SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1996.
Commission file number 0-12283.
ZONIC CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0791199
_______________________________ ________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park 50 TechneCenter, 50 W. TechneCenter Drive, Milford, Ohio 45150-9777
______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 248-1911
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Without Par Value
______________________________________________________________________________
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1996 was $468,296.
The number of shares outstanding of the registrant's Common Shares as of March
31, 1996 was 3,044,136.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the August, 1996 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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PART I
Item 1. Business.
General
Zonic Corporation designs, manufactures and markets fully integrated
standard systems used to analyze and predict noise and vibration
characteristics of mechanical structures. The Company utilizes a number of
technologies in its systems, including digital signal processing, high speed
multichannel data acquisition and processing, structural modal analysis, noise
analysis, and computerized machinery monitoring.
The Company's systems are used world-wide in engineering testing and
machinery condition monitoring. The Company's testing systems are designed to
enable engineers engaged in the product design process to shorten development
time and improve product quality by evaluating and redesigning products
without the cost and delay associated with constructing physical prototypes.
The Company's monitoring systems allow operators of turbines, compressors and
other large rotating machinery to monitor wear, schedule maintenance before
failures occur and optimize operating performance. The Company's systems have
also been used in the field of non-destructive production testing. These
systems are designed to provide a cost effective method to improve product
quality by allowing for one hundred percent inspection of component parts.
Industry-Applications and Technology
Engineering Testing. Increasing global competition in the industries
served by the Company has made the development and introduction of new
products on a timely, cost effective basis vital to a manufacturer's success.
As a result, product design engineers are constantly challenged to shorten
product design cycles and improve product quality. Computer Aided Engineering
(CAE) systems are vital tools in helping engineers achieve these goals.
Lack of noise and vibration are key measures of product quality.
Traditional methods of assessing noise and vibration characteristics of a
product involve the costly and time consuming process of building, testing and
revising physical prototypes. In contrast, CAE systems allow new products to
be evaluated and redesigned through the use of computer software. Once an
acceptable design has been developed, an actual prototype can be tested to
confirm the computerized analysis. This change can significantly reduce the
amount of time required to design new products.
Machinery Monitoring Systems (MMS). Turbines, compressors and other
types of large, rotating machinery designed to operate continuously for many
years are used extensively in the petrochemical and power generation
industries. Breakdown of the machinery can be extremely expensive, both in
terms of lost production and repair cost.
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Machinery Monitoring Systems utilize high-speed digital signal processing
technology and sophisticated monitoring software to continuously monitor
vibration, temperature, pressure and flows in this type of machinery. Current
operating characteristics can be compared to a "baseline" obtained when the
machine was new. This comparison can be used to monitor wear in bearings,
blades, and other parts, and to predict failures. The analysis can be
conducted automatically without the presence of a skilled engineer at the
equipment site. Predictions can be used to schedule maintenance before
catastrophic breakdowns occur.
Monitoring large, rotating machinery requires rapid collection,
management, and analysis of vast amounts of data. Once this data is
available, it can be used to monitor the performance and efficiency of the
machinery. Machinery Monitoring Systems can be developed to adjust operating
parameters of the equipment to maximize output and minimize fuel cost.
Non-Destructive Testing (NDT). Demands for high quality products are
forcing manufacturers to find ways to eliminate defects in parts used in the
assembly of their products. Interest is growing in using 100 percent parts
inspection as a method of accomplishing this goal. Although a variety of
techniques are available to inspect parts, vibration analysis systems offer
several important benefits. Vibration analysis systems are designed to be
inexpensive, efficient, and allow detection of cracks and internal flaws in a
part that cannot be detected by physical inspection.
When a vibration analysis system is used for non-destructive production
testing, the vibrational characteristics of an approved part are measured and
used as a baseline. As each part is produced, it is tested and compared to
this baseline. Parts that do not match can be rejected or more thoroughly
inspected.
The Company believes that its expertise in acquisition and analysis of
vibration data position it well to take advantage of these opportunities in
the non-destructive testing field. For example, the Company's systems have
been used by automotive parts suppliers to conduct non-destructive testing of
steering knuckles, drive shaft yokes and other automobile components.
Relationships
In 1988, the Company established a relationship with A&D Company Ltd.
(A&D), a Japanese instrument manufacturer. As part of this relationship,
A&D acquired a 28% ownership interest in the Company; and the Company and A&D
engaged in joint product development and marketing efforts. The Company
benefited from this relationship, as funding and hardware manufacturing
expertise supplied by A&D coupled with the Company's expertise in the design
of hardware and software used in noise and vibration analysis systems enabled
the Company to expand its product development and marketing efforts, which
included the World Class Analyzer product line ("WCA Product"), previously
owned 60% by A&D and 40% by the Company.
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In December 1992, the Company entered into a Credit Agreement (the
"Credit Agreement") with A&D, whereby the Company had borrowed up to an
aggregate of $2,480,000 in loans from A&D. As consideration for the making of
loans and issuance of guaranties under the Credit Agreement by A&D, the
Company granted A&D a stock option for 1,000,000 shares of the Company's
common stock (the "Common Stock") and executed a Control Agreement (the
"Control Agreement") whereby the Company granted A&D the right to purchase a
sufficient number of shares of the Common Stock to give A&D a majority of all
the then issued and outstanding shares of Common Stock in the event the
Company violates the Credit Agreement.
In June 1995, the Company sold its 40% interest in the WCA Product to
A&D, the owner of the remaining 60% ownership interest in the WCA Product,
pursuant to a WCA Rights Sale Agreement. The Company's ownership interest in
the WCA Product sold to A&D included intellectual property, know-how,
drawings, source and machine executable software, manufacturing drawings,
manufacturing fixtures, manufacturing procedures, and marketing and
distribution rights.
The Company sold its 40% interest in the WCA Product for total
consideration of $2,397,275. $2,000,000 represents the purchase price and was
used to repay a portion of existing indebtedness to A&D under the Credit
Agreement. The remaining $397,275 constituted accrued but unpaid interest on
loans made by A&D to the Company which was forgiven by A&D. The purchase
price was determined through arms-length negotiation and was based upon the
following factors: (1) an analysis of estimated WCA Product sales over a five-
year period; (2) a calculation of the Company's 40% interest in the estimated
WCA Product sales; (3) future interest expense reduction resulting from the
interest forgiveness and reduced debt outstanding; and (4) the amount of the
debt reduction.
In conjunction with the sale of the Company's interest in the WCA
Product, the credit limit under the Credit Agreement was reduced from
$6,000,000 to $4,000,000. Borrowing by the Company under the Credit Agreement
currently consists of $3,500,000 in bank loans guaranteed by A&D and $680,000
in loans made by A&D. A&D has waived this indebtedness in excess of the
credit limit as a violation of the Credit Agreement. The Company has no
further ability to borrow under the Credit Agreement. In addition, the
Control Agreement was terminated, such that A&D no longer has the right to
purchase a controlling interest in the Company. (See Note D of Notes to
Financial Statements.)
The Company and A&D also entered into an Amendment to the Distribution
Agreement (the "Amendment") which added the WCA Product to the existing
Product Distribution Agreement, dated October 7, 1988, between the Company and
A&D. Pursuant to the Amendment the Company and A&D agreed to customize
certain operational features of the WCA Product software and provide the
Company with technical information and advice. A&D also granted the Company
the right to configure, assemble, test and support WCA systems for sale to end
users or agents, as well as an unlimited license to manufacture all printed
circuit boards, assemblies and other items which are specific to the
construction of WCA Portable systems.
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In April 1991, the Company entered into a marketing agreement with
Structural Dynamics Research Corporation ("SDRC"), a leading supplier of
computer aided engineering software, to market three software products
developed by SDRC for engineering testing applications. The use of these
software products with the Company's Workstation 7000 multichannel signal
processors enhances the capabilities of these systems in engineering testing
applications.
In February 1996, the Company entered into an OEM Distribution and
Confidentiality Agreement (the "Spectral Agreement") with Spectral Dynamics,
Inc. ("Spectral"). Pursuant to the Spectral Agreement, Spectral markets and
distributes certain of the Company's manufactured equipment on a non-exclusive
basis. The Company and Spectral also agreed in the Spectral Agreement to join
forces to identify and develop new products.
Products
Noise and vibration systems require both hardware and analysis software.
Unlike many of its competitors, the Company designs and manufactures fully-
integrated standard systems that can be used without additional equipment.
The capability of a noise and vibration analysis system is typically
ranked by the number of channels of data that can be collected simultaneously.
A channel generally corresponds to data measured at a single point on a
structure. The Company offers a full range of systems from single channel
systems to those that can acquire over 1,000 channels of data simultaneously.
Engineering Testing Products. The Company offers a broad range of
products for use in Engineering Testing applications. These products include:
- Zonic A&D 3527 Portable Analyzer - The 3527 Analyzer is an
economical, hand held single channel unit used for limited data collection in
a production plant environment. The 3527 Analyzer sells for approximately
$4,000.
- Zonic A&D 3524/25 Analyzer - These two channel analyzers offer a
broad range of pre-programmed analysis functions and are particularly useful
for spectrum and noise analysis. This product has a price range of
approximately $15,000 to $25,000.
- Zonic A&D Series 4000 WCA (World Class Analyzer) - The WCA
Product can be configured to acquire 2 to 32 channels of data, has a broad
range of analysis capabilities, and a full color graphical user interface. It
is integrated with an Apple Macintosh computer which enables it to provide a
wide range of display and output options. A WCA Portable model makes it
possible to acquire and analyze data at field locations. The WCA Product
ranges in price from approximately $25,000 to $100,000. See "Business -
Research and Development and Software Construction" for a description of
research and development costs; "Business - Relationships."
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- Zonic Medallion Series Mobile FFT Analyzer - This analyzer is a
portable, instrument grade, multichannel FFT Analyzer offering an open
software environment under Microsoft's Windows 95 and NT operating
systems. It provides simultaneous FFT analysis on eight input channels and
one output channel. This product has a price range of approximately $13,000
to $20,000.
- Zonic Workstation 7000 - The Workstation 7000 products generally
fall into two size categories, smaller systems which can accommodate 8 to 96
channels of data, and larger systems which can be configured to acquire over
1000 channels of data. These products utilize the Company's proprietary
parallel digital signal processing technology which is designed to give it the
capability to efficiently acquire, analyze, and manage large quantities of
data. The modular design allows the systems to be configured to the customers
needs.
The larger 7000 systems' large capacity for data analysis makes it
particularly useful in testing large structures. For example, the system is
used by the National Aeronautics and Space Administration ("NASA") to test the
space shuttle orbiter and other space vehicles for structural integrity.
These systems sell from $100,000 to more than $2,000,000.
The smaller 7000 system is used in the automotive and other machinery
industries to analyze the properties of moderate-sized structures. These
systems range in price from approximately $50,000 to $150,000.
The 7000 is also designed to interface with CAE (Computer Aided
Engineering) software developed by SDRC. The SDRC software performs a variety
of engineering functions including testing. The 7000 can be used to acquire
the vibration and acoustical data required by the testing programs in the SDRC
software. The Company has a marketing and distribution agreement with SDRC.
See "Business - Relationships."
- Zonic PC7000 Multichannel Analyzer and Software Suite - The PC7000
allows the Workstation 7000 to be operated from a PC using the Windows NT
operating system and provides the tools to measure, analyze and document noise
and vibration problems. This product has a price range of approximately
$25,000 to $150,000.
- Zonic XCITE Hydraulic Exciters - The exciter is a key part of
the process for testing the vibrational characteristics of a structure. The
exciter applies known, controlled forces to the structure in order to induce
vibration, which in turn can be measured and analyzed by one of the systems
described above. A variety of XCITE products are offered to provide all types
of excitation, with a price range of approximately $35,000 to $100,000.
- Machinery Monitoring Systems - The Company designs, assembles, and
markets systems for machinery monitoring. These products are targeted toward
large petrochemical processing and electric power generation plants. Such
plants have large rotating compressors and generators that may run
continuously for several years. Often this equipment is unattended and is
checked infrequently by maintenance personnel.
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The Company's Machinery Monitoring Systems measure vibrational
characteristics and operating parameters (pressures, temperatures, speeds,
etc.) at predetermined intervals. The systems record, store, organize and
analyze massive amounts of data. The systems also perform analytical
functions to assist maintenance personnel in monitoring the equipment.
The Company's Machinery Monitoring Systems compare current vibrational
characteristics with a baseline determined when the equipment was new. Based
on this comparison, the systems are designed to monitor wear and predict
possible failure before it occurs. They can also be programmed to broadcast
alarms or even shut down the machine if certain parameters exceed
predetermined levels. Machinery Monitoring Systems also can be programmed to
use the operating data they collect to calculate adjustments to operating
parameters that will maximize efficiency and minimize fuel usage.
Because each large petrochemical and power generation plant is unique,
each Machinery Monitoring System is tailored to measure the operational
characteristics of specific machines and to meet the needs of each customer.
Machinery Monitoring Systems prices range from several hundred thousand to
over $2,000,000 depending on the requirements of the installation.
- Non-Destructive Production Testing Products - Applications of the
Company's systems for Non-Destructive Production Testing ("NDT") are numerous.
This is a growing market as manufacturers look for ways to improve product
quality. One way to improve quality is to eliminate defects in component
parts and assemblies. The Company's systems can be used for efficient, cost
effective 100% inspection. The price of the Company's Non-Destructive Testing
systems range from approximately $20,000 to $25,000 per production line.
Marketing and Distribution
The Company markets its Engineering Testing and Non-Destructive Testing
systems primarily to original equipment manufacturers and suppliers in the
aerospace and transportation industries, while its Machinery Monitoring
Systems are marketed primarily to petrochemical manufacturing facilities and
power generation plants.
The Company sells its products world-wide. Export sales accounted for
56%, 40% and 45% of the Company's net revenue during the fiscal years ended
March 31, 1996, 1995 and 1994, respectively. See Note G of Notes to Financial
Statements.
As part of their relationship, the Company and A&D have jointly
established a marketing network to sell both companies' products in various
parts of the world. Zonic A&D Company, a general partnership between the
Company and a subsidiary of A&D was established in 1988 and markets both
companies' products in the Western Hemisphere. A&D sells both companies'
products in the Japanese market. The Company sells its own products in the
remainder of the world. The Company also has an agreement with Spectral
whereby Spectral markets and distributes certain of the Company's manufactured
equipment on a non-exclusive basis. See "Business - Relationships."
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Except as described herein, the Company's products are sold directly
through independent manufacturers' representatives and agents. Zonic A&D
Company employs regional sales managers who handle direct sales and supervise
the activities of the Company's manufacturers' representatives and agents.
Major Customers
During the fiscal year ended March 31, 1996, one customer accounted for
10% or more of the Company's total revenues totaling $396,000 or 11% of total
revenues. (See Note H of Notes to Financial Statements.)
Manufacturing and Supplies
In manufacturing its systems, the Company utilizes custom designed
electronic components, custom machined parts and, to the extent feasible,
commercially available devices such as integrated circuits, power supplies,
servo-valves and CRT monitors. The Company also purchases engineering work
stations and personal computers which are used in the assembly of its
products.
The Company purchases several component parts from single source
suppliers. If these single source suppliers are unable to supply the Company
with needed parts, or to supply them on schedule, material production delays
could occur.
Service, Maintenance and Warranty
The Company provides a one year limited warranty for all hardware
products, and a ninety day limited warranty for software products. The
Company will repair, or at its option replace, defective products returned to
its Milford, Ohio, location. The customer must pay shipping expenses. As an
alternative, service technicians employed by the Company will provide repair
service at the customer's location if the customer pays travel expenses.
Service for products sold overseas is generally provided by the distribution
company that sells the Company's product in that country. See "Business -
Marketing and Distribution." The Company's warranty expense was 3.1%, 3.0%
and 2.8% of revenue for fiscal 1996, 1995 and 1994, respectively.
The Company also sells extended warranty service contracts. These
contracts are for one year and extend the original warranty provisions.
Owners of extended warranty service contracts are also entitled to receive,
without additional cost, all software upgrades issued during the year for that
product.
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Research and Development and Software Construction
Research and product development and software construction is an
important factor in the Company's business. The Company maintains an internal
staff of 8 full-time employees for the development of new products and
software, as well as the improvement and refinement of its present products
and the expansion of their uses and applications. There can be no assurance
the Company will be successful in developing new products or software or
improving existing products or software. Moreover, there can be no assurance
that the introduction of new products or technological developments by others
will not materially adversely affect the Company's operations. The Company
has significantly reduced its research and product development and software
construction during the last three fiscal years.
Software construction and product enhancement costs totaling $252,000,
$276,000 and $738,000 were capitalized during fiscal years 1996, 1995 and
1994, respectively. Software construction and product enhancement
amortization expenses for fiscal years 1996, 1995 and 1994 were $722,000,
$853,000 and $1,231,000, respectively. The Company expensed $12,000, $35,000
and $406,000 for research and product development for fiscal years 1996, 1995
and 1994, respectively. In addition, the Company wrote off $79,000 and
$2,759,000 of previously capitalized costs in the fiscal years ended March 31,
1996 and 1994, respectively. See Note A of Notes to Financial Statements.
Patents
The Company's primary focus in the area of research and development is
the development of data acquisition, digital signal process electronics, and
related software. The Company holds three patents. In the opinion of
management, the Company's present position and its future progress are a
function of the level of excellence and creativity of its technical staff;
patent protection is useful, but of secondary importance.
Competition
The Company markets a full range of standard products for use in
analyzing noise and vibration from single channel systems to systems that
process over 1,000 channels of data. There are different competitors in each
market segment. See "Business - Products."
Many of the Company's competitors offer only hardware or software
components of a noise and vibration analysis system. Thus, a customer
purchasing products from those competitors must integrate components in order
to have the complete system necessary to conduct noise and vibration analysis.
The Company provides its customers with fully integrated systems that include
both the hardware and software necessary for the customer to conduct noise and
vibration analysis.
Competition in the market for noise and vibration analysis systems is
generally based on product features. Customers select a particular system
based on how well they perceive it will meet their particular needs. Price is
generally a secondary consideration, although the system selected must fit
within the customer's equipment budget. The Company has designed its products
with a wide range of capabilities so that those products will meet a variety
of customer needs.
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Competitors in the market for one and two channel analyzers include
Hewlett-Packard Corporation, Ono Sokki (a Japanese company), Scientific
Atlanta Corporation, and Bruel & Kjaer (a Danish company).
Competitors in the market for the company's mid-range (WCA Product) and
large (System 7000) analyzers until recently offered either hardware or
software solutions. Competitors selling only hardware include Hewlett-Packard
Corporation and Bruel & Kjaer (a Danish company). Suppliers of only software
solutions are Spectral Dynamics Corporation, Vibrant Technology Inc., Leuven
Measurement Systems NA (a Belgium company), and Structural Dynamics Research
Corporation. A combination of hardware from one competitor and software from
another is required to compete with one of Zonic's integrated systems.
Recently, Leuven Measurement Systems NA, and Data Physics Corporation, have
begun to offer turnkey solutions including hardware, software, and system
integration.
Competitors in the market for large Machinery Monitoring Systems include
SKF Corporation and Bentley Nevada Corporation. Competitors in this market
may also include custom systems developers who develop specialized one-of-a-
kind systems.
Several of the Company's and Zonic A&D Company's competitors, including
the above, have financial, technical, research, distribution and personnel
resources that exceed those of the Company and Zonic A&D Company. There can
be no assurance that the Company and Zonic A&D Company can continue to
effectively compete against such companies, or that other competitors will not
emerge. Competition is intense in all product lines and, in many cases,
requires significant discounts from list prices being passed on to customers.
Product Backlog
The Company's product and services backlog of orders believed to be firm
as of March 31, 1996 and March 31, 1995 were $1,470,000 and $1,574,000,
respectively. The backlog for both years includes orders placed by A&D and
Zonic A&D Company.
Generally, orders can be processed and shipped on products not requiring
modifications in 15 to 45 days if requested by the customer. Certain orders
are processed and shipped on a longer cycle due to customer delivery requests
or because of modifications ordered by a customer. Orders are subject to
cancellation upon certain conditions.
Employees
As of March 31, 1996, the Company had 26 employees, exclusive of those
employed by Zonic A&D Company. Many of the Company's employees are highly
skilled. The Company's continued success will depend in part on its ability
to attract and retain such employees. None of the Company's employees are
represented by a labor organization. The Company believes its relations with
its employees are good.
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Item 2. Properties.
The Company's executive offices and manufacturing facilities, and the
executive offices and sales facilities of Zonic A&D Company, are located at
Park 50 TechneCenter, 50 West TechneCenter Drive, Milford, Ohio. The leased
premises consists of approximately 16,500 square feet of which about 8,000
square feet is office space. The lease also provides the Company with the
option to lease additional contiguous space during the term of the lease. The
Company anticipates that this facility will accommodate the Company's needs
for the near future. The lease for the premises expires December 31, 2000.
In September 1993, the Landlord of the leased premises was granted warrants to
purchase up to 100,000 shares of the Company's Common Shares at $2.00 per
share in consideration of the Landlord waiving payment of all unpaid rent,
late charges, interest and penalty amounts due and owing from the Company as
of March 31, 1993 which amounted to $250,000. The warrants expire on March
31, 2000.
Zonic A&D Company occupies approximately 1,000 square feet of these
premises. The Company is providing the space to Zonic A&D Company on a rent-
free basis pursuant to the Company's agreement with A&D Co. of Japan.
Item 3. Legal Proceedings.
The Company and its subsidiaries occasionally are involved in ordinary
routine litigation incidental to their business. Neither the Company nor its
subsidiaries are involved in any material pending litigation not covered by
insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters.
(a) The Company's Common Shares were traded in the automated quotation
system of the National Association of Securities Dealers, Inc. (NASDAQ) under
the symbol "ZNIC". Effective June 18, 1993, the Company's stock price was no
longer reported by NASDAQ due to the Company's inability to maintain the
minimum capital and surplus required by the NASDAQ listing requirements.
The Company's Common Shares are currently listed over-the-counter on the
"OTC Bulletin Board" through the National Daily Quotation Bureau, Inc.;
therefore, there is only limited trading in the Company's Common Shares.
Quarterly trading information is not available.
(b) As of March 31, 1996, there were approximately 622 holders of record
of the Company's Common Shares, without par value, the Company's only class of
common equity. On March 31, 1996, there were 3,044,136 Common Shares of the
Company outstanding.
(c) The Company did not pay any dividends during the fiscal years ended
March 31, 1996 and March 31, 1995.
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Item 6. Selected Financial Data.
The following financial data is provided for the Company and its
subsidiaries for the five preceding fiscal years.
1996 1995 1994 1993 1992
____ ____ ____ ____ ____
Net revenues $3,639,982 $4,860,036 $4,629,665 $7,091,400 $10,302,496
Profit (Loss)
before extra-
ordinary item (9,969) (1,366,481) (6,135,649) (2,871,008) 93,242
Profit (Loss) 387,306 447,648 (6,135,649) (2,871,008) 469,645
Primary Earnings
Net Profit (Loss)
Per Share $.13 $.14 $(1.99) $(.94) $.15
Fully Diluted
Earnings (Loss)
Per Share:
Net profit (loss)
before extra-
ordinary item 0 $(.44) $(1.99) $(.94) $.03
Extraordinary
item - benefit of
utilization of
loss carryforward $.13 $.58 -0- -0- $.12
Net profit (loss) $.13 $.14 $(1.99) $(.94) $.15
Total Assets $3,242,766 $4,387,721 $5,628,446 $10,924,800 $11,624,928
Long-term
obligations
(including
long-term
debt and
capital
leases less
current
maturities) $4,070,000 $6,018,761 $7,587,311 $7,689,571 $5,711,963
Cash dividends
declared per
common share -0- -0- -0- -0- -0-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
The following Management's Discussion and Analysis should be read in
conjunction with the financial statements and notes thereto which follow.
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Results of Operations
1996 versus 1995
Revenues
Total revenues decreased $1,220,000 or 25% in 1996 from the prior year.
Sales decreased in all product lines with the most significant declines in the
Company's structural excitation and Machinery Monitoring System product lines
as the Company experienced delays in receiving orders. Sales in both periods
were geographically diverse and not dependent on any one customer nor specific
region of the world. (See Notes G and H of Notes to the Financial
Statements.) Price increases did not have a significant impact on sales. As
a percentage of total revenues, sales to domestic customers decreased in 1996
to 44% compared to 60% in 1995 and 55% in 1994. A foreign government was the
Company's largest customer which accounted for 11% of total sales in 1996,
while the U.S. government accounted for 13% of total sales in 1995.
Cost of Products and Services Sold
Cost of Products and Services sold as a percentage of revenues increased
to 52% in 1996 versus 49% in the prior year, mainly due to lower profit
margins on two Workstation 7000 sales recorded earlier this fiscal year, and
higher material costs related to WCA sales.
Selling and Administrative Expenses
Selling and administrative expenses decreased by $471,000 in 1996 from
the prior year due primarily to lower commissions to sales representatives and
the reduction of facility related costs. However, as a percentage of total
revenue, these expenses increased slightly to 45% in 1996 compared to 43% in
1995 as the result of revenues being significantly lower in 1996 versus 1995.
Research and Development and Software Construction and Product Enhancement
Amortization
Research and development and software construction and product
enhancement amortization decreased from 888,000 in 1995 to 734,000 in 1996.
This decrease is primarily attributable to the sale of the Company's interest
in the WCA product in June of this year. Research and development expenses
decreased to $12,000 in 1996 versus $35,000 in 1995. The Company capitalized
certain costs related to significant improvements in its products which are
incurred after technological feasibility of the product is established. Such
costs are amortized over the estimated useful life of the improvements. (See
Liquidity and Capital Resources which follows and Note A-3 of Notes to the
Financial Statements.)
Costs Related to Management Change and Product Discontinuance
In December, 1995, the President and Chief Executive officer of the
Company resigned. The Company has accrued certain costs related to the
resignation. Also, the Company recorded an expense for the write-off of a
development project that will not be completed. Costs related to both of these
events totaled $455,682 (See Liquidity and Capital Resources which follows and
Note B of Notes to the Financial Statements.)
page 13
<PAGE>
Gain on the Sale of Asset
In June, 1995, the Company sold its 40% ownership of the WCA Product to
A&D Company Ltd. The gain on the sale of this asset was $1,417,027 and is net
of the unamortized portion of Capitalized Development for the WCA product.
(See Liquidity and Capital Resources which follows and Note C of Notes to the
Financial Statements.)
Interest Expense
Interest expense decreased to $486,000 in 1996 from $750,000 in 1995 due
to reduced borrowing levels as the result of the Company restructuring its
bank loans during the fourth quarter of last year and the use of proceeds from
the sale of its WCA Product to repay debt in June of this year. The effect of
this decrease in borrowings was partially offset by interest costs related to
the sale of trade accounts receivable and higher interest rates earlier this
year. Interest capitalized which related to software construction and product
enhancements amount to $5,000 and $20,000 in 1996 and 1995, respectively.
Foreign Currency Losses
Foreign currency gains amounted to $131,000 in 1996 compared with a loss
of $108,500 in 1995. These gains were due to the increase in value of the
U.S. dollar against the Japanese yen.
Extraordinary Item-Gain on Debt Restructuring
In conjunction with the sale of its WCA Product in June, 1995, accrued
interest totaling $397,275, was forgiven. This amount represents interest due
on loans made by A&D Company Ltd. to the Company under the Credit Agreement
between the Company and A&D Company Ltd. dated December 7, 1992. There is no
net tax effect of the gain. (See Liquidity and Capital Resources which follow
and Note C of Notes to the Financial Statements.)
Results of Operations
1995 versus 1994
Revenues
Total revenues increased $230,000 or 5% in 1995 from the prior year with
revenues from products and services increasing 13% in the comparative periods.
Sales in both periods were geographically diverse and not dependent on any one
customer nor specific region of the world. (See Notes G and H of Notes to
Financial Statements.) Price increases did not have a significant impact on
sales. As a percentage of total revenues, sales to domestic customers
increased in 1995 to 60% compared to 55% in 1994. The US Government was the
Company's largest customer in both 1995 and 1994 accounting for 13% and 19% of
total sales respectively. Significant increases in revenues form the
Company's Workstation 7000 multichannel analyzer and structural excitation
products were partially offset by a decline in WCA Product revenue in 1995
when compared to 1994.
page 14
<PAGE>
No development contracts or other revenue were recorded in 1994 as
compared to $338,000 recorded in 1994 because the contracts with A&D Company
Ltd. generating such revenue were completed in 1994.
Cost of Products and Services Sold
Cost of Products and Services sold decreased by $68,500 in 1995 from the
prior year despite an increase in revenue primarily due to the product sales
mix changes in 1995 from 1994 and improvements in productivity undertaken by
the Company. As a percentage of products and services revenue, these costs
decreased to 49% in 1995 versus 57% in 1994.
Selling and Administrative Expenses
As a percentage of total revenue, selling and administrative expenses
decreased to 43% in 1995 compared to 49% in 1994. Significant reductions in
employee benefits and facility related costs were realized from the reduction
of employees and relocation of the Company's offices in prior years.
Research and Development and Software Construction and Product Enhancement
Amortization.
Research and development and software construction and product
enhancement amortization decreased from $1,638,000 in 1994 to $888,000 in
1995. This decrease is primarily attributable to the writedown taken in prior
periods on the amount of capitalized software and product enhancements
previously capitalized. (See Note A of Notes to Financial Statements.)
Research and development expenses decreased to $35,000 in 1995 versus $406,000
in 1994. This decrease relates to a specific project completed in 1994 for
which there was no similar expense in 1995. The Company capitalizes certain
costs related to significant improvements in its products which are incurred
after technological feasibility of the product is established. Such costs are
amortized over the estimated useful life of the improvements. (See Liquidity
and Capital Resources which follows and Note A of Notes to the Financial
Statements.)
Bad Debt Expense -- Affiliate.
No costs were incurred for affiliate bad debt in the year ended March 31,
1995. In 1994, the Company had recognized bad debt expense of $481,000 and
$200,000 for potential write-offs of accounts receivable due the Company from
Zonic A&D Ltd. and Zonic A&D Company, respectively. In 1995, the Company
reduced operations of Zonic A&D Ltd. and traded through direct agents in
Europe. (See Note J of Notes to the Financial Statements.)
Loss from Affiliate.
During 1994, the Company recognized a loss of $90,000 for a loan made by
A&D Company to Zonic A&D Company which the Company assumed. Also in 1994, the
Company recorded an allowance of $50,000 for costs associated with the
possible dissolution of Zonic A&D Ltd. Those losses are limited to the
Company's investment in those affiliates and the Company is not committed to
fund any additional losses.
page 15
<PAGE>
Interest Expense.
Interest expense increased to $750,000 in 1995 from $570,000 in 1994 due
to increases in interest rates and a reduction in the amount of interest
capitalized related to software construction and product enhancements.
Interest amounting to $20,000 was capitalized in 1995 as compared to $67,000
in 1994.
Foreign Currency Losses.
Foreign currency losses amounted to $108,500 in 1995 compared with
$34,000 in 1994. These losses are due primarily to the decline in value of
the dollar against the Japanese yen.
Extraordinary Item-Gain on Debt Restructuring.
In March, 1995, the Company extinguished $2,422,879 of short-term bank
debt and interest with a cash payment of $600,000 and issuance of warrants for
350,000 common shares. The resultant gain of $1,814,129 is net of the
valuation of the warrants and net of taxes. (See Note D of Notes to the
Financial Statements.)
Liquidity and Capital Resources.
In June 1995, the Company used proceeds from the sale of its rights in
the WCA Product totaling $2,000,000 to repay debt owed to A&D Company.
Repayment of the then remaining $480,000 was extended to June 30, 1997. In
addition, the Company has received additional short-term loans of $200,000
from A&D as of March 31, 1996 which are repayable upon the collection of
certain receivables. Also, the Company has a $600,000 short-term note payable
to a bank which is guaranteed by A&D due on September 15, 1996. The Company
anticipates that the repayment date will be extended through fiscal 1997.
Working capital decreased to a negative $1,966,000 as of March 31, 1996
from a negative $1,457,000 in 1995. This decline is mainly due to the
increase in deferred income resulting from billings pursuant to the terms of a
contract in excess of revenues earned. The decrease in accrued liabilities
resulting from the forgiveness of accrued interest during the current year was
partially offset by accrued costs incurred related to the change in
management. Total Current Liabilities increased 15% from $3,264,000 at March
31, 1995 to $3,742,000 at the end of 1996.
The Company's operations generated $153,000 of cash in 1996 versus
$342,000 in 1995, and short-term borrowings from A&D Company less repayment of
debt obligation provided an additional $177,000 in 1996. The Company realized
cash proceeds of $606,000 in 1996 from the sale of certain trade receivables.
(See Note A-8 of Notes to Financial Statements.) Investments in software
construction and product enhancement activities used cash of $312,000 and
$276,000 in 1996 and 1995, respectively.
page 16
<PAGE>
The Company continues to experience serious cash flow problems as a
result of reduced revenues but has been able to reduce certain accrued
liabilities by reductions in fixed operating expenses as a result of
facilities relocation and other on-going cost reduction efforts by the
Company. The Company is seeking additional sources of working capital either
through additional debt or equity financing to reduce its accounts payable,
and make payments on its debt obligations. If additional working capital
cannot be obtained, there is substantial doubt about its ability to continue
as a going concern. There can be no assurance that the Company will be able
to obtain additional financing on favorable terms, if at all, from any source.
(See Notes D and N of Notes to Financial Statements.)
Item 8. Financial Statements and Supplementary Data.
Financial Statements included as part of this Report:
Auditors' Report
Statements of Operations for the Years Ended March 31, 1996, 1995, and 1994
Balance Sheets as of March 31, 1996 and 1995
Statements of Cash Flows for the Years Ended March 31, 1996, 1995, and 1994
Statements of Shareholders' Equity for the
Years Ended March 31, 1996, 1995, and 1994.
Notes to Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Items 10, 11, 12 and 13 of Part III hereof are incorporated by reference to
the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders involving the election of directors which will be filed on or
about July 23, 1996. The information being incorporated by reference is set
forth under the captions: "Outstanding Voting Securities"; "Election of
Directors"; "Executive Officers of the Company"; and "Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report or
incorporated by reference:
(1) All financial statements required to be filed by Item 8 of this
Form and included in this Report have been listed previously.
(2) Financial Statements and Financial Statement Schedules
Required:
Zonic A&D Company . . . . . . . . . . . . . . . .
Independent Auditors' Report and
Financial Statements for the Years Ended
March 31, 1996 and March 31, 1995
page 17
<PAGE>
Auditors' Report . . . . . . . . . . . . . . .
To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio
We have audited the accompanying balance sheets of Zonic Corporation as
of March 31, 1996 and 1995 and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 1996 and 1995
and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Zonic Corporation will continue as a going concern. As discussed in Note N to
the financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note N. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
by: / s / Deloite and Touche LLP
Cincinnati, Ohio
June 13, 1996
page 18
<PAGE>
Statements of Operations for the Years
Ended March 31, 1996, 1995 and 1994 . . . .
Years ended March 31
1996 1995 1994
____ ____ ____
Revenues:
Products and services $ 3,639,982 $ 4,860,036 $ 4,291,705
Development contracts and other - - 337,960
_________ _________ _________
Total 3,639,982 4,860,036 4,629,665
__________ _________ _________
Cost of products and services sold 1,882,848 2,369,965 2,438,493
Writedown of inventory - - 220,000
Selling and administrative expenses 1,642,061 2,113,509 2,286,905
Research and development expenses and
software construction and product
enhancement amortization 733,770 887,808 1,637,500
Writedown of capitalized software - - 2,758,842
Bad debt expense - affiliate - - 681,434
Costs related to management change and
product discontinuance 455,682 - -
_________ _________ __________
Total Operating Expenses 4,714,361 5,371,282 10,023,174
_________ _________ __________
Operating loss (1,074,379) (511,246) (5,393,509)
Gain on sale of asset 1,417,027 - -
Loss from affiliate - - (140,000)
Interest expense (486,286) (749,964) (569,558)
Other income 2,318 3,189 1,702
Foreign currency gains (losses) 131,351 (108,460) (34,284)
_________ _________ __________
Loss before taxes and extraordinary item (9,969) (1,366,481) (6,135,649)
Provision for income taxes - - -
________ _________ _________
Loss before extraordinary item (9,969) (1,366,481) (6,135,649)
Extraordinary item - gain from debt
restructuring, net of taxes 397,275 1,814,129 -
________ ________ _________
Net profit (loss) $ 387,306 $ 447,648 $(6,135,649)
========= ======== ==========
Primary earnings (loss) per share $ .13 $ .14 $ (1.99)
========= ======== ===========
Fully diluted earnings (loss) per share
Net loss before extraordinary item $ 0 $ (.44) $ (1.99)
Extraordinary item - gain from
debt restructuring, net of taxes .13 .58 -
__________ _________ __________
Net profit (loss) $ .13 $ .14 $ (1.99)
======= ======== =======
Weighted average:
Primary shares outstanding 3,081,497 3,094,136 3,080,553
Fully diluted shares outstanding 3,081,497 3,094,136 3,080,553
Dividends - none in 1996, 1995 or 1994.
The accompanying notes are an integral part of these statements.
page 19
<PAGE>Balance Sheets as of March 31, 1996 and 1995 .
Assets
March 31
1996 1995
____ ____
Current Assets
Cash $ 28,951 $ 27,222
Receivables, net of allowance
for doubtful accounts
Trade 642,311 494,229
Related parties 334,781 412,302
Unbilled contracts 56,788 73,881
_________ _______
Total receivables 1,033,880 980,412
Inventories
Finished products 296,762 359,844
Work in process 102,418 118,719
Raw material 309,737 316,894
_________ _______
Total inventory 708,917 795,457
Prepaid expenses 3,833 4,004
_________ _________
Total current assets 1,775,581 1,807,095
Property and Equipment-at cost
Furniture and office equipment 465,421 484,053
Machinery and plant equipment 1,046,580 1,273,631
Software construction and product enhancements 7,260,451 8,974,113
_________ _________
8,772,452 10,731,797
Less accumulated depreciation and amortization 7,305,267 8,151,171
_________ _________
1,467,185 2,580,626
__________ __________
$3,242,766 $4,387,721
========== ==========
The accompanying notes are an integral part of these statements.
page 20
<PAGE>
Balance Sheets as of March 31, 1996 and 1995 (Continued) .
Liabilities and Shareholders' Equity (Deficit)
March 31
1996 1995
____ ____
Current Liabilities
Short term notes payable and current maturities
of long-term obligations $ 806,316 $ 622,874
Accounts payable - trade 844,685 778,994
Accounts payable - related parties 611,823 806,466
Deferred income 792,977 172,969
Accrued liabilities
Salaries and wages 142,813 158,853
Property and payroll taxes 86,429 100,900
Interest 111,060 404,714
Costs related to management change 122,931 -
Other 223,021 218,330
_________ _________
Total accrued liabilities 686,254 882,797
_________ _________
Total current liabilities 3,742,055 3,264,100
Long-term obligations, less current maturities 4,070,000 6,018,761
Deferred rent 292,685 354,140
Commitments and Contingencies
Shareholders' Equity (Deficit)
Preferred shares - authorized, 250,000 shares
without par value; none issued or outstanding.
Common shares - authorized, 9,750,000 shares
without par value; issued and outstanding,
3,044,136 shares at March 31, 1996 and
3,094,136 at March 31, 1995 at stated issue price 61,674 62,674
Additional paid-in capital 5,727,881 5,726,881
__________ __________
5,789,555 5,789,555
Accumulated deficit (10,651,529) (11,038,835)
__________ __________
Total shareholders' equity (deficit) (4,861,974) (5,249,280)
_________ _________
$3,242,766 $4,387,721
========== ==========
The accompanying notes are an integral part of these statements.
page 21
<PAGE>
Statements of Cash Flows for the Years
Ended March 31, 1996, 1995 and 1994 . . . .
Years ended March 31
1996 1995 1994
____ ____ ____
Cash provided by operations
Net profit (loss) for year $ 387,306 $ 447,648 $(6,135,649)
Adjustments to reconcile net profit
(loss) to net cash provided
by operating activities:
Gain from sale of right
to software $ (1,417,027) - -
Gain from debt restructuring (397,275) (1,814,129) -
Depreciation and amortization 55,126 112,153 189,857
Amortization of software construction
and product enhancements 722,039 852,685 1,231,328
Write-off of costs related to management
change and product discontinuance 304,573 - -
Write-off of capitalized software
costs - - 2,758,842
Amortization of deferred income (274,809) (278,850) (254,808)
Bad debts provision (recovery) 17,135 (12,014) 793,434
Provision for obsolete inventories 36,000 60,000 284,999
Amortization of stock options 57,888 63,144 63,144
Loss from affiliates - - 140,000
Issuance of common shares for
services provided - - 18,958
Foreign currency (gain) loss and other (170,128) 109,751 30,839
Increase (decrease) in cash due
to changes in:
Receivables (225,525) (17,296) 64,042
Inventories (164,453) 513,260 211,790
Prepaid expenses 171 1,379 5,145
Accounts payable and accrued
liabilities 388,634 486 459,778
Accrued rent (61,455) (55,450) (39,788)
Deferred income and advanced
billings to customers 894,817 359,535 266,411
_________ _______ _______
Net cash provided by operations 153,017 342,302 88,322
Cash used in investment activities
Purchase of equipment and leasehold
improvements (16,134) (22,171) (4,137)
Proceeds from sale of fixed assets - 41,068 -
Software construction and product
enhancement expenditures (311,947) (276,016) (737,777)
_________ _______ _______
Net cash used in investment
activities (328,081) (257,119) (741,914)
Cash provided by (used in) financing activities
Proceeds from short-term notes 300,000 600,000 -
Proceeds from long-term obligations - - 950,000
Repayment of short-term notes and
long-term obligations (123,207) (680,647) (598,214)
_________ _______ _______
Net cash provided by (used in)
financing activities 176,793 (80,647) 351,786
Increase (decrease) in cash 1,729 4,536 (301,806)
Cash - beginning of period 27,222 22,686 324,492
_________ _______ _______
Cash - end of period 28,951 $ 27,222 $ 22,686
======= ======= ========
Interest paid during the year
(net of amounts capitalized) $ 325,683 $ 419,023 $ 439,637
======= ======= ========
The accompanying notes are an integral part of these statements.
page 22
<PAGE>
Statements of Shareholders' Equity (Deficit) for the
Years Ended March 31, 1996, 1995 and 1994.
Additional
Common Preferred Paid in Accumulated
Shares Shares Capital Deficit Total
Balance at
March 31, 1993 $62,195 - $5,689,652 $(5,350,834) $401,013
Common shares
issued 479 - 18,479 - 18,958
Stock warrants
issued - - 10,000 - 10,000
Net loss for year - - - (6,135,649) (6,135,649)
Balance at
_______ ____ _________ __________ _________
March 31, 1994 $ 62,674 - $5,718,131 $(11,486,483) $(5,705,678)
Stock warrants
issued - - 8,750 - 8,750
Net income
for year - - - 447,648 447,648
Balance at
_______ ____ _________ __________ _________
March 31, 1995 $ 62,674 - $5,726,881 $(11,038,835) $(5,249,280)
Common shares
retired (1,000) - 1,000 - -
Net income
for year - - - 387,306 387,306
_______ ____ _________ __________ _________
Balance at
March 31, 1996 61,674 - $5,727,881 (10,651,529) (4,861,974)
======= ==== ========= ========== =========
The accompanying notes are an integral part of these statements.
page 23
<PAGE>
Notes to Financial Statements . . . . . . . .
Note A - Summary of Accounting Policies
The Company's principal activity consists of the design, manufacture, and
marketing of data acquisition and analysis systems. A summary of significant
accounting policies applied in the preparation of the accompanying financial
statements follows:
1. Inventories
Inventories are stated at the lower of cost or market. Finished
products and work in process cost is determined principally by the average
cost method, including material, labor, and overhead associated with inventory
production. Raw material cost is determined by the first-in first-out method
(FIFO). Inventories are reduced by allowances for obsolescence totaling
$199,559 and $344,024 at March 31, 1996 and 1995, respectively.
2. Depreciation
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives under the
straight-line method. Estimated remaining useful lives range from three to
five years.
3. Research and Development Expenses, Software Construction, and
Product Enhancement
Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological feasibility,
estimated economic life and changes in software and hardware technologies.
Research and development expenses, including development costs of new products
and processes, are expensed as incurred.
Total unamortized costs for software construction and product
enhancement at March 31, 1996 and 1995 were:
1996 1995
---- ----
Software construction $1,188,184 $2,175,337
Product enhancement 123,832 268,793
_________ _________
$1,312,016 $2,444,130
========= =========
page 24
<PAGE>
Capitalized costs of software construction and product enhancement
and related information for fiscal years 1996, 1995, and 1994 follow:
1996 1995 1994
____ ____ ____
Capitalized costs
Software construction $246,947 $ 255,852 $ 892,716
Medallion 60,000 - -
Interest 5,000 20,164 67,389
Development funding - - (222,328)
Amortization
Software construction 723,583 1,112,929 1,194,743
Product enhancement 99,037 138,928 481,151
Development funding (100,581) (399,172) (444,566)
Reductions of capitalized
software construction and
product enhancement
costs 79,049 - 2,758,842
Research and development
expenses 11,731 35,123 406,172
The reduction of capitalized software construction and product
enhancement costs in 1996, was due to the write-off of costs related to a
development project that will not be completed. The 1996 reduction is
included in costs related to management change and product discontinuance on
the accompanyhing statement of operation. In 1994, a writedown of costs
occurred due to a reduction in estimated useful lives of certain products
reflecting management's projection of future revenues.
In 1996, the Company purchased a new product, Medallion, for $60,000.
This amount has been included with software construction and product
enhancement costs on the balance sheet. Current year capitalized costs
include amounts related to further development of this product.
See Note C of Notes to the Financial Statements for explanation of
development service funding.
4. Income Taxes
The Company provides for income taxes using the asset and liability
method required under Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." (See Note I of Notes to the Financial
Statements.)
5. 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
page 25
<PAGE>
6. Joint Ventures
The Company, along with A&D Co. Limited of Japan (A&D), have
established two jointly-owned entities, Zonic A&D Company, an Ohio general
partnership, and Zonic A&D Ltd., a corporation organized under the laws of the
United Kingdom, to conduct marketing activities with respect to the Company's
and A&D's products in the Western Hemisphere and Europe, respectively. The
Company's interest in the income and losses of these two entities is accounted
for under the equity method of accounting. Under this method, the Company's
net income for a particular accounting period includes its proportionate share
of the net income or losses reported by these entities during that period to
the extent of its investment. (See Note J of Notes to the Financial
Statements.)
7. Revenue Recognition
The Company recognizes revenue upon shipment for contracts which are
completed and shipped within one fiscal quarter. The Company recognizes
revenue using the percentage of completion method for those contracts which
production spans more than one fiscal quarter and are significant to the
financial statements.
Under the percentage of completion method, revenues are recognized
based on the ratio of total cost incurred at the balance sheet date to total
estimated cost of the project through completion.
The Company sells extended warranty contracts which provide for
repair of hardware and no-cost upgrades of software. These contracts normally
cover a one year period with revenue being recognized on a straight line basis
over the contract period.
8. Credit Risk
The Company is diversified geographically and has a broad customer
base. The Company grants credit to substantially all of its customers. Export
sales are generally secured with a letter of credit in favor of the Company
payable on shipment. Management believes bad debt losses resulting from
default by a single customer, or defaults by customers in any depressed region
or business sector, would not have a material effect on the Company's
financial position. (See Notes G and H of Notes to the Financial Statements.)
At March 31, 1996 the Company had an allowance for doubtful accounts
of $1,165,889, including $1,094,988 relating to receivables from affiliates.
At March 31, 1995 such allowances amounted to $1,148,754, including $1,094,988
related to affiliate receivables. (See Note J of Notes to the Financial
Statements.)
During 1996, the Company began selling certain trade receivables
which require payment of a fee based on the period of time the account remains
unpaid by the customer. The Company retains substantially the same credit
risk as if the receivables had not been sold. Cash proceeds from the sale of
trade receivables during the year were $605,728. At March 31, 1996, the
amount of receivables sold which remain uncollected from customers was
$66,699. The Company has received $56,694 from the sale of the receivable and
such amount has reduced the amount of receivables reported on the balance
sheet.
page 26
<PAGE>
In addition to the related party receivables discussed in Note J, the
Company had accounts receivable from major customers, each of which was in
excess of 10% of the Company's total accounts receivable, as follows:
Number of Percent of Gross
Customers Accounts Receivable
_________ ___________________
March 31, 1996 2 56%
March 31, 1995 3 39%
9. Stock Based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 - Accounting for Stock-Based Compensation during
fiscal 1996. The standard defines a fair-value-based method of accounting for
stock-based compensation, but permits compensation expense to continue to be
measured using the intrinsic-value-based method previously used. The Company
intends to continue measuring compensation expense using the intrinsic-value-
based method and under the provisions of the standard, which must be adopted
in fiscal 1997, will be required to make pro forma disclosures of net income
and earnings per share as if the fair value method had been used. Such pro-
forma information has not yet been obtained for 1996.
10. Earnings Per Share
Earnings per common and common equivalent share were based on the
weighted average number of common shares and common equivalent shares
outstanding during each period. Exercise of options is not assumed when the
effect would be anti-dilutive.
Note B - Resignation of President and Product Discontinuance
On December 27, 1995, the Board of Directors of the Company accepted the
resignation of Gerald J. Zobrist as President and Chief Executive Officer
effective December 31, 1995. At the same time, the Board of Directors elected
James B. Webb to succeed Mr. Zobrist as President and Chief Executive Officer
of the Company. Mr. Zobrist retains his ownership in the Company, less 50,000
shares which he surrendered to the Company without compensation, remains on
the Company's Board of Directors, and no longer personally guarantees any
loans under the Credit Agreement with A&D Company Ltd. However, Mr. Zobrist
continues to guarantee past due rents under the Company's prior facilities
lease agreement. (See Note F of Notes to the Financial Statements.) The
Company has recorded $156,640 as costs related to his resignation. Also, in
connection with the change in management the Company recorded an expense of
$299,042 for the write-off of a development project that will not be
completed. At March 31, 1996, related accrued costs were $122,931.
page 27
<PAGE>
Note C - Sale of Asset
In June 1995, the Company sold its 40% ownership interest in the WCA
Products to A&D Company, Ltd. (A&D), who previously owned the remaining 60%
interest in WCA. Proceeds from the sale were $2,000,000 which resulted in a
pre-tax gain of $1,417,027. The gain on sale of this asset is net of the
unamortized portion of Capitalized Software Construction and Product
Enhancement for the WCA product. These proceeds were directly applied to
reduce loans owed to A&D Company, Ltd. Included in the terms of sale was the
forgiveness of accrued interest on these loans amounting to $397,275 or $.13
per share, which was recorded as an extraordinary item. In addition,
modifications to the Credit Agreement were made, and A&D appointed the Company
as exclusive distributor of the WCA Product in the Western Hemisphere. (See
Note D of Notes to the Financial Statements)
Note D - Short-Term Note Payable and Long-Term Obligations
Short-term note payable and long-term obligations at March 31 consist of
the following:
1996 1995
____ ____
Notes Payable to Banks $ 4,100,000 $ 4,100,000
Notes payable to A&D 770,000 2,570,000
Value of stock options issued in connection
with notes payable to A&D (net) - (57,888)
Capitalized lease
obligations & other 6,316 29,523
_________ _________
4,876,316 6,641,635
Less current maturities 806,316 622,874
_________ _________
$4,070,000 $6,018,761
========= =========
In June 1995, the Company used proceeds from the sale of its ownership
interest in the WCA Product to repay $2,000,000 of loans payable to A&D which
were made under a Credit Agreement dated December 7, 1992. At the same time
modifications to the Credit Agreement included a reduction in the Company's
maximum allowable indebtedness to A&D and loan guarantees by A&D from
$6,000,000 to $4,000,000, elimination of the Control Agreement as defined in
the Credit Agreement which granted A&D the right to purchase a sufficient
number of shares of the Company's common stock to give A&D a majority of all
outstanding shares, and the extension of the due date of the then remaining
$480,000 due to A&D to June 30, 1997.
page 28
<PAGE>
The Company's ability to request additional advances or guarantees under
the Agreement terminated March 31, 1996, but has been extended for an
additional one year period by mutual consent of the parties. The Agreement
also provides that A&D under certain circumstances and using their sole
reasonable judgement may declare the Company in default of the Agreement if
the Company is not achieving the desired results from the Plan of
Restructuring or the occurrence of certain other events, resulting in the
loans becoming due immediately.
As consideration for entering into the Agreement, the Company granted A&D
a stock option to purchase 1,000,000 shares of the Company's stock at $2.00
per share. This option is exercisable until all outstanding loans and
guarantees is equal to $3,000,000 or less and the Company can no longer
request loans as advances under the Agreement. The Agreement is
collateralized by all the assets of the Company and contains several negative
covenants that the Company must comply with including restrictions on assuming
additional indebtedness and the issuance of stock options to directors and
officers. The terms of the Agreement provide that A&D will be able to
exercise significant influence on the Company's operations and policies.
Gerald Zobrist, the former President of the Company, personally
guaranteed loans received under the Agreement. This guarantee was terminated
upon his resignation in December of 1995. As consideration for this
guarantee, he received an option to purchase 140,000 shares of the Company's
common stock at $2.00 per share. This option expires December 7, 2002.
The option issued to A&D and the Company's President were valued by an
independent appraiser at $.18 per share, or $205,200. This amount has been
recorded as a reduction of long-term debt and credited to paid-in capital in
the accompanying statements and has been amortized to interest expense on a
straight line basis from December 7, 1992 through March 31, 1996.
Amortization included in interest expense amounted to $57,888 in 1996, and
$63,144 in both 1995 and 1994.
At March 31, 1996, the Company's aggregate indebtedness to A&D and
guaranteed by A&D under the Agreement exceeded $4,000,000. A&D has waived
this violation and has notified the Company that it has no intention to
declare loans made under the Agreement payable before April 1, 1997.
Notes payable to A&D amounting to $680,000, including $480,000 payable
June 30, 1997, bear interest at the prime rate plus 1%. At March 31, 1996,
the prime rate was 8.25%.
In 1994, the Company assumed a $90,000 short-term loan due A&D from Zonic
A&D Company which is not part of the Agreement. The loan bears interest at 4%
and the due date has been extended to April 1, 1997.
In March 1995, the Company recorded an extraordinary gain of $1,814,129,
or $.58 per share from the extinguishment of long-term bank debt. The Company
extinguished $2,422,879 of interest and principal for an immediate payment of
$600,000 and the issuance of warrants for 350,000 share of common stock. At
the time of the extinguishment of debt, the Company was in compliance with all
the covenants of the loan agreement.
page 29
<PAGE>
A $600,000 short-term note payable to a bank which is guaranteed by A&D
bears interest at 1.50% over the Federal Funds rate, adjusted and payable on a
quarterly basis. The rate at March 31, 1996 was 7.18%. Principal and
interest are due on September 15, 1996. (See Note J of Notes to the Financial
Statements.)
A $3,500,000 bank loan guaranteed by A&D is payable April 1, 1997 and
requires interest payments quarterly at 1.25% over the Federal Funds rate.
(See Note J of Notes to the Financial Statements.) The Federal Funds rate at
March 31, 1996 and 1995 was 5.63% and 6.50%, respectively.
The Company has leased certain equipment through capital leases. The leased
property for 1996 and 1995 had a cost of $93,658 and accumulated amortization
of $83,847 and $64,224, respectively.
Notes payable and capital lease obligations mature as follows:
Notes Payable Capital Leases
1997 $ 800,000 $ 6,316
1998 4,070,000 -
Fair value of financial instruments has not been provided for notes
payable and long-term debt as it is not practicable to estimate such fair
values as such instruments are being transacted with related parties or are
guaranteed by related parties. The Company has not recently secured debt from
unrelated parties and accordingly cannot estimate, with reasonable certainty,
the rate available to the Company or even if market debt would be provided at
all. All other financial instruments are carried at an amount approximating
their fair value.
page 30
<PAGE>
Note E - Shareholders' Equity (Deficit)
The Company has certain incentive and non-qualified stock option plans
available to key employees to purchase common stock of the Company at not less
than the market value on the date of grant. A summary of option transactions
during 1996, 1995 and 1994 follows:
Number of Options
Options Price Range
Outstanding at March 31, 1993 1,602,892 63 - 4.00
Granted in 1994 432,500 .65 - .72
Exercised in 1994 0 -
Forfeited in 1994 (270,000) .65 - 4.00
Outstanding at March 31, 1994 1,765,392 .63 - 3.875
Granted in 1995 8,000 .31
Exercised in 1995 0 -
Forfeited in 1995 (121,642) .65 - 3.875
Outstanding at March 31, 1995 1,651,750 .31 - 3.875
Granted in 1996 190,000 .34 - .50
Exercised in 1996 0 -
Forfeited in 1996 (89,750) .65 - 2.00
Outstanding at March 31, 1996 1,752,000 .31 - 3.875
Exercisable at March 31, 1996 543,750 .31 - 3.875
At March 31, 1996, there were 499,500 incentive options and 1,252,500
non-qualified options outstanding and 70,750 shares were available for
granting additional options.
During 1994, the Company issued warrants for 100,000 common shares in
connection with the renegotiation of the lease for its facilities. The
warrants are exercisable at $2.00 per share and expire on March 31, 2000. None
of these warrants have been exercised.
During 1995, the Company issued warrants for 350,000 common shares, with
a market value of $8,750, in connection with the extinguishment of certain
long-term debt obligations. These warrants are exercisable for $2.00 per share
and expire on March 31, 2000. None of these warrants have been exercised.
At March 31, 1996 the Company has reserved common shares sufficient to
cover the exercise of outstanding stock options and warrants.
page 31
<PAGE>
Note F - Operating Lease Commitments
In 1995, the Company relocated its operations. The new facilities lease
agreement results in a reduction of rent payments from the 1994 amounts. This
lease expires in December, 2000. Deferred rent arising from incentives and
concessions from the landlord was $292,685 and $354,140 at March 31, 1996 and
1995, respectively, including $142,399 of past due rent related to the lease
agreement signed in 1993. These amounts are amortized as a reduction of rent
payments charged to expense over the remaining life of the lease.
In addition, the Company also leases furniture, fixtures, and computer
equipment under operating leases.
The minimum future rental commitments under operating leases are as
follows:
1997 $229,347
1998 206,124
1999 193,344
2000 193,344
2001 145,008
Rent expense including deferred rent for 1996, 1995, and 1994 was
$132,885, $205,591, and $258,852, respectively.
Note G - Foreign Sales
The Company had foreign sales as follows:
Percent of
Amount Total Sales
1996 $ 2,027,000 56%
1995 1,957,000 40%
1994 2,103,000 45%
Note H - Sales to Major Customers
The Company had sales to major customers as follows:
Percent of
Customers Amount Total Sales
1996 1 $396,000 11%
1995 1 619,000 13%
1994 1 875,000 19%
Sales to major customers (customers with sales in excess of 10% of total
annual sales) include products and services sold to end-user customers through
the Company's exclusive selling agents for their respective geographic
territories. These selling agents include related parties described in Note J
of Notes to the Financial Statements. Sales of large systems to end-users
represent relatively high percentages of sales. However, the Company is not
dependent on any one customer for future sales.
A foreign government was the Company's largest customer in 1996, while
the U.S. Government was the major customer in 1995 and 1994.
page 32
<PAGE>
Note I - Federal Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
Deferred tax assets have been reduced by a valuation allowance, as it is
uncertain when these benefits will be realized. Although the Company realized
profits in 1996 and 1995, there was no provision for income taxes as the
result of changes in deferred tax assets and the related valuation allowance
during the year.
Deferred taxes at March 31 consist of the following:
1996 1995
____ ____
Current deferred tax asset:
Reserves not currently deductible $ 484,015 $ 533,297
Deferred revenue 50,726 41,237
Accruals not currently deductible 77,412 89,451
________ ________
Total 612,153 663,985
Less valuation allowance (612,153) (663,985)
________ ________
Net $ - $ -
======== ========
Non-current deferred tax asset:
Net operating loss carryforward $ 2,205,360 $ 2,029,953
Research, development, and
investment tax credits 667,278 674,613
Write-off and reserve for software construction
and product 370,139 555,209
Deferred Income 99,877 120,771
________ _________
Subtotal 3,342,654 3,380,546
__________ _________
Non-current deferred tax liability:
Loss from affiliates (164,696) (195,475)
Capital leases and accelerated depreciation (3,838) (3,146)
__________ _________
Subtotal (168,534) (198,621)
Net non-current deferred tax asset 3,174,120 3,181,925
Less valuation allowance (3,174,120) (3,181,925)
__________ _________
Net $ - $ -
========== ==========
page 33
<PAGE>
The provision for income taxes for the years ended consist of the following:
1996 1995 1994
____ ____ ____
Deferred expense $ 59,637 $ 153,137 2,000,798
Reduction in the valuation reserve (59,637) (153,137) (2,000,798)
______ _______ _________
Provision for income taxes $ - $ - $ -
======= ======= =========
At March 31, 1996 the Company had net operating loss carryforwards of
approximately $6.5 million for U.S. Federal tax purposes. Such loss
carryforwards, if unused as offsets to future taxable income, will expire
beginning in 2001 and continuing through 2011.
Tax credits are accounted for under the flow-through method as a
reduction of the provisions for income taxes in the year utilized.
The Company has $667,278 of tax credits primarily comprised of research
and development available for U.S. income tax purposes. These credits expire
at various dates beginning in 1997 and continuing through 2008.
Note J - Related Party Transactions and Bad Debt Expense-Affiliate
The Company has developed a significant relationship with A&D, a 29%
shareholder.
In October 1988, the Company and A&D Engineering Inc., a wholly-owned
subsidiary of A&D, formed a joint venture, Zonic A&D Company, to distribute
all of the Company's products, and A&D's spectrum analysis instruments in the
Western Hemisphere. The Company and A&D each have 50% ownership interest and
share the results of operations equally. Under the joint venture agreement,
the Company loaned $500,000 and A&D loaned $2,801,500 to Zonic A&D Company to
fund operating costs. The Company accounts for its investment using the equity
method of accounting and as such recognizes losses only to the extent it is at
risk for funding such losses. During 1994, the Company assumed a loan on
behalf of Zonic A&D Company of $90,000, and recognized a loss for the same
amount. The Company is not required to provide any additional funding, but
would recognize losses up to its funded amount if it did so. The Company's
investment in Zonic A&D Company was $0 at March 31, 1996 and 1995 as a result
of this accounting treatment. The joint venture agreement also permits the two
parties to charge Zonic A&D Company for expenses incurred by them on its
behalf.
During 1995, Zonic A&D Company repaid notes payable to A&D totaling
$2,691,000. The source of funds for the repayment was a capital contribution
from A&D Engineering, Inc. The remaining notes payable and unpaid interest to
A&D and to the Company were forgiven and contributed as capital. There was no
effect on the Company's statement of income as these receivables had
previously been written off.
In 1991, the Company and A&D founded Zonic A&D Ltd. in the United
Kingdom, to distribute the products of both companies in Europe. Each partner
has a 50% ownership interest and shares the results of the operation equally.
The Company contributed capital and made a loan totaling $485,000 and
recognized losses to the extent of its investment in the affiliate. No losses
have been recorded by the Company since 1992.
page 34
<PAGE>
Due to continuing losses, the partners of Zonic A&D Ltd. have
significantly reduced the operations of Zonic A&D Ltd. and now distribute
products in this market directly from their respective operations. None of the
amounts due the Company are considered collectable and have been fully
reserved in 1996 and 1995. In addition, a liability of $50,000 was recorded in
1994 for potential liabilities associated with the reduction of operations, of
which $28,125 remains as of March 31, 1996. Management does not expect to
incur any additional liability associated with the reduction of this
operation. The operations of Zonic A&D Ltd. are not significant to the
Company's financial statements.
The Company recognized bad debt expense of $681,434 in 1994, to provide
for potential write-offs of accounts receivable due the Company from its
affiliates. $481,434 of this amount is related to amounts due from Zonic A&D
Ltd. and the remaining $200,000 is related to amounts due from Zonic A&D Co.
The total reserve against affiliate receivables at March 31, 1996 and 1995 was
$1,094,988. There was no bad debt expense related to affiliates in 1996 or
1995.
The Company had the following amounts due from/to related parties at the
balance sheet dates:
March 31 March 31
1996 1995
________ ________
Receivable from:
A&D $ 974 $ 20,322
Zonic A&D Company 471,375 529,548
Zonic A&D Limited 957,420 957,420
_________ _________
Total 1,429,769 1,507,290
Allowance for doubtful accounts (1,094,988) (1,094,988)
_________ _________
Net receivables $ 334,781 $ 412,302
======== ========
Accounts payable-A&D $ 611,823 $ 806,466
======== ========
During 1996 and 1995, the Company purchased from Zonic A&D Company
accounts receivable of $1,903,227 and $3,090,143, respectively, due from end-
user customers in exchange for forgiveness of accounts receivable due from
Zonic A&D Company.
page 35
<PAGE>
The summarized balance sheets of Zonic A&D Company at March 31, 1996 and
1995 and the results of operations for the years then ended follows:
Zonic A&D Company
Balance Sheets
1996 1995
____ ____
Assets
Current assets $ 1,104 $ 1,611
Fixed and other assets 18,226 46,946
________ ________
Total assets $ 19,330 $ 48,557
======== ========
Liabilities and Deficit
Current liabilities $ 559,114 $ 635,169
Net deficit in owners' capital (539,784) (586,612)
________ ________
Total liabilities and deficit $ 19,330 $ 48,557
======= =======
Statements of Operations
Net revenue $ 353,346 $ 545,932
Net expenses 306,518 449,302
_______ _______
Net Income $ 46,828 $ 96,630
======= =======
The following summarizes revenues from sales by the Company to A&D, Zonic
A&D Company, and Zonic A&D Ltd. in the aggregate:
1996 1995 1994
____ ____ ____
Sales for resale to end-users $2,040,206 $ 3,207,032 $ 3,099,921
Development contracts and other - - 337,960
Total $2,040,206 $ 3,207,032 $ 3,437,881
The Company sells products to these related parties at its normal gross
profit margins for items resold to customers. The Company also sells
demonstration equipment to the related parties at cost.
The Company pays commissions to Zonic A&D Company and Zonic A&D Ltd. for
sales made through the related entities to end-users. Commission expense for
1996, 1995, and 1994 was $353,346, $545,932, and $577,397, respectively.
The Company also purchases components from A&D used principally in the
production of its WCA product line. Such purchases totaled $301,889, $218,990,
and $522,876, for 1996, 1995, and 1994 respectively.
page 36
<PAGE>
The Company has charged Zonic A&D Company and Zonic A&D Ltd. for certain
costs incurred on their behalf amounting to $53,560, $66,322, and $109,440,
for 1996, 1995, and 1994, respectively.
In May 1990, the Company entered into a research and development
agreement with A&D totaling approximately $1,600,000. The Company has a 40%
ownership interest and A&D has a 60% ownership interest in the products
developed under this agreement. The two parties share profits on this product
line relative to their respective ownership percentage. Pursuant to this
agreement, the Company recorded revenue related to the funding from A&D for
the project of $324,369 in 1994.
Note K - Retirement Plan
The Company has an employee savings and investment retirement plan
qualified under sections 401 (a) and 401 (k) of the Internal Revenue Code. The
plan covers all employees of the Company age 18 and over who have completed
three months of service and are scheduled to work 1,000 hours or more during
the plan year.
Under the Plan agreement the Company is required to contribute 30 percent
of the voluntary 401 (k) contribution of all participants up to a maximum of
5% of each employee's salary. One half of this contribution may be made in
Company stock at the discretion of the Company's Board of Directors.
In any plan year, a supplemental contribution may be made if the Company
has a net after tax profit of more than 5% of sales.
The Company made contributions of $14,040 and $15,432 for 1996 and 1995,
respectively. The Company recorded a liability of $20,088 in 1994 for
contributions which were paid in 1995. None of the contributions were made in
Company stock.
Note L - Statement of Cash Flows
In addition to those shown in the statement of cash flows or elsewhere
within these footnotes, the following non-monetary transactions occurred:
1) The Company offset accounts payable owed to A&D with accounts
receivable from A&D in 1996 and 1995. This offset reduced both current assets
and current liabilities by $156,326 and $62,004 in 1996 and 1995,
respectively, resulting in no gain or loss.
2) The Company reduced accounts payable and increased deferred rent in
1995 by $142,399 in conjunction with signing a new lease facilities agreement.
3) The Company issued warrants for 350,000 common shares in 1995 in
connection with the extinguishment of long-term debt. Additional paid in
capital was increased by $8,750 as the result of this transaction. (See Note D
of Notes to the Financial Statements.)
page 37
<PAGE>
Note M - Percentage of Completion Contracts
With regard to contracts in progress, the Company has recognized the
following through March 31:
1996 1995
____ ____
Total revenue recognized $ 91,531 $ 617,349
Total billings 732,810 543,468
_______ _______
Under (Over) billed receivables $(641,279) $ 73,881
======= =======
Total costs incurred $ 42,518 $ 267,855
Billings, as specified in the terms of a contract, and in excess of
revenue earned have been recorded as deferred income. Unbilled receivables at
March 31, 1996 totaling $57,000 are amounts retained by the Company's
customers pursuant to the terms of their contracts.
Note N - Basis of Financial Statement Presentation
The Company has prepared a business plan for fiscal 1997 which
contemplates improved cash flow during the third and fourth quarters due
primarily to an increase in revenue and the benefit of continuing cost
reduction measures achieved to date. Specific to this business plan are
increases in sales of specific products, constant level of staff, and
expenditures for product development equal to 1996. A&D has made short-term
loans to the Company during the first quarter of fiscal 1997 and the 1997
business plan requires additional short-term borrowings from A&D during the
second quarter. All of these loans are scheduled for repayment by the end of
the third quarter of fiscal 1997.
As the result of operating losses incurred in 1996, 1995, and 1994, the
Company continues to experience cash flow problems, but has been able to
improve on the aging of its accounts payable and certain accrued liabilities
during 1996 through improved inventory turnover and the overall reduction of
operating expenses. The accompanying financial statements have been prepared
assuming that the Company will continue as a going-concern which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary should
the Company be unable to generate sufficient cash to meet its obligations and
sustain operations.
Note O - Fourth Quarter Adjustments
During the fourth quarter of 1994, a charge of $1,959,000 was recorded
for the writedown of capitalized software construction and product enhancement
costs. The adjustment was necessary to reflect management's estimate of the
net realizable value resulting from the decline in revenue of certain products
and the effects from products no longer marketed by the company. No such
adjustments were necessary in 1996 or 1995.
page 38
<PAGE>
ZONIC A&D COMPANY
(a Partnership)
Financial Statements for the Years Ended March 31, 1996 and 1995 and
Independent Auditors' Report
ZONIC A&D COMPANY
TABLE OF CONTENTS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
Page
INDEPENDENT AUDITORS' REPORT 40
FINANCIAL STATEMENTS OF ZONIC A&D COMPANY AS OF MARCH 31, 1996 AND
1995 AND FOR THE YEARS THEN ENDED:
Balance Sheets 41
Statements of Operations and Partners' Deficit 43
Statements of Cash Flows 44
Notes to Financial Statements 45
page 39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Zonic A & D Company
We have audited the accompanying balance sheets of Zonic A & D Company (the
Partnership) as of March 31, 1996 and 1995, and the related statements of
operations and partners' deficit and of cash flows for the years then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Partnership as of March 31, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 5 to the
financial statements, the excess of Partnership liabilities over its assets
raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 5. The
financial statements do not include any adjustments that might result from the
outcome of the uncertainty.
As discussed in Note 4 to the financial statements, the Partnership has
significant transactions with one of the partners and, as a result, the
accompanying financial statements may not necessarily be indicative of the
conditions that would have existed or the results of operations if the
Partnership had operated without the assistance of the partners.
by: / s / Deloitte and Touche LLP
Cincinnati, Ohio
June 13, 1996
page 40
<PAGE>
ZONIC A&D COMPANY (a Partnership)
BALANCE SHEETS
MARCH 31, 1996 AND 1995
ASSETS 1996 1995
____ ____
CURRENT ASSETS:
Cash $ 247 $ 1,211
Accounts receivable 857 400
__________ __________
Total current assets 1,104 1,611
__________ __________
PROPERTY AND EQUIPMENT, AT COST:
Furniture and equipment 66,783 70,350
Vehicles 32,839 50,806
__________ __________
Total 99,622 121,156
Accumulated amortization (96,476) (116,212)
__________ __________
Property and equipment, net 3,146 4,944
__________ __________
DEMONSTRATION EQUIPMENT, AT COST
Equipment 502,051 510,079
Reserve for obsolescence (486,971) (468,077)
__________ __________
Demonstration equipment, net 15,080 42,002
__________ __________
TOTAL ASSETS $ 19,330 $ 48,557
========== ==========
page 41
<PAGE>
ZONIC A&D COMPANY (a Partnership)
BALANCE SHEETS
MARCH 31, 1996 AND 1995
LIABILITIES AND PARTNERS' DEFICIT 1996 1995
____ ____
CURRENT LIABILITIES:
Accounts payable:
Trade $ 33,898 $ 34,990
Partners 471,375 529,548
__________ __________
Total accounts payable 505,273 564,538
__________ __________
Accrued liabilities:
Salaries and wages 14,081 11,813
Property and payroll taxes 3,650 5,209
Commissions 19,962 39,181
Interest - A&D Engineering, Inc. 13,684 13,684
Other 2,464 744
__________ __________
Total accrued liabilities 53,841 70,631
__________ __________
Total current liabilities 559,114 635,169
__________ __________
PARTNERS' EQUITY (DEFICIT):
Zonic Corporation (1,498,963) (1,522,377)
A&D Engineering, Inc. 959,179 935,765
__________ __________
Total partners' deficit (539,784) (586,612)
__________ __________
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 19,330 $ 48,557
========== ==========
See notes to financial statements.
page 42
<PAGE>
ZONIC A&D COMPANY (a Partnership)
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
1996 1995
____ ____
NET PRODUCT SALES $ 1,903,227 $ 3,090,143
========== ==========
COMMISSION INCOME $ 353,346 $ 545,932
__________ __________
EXPENSES:
Selling and administrative expense 278,634 412,331
Depreciation and amortization expense 3,223 3,203
Provision for demonstration equipment obsolescence 24,661 33,768
__________ __________
Total expenses 306,518 449,302
__________ __________
NET INCOME 46,828 96,630
CONTRIBUTIONS BY PARTNERS DURING THE YEAR - 3,763,006
PARTNERS' DEFICIT, Beginning of year (586,612) (4,446,248)
__________ _________
PARTNERS' DEFICIT, End of year $ (539,784) $ (586,612)
========== =========
See notes to financial statements.
page 43
<PAGE>
ZONIC A&D COMPANY (a Partnership)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
1996 1995
____ ____
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,828 $ 96,630
________ __________
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,223 3,203
Provision for demonstration equipment obsolescence 24,661 33,768
Gain on exchange of equipment in lieu of
commission payment (10,790)
Other (1,404) (3,924)
Change in assets and liabilities:
Accounts receivable (457) 285
Demonstration equipment 10,980
Other assets 1,754
Accounts payable (59,265) (127,019)
Accrued liabilities (3,760) (17,310)
________ ________
Total adjustments (47,792) (98,263)
________ ________
Net cash provided by operating activities (964) (1,633)
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 2,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from partner 2,691,500
Repayment of notes payable (2,691,500)
_________ __________
Net cash from financing activities - -
_________ __________
NET INCREASE (DECREASE) IN CASH (964) 867
CASH, Beginning of year 1,211 344
_________ _________
CASH, End of year $ 247 $ 1,211
========= =========
See notes to financial statements.
page 44
<PAGE>
ZONIC A&D COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
Organization - In October 1988, Zonic Corporation (an Ohio corporation
hereafter referred to as Zonic) and A&D Engineering, Inc. (a California
corporation), which is an affiliate of A&D Company, Limited of Tokyo, Japan
(hereafter referred to as A&D), formed an Ohio partnership called Zonic A&D
Company (the Partnership). This partnership is a sales and marketing joint
venture, the purpose of which is to market Zonic products and A&D spectrum
analysis instruments in North and South America. These products consist
primarily of data acquisition, analysis and computer graphics systems. Zonic
and A&D Engineering, Inc. each have a 50% ownership in the Partnership which
is based on a one year automatically renewable agreement unless terminated
six months in advance of the renewal date.
Demonstration Equipment - Demonstration equipment includes inventory
items in the custody of salesmen or potential customers and is stated at the
lower of cost or market. Cost is determined principally by the specific
identification method. The cost of demonstration equipment is amortized over
a five-year period. Amortization stops at the time the unit is sold.
Use of Estimates - Preparation of the financial statements requires the
use of estimates, none of which have a material effect on the financial
statements.
Depreciation - Provisions for depreciation of property and equipment are
computed over the estimated useful lives of the assets, using the straight-
line method.
Income Taxes - Zonic A&D Company is a partnership. As such, income
taxes are the responsibility of the individual partners and, accordingly, are
not reflected in the financial statements.
Fair Value of Financial Instruments has not been provided for partners
accounts payable as it is not practicable to estimate such fair value as such
instrument is being transacted with related parties. The Company has not
recently secured debt from unrelated parties and accordingly cannot estimate,
with reasonable certainty, the market rate available to the Company or even
if market debt would be provided at all. All other financial instruments are
carried at an amount approximating their fair value.
2. CONTRIBUTION OF CAPITAL
On September 30, 1994 A&D Engineering Inc. forgave the Partnership's
note payable of $110,000 and contributed additional capital of $2,691,500.
The contribution was used by the Partnership to repay a note payable to A&D.
The forgiveness of the note payable was recorded as a capital contribution.
As part of this transaction, A&D also agreed to forgive accrued interest of
$309,074. The forgiveness of this liability was also recorded as a capital
contribution. Additionally, Zonic made a capital contribution of $652,432 in
the form of forgiveness of the notes payable of $590,000 and accrued interest
of $62,432.
page 45
<PAGE>
3. NOTES PAYABLE
As described in Note 2, all notes payable were repaid or forgiven as of
March 31, 1995.
While outstanding, the notes payable to A&D and Zonic accrued interest
at a rate of 4% per year, while the note payable to A&D Engineering, Inc.
accrued interest at 8% per year. In accordance with the partnership
agreement, the interest is payable upon termination of the partnership.
During 1996 and 1995, interest expense related to all notes payable was
waived. In addition, interest accrued related to the notes payable to A&D
and Zonic was forgiven in 1995. The partners have not committed to make any
additional loans or advances.
4. RELATED PARTY TRANSACTIONS
As described in Note 1, the Partnership sells only Zonic and A&D
products. The partnership agreement requires that all products sold by this
Partnership be purchased from Zonic. In addition, the Partnership
occasionally purchases equipment from Zonic for demonstration purposes.
There were no purchases of demonstration equipment in 1996 or 1995.
The Partnership earns commissions from Zonic equal to 20.0% (23.5% in
1994) of the Partnership's purchases of Zonic and A&D products provided the
sale carries a minimum gross margin dependent upon product. All commissions
are reduced in direct proportion to the respective gross margins when they
are less than the minimum gross margins. The Partnership earned commission
income of $353,346 and $545,932 in 1996 and 1995, respectively.
The partnership agreement also requires the Partnership to pay Zonic a
management fee for its administrative and consulting services. The
management fee was waived for 1996 and 1995.
The partnership agreement permits Zonic and A&D Engineering, Inc. to
charge the Partnership both direct expenses and an allocation of their
selling and administrative expenses. Both partners waived these charges for
1996 and 1995.
Zonic provides office space to the Partnership at no cost.
The Partnership had the following amounts due to related parties at
March 31:
1996 1995
____ ____
Accounts payable $ 471,375 $ 529,548
Accrued interest payable 13,684 13,684
page 46
<PAGE>
5. GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business The Partnership's
liabilities exceed its assets and cash flows are dependent upon Zonic.
Therefore, the Partnership's continuation is dependent upon Zonic's ability
to generate sufficient cash flow to meet it's obligations to the Partnership
and others on a timely basis or to obtain additional financing from outside
sources. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary should the
Partnership be unable to continue. In 1995, Zonic assumed responsibility for
the sales management and marketing areas at no additional cost to the
Partnership. Management is of the opinion that Zonic will continue to meet
its obligations and sustain operations from cash flows from increased sales
and reduced operating costs.
6. RETIREMENT PLAN
All employees of the Partnership are covered by a defined contribution
plan sponsored by Zonic (the Sponsor). Such plan is an employee savings and
investment retirement plan qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code. The plan covers all employees of the Company age 18
and over who have completed three months of service and are scheduled to work
1,000 hours or more during the plan year.
The Partnership is required to make a contribution equal to 30 percent
of the voluntary 401(k) contribution of all participants up to a maximum of
5% of each employee's salary. One half of this contribution may be made in
the Sponsor's stock at the discretion of the Sponsor's Board of Directors.
The Partnership expensed $1,262 and $1,008 for 1996 and 1995, respectively.
In any plan year, a supplemental contribution may be made if the Sponsor
has a net after tax profit of more than 5% of sales. No such contributions
were made in 1996 or 1995.
7. STATEMENTS OF CASH FLOWS
The Partnership offset accounts payable with accounts receivable from a
related party in the amount of $353,346 and $545,932 at March 31, 1996 and
1995, respectively.
During 1996 and 1995, Zonic purchased receivables of the Partnership
without recourse amounting to $ 1,903,227 and $3,090,143. In consideration
for the purchases of these receivables an equivalent amount of accounts
payable to Zonic were forgiven.
During 1996, the Partnership transferred certain equipment and
demonstration equipment with a net book value of $2,240 to a third party in
exchange for settlement of $13,030 in commissions due.
In 1995, notes payable to partners totaling $700,000 and accrued
interest totaling $371,506 were forgiven and recorded as capital
contributions to the Partnership.
page 47
<PAGE>
(3) Exhibits Required by Item 601 of Regulation S-K:
(3)(i) The Company's Amended and Restated Articles of
Incorporation incorporated by reference to Exhibit
14(a)(3)(3)(i) of the Form 10-K filed by the Company
for the fiscal year ended March 31, 1993.
(ii) Code of Regulations of the Company incorporated by
reference to Exhibit (b) to Registration Statement of
Company which became effective under the Securities
Act of 1933 on July 2, 1981, (File No. 2-72450C) "the
Registration Statement".
(iii) Amendment to the Company's Code of Regulations Article
II Section 1 as adopted by the stockholders on
August 8, 1986 incorporated by reference to
Exhibit 14(a)(3)(iv) of the Form 10-K filed by the
Company for fiscal year ended March 31, 1987.
(4) (i) Specimen Common Share Certificate incorporated by
reference to Exhibit 3(e) to the Registration
Statement.
(ii) 1989 Stock Option Plan incorporated by reference to
Exhibit 14(a)(3)(4)(xii) of Form 10-K filed by the
Company for the fiscal year ended March 31, 1990.
(iii) 1991 Executive Stock Option Plan incorporated by
reference to Exhibit 14 (a)(3)(4)(ix) of Form 10-K
filed by the Company for the fiscal year
ended March 31, 1991.
(10)(i) Partnership Agreement, dated October 7, 1988, between
the Company, A&D Co., Ltd. and A&D Engineering, Inc.
incorporated by reference to Exhibit 14(a)(3)(10)(v)
of the Form 10-K filed by the Company for the fiscal
year ended March 31, 1989.
(ii) Distributorship Agreement, dated October 7, 1988,
between the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 14(a)(3)(10)(vi) of the Form 10-K
filed by the Company for the fiscal year ended
March 31, 1989.
(iii) Distributorship Agreement, dated October 7, 1988,
between the Company and Zonic-A&D Company incorporated
by reference to Exhibit 14(a)(3)(10)(vii) of the Form
10-K filed by the Company for the fiscal year ended
March 31, 1989.
(iv) Sales Promotional Fee Contract, dated October 7, 1988,
between the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 14(a)(3)(10)(viii) of the
Form 10-K filed by the Company for the fiscal year
ended March 31, 1989.
page 48
<PAGE>
(v) Distribution Agreement, dated February 26, 1988,
between the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 14 (a)(3)(10)(viii) of the
Form 10-K filed by the Company for the fiscal year
ended March 31, 1990.
(vi) Shareholder Agreement, dated February 21, 1991,
between the Company and A&D Co., Ltd. with respect
to Zonic A&D Ltd. incorporated by reference to
Exhibit 14 (a) (3) (10)(ix) of the Form 10-K filed
by the Company for the fiscal year ended
March 31, 1991.
(vii) Distribution Agreement, dated February 21, 1991,
between the Company and A&D Co., Ltd. incorporated
by reference to Exhibit 14 (a)(3)(10)(x) of the
Form 10-K filed by the Company for the fiscal year
ended March 31, 1991.
(viii) Amended and Restated Distribution Agreement, dated
March 1, 1992, between the Company and Zonic A&D Ltd.
incorporated by reference to Exhibit 14(a)(3)(10)(xi)
of the Form 10-K filed by the Company for the fiscal
year ended March 31, 1992.
(ix) Termination Agreement, dated March 31, 1992, between
the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 14(a)(3)(10)(xii) of the
Form 10-K filed by the Company for the fiscal year
ended March 31, 1992.
(x) Value Added Reseller U.S. Sales Agreement, dated
October 10, 1991, between the Company and Apple
Computer, Inc. incorporated by reference to
Exhibit 14(a)(3)(10)(xiii) of the Form 10-K filed
by the Company for the fiscal year ended
March 31, 1992.
(xi) Credit Agreement, dated December 7, 1992, between
the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 10.1 of the Form 8-K dated
December 7, 1992 filed by the Company.
(xii) Non-Qualified Stock Option granted to A&D Co., Ltd.
dated December 7, 1992 incorporated by reference to
Exhibit 10.2 of the Form 8-K dated December 7, 1992
filed by the Company.
(xiii) Control Agreement, dated December 7, 1992, between
the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 10.3 of the Form 8-K dated
December 7, 1992 filed by the Company.
page 49
<PAGE>
(xiv) Services Agreement, dated December 7, 1992, between
the Company and A&D Co., Ltd. incorporated by
reference to Exhibit 10.5 of the Form 8-K dated
December 7, 1992 filed by the Company.
(xv) First Lease Amendment, dated September 1, 1993,
between the Company and Duke Associates No. 55
Limited Partnership for the premises located at
Park 50 TechneCenter, 50 W. TechneCenter Drive,
Milford, Ohio incorporated by reference to
Exhibit 14(a)(3)(10)(xvii) of the Form 10-K filed by
the Company for the fiscal year ended March 31, 1994.
(xvi) Warrant, dated September 1, 1993, between the Company
and Duke Associates No. 55 Limited Partnership
incorporated by reference to Exhibit
14(a)(3)(10)(xviii) of the Form 10-K filed by the
Company for the fiscal year ended March 31, 1994.
(xvii) Amendment to Partnership Agreement, dated May 31,
1990, between the Company, A&D Engineering, Inc.
and A&D Co., Ltd. incorporated by reference
to Exhibit (10)(xvii) of the Form 10-K filed by the
Company for the fiscal year ended March 31, 1995.
(xviii) Second Amendment to the Partnership Agreement, dated
September 30, 1994, between the Company and A&D
Engineering, Inc. incorporated by reference to Exhibit
(10)(xviii) of the Form 10-K filed by the Company for
the fiscal year ended March 31, 1995.
(xix) Capital Contribution Agreement, dated September 30,
1994, between the Company, A&D Engineering, Inc.,
Zonic A&D Company and A&D Co., Ltd. incorporated by
reference to Exhibit (10)(xviv) of the Form 10-K filed
by the Company for the fiscal year ended
March 31, 1995.
(xx) Warrant, dated March 16, 1995, between the Company and
Star Bank, National Association, issued in connection
with the discharge in full of the Company's Star Bank
indebtedness incorporated by reference to Exhibit
(10)(xx) of the Form 10-K filed by the Company for the
fiscal year ended March 31, 1995.
(xxi) WCA Rights Sale Agreement, dated June 30, 1995,
between A&D Company, Ltd. and the Company incorporated
by reference to Exhibit 2.1 of the Form 8-K dated
June 30, 1995 filed by the Company.
(xxii) Amendment to Credit agreement, dated June 30, 1995,
between the Company and A&D Company, Ltd. incorporated
by reference to Exhibit 2.2 of the Form 8-K dated June
30, 1995 filed by the Company.
page 50
<PAGE>
(xxiii) Amendment to Distribution Agreement, dated June 30,
1995, between the Company and A&D Company, Ltd.
incorporated by reference to Exhibit 2.3 of the
Form 8-K dated June 30, 1995 filed by the Company.
(xxiv) WCA Software Source Agreement, dated June 30, 1995,
between A&D Company, Ltd. and the Company incorporated
by reference to Exhibit 2.4 of the Form 8-K dated June
30, 1995 filed by the Company.
(xxv) WCA Manufacturing Agreement, dated June 30, 1995,
between A&D Company, Ltd. and the Company incorporated
by reference to Exhibit 2.5 of the Form 8-K dated June
30, 1995 filed by the Company.
(xxvi) OEM Distribution and Confidentiality Agreement, dated
February 12, 1996, between Spectral Dynamics, Inc. and
the Company.
(22) The only subsidiaries of the Company are TechneCenter
Limited, a United Kingdom corporation and Zonic A&D Ltd., a
United Kingdom corporation. The Company also has an
ownership interest in Zonic A&D Company, an Ohio general
partnership.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See subparagraph (a) above.
(d) Financial Statement Schedules.
None, except as set forth under Item 14(a)(2)
above.
page 51
<PAGE>
OEM Distribution
and
Confidentiality Agreement
This Agreement is made and entered into as of this February 12, 1996 by
and between Spectral Dynamics, Inc., a California company with principal
offices at 1983 Concourse Drive, San Jose, California, hereinafter referred
to as "Spectral", and Zonic Corporation, an Ohio Corporation with principal
office at 50 West TechneCenter Drive Milford, Ohio, hereinafter referred to
as "Zonic".
WHEREAS, Zonic is a manufacturer of data acquisition and digital signal
processing equipment and engaged in the business of supplying such products
for use in structural analysis applications; and,
WHEREAS, Spectral is a manufacturer of shaker control equipment, related
software products and general signal analysis and modal analysis software and
engaged in the business of supplying such products for use in structural
analysis applications; and,
WHEREAS, the parties desire that Spectral market and distribute Zonic
manufactured equipment.
NOW, THEREFORE, the parties agree as follows:
1. Zonic agrees to sell to Spectral those Zonic products identified as
Exhibit "A" at the prices therein listed.
2. Spectral agrees purchase from Zonic the materials identified Exhibit
A and incorporate the purchased products into systems for resale to
Spectral's customers.
3. Zonic warrants that products manufactured by Zonic and sold to
Spectral under this agreement will be free from defects in material and
workmanship for one year from date of shipment from Zonic's facility. Zonic
will repair or replace, at Zonic's option and without charge, any product
which fails to satisfy this warranty. Claims against this warranty must be
made in writing and the defective material returned to Zonic, prepaid and
insured. Zonic will return ship EX-WORKS after repair.
In no event shall Zonic be liable to Spectral nor Spectral's end customer
for any incidental or consequential damages, including without limitation any
loss, damage, claim, liability or expense, of any kind or nature, caused
directly or indirectly by the furnishing of service or materials pursuant to
this Agreement, or by any interruption of service, or loss of use thereof or
for any loss of business or damage to Spectral whatsoever and howsoever
caused.
4. Zonic agrees to provide reasonable amounts of technical and product
training to Spectral's designated representatives at Zonic's facility.
5. Zonic agrees to provide reasonable amounts of demonstration
materials to Spectral under terms to be mutually agreed upon by the parties.
6. The parties agree that additional products developed by Zonic may be
added to Exhibit "A" from time to time by mutual consent and such additions
shall be considered amendments to this agreement.
page 52
<PAGE>
7. The parties agree to cooperate in the identification and development
of new products and enter into development agreements by mutual consent.
8. This agreement is nonexclusive and the parties retain their rights
to secure similar distribution agreements with others as they deem
appropriate.
9. All information in any form transferred by Zonic to Spectral related
to product design, product plans, marketing plans, or other business matters
will be considered proprietary information and will be provided on the
condition that it be retained in confidence and not disclosed to any third
party without the written consent of Zonic. Product specifications,
operating information, performance characterizations and other information
published and made available by Zonic to the general public shall not be
considered confidential information as defined herein.
10. All information in any form transferred by Spectral to Zonic related
to product design, product plans, marketing plans, or other business mattress
will be considered proprietary information and will be provided on the
condition that it be retained in confidence and not disclosed to any third
party without the written consent of Spectral. Product specifications,
operating information, performance characterizations and other information
published and made available by Spectral to the general public shall not be
considered confidential information as defined herein.
11. Either party may terminate this Agreement by providing the other
party 60 days notice of their intention to terminate the agreement except
that the confidentially provisions as described in Articles 9 and 10 of this
Agreement shall be binding on the parties for five (5) years after
termination of this Agreement. Notice shall be considered to have been given
upon delivery of such notice in writing by registered mail
12. This Agreement, including all Exhibits referenced herein,
constitutes the entire agreement between the parties with respect to the
subject matter and supersedes any and all previous agreements,
representations, and understandings, either oral or written between the
parties. This Agreement shall be modified only by an instrument in writing
and signed by the duly authorized representatives of the parties
13. This Agreement will be governed and construed in accordance with the
laws of the State of Ohio.
Spectral Dynamics Zonic Corporation
by: / s / Stewart Slykhous by: / s / James B. Webb
___________________________ ________________________
Stewart Slykhous James B. Webb
President President
page 53
<PAGE>
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 to be signed
on its behalf by the undersigned, thereunto duly authorized.
ZONIC CORPORATION
By: \ s \ James B. Webb
James B. Webb, President
Date: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: \ s \ James B. Webb
James B. Webb, President, Treasurer
Principal Executive Officer,
and Director
Date: June 28, 1996
By: \ s \ John H. Reifschneider
John H. Reifschneider, Controller
Date: June 28, 1996
By: \ s \ Shoiche Sekine
Shoiche Sekine, Executive Vice-
President and Director
Date: June 19, 1996
By: \ s \ Gerald J. Zobrist
Gerald J. Zobrist, Director
Date: June 19, 1996
page 54
<PAGE>
EXHIBIT INDEX
Exhibit No. Name of Exhibit
(3)(I) Amended and Restated Articles of Incorporation (incorporated
by reference)
(3)(ii) Code of Regulations (incorporated by reference).
(3)(iii) Amendment to Article II Section 1 of the Company's Code of
Regulations (incorporated by reference).
(4)(I) Specimen Common Share Certificate (incorporated by reference).
(4)(ii) 1989 Stock Option Plan (incorporated by reference).
(4)(iii) 1991 Executive Stock Option Plan (incorporated by reference).
(10)(I) Partnership Agreement, dated October 7, 1988 between the
Company, A&D Co., Ltd. and A&D Engineering, Inc. (incorporated
by reference).
(10)(ii) Distributorship Agreement, dated October 7, 1988, between
the Company and A&D Co., Ltd. (incorporated by reference).
(10)(iii) Distributorship Agreement, dated October 7, 1988, between
the Company and Zonic-A&D Company (incorporated by reference).
(10)(iv) Sales Promotional Fee Contract, dated October 7, 1988, between
the Company and A&D Co., Ltd. (incorporated by reference).
(10)(v) Distribution Agreement, dated February 26, 1988, between the
Company and A&D Co., Ltd. (incorporated by reference).
(10)(vi) Shareholder Agreement, dated February 21, 1991, between the
Company and A&D Co., Ltd. (incorporated by reference).
(10)(vii) Distribution Agreement, dated February 21, 1991, between the
Company and A&D Co., Ltd. (incorporated by reference).
(10)(viii) Amended and Restated Distribution Agreement, dated March 1,
1992, between the Company and Zonic A&D Ltd. (incorporated by
reference).
(10)(ix) Termination Agreement, dated March 31, 1992, between the
Company and A&D Co., Ltd. (incorporated by reference).
(10)(x) Value Added Reseller U.S. Sales Agreement, dated October 10,
1991, between the Company and Apple Computer, Inc.
(incorporated by reference).
(10)(xi) Credit Agreement, dated December 7, 1992, between the Company
and A&D Co., Ltd. (incorporated by reference).
(10)(xii) Non-Qualified Stock Option granted to A&D Co., Ltd. dated
December 7, 1992 (incorporated by reference).
page 55
<PAGE>
(10)(xiii) Control Agreement, dated December 7, 1992, between the Company
and A&D Co., Ltd. (incorporated by reference).
(10)(xiv) Services Agreement, dated December 7, 1992, between the
Company and A&D Co., Ltd.(incorporated by reference).
(10)(xv) First Lease Amendment, dated September 1, 1993, between the
Company and Duke Associates No. 55 Limited Partnership for the
premises located at Park 50 TechneCenter, 50 W. TechneCenter
Drive, Milford, Ohio (incorporated by reference).
(10)(xvi) Warrant, dated September 1, 1993, between the Company and Duke
Associates No. 55 Limited Partnership (incorporated by
reference).
(10)(xvii) Amendment to Partnership Agreement, dated May 31, 1990,
between the Company, A&D Engineering, Inc. and A&D Co., Ltd.
(incorporated by reference).
(10)(xviii) Second Amendment to the Partnership Agreement, dated
September 30, 1994, between the Company and A&D Engineering,
Inc. (incorporated by reference).
(10)(xix) Capital Contribution Agreement, dated September 30, 1994,
between the Company, A&D Engineering, Inc., Zonic A&D Company
and A&D Co., Ltd. (incorporated by reference).
(10)(xx) Warrant, dated March 16, 1995, between the Company and Star
Bank, National Association, issued in connection with the
discharge infull of the Company's Star Bank indebtedness.
(incorporated by reference).
(10)(xxi) WCA Rights Sale Agreement, dated June 30, 1995, between A&D
Company, Ltd. and the Company. (incorporated by reference).
(10)(xxii) Amendment to Credit agreement, dated June 30, 1995, between
the Company and A&D Company, Ltd. (incorporated by reference).
(10)(xxiii) Amendment to Distribution Agreement, dated June 30, 1995,
between the Company and A&D Company, Ltd.(incorporated by
reference).
(10)(xxiv) WCA Software Source Agreement, dated June 30, 1995, between
A&D Company, Ltd. and the Company. (incorporated by
reference).
(10)(xxv) WCA Manufacturing Agreement, dated June 30, 1995, between A&D
Company, Ltd. and the Company. (incorporated by reference).
(10)(xxvi) OEM Distribution and Confidentiality Agreement, dated
February 12, 1996, between Spectral Dynamics, Inc. and
the Company.
page 56
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-K FOR THE YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRITY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 28,951
<SECURITIES> 0
<RECEIVABLES> 1,104,781
<ALLOWANCES> 70,901
<INVENTORY> 708,917
<CURRENT-ASSETS> 1,775,581
<PP&E> 8,772,452
<DEPRECIATION> 7,305,267
<TOTAL-ASSETS> 3,242,766
<CURRENT-LIABILITIES> 3,742,055
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (4,924,093)
<TOTAL-LIABILITY-AND-EQUITY> 3,242,766
<SALES> 3,639,982
<TOTAL-REVENUES> 3,639,982
<CGS> 1,882,848
<TOTAL-COSTS> 2,831,513
<OTHER-EXPENSES> (1,548,378)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483,968
<INCOME-PRETAX> (9,969)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 397,275
<CHANGES> 0
<NET-INCOME> 387,306
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<FN>
<F1>INCLUDES GAIN FROM SALE OF ASSET OF $1,417,027 AND FOREIGN CURRENCY GAIN
OF $131,351.
</FN>
</TABLE>
