Z AXIS CORP, 10-K, 1999-07-14

Z AXIS CORP
10-K, 1999-07-14
MOTION PICTURE & VIDEO TAPE PRODUCTION

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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, 1999.

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 (I.R.S. Employer Identification No.)
incorporation or organization)

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 [X].

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, 1999 was $365,849. The aggregate market value was calculated
based upon the number of shares held by non-affiliates on March 31, 1999 and the
price at which the registrant's common stock traded on June 25,1999 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, 1999: 3,805,000.

Documents incorporated by reference:

Proxy Statement to shareholders to be filed by July 29, 1999 Part III

Annual Report to shareholders for the fiscal year ended
March 31, 1999 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
publicly 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 primarily from three locations, its corporate office and
production facility located in metropolitan Denver, Colorado and sales offices
located in Chicago, Illinois and New York City, New York. During fiscal year
1999 and 1998, the Company also had sales consultants located in Los Angeles,
California and New York City, New York. These positions are currently vacant;
however, management expects to fill the vacancies with sales consultants by the
end of the second quarter of fiscal year 2000, as well as develop alliances with
independent sales representatives in these areas. The Company operates within
only one industry segment.

The Company provides video graphic presentation services in the litigation
services industry for commercial and government customers. Litigation support
customers include law firms, corporations and insurance companies throughout the
United States. During fiscal years 1999, 1998 and 1997 over 95% of the sales
were derived from the litigation support field. The Company has increasingly
developed its marketing strategies in this field and expects that the core
business revenues will continue to be focused on this market. Management is also
exploring other markets that could benefit from the core technologies and
expertise developed in the litigation support field. 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. Three customers accounted for 44%
of sales in fiscal 1999, two customers accounted for 44% of sales in fiscal 1998
and three customers accounted for 34% of sales in fiscal 1997 .

The Company's products may consist of any combination of computer-generated
graphics, live action video, 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. The Company's video
product is delivered to its customers on videotape, videodisc or in an
electronic format. Videodisc material can be presented via either a bar code
system, a touch screen system or an electronic courtroom presentation system
called "VuPoint". During the past four fiscal years 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". The Company received trademark protection of the name and
has filed for 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 years ended March 31, 1999 and 1998, the
Company earned $161,451 and $357,093, respectively, in revenue from rental and
service of the VuPoint system. The Company capitalized $146,873 of costs
associated with a major revision of the VuPoint system during fiscal 1999.
During fiscal 1999 and 1998, the Company expensed $13,967 and $312,611,
respectively, in related software development costs that were capitalized during
fiscal years ended March 31, 1999 and March 31, 1997 and 1996.

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, 1999 and 1998, the Company had a backlog of orders for its video
services in the amounts of approximately $1,123,000 and $1,062,000,
respectively. Management believes that the backlog will be comparable in the
second and third quarters of fiscal 2000. 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, 1999, the Company had 25 regular full-time employees and
approximately 10 temporary 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

General

Many older computer systems, software products and embedded chips that are in
use today were programmed to accept two digit entries in the date code field
(e.g. "98" for "1998"). These systems, software and embedded chips need to be
modified or upgraded to distinguish twenty-first century dates (e.g. "2002")
from twentieth century dates (e.g. "1902"), in order to avoid the possibility of
erroneous results or systems failures.

The Company's management has addressed potential Year 2000 compliance issues
relating to its 1) internal operating systems, 2) vendors, facilities and other
third parties and 3) software products that it licenses to customers. Management
believes that adequate resources have been allocated to this effort and expects
that any Year 2000 considerations will not 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.

Corporate Infrastructure State of Readiness

Management has addressed the Year 2000 issues with respect to the software
product ("VuPoint") which the Company licenses to existing and potential
customers. VuPoint currently is Year 2000 compliant and any modifications or
rewrites of the software code will be tested to be assured that they are also
Year 2000 compliant. Management has also evaluated the Company's internal
critical business systems that have date sensitivity. Any internal critical
business systems that are not Year 2000 compliant have been or will be replaced
or modified before their potential "failure date". Management has communicated
with major vendors, suppliers, landlords and other third parties regarding Year
2000 compliance of embedded processors in the Company's computers and
facilities, software and other information technology, and other products and
services which the Company obtains from third parties.

Costs

In the course of normal business operations, the Company has incurred
approximately $110,000 in costs to replace and upgrade computer systems and
software programs that potentially were not Year 2000 compliant. Management
estimates that an additional $5,000 to $10,000 will need to be expended to
upgrade the remaining business systems that are not currently Year 2000
compliant. As a result of the expenditures already made, and those planned,
management is confident that all critical business systems that the Company
relies upon for operations are or will be Year 2000 compliant by the end of the
current calendar year.

Risks

The VuPoint software that the Company intends to offer to its customers under
licensing arrangements, might contain undetected errors or failures when first
introduced or when new versions are released, even though the product is
intended to be Year 2000 compliant. While the Company has assessed, corrected
and tested VuPoint in regard to Year 2000 compliance, there can be no assurances
that the product or future releases of the product will not contain undetected
date sensitivity errors. If the Company is unable or is delayed in making the
necessary date code changes to VuPoint or future releases of the product, the
Company does not anticipate that there would be a material adverse effect upon
the Company's business, operating results, financial condition and cash flows.

There can be no assurances that the systems of other parties upon which the
Company relies will be made Year 2000 compliant on a timely basis. The Company
utilizes third party vendor equipment, telecommunications products, and software
products. Third parties' Year 2000 compliance efforts are not within the control
of the Company. The failure of any critical technology components to operate
properly may have a material impact on business operations or require the
Company to incur unanticipated expenses to remedy any problems.

The most substantial operational risks are those that are beyond the Company's
control, including the progress of government agencies and compliance efforts of
utility companies. It is possible that interruptions in vital services due to
Year 2000 non-compliance will interfere with normal business operations. Such
failures could materially and adversely affect the Company's results of
operations.

Forward-looking statements contained in this Year 2000 Compliance disclosure
should be read in conjunction with the Company's disclosure under the heading of
Forward Looking Statements for the purposes of the Safe Harbor provisions of the
Private Securities Litigation Act of 1995.

Item 2. Properties

The Company's current headquarters and production facility are located in
business park in the southern suburbs of Denver, Colorado. It leases two spaces
from unaffiliated third parties. The terms of the leases are five-year and
three- year periods; both expiring on July 31, 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,
1999 was 442 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:

Bid Ask
------------------- -----------------
High Low High Low
------- ------- ------- -------
Fiscal year ended March 31, 1999:
First quarter ................. $0.3125 $0.3125 $0.5625 $0.5625
Second quarter ................ $0.2500 $0.2500 $0.4375 $0.4375
Third quarter ................. $0.2500 $0.2500 $0.4375 $0.4375
Fourth quarter ................ $0.1875 $0.1875 $0.3750 $0.3750
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 $0.3750
Fourth quarter ................ $0.1875 $0.0625 $0.3750 $0.2500

Quotations reported may represent prices between dealers, may not include retail
markups, markdowns or commissions and may not represent actual trades.

Item 6. Selected financial data

Selected Financial Data on page 17 of the Annual Report to shareholders for the
fiscal year ended March 31, 1999 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 18 through 25 of the Annual Report to shareholders for the
fiscal year ended March 31, 1999 is incorporated herein by reference.

Item 8. Financial statements and supplementary data

The financial statements included on pages 3 through 17 of the Annual Report to
shareholders for the fiscal year ended March 31, 1999 are incorporated herein by
reference.

Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure

On April 12, 1999 the Company engaged a new independent auditor. On April 28,
1999 a form 8-K/A, which is included herein by reference, was filed reflecting
this change.

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, 1999, 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, 1999, 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, 1999, 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, 1999, with respect to certain relationships
and related transactions, is incorporated herein by reference.

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, 1999 and 1998

Statements of Operations - Years ended March 31, 1999, 1998 and 1997

Statements of Cash Flows - Years ended March 31, 1999, 1998 and 1997

Statements of Stockholders' Equity - Years ended March 31, 1999,
1998 and 1997

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.

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, 1999

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
Steven H. Cohen

/s/ Alan Treibitz Director, President, Treasurer,
Alan Treibitz Chief Financial Officer, Principal
Accounting Officer

/s/ Marilyn T. Heller Director, Secretary
Marilyn T. Heller

Z-AXIS CORPORATION
Selected Financial
Data

Years Ended March 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales ............ $3,748,053 $3,894,627 $2,477,645 $2,830,797 $3,279,330
Income from operations 67,296 113,111 7,429 27,564 655,264
Income before
extraordinary items
and cumulative
effect of change
in accounting for
income taxes ........ 26,809 87,258 11,356 4,437 632,919
Net income ........... 14,439 53,403 7,856 2,937 453,919
Total assets ......... 1,765,326 1,927,628 1,735,908 1,651,145 1,836,209
Long-term debt and
capital lease
obligations ......... 131,102 114,585 85,808 110,129 187,154
Stockholders' equity . 1,138,334 1,121,395 1,065,492 1,056,886 1,052,449
Working capital ...... 506,022 616,315 330,206 393,147 505,373
Net income per common
share:
Basic ............ $ 0.00 $ 0.01 $ 0.00 $ 0.00 $ 0.12
Diluted .......... $ 0.00 $ 0.01 $ 0.00 $ 0.00 $ 0.12

Weighted average
number of common
shares outstanding
during the period:
Basic ............ 3,800,726 3,775,411 3,761,992 3,759,000 3,752,500
Diluted .......... 3,850,216 3,779,458 3,761,999 3,759,000 3,752,500
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, 1999, 1998
and 1997. Except where otherwise noted, references to years are to fiscal years
ending March 31 of the year stated.

Results of operations

Net sales

During fiscal years 1999, 1998 and 1997 over 95% of the sales were derived from
the litigation support field. The Company has increasingly developed its
marketing strategies in this field and expects that the core business revenues
will continue to be focused on this market. Management is also exploring other
markets that could benefit from the core technologies and expertise developed in
the litigation support field. Net sales decreased 4% during 1999. This followed
an increase of 57% during 1998 and a decrease of 12% during 1997. The decrease
during 1999 was due to lower revenues from the rental and service of the VuPoint
courtroom presentation software system as compared to 1998. The core litigation
services revenues remained at a consistent level from 1998 to 1999. 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 litigation services. In addition, during 1998 the
Company earned revenues from the rental and service of the VuPoint courtroom
presentation software system. The decrease in net sales during 1997 was
primarily attributable to turnover in the sales department. Three customers
accounted for a total of 44% of sales in 1999. Two customers accounted for 44%
of sales in 1998 and three customers accounted for 34% of sales in 1997. 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.

During fiscal year 1999, the Company announced a strategic alliance formed with
Ann Cole Opinion Research and Analysis (ACORA). ACORA works with attorneys and
experts in refining their presentations or testimony in court, and ACORA
provides analysis on how these communications will be perceived by various
jurors. By combining talents and resources, Z-Axis and ACORA can assist in
reducing the communication challenges and eliminating the obstacles that can
potentially thwart the success at trial. Working together the two companies can
provide an approach that encompasses virtually every form of communication and
understanding, so that attorneys have few, if any, surprises in court, and what
the judge and jury receive is a concise, compelling, complete, effective and
winning presentation. Z-Axis will pay ACORA a fee based on revenues generated
from leads provided by ACORA. Management believes that this alliance will
further strengthen Z-Axis leadership position within the litigation services
industry.

The continued investment of funds into research and development, expansion of
the market share in the litigation support field and exploration of additional
market opportunities are also high management priorities. 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, 1999, 1998 and 1997, total operating expenses were
98%, 97% and 99% of net sales, respectively, producing income from operations of
$67,296, $113,111 and $7,429, respectively. During 1999, operating expenses
decreased 3% over 1998. During 1998, operating expenses increased 53% over 1997.
The decrease in 1999 is consistent with the 4% decrease in revenues for the same
period. The increase in 1998 is consistent with the 57% increase in revenues
during 1998; 24% of the increase in operating expenses for that period were due
to the amortization of $312,611 in prior years' capitalized software development
costs. Labor expense continues to be the most significant of the Company's
operating costs during 1999, 1998 and 1997. During the years 1999, 1998 and 1997
employee compensation costs accounted for approximately 58%, 47% and 49%,
respectively, of total operating expenses. The increase in compensation costs
for 1999 was due to the addition of a director level position in the research
and development department, addition of a sales consultant in Los Angeles and
staff salary adjustments primarily in production to bring compensation levels up
to the current market rates. Management believes that the Company's 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 that the Company hires
on a contract basis as production requirements dictate.

Production expenses increased during 1999 as compared to 1998 and 1997.
Production costs as a percentage of sales were 44% for 1999 and 40% for both
1998 and 1997. Production costs for direct contract labor and other billable
expenses will vary directly with sales levels. The increase in production costs
during 1999 were primarily due to the increased market rates for the type of
labor the Company employs. Over the past two years, the Company has increasingly
employed more contract labor to produce the core business and VuPoint service
revenues. This strategy is used to manage more effectively the cost of labor, as
monthly revenue levels can vary significantly depending on the needs of the
industry.

Research and development costs, before capitalization of software development
costs, increased during 1999 as compared to 1998 and 1997. During 1999, the
research and development costs increased due to the addition of a director
position to the department. The total research and development costs for 1999
were $246,024; $146,873 of these costs were capitalized as software development
costs in accordance with Statement of Position 98-1. The capitalized costs
represent a significant change to VuPoint which resulted in a new version of the
software that became available for sale January 1, 1999. During the fourth
quarter of fiscal 1999, the Company earned VuPoint rental and service revenue,
and accordingly, $13,967 in amortization of the capitalized software costs were
recorded. During 1998, the Company expensed $234,967 in current research and
development costs, and also amortized $312,611 in capitalized software
development costs previously capitalized in 1997 and 1996. 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. The Company has filed for
trademark 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. In addition, VuPoint is being considered for
introduction into other markets that may need document intensive presentation
systems.

General and administrative expenses increased 4% during 1999 as compared to
1998. General and administrative expenses represented 20%, 19% and 30% of sales
for 1999, 1998 and 1997, respectively. The increase during 1999 was primarily
due to increasing the monthly reserves for bad debts and sales and use tax. In
addition, the Company increased expenditures on professional consultation in the
area of human resources and strategic planning. General and administrative
expenses did not fluctuate significantly during 1998 when compared to 1997. The
decrease in 1998 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 1999 or 1998.

Marketing expenses increased during 1999 when compared to 1998 and 1997. The
increase in 1999 is primarily due to opening a new sales office in Los Angeles,
coupled with an increase in travel and advertising costs. Management believes
that training and development of sales consultants in regional locations is
important to the overall strategy of increasing market share in the litigation
support industry. The increase in marketing costs during 1998 was the result of
commissions increase based on sales levels. Marketing expenses represented 24%,
20% and 24% of sales for 1999, 1998 and 1997, respectively.

Depreciation expense increased during 1999, 1998 and 1997 as a result of
purchase of $316,611, $339,910 and $185,784, respectively 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 $181,167, $226,757
and $124,602 were entered into during 1999, 1998 and 1997, respectively, to
finance the purchase of the production equipment noted above. During 1999, 1998
and 1997, the Company retired equipment with a net book value of $21,161, $7,030
and $35,258, 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.

Other income and expenses

Interest expense remained consistent at 1% of net sales for fiscal years 1999,
1998, and 1997. Included in the net interest for 1997 is approximately $22,000
of interest income paid by a customer due to settlement of a receivable. Other
income (expense) is comprised primarily of gain (loss) on sale and disposal of
fixed assets during 1999, 1998 and 1997 respectively.

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.

At March 31, 1999 and 1998, the Company had federal income tax loss carry
forwards of approximately $1,130,000 and $1,139,000, respectively which expire
in the years 2001 through 2014 and federal and state tax credits of
approximately $0 and $14,000, respectively. The Company's taxes on income
decreased to $12,370 during 1999 as compared to $33,855 during 1998. Income
taxes were $3,500 during 1997 as compared to 1998 and 1999 as noted above. 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 $120,205 and $132,575 at March 31, 1999
and 1998 resulting primarily from cash basis adjustments and operating loss and
tax credit carry-forwards. The company has established a valuation allowance of
$0 and $14,000 at March 31, 1999 and 1998 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 $14,439, $53,403 and $7,856
during the years ended March 31, 1999, 1998 and 1997, respectively.

At March 31, 1999, the Company had a backlog of orders in the amount of
approximately $1,123,000, compared to approximately $1,062,000 at March 31,
1998. Management believes that the backlog will be comparable during the second
and third quarters of fiscal 2000. 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, 1999, the Company's working capital position was $506,023, a
decrease of 18% when compared to that of March 31, 1998. The working capital
position during 1998 increased 87% when compared to 1997. Total stockholders'
equity at March 31, 1999 increased to $1,138,334. The increase in stockholders'
equity was due to net income of $14,439 and proceeds from the issuance of common
stock of $2,500.

Cash flows from operations were $390,864, $385,686 and $(8,141) during the years
ended March 31, 1999, 1998 and 1997, respectively. Cash flows from operations
for 1999 were consistent with 1998 and fluctuated less than 1%. The increase in
cash flows from operations during 1998 was attributable to higher sales volumes
than 1997. 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
$400,000 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 $316,611, $339,910 and $185,784 during the years ended
March 31, 1999, 1998 and 1997, 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
period, approximately 37% 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 provided by (used by) financing activities were $(229,842),
$(160,671) and $149,464 during the years ended March 31, 1999, 1998 and 1997,
respectively. The decrease in cash flows from financing activities during 1999
was due to payoff of approximately $200,000 on the outstanding beginning balance
on the line of credit. The decrease in cash flows from financing during 1998 was
the result of payoff of outstanding notes to related parties. The increase in
cash flows from financing activities during 1997 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 the
first quarter of fiscal year 2000 with a 35% decrease in sales volumes as
compared to the fourth quarter of fiscal year 1999. Sales revenues for the first
quarter of fiscal year 2000 are anticipated to be approximately $565,000
resulting in an after tax loss of approximately $(200,000). The decrease in the
sales volumes and resulting net profit is due to an overall slow-down in the
revenues generated by the litigation industry. Management believes that the
slow-down is temporary and sales volumes are expected to increase during the
remaining quarters of fiscal 2000. In addition, management is aggressively
pursuing development of alternative revenue sources from other industries that
can benefit from the many artistic and creative resources found within the
Company. 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

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. This statement currently has no
impact on the financial statements of the Company as the Company has no
derivative instruments nor participates in hedging activities.

Inflation

Management believes that inflation has not had a significant impact on the
Company's operations during the fiscal years ended March 31, 1999, 1998 and
1997.

Year 2000 Compliance

General

Corporate Infrastructure State of Readiness

Costs

Risks

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, 1999 and 1998 was as follows:

Quotations reported may represent prices between dealers, may not include retail
markups, markdowns or commissions and may not represent actual trades.

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, Chief Financial Officer
Corporate Office
7395 E. Orchard Road, Suite A-100
Greenwood Village, Colorado 80111
Telephone: (303) 713-0200

Transfer Agent Independent Auditors

American Securities Transfer, Incorporated Ehrhardt Keefe Steiner & Hottman PC
938 Quail Street, Suite 101 7979 E. Tufts Avenue
Lakewood, Colorado 80215 Suite 400
Denver, Colorado 80237-2843

Dividends

No dividends have been declared as of March 31, 1999 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, 1999, as filed with the
Securities and Exchange Commission, is available without charge upon written
request to the corporate Secretary.

<PAGE>

Table of Contents

Independent Auditors' Report..........................................1

Report of Independent Certified Public Accountants....................2

Financial Statements

Balance Sheets....................................................3

Statements of Operations..........................................4

Statement of Stockholders' Equity.................................5

Statements of Cash Flows..........................................6

Notes to Financial Statements.........................................7

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Z-Axis Corporation
Greenwood Village, Colorado

We have audited the accompanying balance sheet of Z-Axis Corporation as of March
31, 1999 and the related statements of operations, stockholders' equity and cash
flows for the year 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 audit. The financial statements of
Z-Axis Corporation as of March 31, 1998 and 1997 were audited by other auditors
whose report dated June 10, 1998, expressed an unqualified opinion on those
statements.

We conducted our audit 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 signficant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides 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, 1999 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC

May 11, 1999
Denver, Colorado

<PAGE>

Report of Independent Certified Public Accountants

Board of Directors
Z-Axis Corporation
Greenwood Village, Colorado

We have audited the accompany balance sheet of Z-Axis Corporation as of March
31, 1998 and the related statements of operations, stockholders' equity and cash
flows for the years ended March 31, 1998 and 1997. 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 signficant 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 the results of its operations and its cash flows for the years
ended March 31, 1998 and 1997 in conformity with generally accepted accounting
principles.

BDO Seidman, LLP

Denver, Colorado
June 10, 1998

<PAGE>

Z-AXIS CORPORATION

Balance Sheets
<TABLE>
<CAPTION>

March 31,
----------------------------
1999 1998
----------- -----------
Assets
<S> <C> <C>
Current assets
Cash .................................................... $ 25,867 $ 139,254
Trade accounts receivable, net of allowance
of $64,157 (1999) and $19,426 (1998) (Note 2) ......... 925,249 1,121,753
Other current assets ................................... 50,796 46,956
----------- -----------
Total current assets .................................. 1,001,912 1,307,963
----------- -----------

Property and equipment, at cost (Note 5)
Production equipment ................................... 1,193,485 1,182,463
Office equipment ....................................... 323,297 238,790
Leasehold improvements ................................. 35,226 29,584
Accumulated depreciation and amortization .............. (1,052,417) (977,566)
----------- -----------
Net property and equipment ............................ 499,591 473,271
----------- -----------

Deferred income taxes (Note 4) ........................... 120,205 132,575

Capitalized software cost, net of accumulated
amortization of $13,967 (1999) .......................... 132,906 --

Other assets ............................................. 10,712 13,819
----------- -----------

Total assets ............................................. $ 1,765,326 $ 1,927,628
=========== ===========

Liabilities and Stockholders' Equity

Current liabilities
Line-of-credit (Note 2) ................................ $ 70,000 $ 200,000
Accounts payable ....................................... 102,788 113,829
Accrued expenses (Notes 3 and 8) ....................... 160,143 278,168
Customer deposits ...................................... 28,000 27,000
Current portion of capital lease
obligations (Note 5) .................................. 134,959 72,651
----------- -----------
Total current liabilities ............................. 495,890 691,648

Capital lease obligations (Note 5) ....................... 131,102 114,585
----------- -----------
Total liabilities ..................................... 626,992 806,233
----------- -----------

Commitments (Notes 7 and 8)

Stockholders' equity
Common stock, $.001 par value,
10,000,000 shares authorized,
shares issued and outstanding:
3,805,000 (1999) and 3,785,000 (1998) ................. 3,805 3,785
Additional paid in capital ............................. 1,444,191 1,441,711
Accumulated deficit .................................... (309,662) (324,101)
----------- -----------
Total stockholders' equity ............................ 1,138,334 1,121,395
----------- -----------

Total liabilities and stockholders' equity ............... $ 1,765,326 $ 1,927,628
=========== ===========
</TABLE>

See notes to financial statements.

- 3 -

<PAGE>

Z-AXIS CORPORATION

Statements of Operations
<TABLE>
<CAPTION>

Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------

<S> <C> <C> <C>
Net sales (Note 6) ..................... $ 3,748,053 $ 3,894,627 $ 2,477,645
----------- ----------- -----------
Operating expenses
Production ........................... 1,652,828 1,548,629 984,229
Research and development ............. 99,151 234,967 --
General and administrative ........... 764,539 732,204 741,871
Marketing ............................ 881,142 768,499 583,602
Depreciation and amortization ........ 269,130 184,606 160,514
Amortization and write-off of software
development costs .................... 13,967 312,611 --
----------- ----------- -----------
Total operating expenses ............ 3,680,757 3,781,516 2,470,216
----------- ----------- -----------

Income from operations ................. 67,296 113,111 7,429

Interest (expense) ..................... (30,380) (33,542) (26,281)
Other income (expense) ................. (10,107) 7,689 30,208
----------- ----------- -----------

Income before income taxes ............. 26,809 87,258 11,356

Provision for income taxes (Note 4) .... 12,370 33,855 3,500
----------- ----------- -----------

Net income ............................. $ 14,439 $ 53,403 $ 7,856
=========== =========== ===========

Net income per common share of stock
Basic ................................ $ - $ .01 $ -
Diluted .............................. $ - $ .01 $ -

Weighted average number of common shares
outstanding during the period
Basic ................................ 3,800,726 3,775,411 3,761,992
Diluted .............................. 3,850,216 3,779,458 3,761,999

</TABLE>

See notes to financial statements.

- 4 -

<PAGE>

Z-AXIS CORPORATION
Statements of Stockholders' Equity
<TABLE>
<CAPTION>

Number of Additional Total
Common Common Paid-in Accumulated Stockholders'
Shares Stock Capital Deficit Equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 3,759,000 $ 3,759 $1,438,487 $ (385,360) $1,056,886

Issue 6,000 common shares 6,000 6 744 - 750

Net income ........... - - - 7,856 7,856
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1997 3,765,000 3,765 1,439,231 (377,504) 1,065,492

Exercise of options
(Note 9) ............. 20,000 20 2,480 -- 2,500

Net income ............ -- -- -- 53,403 53,403
---------- ---------- ---------- ---------- ----------

Balance, March 31, 1998 3,785,000 3,785 1,441,711 (324,101) 1,121,395

Exercise of options
(Note 9) ............. 20,000 20 2,480 -- 2,500

Net income ............ -- -- -- 14,439 14,439
---------- ---------- ---------- ---------- ----------

Balance, March 31, 1999 3,805,000 $ 3,805 $1,444,191 $ (309,662) $1,138,334
========== ========== ========== ========== ==========
</TABLE>

See notes to financial statements.

- 5 -

<PAGE>

Z-AXIS CORPORATION

Statements of Cash Flows

Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income ................................... $ 14,439 $ 53,403 $ 7,856
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities
Deferred income taxes ..................... 12,370 33,425 5,000
Depreciation .............................. 269,130 184,606 160,514
Amortization of software development costs 13,967 312,611 --
Loss on disposal of equipment ............. 13,253 4,330 28,259
Provision for bad debts ................... 60,000 34,400 45,000
Accrued interest on notes payable ......... -- -- 15,813
Changes in operating assets and liabilities
Trade accounts receivable ................ 136,504 (294,049) (200,507)
Other current assets ..................... (3,840) (18,938) 23,839
Other assets ............................. 3,107 3,667 (5,545)
Accounts payable ......................... (11,041) (47,220) (22,613)
Accrued expenses ......................... (118,025) 114,951 (58,704)
Customer deposits ........................ 1,000 4,500 (7,053)
----------- ----------- -----------
376,425 332,283 (15,997)
----------- ----------- -----------
Net cash provided by (used in)
operating activities ........... 390,864 385,686 (8,141)
----------- ----------- -----------

Investing activities
Purchase of property and equipment ......... (135,444) (113,153) (61,182)
Additions to software development costs .... (146,873) -- (178,272)
Proceeds from sale of property and
equipment ................................. 7,908 2,700 4,000
----------- ----------- -----------
Net cash used in investing
activities ............................ (274,409) (110,453) (235,454)
----------- ----------- -----------

Financing activities
Borrowing on line-of-credit ................ 1,180,000 1,035,000 530,000
Payments on line-of-credit ................. (1,310,000) (1,035,000) (330,000)
Capital lease principal payments ........... (102,342) (163,171) (50,536)
Proceeds from the exercise of stock
options ................................... 2,500 2,500 --
----------- ----------- -----------
Net cash (used in) provided by
financing activities .................. (229,842) (160,671) 149,464
----------- ----------- -----------

Net (decrease) increase in cash .............. (113,387) 114,562 (94,131)

Cash, beginning of year ...................... 139,254 24,692 118,823
----------- ----------- -----------

Cash, end of year ............................ $ 25,867 $ 139,254 $ 24,692
=========== =========== ===========

</TABLE>

See notes to financial statements.

- 6 -

<PAGE>

Z-AXIS CORPORATION

Statements of Cash Flows

Supplemental disclosures of cash flow information:

Years Ended March 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------

<S> <C> <C> <C>
Cash paid for taxes $ - $ - $ -
Cash paid for interest $ 35,854 $ 42,114 $ 29,396
</TABLE>

Supplemental noncash disclosure:
Capital lease obligations were incurred in the amount of $181,167 and
$226,757 during the year ended March 31, 1999 and 1998, respectively, when
the Company entered into capital lease agreements for certain production
and office equipment.

Accrued interest on notes payable to related parties in the amounts of $0,
$5,525 and $8,376 was added to the principal of the notes during the years
ended March 31, 1999, 1998 and 1997, respectively.

During the years ended March 31, 1998, fixed assets with a net book value
in the amount of $7,030 were retired.

See notes to financial statements.

- 7 -

<PAGE>

Z-AXIS CORPORATION

Notes to Financial Statements

Note 1 - Organization and Summary of Significant Accounting Policies

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, Chicago and
Los Angeles.

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. 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.

Software Development Costs

Direct costs incurred in the development of software are capitalized once the
preliminary project stage is completed, management has committed to funding the
project and completion and use of the software for its intended purpose are
probable. The Company ceases capitalization of development costs once the
software has been substantially completed and is ready for its intended use.
Software development costs are amortized in proportion to future estimated
revenues. Costs associated with upgrades and enhancements that result in
additional functionality are capitalized.

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 services are
performed. 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
which is typically completed within a 6 month time period.

<PAGE>

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Income Taxes

Deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the current period and the change during the period in
deferred tax assets and liabilities. The deferred tax assets and liabilities
have been netted to reflect the tax impact of temporary differences. The
principal temporary differences that result in deferred tax assets and
liabilities are the cash-basis treatment of certain assets and liabilities for
tax purposes and property and equipment.

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share consists of the weighted average number of common shares outstanding plus
the dilutive effects of options and warrants calculated using the treasury stock
method. In loss periods, dilutive common equivalent shares are excluded as the
effect would be anti-dilutive.

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.

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, 1999, 1998 and 1997 were approximately $90,000, $92,000 and $69,000.

<PAGE>

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Research and Development

Research and development costs related to both present and future products are
charged to operations in the year incurred.

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.

During the year ended March 31, 1999, certain costs were incurred relating to
the development and enhancement of software. Management has estimated the costs
associated with the project and have capitalized those costs which will be
amortized over the estimated useful life of two years.

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.

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, accounts payable, accrued
expenses and the line of credit approximate their fair market values because of
the short maturity of these instruments. Accordingly, the fair value
approximates their reported carrying amount. With respect to capitalized lease
obligations, fair value approximates their reported carrying amount.

<PAGE>

Note 1 - Organization and Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements

Note 2 - Line-of-Credit

The Company entered into an agreement with a bank for a line-of-credit of
$400,000 due August 1999. The interest rate is calculated at 1% over the bank's
prime rate (8.75% at March 31, 1999) and interest is payable monthly. The line
is collateralized by the Company's accounts receivable and general intangibles.
The balance outstanding on the line-of-credit at March 31, 1999 and 1998 was
$70,000 and $200,000, respectively.

Note 3 - Accrued Expenses

Accrued expenses consist of the following:
March 31,
-----------------------
1999 1998
----------- ---------

Compensation (Note 8) $104,353 $212,922
Interest, officers and directors - 4,122
Other 55,790 61,124
-------- --------

$160,143 $278,168
======== ========

Interest expense incurred on indebtedness to related parties was $1,895, $9,896,
and $14,254 during the years ended March 31, 1999, 1998 and 1997, respectively.

<PAGE>

Note 4 - Income Taxes

A reconciliation of the amount of income tax expense that would result from
applying the statutory income tax rate of 34% to the net income before income
taxes in the accompanying financial statements to the reported income tax
expense is as follows:

Years Ended March 31,
-------------------------------
1999 1998 1997
---------- ---------- ---------

Income tax expense at the statutory rate $ 9,115 $ 29,668 $ 3,861

State tax, net 885 3,145 474

Non-deductible items 2,370 2,736 1,020

Other - (1,694) (1,855)
-------- -------- ---------

$ 12,370 $ 33,855 $ 3,500
======== ======== =========

Income tax expense consists of the following:

Years Ended March 31,
-------------------------------
1999 1998 1997
---------- ---------- ---------

Current $ - $ - $ -
Deferred 12,370 33,855 3,500
-------- -------- ---------

$ 12,370 $ 33,855 $ 3,500
======== ======== =========

The components of the current net deferred tax asset are as follows:

March 31,
-----------------------
1999 1998
----------- ---------

Current
Deferred tax assets
Accounts payable and accrued expenses $109,100 $157,000
Net operating loss carryforwards 247,900 281,000
-------- --------
Total deferred tax asset 357,000 438,000
-------- --------

Deferred tax liabilities
Accounts receivable 339,500 420,000
Prepaid expenses and other assets 17,500 18,000
-------- --------
Total deferred tax liability 357,000 438,000
-------- --------

Net current deferred tax asset $ - $ -
======== =======

<PAGE>

Note 4 - Income Taxes (continued)

The components of the non-current net deferred tax asset are as follows:

March 31,
-----------------------
1999 1998
----------- ---------

Non-current
Deferred tax assets
Net operating loss carryforwards $177,780 $146,000
Investment and other tax credits - 14,000
Valuation allowance - (14,000)
-------- --------
Total deferred tax asset 177,780 146,000
-------- --------

Deferred tax liabilities
Property and equipment 7,735 13,425
Capitalized software cost 49,840 -
-------- -------
Total deferred tax liability 57,575 13,425
-------- --------

Net non-current deferred tax asset $120,205 $132,575
======== ========

At March 31, 1999 and 1998, the Company has federal income tax loss carry
forwards of approximately $1,130,000 and $1,139,000, respectively which expire
in the years 2001 through 2019 and federal and state tax credits of
approximately $0 and $14,000.

Note 5 - Capital Lease Obligations

The Company leases various computer and office equipment under capital leases.
The future minimum lease payments required under the capital leases are as
follows:

Years Ending March 31,

2000 $157,026
2001 105,038
2002 53,446
2003 1,925
--------
Total future minimum lease payments 317,435
Less amount representing interest (51,374)
--------
Present value of minimum payments
under capital leases 266,061
Less current portion (134,959)
--------

$131,102
========

<PAGE>

Note 5 - Capital Lease Obligations (continued)

The Company leases certain production and office equipment under the terms of
capital leases. The capitalized value of the leased equipment was $407,924 and
$226,757 at March 31, 1999 and 1998, respectively. The related accumulated
depreciation was $167,115 and $48,824 at March 31, 1999 and 1998, respectively.

Note 6 - Major Customers

The Company's revenues are concentrated in a few customers as follows:

Years Ended March 31,
-------------------------------
1999 1998 1997
---------- ---------- ---------
Sales:
Customer A - 19.24% 12.33%

Customer B - - 10.70

Customer C 13.46 - -

Customer D 18.10 24.38 10.38

Customer E 12.02 - -

<PAGE>

Note 7 - 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 July 31, 2001.

Future minimum payments required under the terms of the lease are as follows:

Years Ending March 31,

2000 $121,393
2001 123,368
2002 41,552
--------

$286,313
========

Rent expense was $133,409, $101,628 and $88,525 for the years ended March 31,
1999, 1998 and 1997.

Note 8 - 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 $4,909, $3,144
and $2,899 during the years ended March 31, 1999, 1998 and 1997, respectively.

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 expensed $12,125, $113,082 and $0 during the years ended March
31, 1999, 1998 and 1997, respectively, under the terms of the Profit Sharing
Plan.

<PAGE>

Note 9 - 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, 1999, 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 54 percent for 1999, 26
percent for 1998 and 18 percent for 1997; risk-free interest rates of 5.45
percent for 1999, 5.5 percent for 1998 and 6.00 - 6.55 percent for 1997; and
expected lives of 10 years for 1999 and 1998 and five years for 1997 for 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 1999 and 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:

March 31,
--------------------------------------
1999 1998 1997
------------ ----------- ---------

Net income
As reported $ 14,439 $ 53,403 $ 7,856
Pro forma $ 6,008 $ 53,403 $ 3,442

Basic earnings per share
As reported $ - $ .01 $ -
Pro forma $ - $ .01 $ -

Diluted earnings per share
As reported $ - $ .01 $ -
Pro forma $ - $ .01 $ -

<PAGE>

Note 9 - Incentive Stock Option Plan (continued)

A summary of the status of the Company's stock option plan follows:

Exercise
Number of Price Per Exercisable
Shares Share Shares
--------- ---------- -------------

Outstanding balance at
March 31, 1997 115,000 $.125-.138 115,000
Options granted 40,000 .125-.275 40,000
Options exercised (20,000) .125 (20,000)
-------- --------- --------
Outstanding balance at
March 31, 1998 135,000 .1875-.2063 135,000
Options granted 64,000 .1875-.2063 64,000
Options exercised (20,000) .125 (20,000)
-------- --------- --------

Outstanding balance at
March 31, 1999 179,000 $.125-.275 179,000
======== ========= ========

The weighted average fair value of options granted during the years ended March
31, 1999, 1998 and 1997 were $.13, $0.07 and $.03, respectively.

The following table summarizes information about stock options outstanding at
March 31, 1999:

Weighted
Average
Number Weighted Weighted
Outstanding Remaining Average
and Contractual Exercise
Range of Exercise Prices Exercisable Life Price
- ------------------------ ------------ --------- ---------

$.125 - .275 179,000 8.72 $ .1790
============ ======== ======= ==========

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