<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 2000.
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 [ ].
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, 2000 was $243,899. The aggregate market value was calculated
based upon the number of shares held by non-affiliates on March 31, 2000 and the
price at which the registrant's common stock traded on June 6, 2000 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, 2000: 3,805,000.
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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, 2000 Part III
Annual Report to shareholders for the
fiscal year ended March 31, 2000 Parts II and IV
Registration Statement on Form S-18,
SEC file no. 2-85302-D Part IV
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 one location, its corporate office and
production facility located in metropolitan Denver, Colorado. During fiscal year
2000 and 1999, the Company also had sales consultants located in Chicago,
Illinois, Los Angeles, California and New York City, New York. The Company
operates within only one industry segment.
The Company was formed for the purpose of providing video graphic presentation
services in the litigation services industry for commercial and government
customers. Litigation support customers are primarily law firms and corporations
located throughout the United States. During fiscal years 2000 and 1999 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. One
customer accounted for 33% of sales in fiscal 2000 and three customers accounted
for 44% of sales in fiscal 1999.
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.
<PAGE>
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, 2000 and 1999, the Company earned $251,421 and $161,451, 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 2000 and 1999, the Company expensed $24,638 and
$13,967, respectively, in related software development costs that were
capitalized during fiscal year ended March 31, 1999.
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, 2000 and 1999, the Company had a backlog of orders for its video
services in the amounts of approximately $2,304,500 and $1,123,000,
respectively. Management believes that the backlog will stay at these levels in
the second and third quarters of fiscal 2001. 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, 2000, the Company had 23 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.
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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 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,
2000 was 435 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.OB" 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
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High Low High Low
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Fiscal year ended
March 31, 2000:
First quarter $ 0.2500 $ 0.1875 $ 0.4375 $ 0.3750
Second quarter $ 0.1875 $ 0.1563 $ 0.3750 $ 0.1875
Third quarter $ 0.2188 $ 0.1250 $ 0.3750 $ 0.1875
Fourth quarter $ 0.6250 $ 0.1250 $ 0.8125 $ 0.2500
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
Quotations reported may represent prices between dealers, may not include retail
markups, markdowns or commissions and may not represent actual trades.
<PAGE>
Item 6. Selected financial data
Selected Financial Data on page 17 of the Annual Report to shareholders for the
fiscal year ended March 31, 2000 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, 2000 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, 2000 are incorporated herein by
reference.
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure
None.
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, 2000, 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, 2000, 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, 2000, 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, 2000, with respect to certain relationships
and related transactions, is incorporated herein by reference.
<PAGE>
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, 2000
Statements of Income - Years ended March 31, 2000 and 1999
Statements of Cash Flows - Years ended March 31, 2000 and 1999
Statements of Stockholders' Equity - Years ended March 31, 2000
and 1999
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.
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_
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Steven H. Cohen
(Chief Executive Officer)
Date__________________
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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
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Steven H. Cohen
/s/ Alan Treibitz Director, President, Treasurer,
----------------- Chief Financial Officer, Principal
Alan Treibitz Accounting Officer
/s/ Marilyn T. Heller Director, Secretary
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Marilyn T. Heller
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<TABLE>
<CAPTION>
Z-AXIS CORPORATION
Selected Financial Data
Years ended March 31,
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2000 1999 1998 1997
<S> ---------- ---------- ---------- ----------
<C> <C> <C> <C>
Net sales $2,283,277 $3,748,053 $3,894,627 $2,477,645
(Loss) income from operations (925,843) 67,296 113,111 7,429
(Loss) income before extraordinary items
and cumulative effect of change
in accounting for income taxes (960,571) 26,809 87,258 11,356
Net (loss) income (1,087,393) 14,439 53,403 7,856
Total assets 807,556 1,765,326 1,927,628 1,735,908
Long-term debt and capital
lease obligations 45,379 131,102 114,585 85,808
Stockholders' equity 50,941 1,138,334 1,121,395 1,065,492
Working capital (307,691) 502,023 616,315 330,206
Net income per common share:
Basic ($0.29) $0.00 $ 0.01 $ 0.00
Diluted ($0.29) $0.00 $ 0.01 $ 0.00
Weighted average number of common shares
outstanding during the period:
Basic 3,805,000 3,800,726 3,775,411 3,761,992
Diluted 3,805,000 3,850,216 3,779,458 3,761,999
Cash dividends - - - -
</TABLE>
Management's discussion and analysis of financial condition and results of
operations
<PAGE>
The following discussion should be read in conjunction with the Company's
financial statements and notes for the fiscal years ended March 31, 2000 and
1999. Except where otherwise noted, references to years are to fiscal years
ending March 31 of the year stated.
Results of operations
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Net sales
During fiscal years 2000 and 1999 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 39% during 2000. This followed a decrease of 4% during 1999.
Management believes that the decrease in revenues during 2000 was due to a slow
down in the general business services that support the litigation industry. This
trend started to improve in the first quarter of fiscal year 2001. In order to
help mitigate the trend, management took steps to increase closes on new jobs by
focusing new sales consultants on in-trial presentation management revenue
opportunities with VuPoint and multimedia technology. Cost management measures
are also in place aimed at decreasing overhead expenses, as well as effective
utilization of contract labor on revenue producing activities. One customer
accounted for 33% of total sales in 2000 as compared to three customers who
together accounted for a total of 44% of sales in 1999. The percentage of sales
for any one customer during a fiscal year can vary greatly depending upon the
number of jobs or magnitude of the dollar value of the projects from that
customer. Although the Company does have several law firms that provide repeat
business, the sales focus is on developing relationships with many different law
firms throughout the country in order to expand the base of potential jobs
arising out of the litigation industry. The Company's on-going operations and
business are not dependent on any customer and are not materially impacted by
the effects of inflation.
In fiscal year 2000 the Company continued with the strategic alliance formed in
1999 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 provide solutions
to customer communication challenges. Working together the two companies 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. Management believes that this alliance further strengthens
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.
<PAGE>
Operating expenses
For the years ended March 31, 2000 and 1999, total operating expenses were
$3,209,120 and $3,680,757, respectively, representing 140% and 98% of net sales
resulting in (loss) income from operations of $(925,843) and $67,296. Operating
expenses decreased in fiscal year 2000 by $471,637, which represents a 13%
decrease as compared to fiscal year 1999 operating expenses. The decrease in
2000 was due to lower labor costs coupled with other cost reduction measures.
Labor expense continues to be the most significant of the Company's operating
costs during 2000 and 1999. During the years 2000 and 1999 employee compensation
and benefit costs accounted for approximately 64% and 68%, respectively, of
total operating expenses. The decrease in compensation costs for 2000 was
primarily due to reduced personnel needs in the production department.
Management believes that the Company's staffing levels and production capacity
are sufficient to maintain current and anticipated near-term production levels.
Production expenses were $1,186,705 for 2000 as compared to $1,652,828 for 1999
representing a decrease of 28%. Production costs for direct contract labor and
other billable expenses will vary directly with sales levels, accordingly the
decrease in production costs for 2000 are comparable to the decrease in core
business revenues. Production costs as a percentage of sales were 52% for 2000
and 44% for 1999. The increase in production costs as a percentage of sales for
2000 were primarily due to the increased market rate for the type of labor the
Company employs. Over the past two years, the Company has increasingly employed
more contract artists 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. In
addition, the production department has compensation and benefit costs for core
staff employees including artists, producers and managers. These core staff
costs do not vary as directly as contract labor costs with sales revenue volume
as core staff compensation is salary based.
Research and development costs, before capitalization of software development
costs in 1999, decreased 54% during 2000 as compared to 1999. The total research
and development costs were $111,909 in 2000 as compared to $246,024 in 1999. The
overall decrease in costs for 2000 was due to personnel attrition in the
research and development department. During 1999, $146,873 of the research and
development expenses were capitalized as software development costs in
accordance with Statement of Financial Standard No. 86. There were no
capitalized costs in 2000 as the costs incurred during this period were for
continued maintenance of the product and did not require significant levels of
labor. The capitalized costs in 1999 represented a significant change to VuPoint
which resulted in a new version of the software that became available for sale
January 1, 1999. During fiscal years 2000 and 1999, $24,637 and $13,967,
respectively, in amortization of the capitalized software costs were recorded.
The Company received trademark protection of the "VuPoint" name and has filed
for 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 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 were $722,428 in 2000 as compared to
$764,539 in 1999 representing a decrease of 6%. The decrease was primarily due
to lower compensation costs as a result of personnel attrition, as well as a
decrease in the use of contract professional services. General and
administrative expenses represented 32% and 20% of sales for 2000 and 1999. The
increase with respect to sales levels is expected, as general and administrative
costs do not vary significantly with sales volumes due to the relatively fixed
nature of the costs.
<PAGE>
Marketing expenses were $752,920 in 2000 as compared to $881,142 in 1999
representing a decrease of 15%. The decrease in marketing costs during 2000 was
the result of commissions expense decrease of 21% based on sales levels. In
addition, other marketing costs including advertising decreased by 12% during
2000 as compared to 1999. Marketing expenses represented 33% and 24% of sales
for 2000 and 1999, respectively. The increase in marketing expenses as a
percentage of sales for 2000 is due to the fact that expenditures for sales
travel, freight for demo VuPoint systems and other costs for sales consultants
and sales management do not vary with revenue and remained at comparable levels
to the same expenses in 1999.
Depreciation expense was $277,484 in 2000 as compared to $269,130 in 1999
representing an increase of 3%. The increased during was the result of purchase
and financing of $63,660, 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 $24,642 and $181,167 were entered into during 2000 and 1999,
respectively, to finance the purchase of the production and office equipment
noted above. During 2000 and 1999, the Company retired equipment with a net book
value of $ 748 and $0, 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.
Initial start up costs of Concept 2
During fiscal year 2000 the Company incurred $133,037 in expenses for the
initial start up of a new marketing effort named "Concept 2". "Concept 2" was a
separate marketing plan aimed at development of alternative markets into which
the Company could potentially sell animation and information consulting
services. Certain senior level personnel from the production department worked
on development of a "Concept 2" customer base. "Concept 2" was able to earn a
minimal amount of revenue for the Company, however it was discontinued during
the fourth quarter of 2000 due to the inability of the division to generate
anticipated revenue potential in a sufficient time frame. Management does not
expect to engage in further efforts to develop "Concept 2", but rather focus on
expansion of the current market and customer base through Core Business Services
and VuPoint products and consulting.
Other income and expenses
Interest expense was $44,152 in 2000 as compared to $30,380 in 1999,
representing an increase of 45%. The increase was due to the higher levels of
borrowing on the line of credit during fiscal year 2000 as compared to 1999.
Management expects that interest expense will remain at current levels for the
next several quarters, as the Company will continue to use the line of credit to
manage cash flow fluctuations. Other income (expense) is comprised primarily of
gain (loss) on sale and disposal of fixed assets during 2000 and 1999.
<PAGE>
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, 2000 and 1999, the Company had federal income tax loss carry
forwards of approximately $1,473,147 and $1,130,000, respectively which expire
in the years 2001 through 2020. The Company's taxes on income increased to
$126,822 during 2000 as compared to $12,370 during 1999. The changes in the
income taxes are the direct result of the corresponding changes in the Company's
deferred tax amounts for such periods. The Company had a net deferred tax asset
of $126,823 at March 31, 2000 resulting primarily from cash basis adjustments
and operating loss and tax credit carry-forwards. The company has established a
valuation allowance of $(126,823) at March 31, 2000 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 (Loss)
The Company recorded net (loss) income in the amounts of $(1,087,393) and
$14,439 during the years ended March 31, 2000 and 1999.
At March 31, 2000, the Company had a backlog of orders in the amount of
approximately $2,304,500, compared to approximately $1,123,000 at March 31,
1999. Management believes that the backlog will be comparable during the second
and third quarters of fiscal 2001. 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, 2000, the Company's working capital position was $(307,691), a
decrease of 161% when compared to that of March 31, 1999. Total stockholders'
equity at March 31, 2000 decreased to $50,941. The decrease in stockholders'
equity was due to net loss of $(1,087,393).
Cash flows from operations were $(123,178) and $390,864 during the years ended
March 31, 2000 and 1999. The decrease in cash flows from operations for 2000 as
compared to 1999 was due to the decrease in sales volumes. Accounts receivable
collection performance improved in 2000 as compared to 1999 with average days
outstanding of 45-60 days in 2000 as compared to 60-75 days in 1999. 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 $500,000
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 $63,660 and $316,611 during the years ended March 31,
2000 and 1999. The expenditures for 2000 and 1999 were for replacement of office
and production equipment. Of the total capital additions during the two year
period, approximately 46% were paid 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 in) financing activities were $191,621 and
$(229,842) during the years ended March 31, 2000 and 1999. The increase in cash
flows from financing activities during 2000 was due to net borrowing of $330,000
on the line of credit coupled with principal payments on outstanding leases of
$138,379. The line of credit, which matures annually each September, is expected
by management to be renewed during the normal course of business.
<PAGE>
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 2001 with an approximate 36% increase in sales
volumes as compared to the fourth quarter of fiscal year 2000. Sales revenues
for the first quarter of fiscal year 2000 are anticipated to be approximately
$750,000 resulting in an after tax net income of approximately $40,000. The
increase in the sales volumes and resulting net profit is due to a consistent
increase in the number of jobs closed by the sales consultants over the last two
quarters of fiscal 2000 and the first quarter of fiscal 2001. The backlog
continues to grow as more potential jobs are identified and closed by the sales
consultants. Management believes that sales volumes are expected to range
between $650,000 and $850,000 for the remaining quarters of fiscal year 2001,
with an anticipated total sales volume of $3,200,000. This volume should allow
the Company to generate an operating profit of approximately 7%. Management is
negotiating with its banking relationship to provide for long-term capital
through the refinancing of fixed assets, monitoring operating costs and making
the necessary adjustments to allow the Company to continue to be in a profitable
financial position during fiscal year 2001 and meet operating cash flow
requirements and debt service obligations. Management also continues to pursue
development of alternative revenue sources from other industries that can
benefit from the many artistic and creative resources within the Company. In
addition,.the company is considering introducing a software product based upon
its VuPoint presentation system. To finance the development of this new product,
management is considering alternative funding sources including venture captial
and a possible secondary offering.
Recent Accounting Pronouncements
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.
<PAGE>
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 effective date has been postponed by the
issuance of SFAS No. 137, to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. 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, 2000 and 1999.
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, 2000 and 1999 was as follows:
Bid Ask
-----------------------------------------------------
High Low High Low
----------- ----------- ----------- -----------
March 31, 2000:
First quarter $ 0.2500 $ 0.1875 $ 0.4375 $ 0.3750
Second quarter $ 0.1875 $ 0.1563 $ 0.3750 $ 0.1875
Third quarter $ 0.2188 $ 0.1250 $ 0.3750 $ 0.1875
Fourth quarter $ 0.6250 $ 0.1250 $ 0.8125 $ 0.2500
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
Quotations reported may represent prices between dealers, may not include retail
markups, markdowns or commissions and may not represent actual trades.
<PAGE>
Corporate Data and Stockholder Information
Directors: Officers:
Steven H. Cohen Steven H. Cohen
Chairman Chief Executive Officer
Member, Compensation Committee
Marvin A. Davis Alan Treibitz
Member, Compensation Committee President,
Chief Operating Officer,
Chief Financial Officer
Marilyn T. Heller Stephanie S. Kelso
Vice President, Sales
and Marketing
James E. Pacotti, Jr. Marilyn T. Heller
Member, Compensation Committee Secretary
Alan Treibitz
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
938 Quail Street, Suite 101 & Hottman PC
Lakewood, Colorado 80215 7979 E. Tufts Avenue,
Suite 400
Denver, Colorado 80237-2843
Dividends
---------
No dividends have been declared as of March 31, 2000 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, 2000, as filed with the
Securities and Exchange Commission, is available without charge upon written
request to the corporate Secretary.
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Income for the period ended March 31, 2000 and is
qualified in its entirety be reference to such financial statements.
(ARTICLE) 6
(TABLE)
(S) (C)
(PERIOD TYPE) 12-MOS
(FISCAL-YEAR-END) MAR-31-2000
(PERIOD-END) MAR-31-2000
(CASH) 25,867
(SECURITIES) 0
(RECEIVABLES) 989,406
(ALLOWANCES) 64,157
(INVENTORY) 0
(CURRENT ASSETS) 1,001,912
(PP&E) 1,552,008
(DEPRECIATION) 1,052,417
(TOTAL-ASSETS) 1,765,326
(CURRENT-LIABILITIES) 495,889
(BONDS) 0
(COMMON) 3,805
(PREFERRED-MANDATORY) 0
(PREFERRED) 0
(OTHER-SE) 1,134,529
(TOTAL-LIABILITY-AND-EQUITY) 1,765,326
(SALES) 3,748,053
(TOTAL-REVENUES0 3,748,053
(CGS) 0
(TOTAL-COSTS) 3,680,757
(OTHER-EXPENSES) 10,107
(LOSS-PROVISION) 0
(INTEREST-EXPENSE) 30,380
(INCOME-PRETAX) 26,809
(INCOME-TAX) 12,370
(INCOME-CONTINUING) 14,439
(DISCONTINUED) 0
(EXTRAORDINARY) 0
(CHANGES) 0
(NET-INCOME) 14,439
(EPS-BASIC) .00
(EPS-DILUTED) .00
(TABLE)
-----------------------------------------------------------------
<PAGE>
Z-AXIS CORPORATION
Financial Statements and
Independent Auditors' Report
March 31, 2000 and 1999
<PAGE>
Z-AXIS CORPORATION
Table of Contents
Independent Auditors' Report............................................1
Financial Statements
Balance Sheet.....................................................2
Statements of Operations..........................................3
Statements of Stockholders' Equity................................4
Statements of Cash Flows..........................................5
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, 2000 and the related statements of operations, stockholders' equity and cash
flows for the years ended March 31, 2000 and 1999. 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, 2000 and the results of its operations and its cash flows for the years
ended March 31, 2000 and 1999 in conformity with generally accepted accounting
principles.
Ehrhardt Keefe Steiner & Hottman PC
May 25, 2000
Denver, Colorado
<PAGE>
Z-AXIS CORPORATION
Balance Sheet
March 31, 2000
Assets
Current assets
Cash $ 61,374
Trade accounts receivable, net of
allowance of $67,636 (Note 3) 330,703
Other current assets 11,469
----------
Total current assets 403,546
----------
Property and equipment, at cost (Note 6)
Production equipment 1,185,513
Office equipment 311,737
Leasehold improvements 35,226
Accumulated depreciation and amortization (1,247,457)
----------
Net property and equipment 285,019
----------
Capitalized software cost, net of
accumulated amortization of $38,604 108,269
Other assets 10,722
----------
Total assets $ 807,556
==========
Liabilities and Stockholders' Equity
Current liabilities
Line-of-credit (Note 3) $ 400,000
Accounts payable 50,962
Accrued expenses (Note 4) 132,328
Customer deposits 21,000
Current portion of capital lease obligations (Note 6) 106,946
----------
Total current liabilities 711,236
Capital lease obligations (Note 6) 45,379
----------
Total liabilities 756,615
----------
Commitments (Notes 8 and 9)
Stockholders' equity (Note 10)
Common stock, $.001 par value,
10,000,000 shares authorized, 3,805,000 shares
issued and outstanding 3,805
Additional paid in capital 1,444,191
Accumulated deficit (1,397,055)
----------
Total stockholders' equity 50,941
----------
Total liabilities and stockholders' equity $ 807,556
==========
See notes to financial statements.
- 2 -
<PAGE>
Z-AXIS CORPORATION
Statements of Operations
For the Years Ended
March 31,
--------------------------
2000 1999
----------- -----------
Net sales (Note 7) $ 2,283,277 $ 3,748,053
----------- -----------
Operating expenses
Production 1,186,705 1,652,828
Research and development 111,909 99,151
General and administrative 722,428 764,539
Marketing 752,920 881,142
Initial start up of Concept 2 133,037 -
Depreciation and amortization 277,484 269,130
Amortization of software development costs 24,637 13,967
----------- -----------
Total operating expenses 3,209,120 3,680,757
----------- -----------
(Loss) income from operations (925,843) 67,296
Interest (expense) (44,152) (30,380)
Other income (expense) 9,424 (10,107)
----------- -----------
(Loss) income before income taxes (960,571) 26,809
Provision for income taxes (Note 5) 126,822 12,370
----------- -----------
Net (loss) income $(1,087,393) $ 14,439
=========== ===========
Net income per common share of stock
Basic $ (.29) $ -
=========== ===========
Diluted $ (.29) $ -
=========== ===========
Weighted average number of common shares
outstanding during the period:
Basic 3,805,000 3,800,726
=========== ===========
Diluted 3,805,000 3,850,216
=========== ===========
See notes to financial statements.
- 3 -
<PAGE>
Z-AXIS CORPORATION
Statements of Stockholders' Equity
For the Years Ended March 31, 2000 and March 31, 1999
<TABLE>
<CAPTION>
<C>
Number of Additional Total
Common Common Paid-in Accumulated Stockholders'
Shares Stock Capital Deficit Equity
------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1998 3,785,000 $ 3,785 $ 1,441,711 $ (324,101) $ 1,121,395
Exercise of options 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
Net (loss) - - - (1,087,393) (1,087,393)
------------ ----------- ------------- ------------ -------------
Balance, March 31, 2000 $ 3,805,000 $ 3,805 $ 1,444,191 $ (1,397,055) $ 50,941
============ =========== ============= ============ =============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
Z-AXIS CORPORATION
Statements of Cash Flows
For the Years Ended
March 31,
--------------------------
2000 1999
------------ -----------
Net (loss) income $ (1,087,393) $ 14,439
------------ -----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Deferred income taxes 120,205 12,370
Depreciation and amortization 277,484 269,130
Amortization of software development costs 24,637 13,967
(Gain) loss on sale of equipment (5,333) 13,253
Provision for bad debts 60,000 60,000
Changes in operating assets and liabilities
Trade accounts receivable 534,546 136,504
Other current assets 39,326 (3,840)
Other assets (10) 3,107
Accounts payable (51,825) (11,041)
Accrued expenses (27,815) (118,025)
Customer deposits (7,000) 1,000
------------ -----------
964,215 376,425
------------ -----------
Net cash (used in) provided by
operating activities (123,178) 390,864
------------ -----------
Investing activities
Purchase of property and equipment (39,018) (135,444)
Additions to software development costs - (146,873)
Proceeds from sale of property and
equipment 6,082 7,908
------------ -----------
Net cash used in investing activities (32,936) (274,409)
------------ -----------
Financing activities
Borrowing on line-of-credit 1,720,000 1,180,000
Payments on line-of-credit (1,390,000) (1,310,000)
Capital lease principal payments (138,379) (102,342)
Proceeds from the exercise of stock
options - 2,500
------------ -----------
Net cash provided by (used in) financing
activities 191,621 (229,842)
------------ -----------
Net increase (decrease) in cash 35,507 (113,387)
Cash, beginning of year 25,867 139,254
------------ -----------
Cash, end of year $ 61,374 $ 25,867
============ ===========
Continued on the following page.
See notes to financial statements.
- 5 -
<PAGE>
Z-AXIS CORPORATION
Statements of Cash Flows
Continued from the previous page.
Supplemental disclosures of cash flow information:
Cash paid for taxes was $2,439 and $0 for the years ended March 31, 2000 and
1999, respectively.
Cash paid for interest was $43,826 and $35,854 for the years ended March 31,
2000 and 1999, respectively.
Supplemental noncash disclosure:
Capital lease obligations were incurred in the amount of $24,642 and $181,167
during the years ended March 31, 2000 and 1999, respectively, when the Company
entered into capital lease agreements for certain production and office
equipment.
See notes to financial statements.
- 6 -
<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 an
electronic image presentation system for use in the courtroom called, "VuPoint."
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.
During the year ended March 31, 2000, the Company expanded their existing
consulting and presentation services, through Concept 2, to a new customer base
in the telecommunications and entertainment industry. The results of these
services did not meet management's expectations; therefore, the Company
discontinued such services.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over their estimated useful lives 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.
- 7 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
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, 2000 and 1999 were approximately $45,000 and $90,000.
- 9 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
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 at a percentage rate of total costs capitalized over the estimated
revenues earned on the sale of software.
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.
- 10 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 2 - Management's Plan
--------------------------
During the year ended March 31, 2000 the Company experienced a loss from
operations of approximately $926,000. Management believes that the loss was due
to a slow down in the general business services that support the litigation
industry and to the number of cases that were settled prior to trial or deferred
until 2001. At March 31, 2000, the Company had a backlog of orders in the amount
of approximately $2,304,500 and management believes that the backlog will be
comparable during the second and third quarters of fiscal 2001. The Company has
projected total sales for fiscal year 2000 to be $3,200,000. This volume should
allow the Company to generate an operating profit. Management's plans consist of
negotiating with its banking relationship to provide for long- term capital
through the refinancing of fixed assets. Finally, management is monitoring
operating costs and making the necessary adjustments to allow the Company to be
in a profitable financial position during fiscal year 2001 and meet operating
cash flow requirements.
Note 3 - Line-of-Credit
-----------------------
The Company entered into an agreement with a bank for a line-of-credit of
$500,000 due October 2000. The interest rate is calculated at 1% over the bank's
prime rate (10% at March 31, 2000) 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, 2000 was $400,000. The
agreement requires the Company to comply with certain restrictive and financial
covenants which the Company was not in compliance with at March 31, 2000. At
March 31, 2000, the Company had exceeded its borrowing base which was corrected
subsequent to year-end and the financial covenant violations have been waived.
Note 4 - Accrued Expenses
-------------------------
Accrued expenses consist of the following:
March 31,
2000
------------
Compensation $ 89,232
Other 43,096
------------
$ 132,328
============
Interest expense incurred on indebtedness to related parties was $1,240 and
$1,895 during the years ended March 31, 2000 and 1999, respectively.
- 11 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 5 - 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,
--------------------------
2000 1999
---------- ----------
Income tax expense at the
statutory rate $ (326,600) $ 9,115
State tax, net (31,700) 885
Non-deductible items 2,500 2,370
Valuation allowance and other 482,622 -
---------- ----------
$ 126,822 $ 12,370
========== ==========
Income tax expense consists of the
following:
Years Ended March 31,
--------------------------
2000 1999
---------- ----------
Current $ - $ -
Deferred 126,822 12,370
---------- ----------
$ 126,822 $ 12,370
========== ==========
The components of the current net
deferred tax assets are as follows:
March 31,
-----------------------
2000 1999
-------- ---------
Current
Deferred tax assets
Accounts payable and accrued
expenses $ 69,459 $ 157,000
Net operating loss
carryforwards 117,000 281,000
Valuation allowance (70,121) -
-------- ---------
Total deferred tax asset 116,338 438,000
-------- ---------
Deferred tax liabilities
Accounts receivable 112,439 420,000
Prepaid expenses and other
assets 3,899 18,000
-------- ---------
Total deferred tax liability 116,338 438,000
-------- ---------
Net current deferred tax asset $ - $ -
======== =========
- 12 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 5 - Income Taxes (continued)
---------------------------------
The components of the non-current net deferred tax assets are as follows:
March 31,
------------------------
2000 1999
------------------------
Non-current
Deferred tax assets
Net operating loss carryforwards $ 383,870 $ 177,780
Property and equipment 7,559 -
Valuation allowance (354,618) -
--------- ---------
Total deferred tax asset 36,811 177,780
--------- ---------
Deferred tax liabilities
Property and equipment - 7,735
Capitalized software cost 36,811 49,840
--------- ---------
Total deferred tax liability 36,811 57,575
--------- ---------
Net non-current deferred tax assets $ - $ 120,205
========= =========
At March 31, 2000 and 1999, the Company has total federal income tax loss carry
forwards of approximately $1,470,000 and $1,130,000, respectively which expire
in the years 2001 through 2020.
Note 6 - 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,
2001 $ 115,868
2002 46,886
2003 9,018
---------
Total future minimum lease payments 171,772
Less amount representing interest (19,447)
---------
Present value of minimum payments
under capital leases
152,325
Less current portion (106,946)
---------
$ 45,379
=========
- 13 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 6 - 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 $397,377 at
March 31, 2000. The related accumulated depreciation was $257,191 at March 31,
2000.
Note 7 - Major Customers
------------------------
The Company's revenues are concentrated in a few customers as follows:
For the Years Ended
March 31,
------------------------
2000 1999
------------------------
Sales:
Customer A - 13.46%
Customer B 32.55% 18.10%
Customer C - 12.02%
Note 8 - Commitments
--------------------
The Company leases its offices and production facility under the terms of
operating leases. The lease term commenced on August 1, 1996 and extends for a
sixty-month period ending in July, 2001.
Future minimum payments required under the terms of the lease are as follows:
Years Ending March 31,
----------------------
2001 $ 125,068
2002 41,552
---------
$ 166,620
=========
Rent expense was $135,362 and $133,409 for the years ended March 31, 2000 and
1999, respectively.
- 14 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 9 - 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 $4,518 and
$4,909 during the years ended March 31, 2000 and 1999, 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 $0 and $12,125 during the years ended March 31, 2000
and 1999, respectively, under the terms of the Profit Sharing Plan.
Note 10 - 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, 2000 and 1999 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 300 percent for 2000 and 54
percent for 1999; risk-free interest rates of 6.03 percent for 2000 and 5.45
percent for 1999; and expected lives of 10 years for 2000 and 1999 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 2000 and 1999.
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<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 10 - Incentive Stock Option Plan (continued)
-------------------------------------------------
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,
--------------------------
2000 1999
--------- -----------
Net (loss) income
As reported $ (1,087,393) $ 14,439
Pro forma $ (1,096,768) $ 6,008
Basic earnings per share
As reported $ (.29) $ -
Pro forma $ (.29) $ -
Diluted earnings per share
As reported $ (.29) $ -
Pro forma $ (.29) $ -
A summary of the status of the Company's stock option plan follows:
<TABLE>
<CAPTION>
Exercise Price Exercisable
Shares Per Share Shares
-------- --------------- -----------
<S> <C> <C> <C>
Outstanding balance at March 31, 1998 135,000 .1875 - .2063 135,000
Options granted 64,000 .1875 - .2063 64,000
Options exercised (20,000) .1250 (20,000)
-------- --------------- -----------
Outstanding balance at March 31, 1999 179,000 .1250 - .2063 179,000
Options granted 25,000 .3750 25,000
Options cancelled (40,000) .1250 (40,000)
Options exercised - - -
-------- --------------- -----------
Outstanding balance at March 31, 2000 164,000 $ .1250 - .3750 164,000
======== =============== ===========
</TABLE>
The weighted average fair value of options granted during the years ended March
31, 2000 and 1999 were $.375 and $.13, respectively.
- 16 -
<PAGE>
Z-AXIS CORPORATION
Notes to Financial Statements
Note 10 - Incentive Stock Option Plan (continued)
-------------------------------------------------
The following table summarizes information about stock options outstanding at
March 31, 2000:
Weighted
Average
Number Weighted Weighted
Outstanding Remaining Average
and Contractual Exercise
Range of Exercise Prices Exercisable Life Price
----------- ----------- --------
$.1250 - .3750 164,000 8.6 $ 0.23
============== =========== =========== ========
- 17 -
<PAGE>
