Humbly report, Doug, I got a teensy weensy little reason why I'll pass on ZMAX at the moment:
sec.gov.
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RISK FACTORS
Investment in the Company involves a high degree of risk. Investors should
consider carefully the following factors, in addition to the other information
contained in this Proxy Statement/Prospectus, in evaluating the transactions
described herein. This Proxy Statement/Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such difference include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
Lack of Experience in Millennium Services. The Company has limited
experience in providing its Year 2000 or "millennium" services. Although the
Company has successfully completed a number of assessment projects and small-
scale (pilot) conversion projects, the Company has not completed a large-scale
millennium conversion project either alone or together with a strategic
partner. Pilot projects performed by the Company to date have generally
consisted of performing test conversions on a small portion of a client's
mainframe computer system. There can be no assurance that the Company will be
successful in completing large-scale conversions, that the Company will not
experience delays or failures in providing its millennium services, or that
its millennium services will be effective. In the pilot projects completed to
date, the amount of failures, errors and bugs detected, and the cost of
correcting them, have not been significant and have not had a material adverse
affect on the Company's business, operating results or financial condition.
However, the failure of the Company's Year 2000 methodology to function
properly in the future or the existence of significant errors or bugs
following completion of future millennium conversions could necessitate
significant expenditures by the Company to remedy the problem. The
consequences of failures, errors or bugs could materially and adversely affect
the Company's business, operating results and financial condition.
Recent Losses and Need for Additional Working Capital. The Company is a
development stage company and did not generate any revenue prior to the second
quarter of 1997. The Company incurred losses of $11.5 million and $4.2 million
for the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. As a result, the Company had an accumulated deficit of $11.5
million and $15.8 million as of December 31, 1996 and June 30, 1997,
respectively. The Company expects to require significant amounts of cash to
support marketing and other anticipated activities related to the
establishment of its Year 2000 services business. Due to the Company's lack of
profitable operating history, the Company may have difficulty obtaining
additional capital on terms acceptable to the Company, if available at all.
There can be no assurance that the Company will not experience liquidity
problems because of adverse market conditions or other unfavorable events.
Further, because of the various business risks described elsewhere in this
"Risk Factors" discussion, there can be no assurance that the Company will be
profitable. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
No Liquid Market; Possible Volatility of Stock Price. Prior to the
completion of the transactions contemplated by this Proxy
Statement/Prospectus, the U.S. trading market for the Old ZMAX Common Stock
has been limited and characterized by significant price and volume volatility.
Old ZMAX has not been subject to the periodic reporting requirements of the
Exchange Act and accordingly current public information regarding Old ZMAX and
its business has not been widely disseminated by Old ZMAX. As a result of the
foregoing, historical price quotations for the Old ZMAX Common Stock may not
be indicative of the operations, financial conditions or prospects for the
Company. In this regard, the Company issued Common Stock and Common Stock
equivalents in the fall of 1996 at prices less than the quoted market price at
such time. See Notes 7 and 9 of the Financial Statements of ZMAX Corporation
for the year ended December 31, 1996 included elsewhere herein. In the
Exchange Offer, Old ZMAX is offering to exchange Debentures for Common Stock
and Warrants at a significant discount to the quoted price of the Old ZMAX
Common Stock on the OTC Bulletin Board. See "The Exchange Offer" and "Price
Range of Common Stock and Dividend Policy." There can be no assurance that an
active trading market for the New ZMAX Common Stock will develop or, if such a
market does develop, that the market price for the New ZMAX Common Stock price
will not be subject to significant fluctuations in response to factors such
as, among others, variations in the Company's anticipated or actual results of
operations,
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announcements of new products or technological innovations by the Company or
its competitors, and changes in earnings estimates by analysts. In addition,
the stock market is subject to price and volume fluctuations that affect the
market prices for companies in general, and small capitalization, emerging
growth and technology companies like the Company in particular, which
fluctuations are often unrelated to the operating performance of such
companies. These broad market fluctuations could adversely affect the market
prices of the New ZMAX Common Stock. Investors in the Company may experience
dilution of their investment upon certain events, such as the issuance of
shares of New ZMAX Common Stock pursuant to the exercise of outstanding
warrants and stock options.
Limited Information on Security Holders; Enforcement of Securities Laws
Against Non-U.S. Persons. The beneficial ownership reporting requirements of
Section 13(d) of the Exchange Act are not currently applicable to the
Company's stockholders because the Old ZMAX Common Stock is not a registered
class of equity securities under the Exchange Act. The Company believes a
substantial portion of its equity securities are held by non-U.S. persons,
including non-U.S. banks that hold securities on behalf of their customers and
are prohibited by local bank secrecy laws from disclosing information
regarding the beneficial ownership of accounts. Up to an additional 2,420,000
shares of New ZMAX Common Stock would be issued to non-U.S. persons in
connection with the Exchange Offer and the exercise of the Warrants. As a
result of the foregoing, non-U.S. persons may be able to substantially
influence the trading market for the Common Stock. The Company and its
shareholders may have difficulty in effecting service of process and enforcing
civil liabilities arising under U.S. securities laws against non-U.S. persons.
Availability of Technical Personnel. The Company's strategy will require the
addition of skilled technical, marketing and management personnel. The Company
competes with major computer, communications, consulting and software
companies, as well as information service departments of major corporations,
in seeking to attract qualified personnel. This competition is expected to
intensify as demand for millennium services grows. There can be no assurance
that the Company will be able to attract and retain the personnel necessary to
pursue its strategy.
Uncertain and Undeveloped Market for Millennium Services. Millennium
services are expected to represent the significant portion of the Company's
business for the next several years. Although the Company believes that the
market for millennium services will grow significantly as the Year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. Significant expenses for sales and
marketing may be required to inform the public of the Year 2000 problem and
the need for millennium services. There can be no assurance that the
millennium services industry will devote the resources necessary to
effectively inform the public of the Year 2000 problem or that potential
clients will understand or acknowledge its significance. In addition,
companies affected by the Year 2000 problem may not be willing or able to
allocate the resources, financial or otherwise, to address the problem in a
timely manner. Many companies may be able to resolve the problem using
internal staff, by discontinuing the use of some older programs, or by
replacing existing systems with new Year 2000 compliant systems. Therefore,
the development of the market for millennium services is uncertain and
unpredictable. If the market for millennium services fails to grow, or grows
more slowly than anticipated, the Company's business, operating results and
financial condition could be materially and adversely affected.
Competition. The market for millennium services is highly competitive and
will become increasingly competitive as the Year 2000 approaches. The primary
competitive factors in the computer services industry are availability of
equipment and facilities, price, service and whether the provider's personnel
possess the skills and knowledge necessary to solve information processing
problems. A number of companies engaged in millennium services are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than the Company.
Moreover, other than technical expertise, there are no significant proprietary
or other barriers to entry in the Year 2000 services market that could keep
competitors from developing similar services or providing competing services
to those offered by the Company. There can be no assurance that the Company
will be able to compete successfully against its competitors or that the
competitive pressures faced by the Company will not affect its financial
performance.
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Rapid Technological Change. The information technology industry is
characterized by rapidly evolving technology and changing methodologies. The
introduction of software tools embodying new technology and the emergence of
new methodologies could render obsolete existing products and services,
including the Company's. The Company's future success will depend on its
ability to continue to refine and update its proprietary methodologies for
correcting the Year 2000 problem. There can be no assurance that one or more
of the Company's competitors will not develop a software tool or methodology
that is superior to, or achieves a greater market acceptance than, the
Company's methodology. The development of a superior tool or methodology by
one or more competitors, or any failure by the Company to successfully respond
to such development, could materially and adversely affect the Company's
business, operating results and financial condition.
Need to Develop Additional Products and Services. The Company currently
expects to generate most of its revenue from, and devote most of its resources
to, its Year 2000 services. The Company believes that the demand for its
millennium services will continue to exist for some time after the Year 2000,
however, this demand will diminish significantly over time and will eventually
disappear. Therefore, the Company plans to continue actively pursuing business
opportunities unrelated to the Year 2000 problem in the computer software re-
engineering and consulting market, with a focus on the conversion marketplace,
and to develop products and services to take advantage of those opportunities.
The Company intends to use the relationships developed and experience obtained
while performing complex Year 2000 conversion projects to address other
information systems requirements of its clients. However, there can be no
assurance that the Company will be able to successfully expand its business
beyond the millennium conversion market. The failure to develop additional
computer software and services could materially and adversely affect the
Company's business, operating results and financial condition.
Dependence on Key Executives. The Company is largely dependent on the
efforts of Michael C. Higgins, its President, and Joseph Yeh, its Senior Vice
President--Technology. There can be no assurance that the Company will be able
to retain the services of Mr. Higgins or Mr. Yeh. Although the Company intends
to obtain life insurance on the lives of Mr. Higgins and Mr. Yeh, the loss of
either of them could materially and adversely affect the Company's business,
operating results and financial condition. See "Management and Executive
Compensation."
Limited Protection of Proprietary Information. The Company depends in part
on its proprietary know-how to differentiate its millennium services from that
of its competitors. The Company does not have any patents and relies upon a
combination of trade secret, copyright and trademark laws and contractual
restrictions to establish and protect its proprietary information. The Company
generally enters into non-disclosure and confidentiality agreements with its
employees, consultants and clients. Despite these precautions, it may be
possible for an unauthorized third party to replicate the Company's millennium
service methodology or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the means used by the Company
to protect its proprietary information will be adequate or that the Company's
competitors will not independently develop substantially similar or superior
techniques to resolve the Year 2000 problem.
Risks of Third Party Claims of Infringement. As the number of competitors
providing millennium services increases, overlapping techniques used in such
services will become more likely. There can be no assurance that third parties
will not assert infringement claims against the Company in the future, that
assertion of such claims will not result in litigation, or that the Company
would prevail in such litigation or be able to obtain a license for the use of
any infringed intellectual property from a third party on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to the Company and divert management's attention
from the Company's operations. Any infringement claim or litigation against
the Company could materially and adversely affect the Company's business,
operating results and financial condition.
Potential Contract Liability. The Company's millennium services involve key
aspects of its clients' computer systems. Any failure in a client's system
could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
attempts to limit by contract its liability for damages arising from negligent
acts, errors, mistakes or omissions in rendering its
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professional services. Despite this precaution, there can be no assurance that
the limitations of liability set forth in its service contracts would be
enforceable or would otherwise protect the Company from liability for damages.
The Company maintains general liability coverage, and is in the process of
evaluating coverage options for errors and omissions and professional
liability. However, there can be no assurance that such coverage will continue
to be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that
exceed available insurance coverage, or changes in the Company's insurance
policies, including premium increases or the imposition of a large deductible
or co-insurance requirements, could materially and adversely affect the
Company's business, operating results and financial condition.
Risk of Low-Priced Stocks. The Company has filed a listing application for
quotation of the Common Stock on the Nasdaq SmallCap Market effective upon
completion of the transactions contemplated by this Proxy
Statement/Prospectus. To qualify for listing and to continue to be listed on
the Nasdaq SmallCap Market, a company must meet certain financial criteria.
Although the Company expects to meet these criteria upon completion of the
Merger, there can be no assurance that the Company will be approved for
quotation on the Nasdaq SmallCap Market, or will be able to continue to meet
such tests in the future. Failure to obtain a listing on the Nasdaq SmallCap
Market would reduce market interest in the New ZMAX Common Stock. Failure to
meet such criteria in the future may result in the delisting of the New ZMAX
Common Stock from the Nasdaq SmallCap Market.
Shares Eligible for Future Sale. Upon completion of the transactions
contemplated by this Proxy Statement/Prospectus, all of the outstanding New
ZMAX Common Stock will generally be freely transferable without restriction
under the Securities Act, except for 3,468,142 shares held by affiliates of
the Company or shares subject to contractual restrictions. In addition,
132,000 shares will be issuable to affiliates upon the exercise of stock
options exercisable as of the consummation of the transactions. The
possibility that substantial amounts of Common Stock may be sold in the public
market would likely have a material adverse effect on prevailing market prices
of the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities. Holders of shares of Old ZMAX
Common Stock that are currently restricted securities would generally be
permitted to transfer the New ZMAX Common Stock issued in respect thereof in
the Merger. To the extent holders seek to sell a significant portion of such
shares, the market price of New ZMAX Common Stock could be materially
adversely affected. See "Shares Eligible for Future Sale."
Management of Growth. The Company expects to experience significant
expansion that will place substantial demands upon its management, systems and
resources, including its sales, project management and consulting personnel,
as well as the Company's research and development, finance and administrative
operations. The Company's ability to manage its future growth, if any, will
require the Company to continually improve its financial and management
controls and reporting systems and procedures, as well as implementing new
systems as necessary and expanding, training and managing its workforce. There
can be no assurance that the Company's controls, systems or procedures will
continue to be adequate to support the Company's operations. The Company's
management team has had limited prior experience managing a public company or
a rapidly growing business. The failure of the Company's management to respond
effectively to changing business conditions could have a material adverse
effect upon the Company's business, operating results and financial condition.
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Svejk
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