, convertible
exchangeable debentures, the proceeds from an exchange offer of debt for equity
and the exercise of warrants related to convertible exchangeable debentures.
Cash provided by operating activities for the year ended December 31, 1999 was
$1.0 million, an increase of $0.6 million over the cash provided by operating
activities of $0.4 million for the year ended December 31, 1998. Total cash used
for the year ended December 31, 1999 was $0.3 million, as compared to cash used
of $1.9 million for the year ended December 31, 1998. The cash used during the
year ended December 31, 1999 was primarily a result of the $0.8 million in cash
used for the acquisition of PMC and the purchases of property and equipment of
$0.4 million. Capital expenditures on property and equipment were $0.4 million
for the year ended December 31, 1999, as compared to $0.1 million during the
year ended December 31, 1998. The increase in capital expenditures during 1999
was related primarily to the expansion of the infrastructure of the Company and
growth of its workforce.
As of December 31, 1999, the Company had working capital of $5.9 million. The
Company's primary source of liquidity consists of $4.2 million in cash and cash
equivalents and $5.5 million of accounts receivable. The Company's current
liabilities include $3.2 million in accounts payable and accrued expenses and
the current portion of a note payable due September 30, 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 material 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 Company's revenue
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 significant 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.
19
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.
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, 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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company is not subject the requirement to file selected quarterly
financial data under item 302 of Regular S-K.
The consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMNENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instructions G(3) of Form 10-K, the information called for
by this Item regarding director's is hereby incorporated by reference from the
Company's definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report. Information regarding the Company's executive officers is set
forth under Item 4A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of form 10-K, the information called for by
this item hereby incorporated by reference from the Company's definitive proxy
statement or amendment hereto to be filed pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report.
22
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Financial Statement Schedule
(1) Financial Statements:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December
31, 1999, 1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 1999, 1998, 1997, and 1996
Consolidated Statements of Cash Flow for the Years Ended December
31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(2) Financial Statements Schedule:
Report of Independent Accountants
Schedule II - Valuation and qualifying accounts
All other schedules are omitted either because they are not applicable or
required, or because the required information is included in the financial
statements or notes thereto:
(b) Reports on Form 8-K
On October 18, 1999, the Company filed a Form 8-K with the
Securities and Exchange Commission reporting its acquisition on
October 1, 1999, of Parker Management Consultants, Ltd. On
December 15, 1999, the Company filed an amendment to that Form 8-K
setting forth historical and pro forma financial information
relating to that acquisition.
(c) Exhibits: The following exhibits are filed herewith or
incorporated herein by reference:
23
EXHIBIT
NO. DESCRIPTION
- -------- -----------
2.1 Stock Purchase Agreement among ZMAX Corporation, Michael C. Higgins
and Michael S. Cannon, dated November 6, 1996, for the acquisition
of Century Services, Inc. (Incorporated herein by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
2.2 Agreement and Plan of Merger between ZMAX Corporation and New ZMAX
Corporation, dated June 10, 1999. (Incorporated herein by reference
to Exhibit 2.2 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)
3.1 Amended and Restated Certificate of Incorporation of ZMAX
Corporation. (Incorporated herein by reference to Exhibit 3.5 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
3.2 Bylaws of ZMAX Corporation. (Incorporated herein by reference to
Exhibit 3.6 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)
4.1 Form of Warrant to Purchase Common Stock of ZMAX Corporation.
(Incorporated herein by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.1 ZMAX Corporation 1999 Stock Incentive Plan. (Incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.2 Form of ZMAX Corporation 1999 Non-qualified Stock Option Award (form
of grant and vesting schedule). (Incorporated herein by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)*
10.3 ZMAX Corporation 1999 Directors Formula Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.4 Form of ZMAX Corporation Directors Formula Stock Option Award (form
of grant and vesting schedule). (Incorporated herein by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)*
10.5 Employment Agreement between Century Services, Inc. and
Michael C. Higgins, dated November 6, 1996. (Incorporated
herein by reference to Exhibit 10.5 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
- --------------------
* - Management contract or compensatory plan
24
10.6 First Amendment to the Employment Agreement between Century
Services, Inc. and Michael C. Higgins, dated May 21, 1999.
(Incorporated herein by reference to Exhibit 10.6 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)*
10.7 Employment Agreement between Century Services, Inc. and
Joseph Yeh, dated June 18, 1999. (Incorporated herein by
reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)*
10.8 Separation Agreement between Century Services, Inc. and
Michael S. Cannon, dated April 22, 1999. (Incorporated
herein by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)*
10.9 Consulting Agreement among ZMAX Corporation, MBY, Inc. and Michel
Berty, dated April 1, 1999. (Incorporated herein by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)*
10.10 Consulting Agreement among ZMAX Corporation, Wareham
Management Ltd. and G.W. Norman Wareham, dated May 30,
1999. (Incorporated herein by reference to Exhibit 10.10
to the Registrant's Registration Statement on Form S-4
(File No. 333-29833).)*
10.11 Consulting Agreement between ZMAX Corporation and Shafiq Nazerali,
dated May 30, 1999. (Incorporated herein by reference to Exhibit
10.11 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)*
10.12 Earn Out Stock Escrow Agreement among ZMAX Corporation, Michael C.
Higgins, Michael S. Cannon and Powell, Goldstein, Frazer & Murphy,
dated November 6, 1996. (Incorporated herein by reference to Exhibit
10.12 to the Registrant's Registration Statement on Form S-4 (File
No. 333-29833).)
10.13 ZMAX Corporation Stockholders Agreement among Michael C. Higgins,
Michael S. Cannon and ZMAX Corporation, dated November 6, 1996.
(Incorporated herein by reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
- ----------------------
* - Management contract or compensatory plan
25
10.14 Stock Pledge and Security Agreement from Michael C. Higgins in favor
of ZMAX Corporation, dated November 6, 1996. (Incorporated herein by
reference to Exhibit 10.14 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
10.15 Letter Agreement among ZMAX Corporation, IMS International, Inc.,
Wan Hsien Information International Corporation, Ltd.,
Multi-Dimension International, and Institute for Information
Industry Regarding the Purchase by ZMAX Corporation of the "COCACT"
Software Program, dated April 30, 1999. (Incorporated herein by
reference to Exhibit 10.15 to the Registrant's Registration
Statement on Form S-4 (File No. 333-29833).)
10.16 Letter Agreement between ZMAX Corporation and Institute for
Information Industry Regarding the Purchase by ZMAX Corporation of
the "COCACT" Software Program, dated April 30, 1999. (Incorporated
herein by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-4 (File No. 333-29833).)
10.17 Letter Agreement between ZMAX Corporation and Wan Hsien Information
International Corporation Ltd. Regarding the Purchase by ZMAX
Corporation of the "COCACT" Software Program, dated April 30, 1999,
as amended. (Incorporated herein by reference to Exhibit 10.17 to
the Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.18 Conversion Agreement between Fiserv Federal Systems, Inc. and ZMAX
Corporation, dated April 28, 1999. (Incorporated herein by reference
to Exhibit 10.18 to the Registrant's Registration Statement on Form
S-4 (File No. 333-29833).)
10.19 Agreement between ZMAX Corporation and Investor Communications
Company, LLC, dated as of May 20, 1999. (Incorporated herein by
reference to Exhibit 2.2 to the Registrant's Registration Statement
on Form S-4 (File No. 333-29833).)
10.20 Investor Relations Consulting Agreement between ZMAX Corporation and
Investor Communications Company, LLC, dated as of May 20, 1999.
(Incorporated herein by reference to Exhibit 10.20 to the
Registrant's Registration Statement on Form S-4 (File No.
333-29833).)
10.21 Agreement and Plan of Merger, dated as of December 14, 1998, by and
among ZMAX Corporation, Eclipse Acquisition Corporation, Eclipse
Information Systems, Inc., and Frank Schultz, Mark Mirabile, John
Schultz, Scott Shedd, Brad Adams, Ron Hilicki, Fred Anderson, Harold
Zimmerman, Chris Gildone, Dave Vittitow, Kristina Palmer, Tom
Carroll and Gary Singer. (Incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report of Form 8-K, as filed
on December 29, 1998 (File No. 333-55993).)
10.22 Agreement and Plan of Merger, dated as of October 1, 1999, by and
among ZMAX Corporation, Parker Acquisition Corporation, Parker
Management Consultants, Ltd.,
26
Westmont Non-Grantor Trust, and Kenneth W. Parker and Jennifer L
Parker. (Incorporated herein by reference to Exhibit 2 to the
Registrant's Current Report of Form 8-K, as filed on October 18,
1999 (File No. 333-55993).)
10.23 Employment Agreement between ZMAX Corporation and Michael C.
Higgins, dated September 1, 1999.*
10.24 Employment Agreement between ZMAX Corporation and James T. McCubbin,
dated September 1, 1999.*
11 Statement regarding computation of earnings per share
21 Subsidiaries of ZMAX Corporation
23 Consent of Arthur Andersen LLP
24 Schedule II Valuation and Qualifying Accounts
27 Financial Data Schedule
- -------------------------
* - Management contract or compensatory plan
27
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: March 29, 2000 /s/ MICHAEL C. HIGGINS
----------------------
Michael C. Higgins
President and Chief Executive Officer
Date: March 29, 2000 /s/ JAMES T. MCCUBBIN
---------------------
James T. McCubbin
Vice President - Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 29, 2000 /s/MELVIN A. MCCUBBIN
---------------------
Melvin A. McCubbin
Director and Chairman of the Board
Dated: March 29, 2000 /s/MICHAEL C. HIGGINS
---------------------
Michael C. Higgins
Director, President and Chief
Executive Officer
Dated: March 29, 2000 /s/JAMES T. MCCUBBIN
--------------------
James T. McCubbin
Director, Vice President and Chief Financial
Officer, Secretary and Treasurer
Dated: March 29, 2000 /s/FRANCIS T. SCHULTZ
---------------------
Francis T. Schultz
Director and Vice President
28
Dated: March 29, 2000 /s/G.W. NORMAN WAREHAM
----------------------
G.W. Norman Wareham
Director
Dated: March 29, 2000 /s/STEVE L. KOMAR
-----------------
Steve L. Komar
Director
Dated: March 29, 2000 /s/JAMES M. RITTER
------------------
James M. Ritter
Director
29
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998
and 1997 F-4
Consolidated Statements of Cash Flows for theYears Ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
Exihibit 21 - Subsidiaries of ZMAX Corporation F-16
Exihibit 23 - Report of Independent Public Accountants F-17
Exihibit 24 - Schedule II - Valuation and Qualifying Accounts F-18
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZMAX Corporation:
We have audited the accompanying consolidated balance sheets of ZMAX Corporation
(a Delaware corporation) and its subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ZMAX Corporation and
its subsidiaries, as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 2, 2000
31
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31,
--------------------------------
1999 1998
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 4,226,434 $ 4,521,126
Accounts receivable, net of allowance of $110,000 and $17,160,
respectively ............................................................ 5,548,123 2,545,659
Prepaid expenses and other assets ......................................... 394,554 127,952
------------ ------------
Total current assets .................................... 10,169,111 7,194,737
------------ ------------
Property and equipment, net ............................................... 705,445 477,870
Intangible assets, net .................................................... 10,114,400 9,740,217
Other assets .............................................................. -- 33,538
------------ ------------
Total assets ............................................ $ 20,988,956 $ 17,446,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 3,230,698 $ 1,596,074
Current portion of note payable ........................................... 1,000,000 --
Current portion of capital lease obligation ............................... 27,149 35,519
------------ ------------
Total current liabilities ............................... 4,257,847 1,631,593
------------ ------------
Note payable, net of current portion ............................................ 1,833,436 --
Capital lease obligation, net of current portion ................................ 54,260 34,716
------------ ------------
Total liabilities ....................................... 6,145,543 1,666,309
------------ ------------
Commitments and contingencies
Stockholders' 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;
12,949,913 and 13,117,214 shares issued and
outstanding as of December 31, 1999 and
1998, respectively; none and 167,301 shares
subject to cancellation agreements as of
December 31, 1999 and 1998, respectively .............................. 12,950 13,117
Stock warrants ............................................................ 280,000 704,000
Deferred compensation ..................................................... (120,587) --
Additional paid-in capital ................................................ 41,763,268 41,059,101
Accumulated deficit ....................................................... (27,092,218) (25,996,165)
------------ ------------
Total stockholders' equity .............................. 14,843,413 15,780,053
------------ ------------
Total liabilities and stockholders' equity .............. $ 20,988,956 $ 17,446,362
============ ============
- F-2 -
32
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues .................................. $ 27,196,125 $ 9,916,276 $ 1,425,360
Operating expenses:
Cost of revenues .................... 12,140,007 3,478,982 667,098
Research and development ............ 325,651 473,362 --
Sales and marketing ................. 2,617,117 1,190,548 1,110,655
General and administrative .......... 9,701,672 3,515,391 4,148,421
Employee stock compensation expense.. -- 534,384 --
Impairment of long-term assets ...... 1,703,825 -- --
Depreciation and amortization ....... 1,817,329 1,268,338 1,008,864
------------ ------------ ------------
Loss from operations ...................... (1,109,476) (544,729) (5,509,678)
Other income (expenses):
Interest income ..................... 161,123 270,337 137,814
Interest expense .................... (76,296) (9,140) (1,366,479)
Other ............................... (33,756) 821 (7,468,356)
------------ ------------ ------------
Net loss before income taxes .............. (1,058,405) (282,711) (14,206,699)
------------ ------------ ------------
Income tax provision ...................... 37,648 -- --
------------ ------------ ------------
Net loss .................................. $ (1,096,053) $ (282,711) $(14,206,699)
============ ============ ============
Basic and diluted net loss per share ...... $ (0.08) $ (0.03) $ (2.58)
============ ============ ============
Basic and diluted weighted-average shares
outstanding .......................... 12,949,913 10,638,680 5,502,668
============ ============ ============
- F-3 -
33
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK
-------------------- -------------------------- STOCK
SHARES AMOUNT SHARES AMOUNT WARRANTS
------ ------ ------ ------ --------
Balance, December 31, 1996 ................ -- $ -- 7,000,079 $ 7,000 $ --
Cancellation of shares ........... -- -- (296,007) (296) --
Conversion of notes .............. -- -- 1,600,000 1,600 --
Settlement of a note for common
stock ....................... -- -- 32,077 32 --
Common stock issued in COCACT
purchase .................... -- -- 150,000 150 --
Common stock issued for services . -- -- 60,000 60 --
Issuance of previously issuable
shares ...................... -- -- 904,365 904 --
Exchange of debenture and exercise
of warrants ................. -- -- 2,279,200 2,279 704,000
Net loss ......................... -- -- -- -- --
-------- -------- ----------- ------------ -----------
Balance, December 31, 1997 ................ -- -- 11,729,714 11,729 704,000
Cancellation of shares ........... -- -- (312,500) (312) --
Employee stock compensation ...... -- -- -- -- --
Common stock issued in Eclipse
acquisition ................. -- -- 1,700,000 1,700 --
Net loss ......................... -- -- -- -- --
-------- -------- ----------- ------------ -----------
Balance, December 31, 1998 ................ -- -- 13,117,214 13,117 704,000
Cancellation of shares ........... -- -- (167,301) (167) --
Expiration of warrants ........... -- -- -- -- (704,000)
Issuance of warrants in
Parker acquisition .......... -- -- -- -- 140,000
Deferred compensation ............ -- -- -- -- 140,000
Amortization of deferred
compensation ................ -- -- -- -- --
Net loss ......................... -- -- -- -- --
-------- -------- ----------- ------------- -------------
Balance, December 31, 1999 ................ -- $ -- 12,949,913 $ 12,950 $ 280,000
======== ======== =========== ============= =============
ADDITIONAL ISSUABLE RECEIVABLE
DEFERRED PAID-IN COMMON FOR STOCK
COMPENSATION CAPITAL STOCK SUBSCRIPTION
------------ ------- ----- ------------
Balance, December 31, 1996 ................ $ -- $ 6,724,964 $ 5,299,579 $ (105,000)
Cancellation of shares ........... -- 296 -- --
Conversion of notes .............. -- 2,098,400 -- --
Settlement of a note for common
stock ....................... -- 507,186 -- --
Common stock issued in COCACT
purchase .................... -- 1,931,100 -- --
Common stock issued for services . -- 547,440 -- --
Issuance of previously issuable
shares ...................... -- 5,298,675 (5,299,579) 105,000
Exchange of debenture and exercise
of warrants ................. -- 17,468,044 -- --
Net loss ......................... -- -- -- --
------------- ------------- ------------- --------------
Balance, December 31, 1997 ................ -- 34,576,105 -- --
Cancellation of shares ........... -- 312 -- --
Employee stock compensation ...... -- 534,384 -- --
Common stock issued in Eclipse
acquisition ................. -- 5,948,300 -- --
Net loss ......................... -- -- -- --
------------- ------------- ------------- --------------
Balance, December 31, 1998 ................ -- 41,059,101 -- --
Cancellation of shares ........... -- 167 -- --
Expiration of warrants ........... -- 704,000 -- --
Issuance of warrants in
Parker acquisition .......... -- -- -- --
Deferred compensation ............ (140,000) -- -- --
Amortization of deferred
compensation ................ 19,413 -- -- --
Net loss ......................... -- -- -- --
------------- ------------- -------------- --------------
Balance, December 31, 1999 ................ $ (120,587) $ 41,763,268 $ -- $ --
============= ============= ============== ==============
ACCUMULATED
DEFICIT TOTAL
------- -----
Balance, December 31, 1996 ................ $(11,506,755) $ 419,788
Cancellation of shares ........... -- --
Conversion of notes .............. -- 2,100,000
Settlement of a note for common
stock ....................... -- 507,218
Common stock issued in COCACT
purchase .................... -- 1,931,250
Common stock issued for services . -- 547,500
Issuance of previously issuable
shares ...................... -- 105,000
Exchange of debenture and exercise
of warrants ................. -- 18,174,323
Net loss ......................... (14,206,699) (14,206,699)
------------- -------------
Balance, December 31, 1997 ................ (25,713,454) 9,578,380
Cancellation of shares ........... -- --
Employee stock compensation ...... -- 534,384
Common stock issued in Eclipse
acquisition ................. -- 5,950,000
Net loss ......................... (282,711) (282,711)
------------- -------------
Balance, December 31, 1998 ................ (25,996,165) 15,780,053
Cancellation of shares ........... -- --
Expiration of warrants ........... -- --
Issuance of warrants in
Parker acquisition .......... -- 140,000
Deferred compensation ............ -- --
Amortization of deferred
compensation ................ -- 19,413
Net loss ......................... (1,096,053) (1,096,053)
------------- -------------
Balance, December 31, 1999 ................ $(27,092,218) $ 14,843,413
============= =============
- F-4 -
34
ZMAX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss .............................................................. $ (1,096,053) $ (282,711) $(14,206,699)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization expense ........................ 1,817,329 1,315,154 1,008,864
Impairment of long-term assets ............................... 1,703,825 -- --
Amortization of discount on notes payable .................... 113 -- --
Deferred compensation ........................................ 19,413 -- --
Amortization of deferred financing costs ..................... -- -- 508,363
Amortization of discount on notes and debentures ............. -- -- 591,408
Expenses related to conversion of debentures ................. -- -- 7,370,000
Stock compensation expense ................................... -- 534,384 547,500
Noncash interest expense on promissory note .................. -- -- 8,904
Loss on conversion of promissory note ........................ -- -- 101,442
Changes in assets and liabilities-
Accounts receivable .......................................... (2,473,058) (73,715) (1,067,258)
Prepaid expenses and other assets ............................ 59,264 (15,604) (58,727)
Accounts payable and accrued expenses ........................ 992,103 (138,405) 455,942
Customer deposits ............................................ -- (926,036) 926,039
------------ ------------ ------------
Net cash provided by (used in) operating
activities ............................. 1,022,936 413,067 (3,814,222)
------------ ------------ ------------
Net cash used in investing activities:
Purchase of subsidiaries, net of cash acquired ........................ (847,849) (1,647,644) --
Purchases of property and equipment ................................... (426,887) (109,840) (326,145)
Purchase of software .................................................. -- -- (767,379)
------------ ------------ ------------
Net cash used in investing activities ...... (1,274,736) (1,757,484) (1,093,524)
------------ ------------ ------------
Net cash (used in) provided by financing activities:
Proceeds from the issuance of common stock ............................ -- -- 105,000
Net proceeds from the exchange and exercise of warrants ............... -- -- 6,234,607
Net (payments) borrowings on long-term obligations .................... (42,892) (539,541) 131,054
------------ ------------ ------------
Net cash (used in) provided by financing
activities ............................. (42,892) (539,541) 6,470,661
------------ ------------ ------------
Net (decrease) increase in cash ................................................ (294,692) (1,883,958) 1,562,915
Cash, beginning of period ...................................................... 4,521,126 6,405,084 4,842,169
------------ ------------ ------------
Cash, ending of period ......................................................... $ 4,226,434 $ 4,521,126 $ 6,405,084
============ ============ ============
Supplementary cash flow information:
Cash paid for-
Interest ..................................................... $ 9,005 $ 27,125 $ 299,668
============ ============ ============
Income taxes ................................................. $ 137,648 $ -- $ --
============ ============ ============
- F-5 -
35
1. BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS:
Basis of Presentation
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 December 31, 1999, 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. During 1999, approximately 45 percent of
the Company's revenues were related to millennium services. The Company is not
projecting any revenues related to millennium services in 2000.
In conjunction with the Company's shift to e-business, the Company has
established a new subsidiary, WidePoint, Inc. ("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.
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.
- F-6 -
36
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
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 December 31, 1999 and 1998, cash and cash equivalents included $2,867,950 and
$3,611,339 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. Revenue from the resale
of hardware products is recognized upon shipment.
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
December 31, 1999 and 1998, unbilled accounts receivable totaled $198,773 and
$410,178, respectively.
Revenue from the sale of perpetual and term software licenses is recognized, net
of provisions for returns, at the time of delivery and the 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 ("AICPA") issued Statement of Position ("SOP")
97-2, "Software Revenue Recognition," which superseded Statement of Position
91-1, "Software Revenue Recognition." SOP 97-2 provides additional guidance with
respect to multiple element arrangements; returns,
- F-7 -
37
exchanges, and platform transfer rights; resellers; services; funded software
development arrangements; and contract accounting. The Company recognizes
revenue in accordance with SOP 97-2 and SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." Prior to
1998, the Company had no revenue from the license of software.
Significant Customers
During 1999, two customers individually represented 12 and 11 percent of
revenue. During 1998, three customers individually represented 41, 18, and 11
percent 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 include amounts due from relatively large companies in a variety of
industries. As of December 31, 1999, one customer represented 17 percent of
accounts receivable. As of December 31, 1998, two customers individually
represented 16 and 13 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.
Property and Equipment
Property and equipment are carried at cost and depreciated over their estimated
useful lives, typically three years, using the straight-line method. Leasehold
improvements are depreciated using the straight-line method over their estimated
useful lives or the remaining term of the lease, whichever is shorter.
- F-8 -
38
Property and equipment consisted of the following:
DECEMBER 31,
---------------------------------
1999 1998
-------- ---------
Furniture and fixtures....................................... $281,229 $ 397,600
Computer equipment and software.............................. 887,651 243,685
Leasehold improvements....................................... 80,539 44,151
Less- Accumulated depreciation............................... (543,974) (207,566)
-------- ---------
$705,445 $ 477,870
======== =========
Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed," requires the capitalization of certain computer software
development costs incurred after technological feasibility is established.
Amounts that could have been capitalized under this statement were immaterial
and have not been capitalized.
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires the Company
to capitalize internal computer software costs once the capitalization criteria
of the SOP are met. SOP 98-1 was effective January 1, 1999, and is applied to
all projects in progress upon the initial application of the SOP. The Company
capitalized $101,199 of costs related to computer software purchased for
internal use, primarily related to the new accounting package the Company is
implementing.
Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment,
identifiable intangibles, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets.
During the fourth quarter of 1999, the Company determined that certain of its
long-lived assets related to millennium services were impaired and should be
written off in accordance with the guidance of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This analysis was based in part on the Company's new strategic direction and
changes to its business plan. The assets impaired included the intangible assets
remaining on the Company's books related to its proprietary analysis and
conversion software tool and the goodwill related to the original CSI
acquisition transaction. The Company has written off the $1,703,825 net book
value of these two long-lived assets in the 1999 statement of operations.
Prepaid Expenses and Other Assets
Included in prepaid expenses and other assets at December 31, 1999, is a note
receivable of
- F-9 -
39
approximately $173,600 from a PMC customer that was having difficulty paying the
balance owed to PMC. This note was acquired as part of the PMC acquisition. This
note accrues interest at 10.0 percent per annum and is being paid in monthly
installments of $30,000.
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 2,898,500,
1,714,300 and 1,488,800 shares of common stock outstanding at December 31, 1999,
1998, and 1997, respectively, has not been included in the calculation of the
net loss per share as such effect would have been antidilutive. Similarly,
because the effect would have been antidilutive, common stock issuable upon the
conversion of the Company's convertible debt was not included in the calculation
of diluted loss per share for 1997. Outstanding shares subject to cancellation
agreements have not been included in either the basic or diluted calculation for
1997 and 1998. As a result of these items, the basic and diluted loss per share
for all periods presented are identical.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform with the current year presentation.
3. ECLIPSE AND PMC ACQUISITIONS:
On December 14, 1998, the Company acquired all the outstanding stock of Eclipse
in a transaction accounted for as a purchase. The Company acquired the stock of
Eclipse for $1,450,000 in cash and 1,700,000 shares of the Company's common
stock. The Company also incurred approximately $325,000 in direct acquisition
costs.
On October 1, 1999, the Company acquired all the issued and outstanding stock of
PMC for $1.5 million in cash, subject to post-closing adjustments, the issuance
of a $3.0 million, three-year promissory note and a warrant to purchase 200,000
shares of the Company's common stock for $5.00 per share. The Company also
incurred approximately $233,000 in direct acquisition expenses. The Company also
entered into noncompete and employment agreements with certain members of the
PMC management team. The PMC acquisition has been accounted for as a purchase.
- F-10 -
40
The purchase prices for these acquisitions have been allocated as follows:
ECLIPSE PMC
----------- -----------
Cash ............................................. $ -- $ 523,763
Accounts receivable .............................. 1,404,686 529,406
Property and equipment ........................... 226,091 --
Note receivable .................................. -- 256,875
Other assets ..................................... 62,724 35,452
Intangible assets ................................ 6,991,593 3,754,144
Deferred tax liability ........................... (109,333) --
Liabilities assumed and direct acquisition costs.. (1,178,117) (696,085)
----------- -----------
$ 7,397,644 $ 4,403,555
=========== ===========
This purchase price allocation for PMC may be subject to adjustment for changes
in estimates and to settle certain contingencies. The resolution of these
matters is not expected to have a material impact on the Company's financial
condition or its results of future operations.
The unaudited pro forma information presented below reflects the acquisitions of
Eclipse and PMC as if each had occurred on January 1, 1998. The results
presented below are not necessarily indicative of future operating results or of
what would have occurred had the acquisition actually been consummated on that
date.
DECEMBER 31,
--------------------------------
1999 1998
---------- -------------
(UNAUDITED)
Revenues ......................... $ 30,964,739 $ 22,412,617
Net loss ......................... (831,814) (3,104)
Basic and diluted loss per share.. (0.06) (0.00)
4. INTANGIBLE ASSETS:
Intangible assets consisted of purchased software rights, goodwill acquired as a
result of ZMAX's acquisition of CSI and identifiable intangible assets and
goodwill from the Eclipse and PMC acquisitions. The software rights and
CSI-related goodwill were being amortized over their estimated useful lives of
five years. As described in Note 2, the Company recognized an impairment of the
remaining intangibles related to the software rights and the CSI goodwill as of
December 31, 1999. For the year ended December 31, 1999, the amortization, prior
to the impairment, for these two intangibles was $863,040 and $301,680,
respectively. These assets had remaining net book values at the time they were
determined to be fully impaired of $1,150,745 and $553,080, respectively.
Identifiable intangibles and amounts allocated to goodwill related to the
Eclipse acquisition are being amortized over a weighted-average life of
approximately 25 years. Identifiable intangibles and amounts allocated to
goodwill related to the PMC acquisition are being amortized over a
weighted-average life of approximately 10 years. Accumulated amortization,
excluding the impaired intangibles totaled $409,819 as of December 31, 1999. As
of December 31, 1998, the
- F-11 -
41
accumulated amortization on intangible assets was $2,291,004.
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
------ ------ -------
Income tax (provision) benefit, net of valuation allowance:
Current-
State ...................................... $37,648 $ -- $ --
Federal .................................... -- -- --
Deferred-
State ...................................... -- -- --
Federal .................................... -- -- --
------- ----- -----
$37,648 $ -- $ --
======= ===== =====
The provision (benefit) for income taxes results in effective rates which
differ from the federal statutory rate as follows:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
------ ------ ------
Statutory federal income tax rate .... (35.0)% (35.0)% (35.0)%
Effect of graduated rates ............ 1.0 1.0 1.0
Net operating losses ................. -- 50.6 13.2
Other increases in valuation allowance -- 4.3 1.5
State income tax, net of benefit ..... 3.4 -- --
Non-deductible expenses .............. 34.0 (20.9) 19.3
---- ----- ----
3.4% --% --%
==== ===== ====
- F-12 -
42
The deferred tax assets (liabilities) consisted of the following as of
December 31, 1999 and 1998 (in thousands):
DECEMBER 31,
----------------------------------
1999 1998
--------------- --------------
Deferred tax assets:
Net operating loss carryforwards .................. $ 4,021,099 $ 3,909,685
Depreciation and amortization ..................... -- 41,579
AMT credit ........................................ 13,853 --
Other assets ...................................... 196,952 502,324
--------------- --------------
Total deferred tax assets ........ 4,231,904 4,453,588
Deferred tax liabilities:
Depreciation and amortization ..................... (1,286,506) (276,135)
Other ............................................. -- (16,468)
--------------- --------------
Total deferred tax liabilities.... (1,286,506) (292,603)
Net deferred tax asset .................................... 2,945,398 4,160,985
Less- Valuation allowance ................................. (2,945,398) (4,160,985)
--------------- --------------
$ -- $ --
=============== ===============
The Company has determined that its net deferred tax asset did not satisfy the
recognition criteria set forth in SFAS No. 109 and, accordingly, established a
valuation allowance for 100 percent of the net deferred tax asset.
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $9,477,000 to offset future taxable income. These carryforwards
expire between 2001 and 2019. Under the provision of the Tax Reform Act of 1986,
when there has been a change in an entity's ownership of 50 percent or greater,
utilization of net operating loss carryforwards may be limited. As a result of
ZMAX's equity transactions, the Company's net operating losses will be subject
to such limitations and may not be available to offset future income for tax
purposes.
6. DEBT AND DEFERRED FINANCING COSTS:
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 December 31, 1999, approximately $22,000 of this
discount had been amortized.
- F-13 -
43
Convertible Exchangeable Subordinated Debentures
In December 1996, the Company issued $5.5 million in convertible exchangeable
subordinated debentures (the "Debentures"). In November 1997, the Company
offered to exchange all the Debentures for 1,210,000 shares of common stock and
stock warrants to purchase a total of 1,210,000 shares of common stock. Because
the securities issued pursuant to the terms of the exchange included securities
in excess of the securities issuable pursuant to the original conversion terms
of the Debentures, the Company recognized $7,370,000 as expense at the time of
the exchange. Concurrent with the exchange, warrants to purchase 1,069,000
shares of common stock were exercised for $7,484,000 in proceeds to the Company.
The remaining warrants to purchase 140,800 shares of common stock expired
unexercised in 1999. Upon expiration, the value associated with these
unexercised warrants was reclassified in the accompanying consolidated financial
statements from stock warrants to additional paid-in capital.
7. COMMON STOCK:
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 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. In April 1999, the 167,301 remaining shares were returned to
the Company and canceled.
8. STOCK OPTIONS AND STOCK-BASED COMPENSATION:
Employee Stock Compensation
In October 1998, two of the Company's principal stockholders entered into an
agreement with an employee to transfer 180,000 shares of restricted common stock
held by the stockholders to the employee as consideration for services. The
stockholders transferred the 180,000 shares of common stock to the Company, and
the Company, in turn, reissued the shares to the employee. The shares issued to
the employee were subject to forfeiture and to certain restrictions on
transferability for a period of one year. The Company recognized $534,384 of
employee stock compensation expense related to this transaction, based upon the
fair value of the shares issued to the employee as of the date of the agreement.
The restrictions on these shares lifted in October 1999.
1997 Stock Incentive Plan
In May 1997, the Company adopted the 1997 Stock Incentive Plan (the "Incentive
Plan"). The purpose of the Incentive Plan is to provide additional compensation
to employees, officers, directors and consultants of the Company or its
affiliates. Under the terms of the Incentive Plan,
- F-14 -
44
as amended, 3,000,000 shares of common stock have been reserved for issuance as
incentive awards under the Incentive Plan. The number of shares of Company
common stock associated with any forfeited stock incentive will be added back to
the number of shares that can be issued under the Incentive Plan. Awards under
the Incentive Plan and their terms are determined by a committee (the
"Committee") that has been selected by the Board of Directors. The Incentive
Plan permits the Committee to make awards of a variety of equity-based
incentives (collectively, "Stock Incentives").
The Incentive Plan allows for the grant of incentive stock options and
nonqualified stock options. The exercise price of the options will be
established by the Committee. The term of an option will be specified in the
applicable agreement provided, however, that no option can be exercised ten
years after the date of grant. In addition to stock options, the Incentive Plan
also allows for the grant of other Stock Incentives, including stock
appreciation rights, stock awards, phantom shares, performance unit appreciation
rights and dividend equivalent rights. These Stock Incentives will be subject to
the terms prescribed by the Committee in accordance with the provisions of the
Incentive Plan.
In February 1998, the Company amended the Incentive Plan to permit the
adjustment of the terms and conditions of outstanding options. In March 1998,
the Company and four individuals holding options to purchase 1,300,000 shares of
common stock at prices ranging from $12.44 to $14.31 per share under the
Incentive Plan entered into amendments to such stock options whereby the option
exercise price was reduced to $5.75 per share, the fair market value of the
Company's common stock on the amendment date, and the number of shares of common
stock underlying each such option was reduced by 25 percent. Further, two
optionees who previously had the right to exercise a portion of the shares
underlying their options agreed that such portions of their options would not be
exercisable until January 1, 1999.
1997 Directors Formula Stock Option Plan
In May 1997, the Company adopted the 1997 Directors Formula Stock Option Plan
(the "Director Plan"). The Company has reserved 120,000 shares of common stock
to underlie stock options granted under the Director Plan. Any shares
associated with forfeited options are added back to the number of shares that
underlie stock options to be granted under the Director Plan.
The awards of stock options under the Director Plan are determined by the
express terms of the Director Plan. Generally, only non-employee directors of
the Company who do not perform services for the Company are eligible to
participate in the Director Plan. The Director Plan provides for option grants
to purchase 12,000 shares of common stock upon a nonemployee director's initial
appointment to the Board of Directors. The options will vest immediately to
8,000 shares of common stock underlying such options, will vest to an additional
2,000 shares after the director's completion of the first year of continued
service to the Company, and will vest to the remaining 2,000 shares after the
completion of the second year of continued service to the Company. Each option
granted pursuant to the Director Plan will be evidenced by an agreement and will
be subject to additional terms as set forth in the agreement. Options become
exercisable when vested and expire ten years after the date of grant, subject to
any shorter period
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45
that may be provided in the agreement.
The following is a summary of the ZMAX options activity:
NUMBER OF OPTION PRICE WEIGHTED-
SHARES RANGE AVERAGE
------ ----- EXERCISE PRICE
--------------
Outstanding, December 31, 1996 208,126 $ 5.00-40.00 $ 11.00
Granted .............. 1,348,000 12.00-14.31 14.14
Canceled or expired .. (208,126) 5.00-40.00 11.00
---------- ------------- ---------
Outstanding, December 31, 1997 1,348,000 12.00-14.31 14.14
Granted .............. 1,932,000 2.69-6.125 5.19
Canceled or expired .. (1,706,500) 5.75-14.31 12.27
---------- ------------- ---------
Outstanding, December 31, 1998 1,573,500 2.69-14.06 5.18
Granted .............. 987,000 2.06-2.45 2.35
Canceled or expired .. (62,000) 2.45-5.75 2.97
---------- ------------- ---------
Outstanding, December 31, 1999 2,498,500 $ 2.06-14.06 $ 4.12
========== ============= =========
As of December 31, 1999, options to purchase 705,000 shares of common stock were
exercisable with a weighted-average exercise price of $5.58. The
weighted-average remaining contractual life of the options outstanding at
December 31, 1999, was 8.44 years. The weighted-average fair value of options
granted in 1999 was $1.79.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a "fair value based method" of accounting
for stock-based compensation. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period. Prior to issuance of SFAS No. 123,
stock-based compensation was accounted for under the "intrinsic value method" as
defined by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under
the intrinsic value method, compensation is the excess, if any, of the market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock.
SFAS No. 123 allows an entity to continue to use the intrinsic value method;
however, entities electing the accounting in APB Opinion No. 25 must make pro
forma disclosures as if the fair value based method of accounting had been
applied. The Company applies APB Opinion No. 25 and the related interpretations
in accounting for its stock-based compensation.
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46
Had compensation expense been determined based on the fair value of the options
at the grant dates consistent with the method of accounting under SFAS No. 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------ ---------- -------------
Net loss:
As reported................................................ $(1,096,053) $(282,711) $(14,206,699)
Pro forma.................................................. (2,354,295) (957,021) (15,465,379)
Pro forma basic and diluted net loss per share:
As reported................................................ $ (0.08) $ (0.03) $ (2.58)
Pro forma.................................................. $ (0.18) $ (0.09) $ (2.81)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, expected volatility of 110 percent, risk-free interest rates from 4.10 to
6.73 percent and an expected term of five years.
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
common stock at $2.75 per share, an amount that exceeded the stock's trading
price on that date. The Company has 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 December 31, 1999, $19,413 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 common stock at $5.00 per share, an amount that exceeded the stock's
trading 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.
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47
9. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space and equipment under operating leases that expire
on various dates through 2004. The Company also leases various pieces of
computer and office equipment under capital leases that expire on various dates
through 2003. The future minimum lease obligations under operating and capital
leases as of December 31, 1999, are as follows:
YEAR ENDED OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
- ------------ ------ ------
2000 ......................... $439,071 $ 33,451
2001 ......................... 200,425 32,477
2002 ......................... 57,342 18,763
2003 ......................... 47,981 6,130
2004 ......................... 6,193 --
-------- --------
Total ........... $751,012 90,821
Amount representing interest.. ======== 9,412
--------
81,409
Less- Current portion ........ 27,149
--------
$ 54,260
========
Employment Agreements
The Company has employment agreements with certain executives that prescribe
compensation levels and provide for severance payments in certain instances.
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 shareholder of PMC, has indemnified the
Company against damages related to the complaint. The 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.
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