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UNITED STATES
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 March 31, 1998.
Commission file number 0-11284
Z-Axis Corporation
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(Exact name of registrant as specified in its charter)
Colorado 84-0910490
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7395 East Orchard Road, Suite A-100
Greenwood Village, Colorado 80111-2509
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (303) 713-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.001 par value Electronic Bulletin Board
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 [ ]
Indicate by a 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 knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
The registrant's common stock trades on the electronic bulletin board of the
Over-the-Counter market under the trading symbol "AXIS". The aggregate market
value of the registrant's voting stock held by non-affiliates of the registrant
as of March 31, 1998 was $463,451. The aggregate market value was calculated
based upon the number of shares held by non-affiliates on March 31, 1998 and the
price at which the registrant's common stock traded on May 1, 1998, the last
date on which the registrant had knowledge of a public trade prior to filing
this report.
The number of common shares outstanding as of March 31, 1998: 3,785,000.
Page 1 of 7
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Documents incorporated by reference:
Title of Document Part of Form 10-K
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Proxy Statement to shareholders to be filed by
July 29, 1998 Part III
Annual Report to shareholders for the fiscal year ended
March 31, 1998 Parts II and IV
Registration Statement on Form S-18, SEC file no. 2-85302-D Part IV
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FORWARD LOOKING STATEMENTS
In addition to the historical information, this 10K and Annual Report
incorporated by reference herein, contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and the Company
desires to take advantage of the "Safe Harbor" provisions thereof. Therefore,
the Company is including this statement for the express purpose of availing
itself of the protections of such Safe Harbor with respect to all of such
forward-looking statements. The forward-looking statements in this report
reflect the Company's current views with respect to future events and financial
uncertainties, including those discussed herein, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates", "believes", "expects", "intends", "future" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on the forward-looking statements contained herein,
which speak only as of the date hereof. The Company undertakes no obligation to
publically revise these forward-looking statements to reflect events or
circumstances that may arise after the date of this report.
PART I
ITEM 1. BUSINESS
Z-Axis Corporation (the "Company") was incorporated under the laws of the
State of Colorado on May 16, 1983. The principal business and industry
segment in which the Company operates is the development and production of
computer-generated video graphics and other presentation materials. The
Company conducts its business from three locations, its corporate office and
production facility located in metropolitan Denver, Colorado and sales and
marketing offices located in New York, New York and Chicago, Illinois. The
Company operates within only one industry segment.
The Company was formed for the purpose of providing video graphic presentation
services for industrial and government customers. The Company provided services
during its early years primarily to the broadcast television industry. In the
late 1980's, the Company focused its sales and marketing efforts toward two
specific areas: animation and video presentation services for the litigation
support and aviation communications industries. Litigation support customers
include law firms, corporations and insurance companies throughout the United
States. Approximately 93%, 98% and 96% of the Company's net sales during its
fiscal years ended March 31, 1998, 1997 and 1996, respectively, were provided by
litigation support services and the balance, approximately 7%, 2% and 4%
respectively, from aviation communications and other services. The trend during
recent years has been to concentrate greater sales and marketing efforts towards
the litigation support industry. Although certain customers from time to time
may each provide more than 10% of the Company's net sales, it is not dependent
upon any group of customers. During the year ended March 31, 1998, sales to a
Federal Government agency and to Robins, Kaplan, Miller & Ciresi, a law firm,
accounted for approximately 21.9% and 24.5%, respectively, of the Company's net
sales.
Page 2 of 7
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The Company's products may consist of any combination of computer-generated
graphics, live action, photographs, graphic artwork, document presentation,
special effects and presentation exhibit boards. The litigation service
products have proven to be successful in courtroom presentations when highly
technical or complex concepts are being conveyed. Aviation customers use the
Company's products primarily for training and communications purposes.
The Company's video product is delivered to its customers on videotape or
videodisc. Videodisc material can be presented via either a bar code or touch
screen system. The Company continues to improve its service and product
technology. During the fiscal years ending March 31, 1998, 1997 and 1996, the
Company designed and developed an advanced electronic courtroom presentation
system consisting of proprietary software in combination with off-the-shelf
hardware. The system has been named "VuPoint" and the Company has applied for
trademark protection of the name and patent protection for the software.
VuPoint was introduced to the litigation market in early 1997. It is designed
for use by trial teams, outside counsel and in-house attorneys. The Company
considers it to have significant long-term revenue potential and will continue
further developments in the foreseeable future. During fiscal year ended March
31, 1998, the Company earned $357,093 in revenue from rental and service of the
VuPoint system. The Company expensed $312,611 in related software development
costs that were capitalized during fiscal years ended March 31, 1996 and 1997.
The Company competes nationally with other providers of presentation services.
Over the past several years, the Company has developed a high level of expertise
in the design and development of technical animations and visual presentation
materials for the litigation support industry. Competition at the high end of
this market is limited to a few companies. The Company has developed a good
reputation for its services and has established regular customers. Management
does not consider any portion of its business or markets to be seasonal in
nature.
There are no environmental risks or risk contingencies associated with the
conduct of the Company's business nor is there any foreign sales activity.
The materials and equipment that the Company uses to provide its services are
readily available from a number of sources both locally and on a national level.
The Company does not encounter any difficulty in obtaining these materials or
equipment or in servicing its equipment.
At March 31, 1998 and 1997, the Company had a backlog of orders for its video
services in the amounts of approximately $1,068,000 and $1,022,000,
respectively. Although the Company had agreements to perform services in these
amounts, in the case of litigation support services, the agreements may be
canceled or modified for such reasons as pre-trial settlement of the case being
litigated or a decision to use the Company's services to a greater or lesser
extent than originally anticipated. Federal government contracts may be
terminated at any time at the option of the government.
At March 31, 1998, the Company had 27 regular full-time employees. In addition,
there is an adequate base of local well qualified independent contract personnel
that the Company employs from time to time as production demands require.
YEAR 2000 COMPLIANCE
Management has reviewed the Company's internal computer systems and software
products for Year 2000 problems and believes that such systems and products are,
or will soon be, Year 2000 compliant, and management therefore does not expect
Year 2000 considerations will materially impact the Company's internal
operations. Year 2000 considerations may have an affect on some of the
Company's customers and suppliers, and thus indirectly affect the Company. It
is not possible to quantify the aggregate cost to the Company with respect to
customers and suppliers with Year 2000 problems, although the Company does not
anticipate it will have a material impact on its business.
Page 3 of 7
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ITEM 2. PROPERTIES
The Company's current headquarters and production facility are located in a
business park in the southern suburbs of Denver, Colorado. It leases the space
from an unaffiliated third party. The term of the lease is for a five year
period that ends on June 30, 2001. Management believes that the facilities are
adequate for the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
ITEM 5. MARKET OF REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The number of holders of record of the Company's common stock as of March 31,
1998 was 447 as reported by the transfer agent. This number does not include an
undetermined number of stockholders whose stock is held in "street" or "nominee"
name.
The Company has never paid a dividend with respect to its common stock and does
not anticipate paying a dividend in the foreseeable future.
The Company's common stock had been traded in the NASDAQ over-the-counter market
under the trading symbol "AXIS." On November 1, 1985, the Company's common
stock was deleted from the NASDAQ listing system because its net worth fell
below the minimum required to be traded on NASDAQ. Subsequent to November 1,
1985, the Company's common stock was traded on the "Pink Sheets".
During January 1995, the Company secured a market marker for trading in its
common stock and it became listed for trading on the electronic bulletin board
of the Over-the-Counter market, under the trading symbol "AXIS." Since listing
occurred on the Over-the-Counter market, trading has been sporadic.
The following is a summary of the high and low bid and ask quotations, as
reported by the NASDAQ Stock Market, Inc. for the period indicated:
<TABLE>
Bid Ask
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High Low High Low
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<S> <C> <C> <C> <C>
Fiscal year ended March 31, 1998:
First quarter $0.1875 $0.1875 $0.5625 $0.5625
Second quarter $0.1875 $0.1875 $0.5625 $0.4375
Third quarter $0.1875 $0.0625 $0.4375 $0.375
Fourth quarter $0.1875 $0.0625 $0.375 $0.250
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Fiscal year ended March 31, 1997:
First quarter $0.125 $0.125 $0.500 $0.500
Second quarter $0.125 $0.125 $0.500 $0.500
Third quarter $0.125 $0.125 $0.500 $0.375
Fourth quarter $0.1875 $0.125 $0.5625 $0.375
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</TABLE>
Quotations reported may represent prices between dealers, may not include retail
markups, markdowns or commissions and may not represent actual trades.
Page 4 of 7
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ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data on page 17 of the Annual Report to shareholders for the
fiscal year ended March 31, 1998 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 17 through 22 of the Annual Report to shareholders for the
fiscal year ended March 31, 1998 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included on pages 2 through 16 of the Annual Report to
shareholders for the fiscal year ended March 31, 1998 are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained in Z-Axis Corporation's Proxy Statement to
shareholders to be filed by July 29, 1998, with respect to directors and
officers of the registrant, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in Z-Axis Corporation's Proxy Statement to
shareholders to be filed by July 29, 1998, with respect to executive
compensation, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in Z-Axis Corporation's Proxy Statement to
shareholders to be filed by July 29, 1998, with respect to security ownership of
certain beneficial owners and management, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in Z-Axis Corporation's Proxy Statement to
shareholders to be filed by July 29, 1998, with respect to certain relationships
and related transactions, is incorporated herein by reference.
Page 5 of 7
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference:
1. Financial Statements:
Reports of Independent Certified Public Accountants
Balance Sheets - March 31, 1998 and 1997
Statements of Income - Years ended March 31, 1998, 1997 and 1996
Statements of Cash Flows - Years ended March 31, 1998, 1997 and 1996
Statements of Stockholders' Equity - Years ended March 31, 1998,
1997 and 1996
Summary of Accounting Policies and Notes to Financial Statements
2. Exhibits:
Pursuant to Regulation 240.12b-23, Exhibits 3.1 and 3.2 (Articles of
Incorporation and Bylaws) are incorporated by reference from the
Registration Statement on Form S-18, SEC File No. 2-85302-D, effective
September 15, 1983.
All other exhibits required by Item 601 of Regulation S-K are not
applicable.
(b) Reports on Form 8-K
There were no 8-K reports were filed during the last quarter of this fiscal
year.
Page 6 of 7
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report of be signed on its
behalf by the undersigned, thereunto duly authorized.
Z-AXIS CORPORATION
By: /s/ Steven H. Cohen
--------------------------------
Steven H. Cohen
(Chief Executive Officer)
Date: July 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Steven H. Cohen
- ---------------------- Director, Chief Executive Officer July 14, 1998
Steven H. Cohen
/s/ Alan Treibitz Director, President, Treasurer,
- ---------------------- Chief Financial Officer, Principal
Alan Treibitz Accounting Officer July 14, 1998
/s/ Marilyn T. Heller
- ---------------------- Director,Secretary July 14, 1998
Marilyn T. Heller
Page 7 of 7
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Z-AXIS CORPORATION
1998 ANNUAL REPORT
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[LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Z-Axis Corporation
Greenwood Village, Colorado
We have audited the accompanying balance sheets of Z-Axis Corporation as of
March 31, 1998 and 1997 and the related statements of income, stockholders'
equity and cash flows for each of the three years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Z-Axis Corporation as of
March 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the three years then ended in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado
June 10, 1998
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PRESIDENT'S LETTER TO SHAREHOLDERS
To our shareholders:
In the past fiscal year we have generated significant growth in our business and
have successfully introduced our new electronic courtroom presentation system,
VuPoint, to the market. Our revenue increased 57% over the previous year while
our expenses increased 53%. Approximately 24% of the increase in expenses is
attributable to the amortization of the remaining capitalized software costs,
incurred in prior years, for the development of the initial versions of VuPoint.
We have been involved in three high-profile cases of international significance
this year. We were privileged to work for the United States Department of
Justice in the trials of Timothy McVeigh and Terry Nichols for the Oklahoma City
bombing. The prominent use of VuPoint in these trials and our design and
development of sophisticated demonstrative exhibits proved very valuable to the
trial team.
Our extensive animation and exhibit board work for the State of Minnesota and
Blue Cross and Blue Shield of Minnesota in their highly publicized trial against
the tobacco industry was very positively received by observers in the courtroom.
After four months of trial, a settlement was agreed upon the day it was going to
the jury. The substantial industry concessions on marketing cigarettes in the
state and the $6.6 billion payment made this the most successful tobacco
settlement to date.
We have begun fiscal 1999 with a record first quarter of more than $1 million of
revenue. With the growing maturity of the market for sophisticated evidence in
trial, and the burgeoning market for state-of-the-art presentation technology in
court, we are excited about the rest of the year.
Alan Treibitz
July 10, 1998
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Z-AXIS CORPORATION
BALANCE SHEETS
<TABLE>
March 31,
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1998 1997
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<S> <C> <C>
ASSETS
Current:
Cash $ 139,254 $ 24,692
Trade accounts receivable, net
(Notes 3, 4 and 9) 1,121,753 862,104
Other current assets 46,956 28,018
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Total current assets 1,307,963 914,814
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Property and equipment, at cost :
Production equipment (Note 3) 1,182,463 1,504,141
Office equipment (Note 3) 238,790 216,434
Leasehold improvements 29,584 -
Accumulated depreciation and amortization (977,566) (1,395,578)
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Net property and equipment 473,271 324,997
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Deferred income taxes (Note 1 and 9) 132,575 166,000
Capitalized software cost (Note 10) - 312,611
Other assets 13,819 17,486
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TOTAL ASSETS $ 1,927,628 $ 1,735,908
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Line of credit (Note 3) $ 200,000 $ 200,000
Accounts payable 113,829 161,049
Accrued expenses (Notes 2 and 7) 278,168 163,217
Customer deposits 27,000 22,500
Current portion of long-term debt (Note 3) 72,651 37,842
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Total current liabilities 691,648 584,608
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Long-term debt ($82,878 for 1997 to
related parties), less current portion (Note 3) 114,585 85,808
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Total liabilities 806,233 670,416
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Commitments (Notes 6 and 7)
Stockholders' equity:
Common stock, $.001 par value, 10,000,000
shares authorized, shares issued: 3,785,000,
1998 and 3,765,000, 1997 3,785 3,765
Additional paid in capital 1,441,711 1,439,231
Accumulated deficit (324,101) (377,504)
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Total stockholders' equity 1,121,395 1,065,492
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,927,628 $ 1,735,908
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</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
4
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Z-AXIS CORPORATION
STATEMENTS OF INCOME
<TABLE>
For the years ended March 31,
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1998 1997 1996
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<S> <C> <C> <C>
Net sales (Note 4) $ 3,894,627 $ 2,477,645 $ 2,830,797
Operating expenses:
Production 1,548,629 984,229 1,224,345
Research and development 234,967 - 16,370
General and administrative 732,204 741,871 746,067
Marketing 768,499 583,602 640,114
Depreciation and amortization 184,606 160,514 176,337
Amortization of prior years' software development
costs (Note 10) 312,611 - -
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Total operating expenses 3,781,516 2,470,216 2,803,233
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Income from operations 113,111 7,429 27,564
Interest (expense) (Note 3) (33,542) (26,281) (26,125)
Other income 7,689 30,208 2,998
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Income before income taxes 87,258 11,356 4,437
Income tax expense (Note 1) 33,855 3,500 1,500
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NET INCOME $ 53,403 $ 7,856 $ 2,937
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NET INCOME PER COMMON SHARE OF STOCK (NOTE 8):
BASIC $ 0.014 $ 0.002 $ 0.001
DILUTED $ 0.014 $ 0.002 $ 0.001
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Weighted average number of common shares
outstanding during the period:
Basic 3,775,411 3,761,992 3,759,000
Diluted 3,779,458 3,761,999 3,759,000
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</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
5
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Z-AXIS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
Additional Total
Number of Common paid in Accumulated stockholders'
common shares stock capital deficit equity
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<S> <C> <C> <C> <C> <C>
Balance, April 1, 1995 3,753,000 $ 3,753 $ 1,436,993 $ (388,297) $ 1,052,449
Issue 6,000 common shares (Note 5) 6,000 6 1,494 - 1,500
Net income - - - 2,937 2,937
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Balance, March 31, 1996 3,759,000 3,759 1,438,487 (385,360) 1,056,886
Issue 6,000 common shares (Note 5) 6,000 6 744 - 750
Net income - - - 7,856 7,856
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Balance, March 31, 1997 3,765,000 3,765 1,439,231 (377,504) 1,065,492
Issue 20,000 common shares (Note 5) 20,000 20 2,480 - 2,500
Net income - - - 53,403 53,403
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Balance, March 31, 1998 3,785,000 $ 3,785 $ 1,441,711 $ (324,101) $ 1,121,395
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See accompanying summary of accounting policies and notes to financial
statements.
STATEMENTS OF CASH FLOWS For the years ended March 31,
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INCREASE (DECREASE) IN CASH 1998 1997 1996
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<S> <C> <C> <C>
OPERATING ACTIVITIES: (NOTE 5)
Net income $ 53,403 $ 7,856 $ 2,937
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes 33,425 5,000 1,000
Depreciation 184,606 160,514 176,337
Amortization of prior years'
software development costs 312,611 - -
Loss on disposal of equipment 4,330 28,259 -
Provision for bad debts 34,400 45,000 -
Accrued interest on notes
payable and other non-cash expenses - 15,813 16,429
Changes in operating assets and liabilities:
Trade accounts receivable (294,049) (200,507) 10,381
Other current assets (18,938) 23,839 (7,006)
Other assets 3,667 (5,545) 50,361
Accounts payable (47,220) (22,613) 18,817
Accrued expenses 114,951 (58,704) (139,306)
Customer deposits 4,500 (7,053) 6,037
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Net cash provided by (used in)
operating activities 385,686 (8,141) 135,987
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INVESTING ACTIVITIES:
Purchase of property and equipment (113,153) (61,182) (76,996)
Additions to software development costs - (178,272) (134,339)
Proceeds from sale of property and equipment 2,700 4,000 -
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Net cash used in investing activities (110,453) (235,454) (211,335)
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FINANCING ACTIVITIES:
Borrowing on line of credit 1,035,000 530,000 -
Payments on line of credit (1,035,000) (330,000) -
Debt and capital lease principal payments (163,171) (50,536) (90,979)
Proceeds from the exercise of stock options 2,500 - -
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Net cash provided by (used in) financing activities (160,671) 149,464 (90,979)
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Net increase (decrease) in cash 114,562 (94,131) (166,327)
Cash, beginning of year 24,692 118,823 285,150
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CASH, END OF YEAR $ 139,254 $ 24,692 $ 118,823
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</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
6
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
HISTORY AND NATURE OF BUSINESS:
Z-Axis Corporation (the "Company") was incorporated under the laws of the
State of Colorado on May 16, 1983. The Company is engaged in consulting and
presentation services. The primary market for the Company's services is the
litigation industry. These services include the strategic analysis of
complex litigation issues, the design of demonstrative evidence, the
production of such evidence and courtroom presentation. In addition, the
Company has developed two types of courtroom presentation systems for its
clients: a touchscreen video presentation system and "VuPoint," an electronic
image presentation system. The services are provided through its
headquarters and production facility in Denver, Colorado and its satellite
sales offices in New York City and Chicago.
USE OF ESTIMATES:
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 amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash and trade accounts receivable. The
Company maintains cash in demand deposits and interest bearing money market
accounts with high quality financial institutions. Such deposit accounts, at
times, may exceed federal insured limits. The Company has not experienced
any losses in such accounts. Concentrations of credit risk with respect to
trade accounts receivable are limited due to the Company's periodic credit
evaluations of its significant customers' financial condition and their
dispersion across geographic areas.
FINANCIAL INSTRUMENTS:
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable, accrued expenses and the line of credit approximate their fair
market values because of the short maturity of these instruments. With
respect to long-term debt, substantially all of these notes bear interest at
floating rates based upon a financial institution's prime rate or U.S.
Treasury Bill rates. Accordingly, the fair value approximates their reported
carrying amount. With respect to capitalized lease obligations, fair value
approximates their reported carrying amount.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over periods of two to seven years. Depreciation
expense includes amounts for owned and leased equipment. Repairs and
maintenance are charged to expense as incurred. Property and equipment are
reviewed each year to determine whether any events or circumstances indicated
that the carrying amount of the assets may not be recoverable. This review
includes estimating future cash flows. Property and equipment costs are
expensed when the carrying amounts are determined to be unrealizable.
CAPITALIZED SOFTWARE COSTS:
Cost incurred internally in creating software products for resale are charged
to expense until technological feasibility has been established upon the
completion of a working model. Thereafter, all software costs are
capitalized until the point that the product is ready for sale and
subsequently reported at the lower of amortized cost or net realizable value.
In accordance with Statement of Financial Accounting Standard No. 86, the
Company will recognize the greater amount of annual amortization of
capitalized software costs under 1) the ratio of current
7
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Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
year revenues by product, to the product's total estimated revenues or 2)
over the product's estimated economic useful life by the straight-line
method. Amortization began when the product was sold in April 1997, see Note
10 for adjustment.
REVENUE AND COST RECOGNITION:
The Company generates revenue with both hourly-rate and fixed price
contracts. Revenue generated from hourly-rate contracts is recognized as
costs are billed to the customer. Revenue is determined by the contract
billing rates and the time incurred to perform the service plus reimbursable
expenses. Expense is determined by actual cost incurred. Revenue generated
from fixed price contracts is recognized when the contract is completed. The
contract is considered complete when all costs, except for insignificant
amounts, have been incurred.
NET INCOME PER SHARE:
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128). This
pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion (APB No.
15), "Earnings per Share". SFAS No. 128 provides for the calculation of
"Basic" and "Dilutive" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of the entity, similar to fully
diluted earnings per share. All prior periods weighted average and per share
information has been restated in accordance with SFAS No. 128 and has not had
a material effect on the financial statements of the Company.
INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting No. 109 "Accounting for Income Taxes". Deferred income
taxes result from temporary differences, principally the result of filing its
income tax returns on the cash basis of accounting. Temporary differences
are differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.
STOCK OPTION PLAN
The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for all stock option
plans. Under APB Opinion 25, no compensation cost has been recognized for
stock options issued to employees as the exercise price of the Company's
stock options granted equals or exceeds the market price of the underlying
common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company
to provide pro forma information regarding net income as if compensation cost
for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the
required pro forma information, the Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing
model.
8
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
ADVERTISING AND PROMOTIONAL EXPENSE:
Advertising expenses are charged to operations during the year in which they
are incurred. Promotion expenses are charged to operations over the period
of the promotional campaign. Advertising and promotional expense for the
years ended March 31, 1998, 1997 and 1996 were approximately $92,000,
$69,000, and $55,000.
STATEMENTS OF CASH FLOWS:
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for financial statements with fiscal years beginning
after December 15, 1997. Earlier application is permitted. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Company does not expect the adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" is effective for financial
statements with fiscal years beginning after December 15, 1997. The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, geographic areas in
which they operate and their major customers. The Company does not expect
the adoption of SFAS No. 131 to have a material effect, if any, on its
results of operations.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. The new standard revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of the plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required when no
longer useful. The Company does not expect the adoption of SFAS No. 132 to
have a material effect, if any, on its financial position or results of
operations.
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal
years beginning after December 15, 1997. SOP 97-2 supercedes SOP 91-1
regarding software revenue recognition. SOP 97-2 establishes standards which
require a company to recognize revenue when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the vendor's fee is
fixed or determinable, and (iv) collectability is probable. The SOP also
discusses the revenue recognition criteria for multiple element contracts and
allocation of the fee to various elements based on vendor-specific objective
evidence of fair value. The Company does not expect the adoption of this SOP
to have a material effect, if any, on the financial statements.
9
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS
NOTE 1. INCOME TAXES
For income tax reporting purposes, the Company prepares its income tax returns
using the cash basis of accounting. The temporary differences that arise from
this election are the principle reasons for the difference between the net
income before income taxes in the accompanying financial statements and the
income for income tax reporting purposes. A reconciliation of the amount of
income tax expense that would result from applying statutory income tax rates to
the net income before income taxes in the accompanying financial statements to
the reported income tax expense is as follows:
<TABLE>
Years ended March 31,
--------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense that would result from applying
statutory income tax rates to net income before
taxes in the accompanying financial statements $ 37,721 $ 4,000 $ 1,000
Reduction of valuation allowance (51,000) (20,000) (3,000)
Cash basis conversion adjustments 27,134 19,500 3,500
Expiration of investment and other tax credits 20,000 -- --
- -------------------------------------------------------------------------------------
$ 33,855 $ 3,500 $ 1,500
- -------------------------------------------------------------------------------------
</TABLE>
Income tax expense (benefit) consists of the following:
<TABLE>
Years ended March 31,
--------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ -- $ (1,500) $ 500
Deferred 33,855 5,000 1,000
- -------------------------------------------------------------------------------------
$33,855 $ 3,500 $ 1,500
- -------------------------------------------------------------------------------------
</TABLE>
The components of the current net deferred tax asset are as follows:
<TABLE>
March 31,
------------------------
Current: 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses $157,000 $140,000
Net operating loss carry forwards 281,000 193,000
- -------------------------------------------------------------------------------------
Total deferred tax asset 438,000 333,000
- -------------------------------------------------------------------------------------
Deferred tax liabilities:
Accounts receivable 421,000 323,000
Prepaid expenses and other assets 18,000 10,000
- -------------------------------------------------------------------------------------
Total deferred tax liability 438,000 333,000
- -------------------------------------------------------------------------------------
Net current deferred tax asset $ -- $ --
- -------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
A-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS
The components of the non-current net deferred tax asset are as follows:
<TABLE>
March 31,
------------------------
Non-Current: 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Notes payable - officers and directors $ -- $ 15,000
Net operating loss carry forwards 146,000 319,000
Investment and other tax credits 14,000 34,000
Valuation allowance (14,000) (65,000)
- -------------------------------------------------------------------------------------
Total deferred tax asset 146,000 303,000
- -------------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment 13,425 20,000
Capitalized software cost -- 117,000
- -------------------------------------------------------------------------------------
Total deferred tax liability 13,425 137,000
- -------------------------------------------------------------------------------------
Net non-current deferred tax asset $132,575 $166,000
- -------------------------------------------------------------------------------------
</TABLE>
At March 31, 1998 and 1997, the Company has federal income tax loss carry
forwards of approximately $1,139,000 and 1,400,000, respectively which expire in
the years 2001 through 2013 and federal and state tax credits of approximately
$14,000 and $34,000, respectively which expire through the year 2000. The
Company has assessed its past earnings history and trends, budgeted sales,
expiration dates of the tax credits and loss carryforwards, and its ability to
implement tax planning strategies which are designed to accelerate or increase
taxable income. Based on the results of this analysis, a valuation allowance
has been established as management believes that its more likely than not, that
the deferred tax asset related to tax credits and a portion of the loss carry
forwards may not be realized before all carryforward expiration dates.
NOTE 2. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
March 31,
------------------------
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Compensation (Note 7) $212,922 $109,207
Interest, officers and directors 4,122 12,814
Other 61,124 41,196
- -------------------------------------------------------------------------------------
$278,168 $163,217
- -------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS
NOTE 3. DEBT
Long-term debt consists of the following:
<TABLE>
March 31,
------------------------
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Promissory notes, due May 1998, interest at prime rate
plus 3% per annum (a) $ -- $ 71,187
Promissory note, due May 1998, interest variable
based on the six-month Treasury Bill rate (b) -- 11,691
Capital lease obligations 187,236 40,772
- -------------------------------------------------------------------------------------
187,236 123,650
Less current portion 72,651 37,842
- -------------------------------------------------------------------------------------
$114,585 $ 85,808
- -------------------------------------------------------------------------------------
</TABLE>
(a) Unsecured promissory notes due to current employees, officers and
directors.
(b) Due to a current officer and director, secured by the Company's trade
accounts receivable.
Interest expense incurred on indebtedness to related parties was $9,896,
$14,254, and $18,833 during the years ended March 31, 1998, 1997 and 1996,
respectively.
Maturities, by year, of long-term debt and net minimum lease obligations at
March 31, 1998 are as follows:
<TABLE>
Years ending March 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999 $ 89,682
2000 85,509
2001 27,583
- -------------------------------------------------------------------------------------
202,774
Less amount representing interest 15,538
- -------------------------------------------------------------------------------------
187,236
Less current portion 72,651
- -------------------------------------------------------------------------------------
Total long-term debt $114,585
- -------------------------------------------------------------------------------------
</TABLE>
The Company leases certain production and office equipment under the terms of
capital leases. The capitalized value of the leased equipment was $226,757 and
$124,602 at March 31, 1998 and 1997, respectively. The related accumulated
depreciation was $48,824 and $43,475 at March 31, 1998 and 1997, respectively.
These amounts are combined with similar equipment in the accompanying financial
statements. Lessors have a security interest in all equipment classified as a
capital lease.
The Company maintains a line of credit in the amount of $200,000 with a bank,
which matures August 1998. If drawn upon, the indebtedness bears interest at
the bank's prime rate plus two percent per annum (10.5% at March 31, 1998). The
Company's accounts receivable secure any amounts drawn under the line of credit.
As of March 31, 1998 and 1997, the balance outstanding on the line of credit was
$200,000.
NOTE 4. MAJOR CUSTOMERS
The Company had two customers that accounted for approximately 24.5% and 21.9%
of the net sales for the year ended March 31, 1998. The same two customers
accounted for approximately 11.5% and 13.6% of the net sales for the year ended
March 31, 1997. During the year ended March 31, 1996, there were no customers
that
12
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL STATEMENTS
accounted for more than 10% of the Company's net sales. Approximately 35%
and 21%, of the Company's trade accounts receivable were due from two different
customers at March 31, 1998 and 1997, respectively.
NOTE 5. STATEMENT OF CASH FLOWS
Selected cash payments is as follows:
<TABLE>
Years ended March 31,
----------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash payments for taxes $ -- $ -- $ --
Cash payments for interest $42,141 $29,396 $15,932
- -------------------------------------------------------------------------------------
</TABLE>
Noncash activity is as follows:
Accrued interest on notes payable to related parties in the amounts of $5,525,
$8,376 and $13,027 was added to the principal of the notes during the years
ended March 31, 1998, 1997 and 1996.
During the years ended March 31, 1998 and 1997 fixed assets with a net book
value in the amount of $7,030 and $35,258, respectively were retired.
Capital lease obligations were incurred in the amount of $226,757 during the
year ended March 31, 1998, when the Company entered into capital lease
agreements for certain production and office equipment.
NOTE 6. COMMITMENTS
The Company leases its office and production facility under the terms of an
operating lease. The lease term commenced on August 1, 1996 and extends for a
sixty-month period ending on June 30, 2001.
Future minimum payments required under the terms of the lease are as follows:
<TABLE>
Years ending March 31,
- -------------------------------------------------------------------------------------
<S> <C>
1999 $ 95,521
2000 98,730
2001 101,939
2002 34,336
- -------------------------------------------------------------------------------------
Total $330,526
- -------------------------------------------------------------------------------------
</TABLE>
Rent expense was $97,178, $88,525 and $79,508 for the years ended March 31,
1998, 1997 and 1996.
NOTE 7. EMPLOYEE BENEFIT PLANS
On April 1, 1993, the Company established the Z-Axis Corporation 401(K) Plan
(the "Plan"). Eligible employees may elect to participate in the Plan beginning
on the first day of the calendar quarter following their date of hire. The
Company elected to make matching contributions in amounts of ten percent of the
first five percent of a participating employee's salary deferral amount. The
Company made matching contributions to the Plan in the amounts of $3,144,
$2,899 and $3,761 during the years ended March 31, 1998, 1997 and 1996,
respectively.
13
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
On April 1, 1994, the Company established the Z-Axis Corporation Profit
Sharing Compensation Plan (the "Profit Sharing Plan"). Eligible employees
automatically participate in the non-qualified Profit Sharing Plan after one
year of service. The Company contributes a percentage of profits as defined
in the Profit Sharing Plan. The Company accrued $113,082, $0 and $0 during
the years ended March 31, 1998, 1997 and 1996, respectively, for distribution
under the terms of the Profit Sharing Plan.
NOTE 8. INCENTIVE STOCK OPTION PLAN
In September 1996, the Board of Directors adopted, with the approval of the
Stockholders, the 1996 Stock Option Plan (the "Plan"). The Plan provides for
grants to employees, directors or other persons deemed appropriate at the
discretion of the Compensation Committee (the "Committee") of the Board of
Directors, stock options to purchase common stock of the Company at a price
equal in value to the fair market value, as defined, on the date of grant.
The exercise period for options granted under the Plan shall be determined by
the Committee; however, the exercise period shall not exceed ten years from
the date they are granted.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), requires the Company to provide pro forma information regarding net
income and net income per share as if compensation costs for the Company's
stock option plan had been determined in accordance with fair value based
method prescribed in SFAS No. 123. The Company estimates the fair value of
each stock award at March 31, 1998 and 1997 by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used
respectively: dividend yield of 0 percent for all years; expected volatility
of 26 percent for 1998 and 18 percent for 1997; risk-free interest rates of
5.50 percent for 1998 and 6.00 - 6.55 percent for 1997; and expected lives of
10 years for 1998 and 5 years for 1997 for the stock awards. Because the
exercise price of the Company's employee stock options is equal to or greater
than the market price of the underlying stock on the date of the grant, no
compensation costs was recognized during 1998.
Under the accounting provisions for SFAS No. 123, the Company's net income
per share would have been decreased by the pro forma amounts indicated below:
<TABLE>
March 31,
---------------------
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Net income:
As reported $53,403 $7,856
Pro forma $53,403 $3,442
- --------------------------------------------------------
Basic earnings per share:
As reported $0.014 $0.002
Pro forma $0.014 $0.001
- --------------------------------------------------------
Diluted earnings per share:
As reported $0.014 $0.002
Pro forma $0.014 $0.001
- --------------------------------------------------------
</TABLE>
During the initial phase-in period of SFAS No. 123, the effect on pro forma
results are not likely to be representative of the effects on pro forma
results in future years since options vest over several years and additional
awards could be made each year.
14
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan as of March 31,
1998 and changes during the year is presented below:
<TABLE>
Weighted Average
Number of Shares Exercisable Price
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 1996 -- --
Options granted 115,000 $0.130
- ------------------------------------------------------------------------------
Balance at March 31, 1997 115,000 0.130
Options granted 40,000 0.260
Options exercised (20,000) (0.130)
- ------------------------------------------------------------------------------
Balance at March 31, 1998 135,000 0.160
- ------------------------------------------------------------------------------
Options exercisable at March 31, 1998 135,000 0.160
- ------------------------------------------------------------------------------
</TABLE>
The weighted average value of options granted during the years ended March 31,
1998 and 1997 were $0.070 and $0.030, respectively.
Included in the options granted were 5,000 each to the Chief Executive
Officer and President and 10,000 options granted to a member of the Board of
Directors, issued at or above fair market value.
The following table summarizes information about stock options outstanding at
March 31, 1998:
<TABLE>
Options Outstanding and Exercisable
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Weighted Average Weighted
Number Remaining Weighted
Outstanding and Contractual Average Exercise
Range of Exercise Prices Exercisable Life Price
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.125 - 0.134 15,000 0.43 $0.134
0.125 80,000 4.96 0.125
0.275 10,000 0.35 0.275
0.250 30,000 2.30 0.250
- ------------------------------------------------------------------------------
Total $0.125 - 0.275 135,000 3.52 $0.165
- ------------------------------------------------------------------------------
</TABLE>
NOTE 9. VALUATION AND QUALIFYING ACCOUNTS
Valuation allowance for the deferred tax asset accounts activity was as
follows:
<TABLE>
March 31,
-------------------------
1998 1997
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 65,000 $ 85,000
Charged to expenses (51,000) (20,000)
Deductions -- --
- --------------------------------------------------------------------
Balance at end of year $ 14,000 $ 65,000
- --------------------------------------------------------------------
</TABLE>
15
<PAGE>
Z-AXIS CORPORATION
SUMMARY OF ACCOUNTING POLICIES AND NOTES TO THE FINANCIAL STATEMENTS
Allowance for bad debt account activity was as follows:
<TABLE>
March 31,
-----------------------
1998 1997
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 10,003 $ 0
Additions 34,400 45,000
Write-offs (24,977) (34,997)
- ----------------------------------------------------------------
Balance at end of year $ 19,426 $ 10,003
- ----------------------------------------------------------------
</TABLE>
NOTE 10. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the quarter ended March 31, 1998, the Company amortized $215,515 in
remaining costs associated with a software product, "VuPoint", that was
capitalized during fiscal years 1997 and 1996. These costs were incurred
subsequent to the establishment of technological feasibility and before the
product was ready for sale. The product was ready for sale in April 1997 and
amortization of these costs began at that point. The Company determined that
revenues earned from sale and associated services of the version of VuPoint
that was available for sale during fiscal year 1998 were complete by March
31, 1998. Accordingly, all capitalized costs associated with that version of
VuPoint were amortized by March 31, 1998. A new version of VuPoint is
expected to be released early in fiscal 1999 and costs associated with the
new version will be expensed as incurred.
16
<PAGE>
Z-AXIS CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
- -------------------------------------------------------------------------------------------------------
Years ended March 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $3,894,627 $2,477,645 $2,830,797 $3,279,330 $1,818,505
Income from operations 113,111 7,429 27,564 655,264 4,931
Income before extraordinary items
and cumulative effect of change
in accounting for income taxes 87,258 11,356 4,437 632,919 6,714
Net income 53,403 7,856 2,937 453,919 331,714
Total assets 1,927,628 1,735,908 1,651,145 1,836,209 1,264,002
Long-term debt and capital
lease obligations 114,585 85,808 110,129 187,154 188,711
Stockholders' equity 1,121,395 1,065,492 1,056,886 1,052,449 597,780
Working capital 616,315 330,206 393,147 505,373 247,920
Net income per common share:
Basic 0.014 0.002 0.001 0.121 0.088
Diluted 0.014 0.002 0.001 0.121 0.088
Weighted average number of common
shares outstanding during the
period:
Basic 3,775,411 3,761,992 3,759,000 3,752,500 3,750,000
Diluted 3,779,458 3,761,999 3,759,000 3,752,500 3,750,000
Cash dividends -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes for the fiscal years ended March 31, 1998,
1997 and 1996. Except where otherwise noted, references to years are to
fiscal years ending March 31 of the year stated.
RESULTS OF OPERATIONS
NET SALES
Approximately 93%, 98% and 96% of the Company's net sales during 1998, 1997
and 1996, respectively, were derived from the litigation support field and
the balance from other services. During the most recent three years, a
significantly higher proportion of the Company's net sales have come from the
litigation support field. The Company has increasingly developed its
marketing strategies in this field. Management expects this mix of its sales
markets to continue for the foreseeable future. Net sales increased by
approximately 57% during 1998. This followed decreases of approximately 12%
and 14% during 1997 and 1996, respectively. The significant increase in
revenues during 1998 was due to a stable sales force coupled with more
effective management of client engagements, resulting in a 43% increase in
revenues from core
17
<PAGE>
litigation services. In addition, during 1998 the Company earned revenues
from the rental and service of the VuPoint courtroom presentation software
system. VuPoint revenues represent a significant new source of income for the
Company. The decrease in net sales during 1997 and 1996 was primarily
attributable to turnover in the sales department. Two customers accounted
for approximately 21.9% and 24.5% of sales in 1998 and 10.9% and 11.1% of
sales in 1997, respectively. No customers accounted for more than 10% of
sales in 1996. The Company's on-going operations and business are not
dependent on any customer or group of customers and are not materially
impacted by the effects of inflation.
The continued investment of funds into research and development and the
marketing program remains a high management priority. The Company's ability
to maintain an effective marketing program, expand its market share in the
near-term and establish new markets in the long-term, may have an effect on
its future financial position and results of operations. The number of
contracts that the Company services at any given time varies significantly
throughout the year. Management considers the expenses associated with
development of the VuPoint software presentation system, as well as expansion
of the marketing program, necessary for future growth.
OPERATING EXPENSES
For the years ended March 31, 1998, 1997 and 1996, total operating expenses
were 97.1%, 99.7% and 99.0% of net sales, respectively, producing income from
operations of $113,111, $7,429 and $27,564, respectively, The gross margins
for 1998, 1997 and 1996 were 2.9%, .3% and 1.0%, respectively. During 1998,
operating expenses increased 53% over 1997. The increase is consistent with
the 57% increase in revenues during 1998; 24% of the increase in operating
expenses is due to the amortization of $312,111 in prior years' capitalized
software development costs. As of March 31, 1998, the software development
costs are fully amortized and the Company does not anticipate capitalization
of any further software development costs in fiscal year ended March 31,
1999. During 1997, operating expenses decreased 12% over 1996. The decrease
was primarily due to lower direct production costs as a result of the
decrease in revenues during the same period, coupled with slightly lower
marketing costs and depreciation. Labor expense continues to be the most
significant of the Company's operating costs. During the years 1998, 1997
and 1996 employee compensation costs accounted for approximately 46%, 49%
and 50%, respectively, of total operating expenses. Management believes that
its staffing levels and production capacity are sufficient to maintain
current and anticipated near-term production levels. In addition, there is an
adequate supply of local personnel who are trained and qualified who the
Company hires from time to time on a contract basis as production
requirements dictate.
Production expenses increased during 1998 as compared to 1997 and 1996. The
increase is directly proportional to the increase in sales revenue;
production costs as a percentage of sales were 39.8%, 39.7% and 43.2% for
1998, 1997 and 1996, respectively. Production costs for direct contract labor
and other billable expenses will vary directly with sales levels. Production
expenses decreased in 1997 as compared to 1996 due to lower sales levels
during 1997.
Research and development costs increased during 1998 as compared to 1997 and
1996. This increase was due to additional contract labor needed to reach
certain software development milestones in conjunction with the VuPoint
system described below. During 1998, the Company expensed $234,967 in
current costs, and also amortized $312,611 in capitalized software
development costs previously capitalized in 1997 and 1996. These costs were
capitalized in 1997 and 1996 in accordance with Statement of Financial
Accounting Standard No. 86. The Company determined that revenues earned from
the sale and associated services of the version of VuPoint that was available
for sale during fiscal year ended March 31, 1998 were complete. Accordingly,
all capitalized costs associated with that version of VuPoint were amortized
by March 31, 1998. A new version of VuPoint is in development and is
expected to be released early in fiscal year ended March 31, 1999 and costs
associated with the new version will be expensed as incurred. The Company
has filed for trademark
18
<PAGE>
protection of the "VuPoint" name and patent protection for the software. It
is a state-of-the-art exhibit management and presentation system for use by
trial teams, outside counsel and in-house attorneys. VuPoint's first full
use was by the prosecution in the case against Timothy McVeigh for the 1995
bombing of the Murrah Federal Building in Oklahoma City, Oklahoma. The
Company considers VuPoint to have significant long-term revenue potential and
will continue further developments in the foreseeable future. The product
fulfills a need in the marketplace, particularly in presenting exhibits for
document-intensive cases
General and administrative expenses did not fluctuate significantly during
1998 when compared to 1997 and 1996, however as a percentage of sales,
general and administrative expenses decreased during 1998 as compared to 1997
and 1996. General and administrative expenses represented 18.8%, 29.9% and
26.3% of sales for 1998, 1997 and 1996, respectively. The decrease as a
percentage of sales is due to more effective management of overhead costs
during 1998. Also, included in general and administrative costs for 1997 is
approximately $30,000 in expenses associated with relocation of the corporate
offices, which occurred in August 1996; there were no relocation expenses
incurred during 1998 or 1996.
Marketing expenses increased during 1998 when compared to 1997 and 1996. The
increase is the result of commissions increase based on sales levels. As a
percentage of sales, marketing expenses decreased for 1998 as compared to
1997 and 1996. Marketing expenses represented 19.7%, 23.5% and 22.6% of
sales for 1998, 1997 and 1996, respectively. The decrease as a percentage of
sales is due to effective management of travel and promotional expenses
during 1998. The marketing expenses for 1997 decreased over 1996 due to
reduced sales salaries, commissions and travel. The salaries and travel
decreased as a result of the turnover of the sales staff. The commissions
decreased as a result of lower sales levels. During 1996, additional expenses
were incurred for promotional and advertising material, representation at
trade shows, travel expenses and additional market research capabilities.
Depreciation expense increased during 1998 as a result of purchase of
$339,910 in new production, research and development and office equipment.
The purchase of this equipment was necessary to allow the Company to keep
pace with the rapidly changing technology in the industry. Capital leases in
the amount of $226,757 were entered into during 1998 to finance the purchase
of the production equipment noted above. During 1998, the Company retired
equipment with a net book value of $7,030. Depreciation expense decreased
during 1997 due to retirement of equipment with a net book value of $35,258.
Capital additions during 1997 and 1996 were $61,182 and $76,996 respectively.
Rapid technological advances in the type of equipment that the Company uses
in providing its services require that depreciable lives of the equipment be
relatively short. At March 31, 1998 and 1997, fully depreciated production
video and graphic equipment with an original cost of approximately $565,000
and $998,000, respectively, continued in use.
OTHER INCOME AND EXPENSES
Interest expense increased during each of the three years through 1998, the
net effect of slightly higher interest rates on certain debt and capital
lease debt additions, offset by debt repayments. Also, during 1998, the
Company entered into $226,757 worth of capital leases for the purchase of
equipment. Included in the net interest for 1997 is approximately $22,000 of
interest income paid by a customer due to settlement of a receivable.
INCOME TAXES
For income tax reporting purposes, the Company files its income tax returns
using the cash basis of accounting. Consequently, the timing of the
reporting of certain income and expense items is different than that for
financial statement purposes.
19
<PAGE>
At March 31, 1998, the Company had income tax loss carry forwards and tax
credits in the amounts of approximately $1,139,000 and $14,000, respectively.
The loss carry forwards expire between 2001 and 2013. Regular income taxes
will not be payable on the Company's taxable income until these benefits have
been fully utilized.
The Company's taxes on income increased to $33,855 during 1998 as compared to
$3,500 during 1997 and $1,500 during 1996. The changes in the income taxes
are the direct result of the corresponding changes in the Company's deferred
tax amounts and liabilities for such periods. The Company had a net deferred
tax asset of $132,575 and $166,000 at March 31, 1998 and 1997 resulting
primarily from cash basis adjustments and operating loss and tax credit
carry-forwards. The company has established a valuation allowance of $14,000
and $65,000 at March 31, 1998 and 1997 against the deferred tax asset as
management believes that it is more likely than not, that the deferred tax
asset related to the tax credits and a portion of the loss carry forwards may
not be realized before all carry forward expiration dates. See Note 1 to the
Financial Statements. The Company expects to utilize the deferred tax asset
arising out of net operating loss carryforwards due to improved profitability
and future tax planning strategies which may include acceleration of taxable
income.
NET INCOME
The Company recorded net income in the amounts of $53,403, $7,856 and $2,937
during the years ended March 31, 1998, 1997 and 1996, respectively.
At March 31, 1998, the Company had a backlog of orders in the amount of
approximately $1,068,000, compared to approximately $1,022,000 at March 31,
1997. Although the Company had agreements to perform services in these
amounts, in the case of litigation support services, the agreements may be
modified or canceled for such reasons as pre-trial settlement of the case
being litigated. Production scheduling of the backlog is generally determined
by the Company's customers and is largely controlled by the timing of
courtroom litigation. As a consequence, periods of idle production capacity
can occur. During these periods, management makes every effort to minimize
its impact through a combination of cost controls and production scheduling
to the extent possible.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's working capital position was $616,315, an
increase of 87% when compared to that of March 31, 1997. The working capital
position during 1997 decreased 16% when compared to 1996. Total
stockholders' equity at March 31, 1998 increased to $1,121,395. The increase
in stockholders' equity was due to net income of $53,403 and $2,500 in
proceeds from the issuance of common stock.
Cash flows from operations were $385,686, $(8,141) and $135,987 during the
years ended March 31, 1998, 1997 and 1996, respectively. The increase in
cash flows from operations during 1998 was attributable to higher sales
volumes. During 1998, 1997 and 1996, cash flow from operations was irregular.
Accounts receivable collections slowed at times. The Company's accounts
receivable at any given time are generally few in number and relatively large
in amount. Although the Company has not had any significant bad debt
experiences, any delay in collection of its accounts receivable can result in
a disruption of cash flow. To help mitigate any future cash flow
irregularities, the Company carries a line of credit in the amount of
$250,000 with a bank. Capital additions, as they become necessary to meet
production demands and replace equipment, will be acquired with a combination
of debt financing and cash flow from operations.
Capital additions were $339,910, $61,182 and $76,996 during the years ended
March 31, 1998, 1997 and 1996, respectively. The expenditures for all three
periods were made primarily for new and replacement production and research
and development equipment. Of the total capital additions during the three
year
20
<PAGE>
period, approximately 53% were paid for from current operating cash flows and
the remainder were obtained through lease or debt arrangements with terms of
three to five years.
Cash flows from (used by) financing activities were $(160,671), $149,464 and
$(90,979) during the years ended March 31, 1998, 1997 and 1996, respectively.
The decrease in cash flows from financing activities during 1998 was the
result of payoff of outstanding notes to related parties. The increase in
cash flows from financing activities during 1997 compared to 1996 was the
result of the utilization of the bank line of credit available to the
Company. The line of credit, which matures annually each August, is expected
by management to be renewed during the normal course of business.
The timing of the Company's production volumes is largely dependent upon
factors that are not within its control, namely the timing of courtroom
litigation or the potential that a litigation may settle before trial. The
Company began 1999 with sales volumes comparable to those achieved during the
second half of 1998. Sales revenues for the first quarter of fiscal year 1999
are anticipated to be approximately $1,100,000 resulting in an after tax
profit of approximately $100,000 or a 9% margin. It is management's
anticipation that sales volumes will increase during the remaining quarters
of 1999. Management believes that its current working capital position and
cash flow from operations will be sufficient to meet future operating costs
and debt service obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for financial statements with fiscal years beginning
after December 15, 1997. Earlier application is permitted. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Company does not expect the adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" is effective for financial
statements with fiscal years beginning after December 15, 1997. The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, geographic areas in
which they operate and their major customers. The Company does not expect
the adoption of SFAS No. 131 to have a material effect, if any, on its
results of operations.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. The new standard revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of the plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required when no
longer useful. The Company does not expect the adoption of SFAS No. 132 to
have a material effect, if any, on its financial position or results of
operations.
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal
years beginning after December 15, 1997. SOP 97-2 supercedes SOP 91-1
regarding software revenue recognition. SOP 97-2 establishes standards which
require a company to recognize revenue when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the vendor's fee is
fixed or determinable, and (iv) collectability is probable. The SOP also
discusses the revenue
21
<PAGE>
recognition criteria for multiple element contracts and allocation of the fee
to various elements based on vendor-specific objective evidence of fair
value. The Company does not expect the adoption of this SOP to have a
material effect, if any, on the financial statements.
INFLATION
Management believes that inflation has not had a significant impact on the
Company's operations during the fiscal years ended March 31, 1998, 1997 and
1996.
YEAR 2000 COMPLIANCE
Management has reviewed the Company's internal computer systems and software
products for Year 2000 problems and believes that such systems and products
are, or will soon be, Year 2000 compliant, and management therefore does not
expect Year 2000 considerations will materially impact the Company's internal
operations. Year 2000 considerations may have an affect on some of the
Company's customers and suppliers, and thus indirectly affect the Company.
It is not possible to quantify the aggregate cost to the Company with respect
to customers and suppliers with Year 2000 problems, although the Company does
not anticipate it will have a material impact on its business.
CORPORATE DATA AND STOCKHOLDER INFORMATION
STOCK INFORMATION
Prior to January 1995, there was no market maker for the Company's common
stock and the Company was not aware of any public or private trades and
accordingly, was not aware of high or low bid or ask quotations prior to that
time. During January 1995, the Company's common stock began trading on the
electronic bulletin board of the Over-the-Counter market under the trading
symbol "AXIS". The range of the high and low bid and ask quotations, as
reported by the Nasdaq Stock Market, Inc., for the period ended March 31,
1998 was as follows:
<TABLE>
Bid Ask
-----------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Fiscal year ended March 31, 1998:
First quarter $0.1875 $0.1875 $0.5625 $0.5625
Second quarter $0.1875 $0.1875 $0.5625 $0.4375
Third quarter $0.1875 $0.0625 $0.4375 $0.375
Fourth quarter $0.1875 $0.0625 $0.375 $0.250
- --------------------------------------------------------------------------------
Fiscal year ended March 31, 1997:
First quarter $0.125 $0.125 $0.500 $0.500
Second quarter $0.125 $0.125 $0.500 $0.500
Third quarter $0.125 $0.125 $0.500 $0.375
Fourth quarter $0.1875 $0.125 $0.5625 $0.375
- --------------------------------------------------------------------------------
</TABLE>
Quotations reported may represent prices between dealers, may not include
retail markups, markdowns or commissions and may not represent actual trades.
22
<PAGE>
<TABLE>
<S> <C>
CORPORATE DATA AND STOCKHOLDER INFORMATION
DIRECTORS: OFFICERS:
Steven H. Cohen Steven H. Cohen
Chairman Chief Executive Officer
Member, Compensation Committee
Marvin A. Davis Jon D. Ackelson
Member, Compensation Committee Vice President, Production
Marilyn T. Heller Stephanie S. Kelso
Vice President, Sales and Marketing
James E. Pacotti, Jr. Marilyn T. Heller
Member, Compensation Committee Secretary
Alan Treibitz Alan Treibitz
President, Chief Operating Officer,
CORPORATE OFFICE Chief Financial Officer
7395 E. Orchard Road, Suite A-100
Greenwood Village, Colorado 80111
Telephone: (303) 713-0200
TRANSFER AGENT INDEPENDENT AUDITORS
American Securities Transfer, Incorporated BDO Seidman, LLP
938 Quail Street, Suite 101 303 East 17th Avenue
Lakewood, Colorado 80215 Suite 600
Denver, Colorado 80203
</TABLE>
DIVIDENDS
No dividends have been declared as of March 31, 1998 and the Company does not
anticipate paying dividends in the foreseeable future.
FORM 10-K
A copy of the Form 10-K for the year ended March 31, 1998, as filed with the
Securities and Exchange Commission, is available without charge upon written
request to the corporate Secretary.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME FOR THE PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 139,254
<SECURITIES> 0
<RECEIVABLES> 1,141,179
<ALLOWANCES> 19,426
<INVENTORY> 0
<CURRENT-ASSETS> 1,307,963
<PP&E> 1,450,837
<DEPRECIATION> 977,566
<TOTAL-ASSETS> 1,927,628
<CURRENT-LIABILITIES> 691,648
<BONDS> 0
3,785
0
<COMMON> 0
<OTHER-SE> 1,117,610
<TOTAL-LIABILITY-AND-EQUITY> 1,927,628
<SALES> 3,894,627
<TOTAL-REVENUES> 3,894,627
<CGS> 0
<TOTAL-COSTS> 3,468,905
<OTHER-EXPENSES> 312,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,542
<INCOME-PRETAX> 87,258
<INCOME-TAX> 33,855
<INCOME-CONTINUING> 53,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,403
<EPS-PRIMARY> .014
<EPS-DILUTED> .014
</TABLE>
