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, 1997.
Commission file number 0-12283.
ZONIC CORPORATION
(Exact name of registrant as specified in its charter)
An Ohio Corporation 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, 1997 was $418,121.
The number of shares outstanding of the registrant's Common Shares as of
June 4, 1997 was 3,044,136.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the August, 1997 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the captions "Business," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation" may constitute forward-looking statements
for purposes of the Securities Act of 1933 and the Securities Exchange Act of
1934, as amended, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievement of the Company to differ materially from
the Company's expectations include, without limitation, the following: 1) the
Company is unable to modify existing products or develop new products which
satisfy needs in the Company's markets; 2) the Company is unable to penetrate
new markets; 3) the Company is unable to retain existing personnel or hire
additional personnel; 4) the industries the Company serves experience less
rapid growth than anticipated; 5) the Company is unable to obtain supplies on
a timely basis from its limited number of suppliers; 6) new competitors enter
the markets the Company serves or existing competitors increase their
marketing efforts; 7) the Company is unable to obtain additional debt or
equity financing on favorable terms, if at all, to satisfy its cash
requirements. All written or oral forward-looking statements attributable to
the Company are expressly qualified in their entirety by such factors.
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PART I
Item 1. Business.
General
Zonic Corporation ("Zonic" or the "Company") designs, manufactures and
markets integrated standard systems which are used to measure and analyze the
vibration and noise characteristics of mechanical structures. These systems
are used world-wide in product design conformance testing, manufactured
product quality verification, and operating machine condition monitoring. Key
technologies utilized by the Company include personal computers and related
peripheral equipment, multi-channel data acquisition, digital signal
processing, structural analysis, noise analysis, and rotating machinery
analysis.
In product design conformance testing, the Company's systems are used by
highly skilled engineers to reduce product development time and enhance the
quality of their company's products during the design phase. In
manufacturing, the Company's systems are used both to measure manufactured
product quality and provide evidence of conformance to quality standards. The
Company's monitoring systems allow maintenance and reliability engineers
responsible for turbines, compressors, and other large rotating equipment to
monitor wear, schedule maintenance, and optimize operating performance.
In November of 1996, the Board of Directors of the Company approved a
plan prepared by management to change the mode in which the Company conducts
business (the "Plan"). The Plan focuses on the manufacturing applications of
Company products primarily in the areas of machine condition monitoring and
production processes monitoring. The Company intends to utilize certain of
its existing products and develop new products to satisfy needs which are
currently not being met in certain niche segments of these markets. As a part
of the Plan, the Company (i) sold its "ZETA Technology", as described herein,
to A&D Company, Ltd. ("A&D"), (ii) disposed of its Xcite product line and
certain other unnecessary fixed assets, (iii) suspended operations and began
the dissolution of Zonic A&D Company, (iv) reduced its work force, and (v)
began the development of technology sharing relationships with key market
partners. The Plan also involves implementing new sales and marketing
initiatives including the hiring of a new Marketing and Sales Vice President
and recruiting additional manufacturer representatives for the Company's
Medallion Product line.
Industry-Applications and Technology
Product Design Conformance 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 based
test systems are a vital tool in helping engineers achieve these goals.
The absence of noise and vibration in mechanical structures is a key
measure of product quality. Advances in mechanical design software have
enabled design engineers to predict and estimate noise and vibration
characteristics through simulation algorithms. Accordingly, quality standards
have been increasingly stringent and verification of a product's conformance
to these standards is crucial to a manufacturer.
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Manufacturing Testing Systems. World class manufacturing requires
consistent quality. At all levels of the manufacturing process, manufacturers
are being forced by their customers to not only incrementally improve quality,
but also provide documentary evidence of the improvement. Although there are
a variety of techniques available to inspect a manufactured component,
vibration analysis techniques offer the advantage of a non-invasive, non-
destructive means to detect cracks and internal flaws of components. Further,
vibration measurements of equipment integral to the manufacture of components
or the end product can be used as a means to document the process under which
that component or end product was produced.
When a vibration analysis system is used for production testing, the
vibration characteristics of an approved component are measured and used as a
baseline. As each component is produced, it is tested and compared to that
baseline. Components that do not match the baseline can be rejected or
receive a more thorough inspection and analysis. A metal casting is an
example of a component for which this technique is applicable. When inspection
on a unit is not practical, such as coiled metals, the machinery producing the
product can be monitored for vibration characteristics which affect the
quality of the product. In both cases, data specific to the manufactured item
can be retained as evidence of the condition of the product at that point in
the manufacturing process.
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.
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.
Relationships
In 1988, the Company entered into a relationship with 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") which was owned 60% by A&D and 40% by
the Company until the Company sold its ownership interest in the product in
June 1995.
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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
$2,480,000 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 and executed a
control agreement whereby the Company 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 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
pursuant to a WCA Rights Sale Agreement. Pursuant to the sale, $2,000,000 was
credited to the Company against the amount owed under the Credit Agreement.
In addition, A&D forgave all accrued but unpaid interest on the loans made by
A&D in the amount of $397,275. In addition, the Control Agreement was then
terminated, the borrowing limit under the Credit Agreement was reduced from
$6,000,000 to $4,000,000 (including amounts due on bank notes guaranteed by
A&D), and A&D appointed the Company as exclusive distributor of the WCA
Product in the Western Hemisphere. The Company has no further ability to
borrow under the Credit Agreement.
Effective December 31, 1996, the Company sold its Zeta technology and
software (the "Zeta Technology") to A&D pursuant to a Confidential "Zeta
Technology" Sale Agreement between A&D and the Company dated December 31,
1996, and related letters (the "Zeta Sale Agreement"). The principal assets
disposed of included the core software (inclusive of its micro code), all the
application software and associated techniques and know-how employed within
the collection of software that the Company has developed and designed for its
System 7000 and WS 7000 product lines. This includes the Zeta phased sine,
Zeta data manager, Zeta intensity and Zeta rotating machinery software. Under
the terms of the Zeta Sale Agreement, the Company retains the right to
distribute the Zeta Technology internationally in exchange for a royalty
payment to A&D in the amount of 15% of the proceeds of the sale of the Zeta
products.
Proceeds from the sale of the Zeta Technology were $3.6 million, and
consisted of (i) two notes receivable, one in the amount of $900,000 due on
March 31, 1997, which was paid in full, and one in the amount of $1.5 million
due on June 30, 1997, the proceeds of which are to be used to pay down the
Company's outstanding bank debt; (ii) a $648,000 set-off against accounts
payable and accrued interest owed to A&D by the Company; and (iii) a $570,000
set-off against loans A&D extended to the Company under the Credit Agreement
and otherwise.
In February of 1996, The Company entered into an OEM Distribution
Agreement with Spectral Dynamics, Inc. ("Spectral") of San Jose California
whereby Spectral agreed to purchase certain products manufactured by Zonic for
integration into products sold by Spectral to end customers. On July 10,
1996, the Company and Spectral amended the Agreement to include the Company's
Medallion product line. The Amendment includes price concessions to Spectral
in consideration of Spectral's agreement to purchase minimum quantities of
Medallion product from Zonic.
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Products
Vibration and noise analysis systems require both hardware and analysis
software. The Company provides both complete systems and components depending
on the specific customer's requirements. In addition to product sales, the
Company offers services to its customers both in the form of training and
consulting, and extended warranty and equipment repairs.
Products offered by the Company include:
A&D 35XX Series - This is a line of single and dual channel FFT
analyzers which the Company imports from A&D in Japan for distribution in the
Western Hemisphere. The products range from hand-held analyzers to dual
channel instruments with a breadth of built-in noise and analysis functions.
The 35XX series products are used both as engineering test instruments and
incorporated in production testing systems. The price range is $4,000 to
$25,000.
Zonic Medallion Series - The Medallion is Zonic's newest product having
been introduced in February 1996 with shipment commencing in June of 1996.
The product was designed for field testing and is integrated with a laptop
personal computer running Microsoft Windows 95 or NT. The base product
includes eight channels of signal conditioning, a digital signal processing
card which fits into the PCMCIA slot of the personal computer, necessary
cables and software. The Company offers accessories including personal
computers, carrying cases, battery packs, and additional analysis software.
The Company also sells third party software packages with Medallion systems.
The price range is $10,000 to $40,000.
A&D WCA (World Class Analyzer) - The WCA is an Apple Macintosh based FFT
analyzer configurable from two to thirty-two input channels. Originally
jointly developed by Zonic and A&D, and jointly owned by both companies, Zonic
sold its 40% interest in the product to A&D in June of 1995. The Company now
imports components from A&D for integration into systems for delivery to end
customers, principally for design testing applications. The line includes a
breadth of analysis software packages and systems range in price from $30,000
to $90,000.
Zonic 7000 Series - The 7000 series was designed to provide cost
effective large channel count systems for applications where simultaneous data
acquisition is crucial. Systems range in size from eight input channels
configured with desktop personal computers running Microsoft Windows NT and PC
based analysis software applications to systems of greater than 500 input
channels controlled by UNIX based workstation computers as a part of
integrated Computer Aided Design and Test systems. The product is modular and
systems can be tailored to specific applications through configuration of
hardware modules and application software modules.
A variety of software is offered, again tailored to the specific
application. For general signal data acquisition and FFT analysis, ZETA
software is used. For structural analysis applications, the Company will
offer either Structural Dynamics Research Corporation's ("SDRC") Master Series
software or Spectral's STAR series software. The Master Series is available
on both UNIX and Windows NT operating systems. Spectral's STAR software is
offered for PC host computer applications only. The Company has Distribution
Agreements with both SDRC and Spectral for the distribution of their software
products.
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Windows NT based 7000 systems have a price range from $25,000 to $130,000
depending on configuration and software content. UNIX based systems sell for
approximately $50,000 to over $1,000,000 primarily due to larger channel
counts and the amount of add-on equipment and services.
Although the Company's sale of its ZETA Technology to A&D (see item 1
Business - Relationships) will adversely affect the cost of sales of the 7000
series product due to the payment of royalties, the Company does not believe
that the sale will have a materially adverse effect on the marketability of
7000 Series products. The Company continues to support its customers for
these products and has no plans to suspend that support.
Zonic Xcite Hydraulic Exciters - This line of products is used by test
engineers to induce vibration into structures for analysis of how the
structure responds to that vibration. A variety of Xcite products are offered
to produce a wide range of vibration levels. The products range in price from
$35,000 to $100,000.
On February 27, 1997, the company sold the Xcite Product line including
substantially all of the related assets to Xcite Systems Corporation.
Proceeds from the sale include $70,000 cash and royalties on future sales of
the Xcite products by Xcite Systems Corporation (not to exceed $110,000). In
connection with this sale, the Company may not engage in the excitation
business for a period of 15 years from the date of the sale, and the Company
granted Xcite Systems Corporation a nonexclusive right to use the "Zonic" mark
in their promotional material for two years from the sale. Gerald J. Zobrist,
a Director of the Company, is an officer and director of Xcite Systems
Corporation, 50% of which is owned by a corporation controlled by Mr. Zobrist.
Machinery Monitoring Systems - The Company designs, assembles, and
markets systems for machinery monitoring. These products have been 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 or longer. Often this equipment is unattended
and is checked infrequently by maintenance personnel.
The Company's Machinery Monitoring Systems are designed to 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 has been tailored to measure the operational
characteristics of specific machines and to meet the needs of each customer.
Machinery Monitoring Systems prices range from $200,000 to $2,000,000
depending on the requirements of the installation.
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The Company's products offered in this market to date have concentrated
on the application of its vibration analysis products to the very high end of
the market. The Company believes there is significant opportunities for
growth in these markets through the application of machinery monitoring
techniques developed by the Company to smaller scale systems for less critical
rotating machinery. Products developed for this market are also applicable to
the Company's production testing applications and, to a lesser extent,
engineering test applications.
Marketing and Distribution
The Company markets its Engineering Testing and Production Test systems
primarily to original equipment manufacturers and suppliers in the aerospace
and transportation industries, while its Machinery Monitoring Systems are
marketed primarily to steel, industrial chemical and petrochemical
manufacturing facilities, and power generation plants.
The Company sells its products world-wide. Export sales accounted for 39%,
56% and 40% of the Company's net revenue during the fiscal years ended March
31, 1997, 1996 and 1995, respectively. See Note F of Notes to Financial
Statements.
As part of their relationship, the Company and A&D 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 marketed both companies'
products in the Western Hemisphere. Zonic A&D Company ceased operations on
April 1, 1997 and is being dissolved. A&D sells Zonic products in the
Japanese market. The Company is the exclusive distributor of the WCA Product
owned by A&D in the Western Hemisphere.
The Company sells its products worldwide, but principally in the United
States, Canada, the Pacific Rim Countries (Korea, Japan, China, etc.) and
India. The Company is represented in these markets by manufacturers
representatives and agents who solicit orders for the Company's products on
behalf of the Company. The Company sells its products and services directly
to the end customer and pays the representative a commission. In Japan, A&D
buys products from the Company for re-sale to end customers.
Major Customers
During the fiscal year ended March 31, 1997, there were two customers who
individually accounted for 10% or more of the Company's total revenues.
Revenues from these two customers amounted to $1,543,000 or 41% of total
revenues. Approximately 29% of total revenue was for one large machinery
monitoring system purchased by a foreign government. Approximately 12% of
total revenue was from one customer for multiple test systems. The Company
does not expect similar revenue levels from individual customers in future
periods. See Note G 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.
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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 Company's
appointed agent in that country. (see item 1 Business - Marketing and
Distribution) The Company's warranty expense was 2.0%, 3.1% and 3.0% of
revenue for fiscal 1997, 1996 and 1995, respectively.
The Company also sells extended warranty service contracts. These
contracts are generally for one year and extend the original warranty
provisions. The contracts can cover hardware products, software products, and
combinations. Most are on a return to factory basis and include software, in
which case, software updates are provided at no additional charge.
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 four 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 $261,000,
$312,000 and $276,000 were capitalized during fiscal years 1997, 1996 and
1995, respectively. Software construction and product enhancement
amortization expenses for fiscal years 1997, 1996 and 1995 were $779,000,
$722,000 and $853,000, respectively. The Company expensed $12,000 and $35,000
for research and product development for fiscal years 1996 and 1995,
respectively. There was no research and product development expense during
1997.
Patents
The Company's primary focus in the area of research and development is
the development of data acquisition and digital signal processing equipment.
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.
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Competition
The Company markets a full range of standard products for use in
analyzing noise and vibration from single channel instruments to systems that
process over 1,000 channels of data. There are different competitors in each
market segment. (see item 1 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.
Competitors in the market for one and two channel analyzers include
Hewlett-Packard Corporation, Ono Sokki (a Japanese company), Stanford Research
Systems, and Bruel & Kjaer (a Danish company).
Competitors with the Company for engineering design test and production
testing include a division of Hewlett-Packard, Bruel & Kjaer (a Danish
company), Data Physics, Ono Sokki (a Japanese company), Signal Processing
Systems, OROS (a French company), and Leuven Measurement Systems, N.V. (a
Belgian company).
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.
Bentley Nevada, Computational Systems, Inc. and ENTEK-IRD are the main
competitors with the Company in machine condition monitoring systems for
smaller scale machinery applications.
Several of the Company's competitors, including the above, have
financial, technical, research, distribution and personnel resources that
exceed those of the Company. There can be no assurance that the Company can
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, 1997 and March 31, 1996 were $216,000 and $1,470,000,
respectively. Most of this decrease related to a large MMS order received in
1996. The backlog for both years includes orders placed by A&D and Zonic A&D
Company.
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Generally, orders can be processed and shipped on products not requiring
modifications from stock within 45 days. 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, 1997, the Company had 20 employees. 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.
Effective June 1, 1997, the Company's Senior Vice President in charge of
engineering resigned as an officer of the Company to pursue other interests.
He remains a part-time employee of the Company working on selected projects.
The Company is recruiting a technical replacement but does not expect to hire
such replacement at the officer level.
Item 2. Properties.
The Company's executive offices and manufacturing facilities 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 for the premises expires
December 31, 2000. The Company believes the facility to be in excess of its
needs through the remainder of the lease and the Landlord has agreed to offer
the facility to other potential tenants. There can be no assurance, however,
that the Company will be successful in obtaining more appropriate facilities
nor that the Landlord or Company will find an alternative tenant.
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.
Through April 1, 1997, Zonic A&D Company occupied approximately 1,000
square feet of these premises. The Company provided the space to Zonic A&D
Company on a rent-free basis pursuant to the Company's agreement with A&D Co.
of Japan. As discussed above, Zonic A&D Company operations were suspended on
April 1, 1997.
Item 3. Legal Proceedings.
The Company occasionally is involved in ordinary routine litigation
incidental to its business. The Company is not involved in any material
pending litigation not covered by insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
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PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters.
(a) The Company's Common Shares are currently listed over-the-counter
on the "OTC Bulletin Board" through the National Daily Quotation Bureau, Inc.
under the symbol "ZNIC"; therefore, there is only limited trading in the
Company's Common Shares. Quarterly trading information is not available.
(b) As of March 31, 1997, there were approximately 599 holders of record of
the Company's Common Shares, without par value, the Company's only class of
common equity. On June 4, 1997, 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, 1997 and March 31, 1996.
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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. See Note B of Notes to
Financial Statements.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net revenues $3,734,706 $3,639,982 $4,860,036 $4,629,665 $7,091,400
Gain on sale
of assets 3,027,551 1,417,027 - - -
Profit (Loss)
before extra-
ordinary item 1,898,113 (9,969) (1,366,481) (6,135,649) (2,871,008)
Profit (Loss) $1,898,113 $ 387,306 $ 447,648 $(6,135,649) $(2,871,008)
Primary Earnings
Net Profit (Loss)
Per Share $.62 $.13 $.14 $(1.99) $(.94)
Fully Diluted
Earnings (Loss)
Per Share:
Net profit (loss)
before extra-
ordinary item $.62 $0 $(.44) $(1.99) $(.94)
Extraordinary
item - gain from
debt restructuring
net of taxes $0 $.13 $.58 $0 $0
Net profit (loss) $.62 $.13 $.14 $(1.99) $(.94)
Total Assets $2,687,484 $3,242,766 $4,387,721 $5,628,446 $10,924,800
Long-term
obligations
(including
long-term debt
and capital
leases less
current
maturities) $ 987,425 $4,070,000 $6,018,761 $7,587,311 $ 7,689,571
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
1997 versus 1996
Revenues. Total revenues increased $95,000 or 3% in fiscal 1997 from the
prior year. Sales increased in MMS products while revenue from WCA and Xcite
products declined. MMS revenue which increased by $810,000 or 300% over the
prior year, was primarily from a large order received in fiscal 1996 that was
completed in fiscal 1997. Revenue from this order was recorded on the
percentage of completion method in accordance with the Company's revenue
recognition policies. Revenue from the Medallion product line which was
introduced during the current year was $457,000. Except as discussed below,
sales in both periods were geographically diverse and not dependent on any one
customer for recurring business, nor specific region of the world. (See Notes
F and G 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 increased in 1997 to 61% compared to 44% in 1996 and 60% in
1995. A foreign government was the Company's largest customer which accounted
for 29% and 11% of total sales in 1997 and 1996, respectively.
Cost of Products and Services Sold. Cost of products and services sold
as a percentage of revenues decreased to 44% in 1997 from 52% in the prior
year. The decrease was due to higher gross margins on the mix of products
sold during the current year and to lower than normal profit margins on two
Workstation 7000 sales and higher material costs related to WCA sales during
1996.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by $347,000 in 1997 from the prior year due primarily to less
commission expense to sales representatives, lower administrative salaries and
the continuing reduction of facility related costs. As a percentage of total
revenue, these expenses decreased to 35% in 1997 compared to 45% in 1996.
Research and Development and Software Construction and Product
Enhancement Amortization. Research and development and software construction
and product enhancement amortization increased by $45,000 or 6% in 1997 versus
1996. This increase was due to shorter estimated useful lives for products
developed during the current year. 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-4 of Notes to the Financial
Statements.)
Writedown of Capitalized Software. During 1997, the Company recorded
expenses of $400,000 for the writedown of previously capitalized software
construction and product enhancement costs. These costs were associated with
software on a specific computer used in the company's large scale MMS which
the Company believes to not be usable in future product sales. (See Liquidity
and Capital Resources which follows and Note A-4 of Notes to the Financial
Statements.)
Page 14
<PAGE>
Gain on the Sale of Asset. In December 1996, the Company sold its Zeta
Technology to A&D for $3,618,578. The gain from this sale is net of the
unamortized portion of capitalized software and product enhancement costs for
the Zeta software, a $46,585 writedown of software construction and product
enhancement costs associated with the expected decline in 7000 product
revenues, a provision of $150,000 for the write-off of excess and obsolete
7000 product inventory, and other expenses related to the sale resulting in a
gain of $3,020,942. Revenue from sales of 7000 products, including Zeta
software was $1,296,872 in fiscal 1997. (See Liquidity and Capital Resources
which follows and Note B of Notes to the Financial Statements.)
In June 1995, the Company sold its 40% ownership rights to the WCA
Product to A&D. 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.
Loss from Affiliate. The Company has recorded expenses of $385,000
during 1997 related to uncollected old accounts receivable from the affiliate
and costs expected to be incurred from the dissolution of Zonic A&D Company.
(See Note I of Notes to the Financial Statements.)
Interest Expense. Interest expense decreased to $389,000 in 1997 from
$486,000 in 1996 as borrowings decreased during the current year. In
addition, the Company realized benefits for the entire year resulting from
the reduction and restructuring of other debt in the prior year. The effect of
the decrease in borrowings was partially offset by interest costs related to
an increase in the sale of trade accounts receivable and higher interest rates
in 1997. Interest capitalized which related to software construction and
product enhancements amounted to $5,000 in 1996. There was no interest
capitalized related to software construction and product enhancements during
1997.
Foreign Currency Gains. Foreign currency gains amounted to $26,000 and
$131,000 in 1997 and 1996, respectively. These gains were due to the increase
in value of the U.S. dollar against the Japanese yen.
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 F and G 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.
Page 15
<PAGE>
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 Note A-4 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 Note N of Notes to the Financial Statements.)
Gain on the Sale of Asset. In June 1995, the Company sold its 40%
ownership of the WCA Product to A&D. 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 Note B 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 amounted to $5,000 and $20,000
in 1996 and 1995, respectively.
Foreign Currency Gains (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 to the
Company under the Credit Agreement. There is no net tax effect of the gain.
(See Note B of Notes to the Financial Statements.)
Page 16
<PAGE>
Liquidity and Capital Resources.
During 1997, the Company used proceeds from the sale of its Zeta
Technology to reduce its loans payable to A&D and to repay a portion of a bank
loan guaranteed by A&D. The Company received two notes receivable from A&D,
one in the amount of $900,000 due March 31, 1997, which has been paid in full,
and one in the amount of $1,500,000 due June 30, 1997, the proceeds of which
are to be used to pay down the Company's outstanding bank debt. At March 31,
1997, the balance of the bank loan guaranteed by A&D was reduced to
$2,600,000. On April 1, 1997, the existing loan agreement was amended into
two separate loan agreements. One loan for the amount of $1,500,000 is due
June 30, 1997 and will be repaid from proceeds of the note receivable from
A&D. A second loan for the amount of $1,100,000 is due April 1, 2001. Proceeds
from the sale in the amount of $570,000 were used to reduce loans payable to
A&D to $605,000 at March 31, 1997. Also, the Company has a $600,000 short-
term note payable to a bank which is guaranteed by A&D due on September 15,
1997. The repayment date for this note cannot be extended and a source of
funds is being sought for repayment of this note. (See Note C of Notes to the
Financial Statements)
Working capital as of March 31, 1997 was a negative $1,959,000 versus a
negative $1,966,000 as of March 31, 1996. Short-term notes payable and
current maturities of long-term obligations increased by more than $2,000,000
during the current year due to the maturing of prior year bank and long-term
obligations. This increase has been substantially offset by a note receivable
from A&D, the reduction of accounts payable and loans payable to A&D and the
elimination of accrued interest resulting from the sale of Zeta Technology to
A&D. In addition, A&D has paid the Company $300,000 during 1997 to promote its
WCA products. This amount was recorded as deferred income with $50,000 earned
during 1997 and recorded as a reduction of selling and administrative expenses
and the remainder to be recognized in future periods as earned.
The Company's operations generated $30,000 of cash flow. Short-term
borrowings from A&D Company less repayment of debt obligations provided an
additional $405,000 in 1997. The Company realized cash proceeds of $919,517
in 1997 from the sale of certain trade receivables. (See Note A-9 of Notes to
Financial Statements.) Investments in software construction and product
enhancement activities used cash of $261,000 and $312,000 in 1997 and 1996,
respectively.
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 the Company's 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.
Page 17
<PAGE>
During the fourth quarter of 1997, revenues decreased significantly from
the level of revenues reported in prior quarters of fiscal 1997. However, the
effect of this decrease was substantially offset by reductions in operating
expenses. Management expects similar declines in revenue to continue at least
through the first half of fiscal 1998. While certain operating costs will
continue to decline, this expected revenue decline will adversely impact the
Company's efforts to meet current and future obligations. (See Notes C and M
of Notes to Financial Statements.)
Item 8. Financial Statements and Supplementary Data.
Financial Statements included as part of this Report:
Page No. Where Located
in Sequential
Numbering System
Independent Auditors' Report . . . . . . . . . . . . . 19
Statements of Operations for the Years
Ended March 31, 1997, 1996 and 1995 . . . . 20
Balance Sheets as of March 31, 1997 and 1996 . 21-22
Statements of Cash Flows for the Years
Ended March 31, 1997, 1996 and 1995 . . . . 23
Statements of Shareholders' Equity for the
Years Ended March 31, 1997, 1996 and 1995 . 24
Notes to Financial Statements . . . . . . . . 25
Page 18
<PAGE>
Independent 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, 1997 and 1996 and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and 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, 1997 and 1996
and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1997 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 disclosed in Note M 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 in regard to these matters are also described in Note M.
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 25, 1997
Page 19
<PAGE>
Statements of Operations
for the Years Ended March 31, 1997, 1996 and 1995
Years ended March 31
1997 1996 1995
---------- ---------- ----------
Products and service revenue $3,734,706 $3,639,982 $4,860,036
Cost of products and services sold 1,645,985 1,882,848 2,369,965
Selling and administrative expenses 1,295,413 1,642,061 2,113,509
Research and development expenses and
software construction and product
enhancement amortization 778,750 733,770 887,808
Writedown of capitalized software 400,000 - -
Costs related to management change and
product discontinuance - 455,682 -
--------- --------- ---------
Total Operating Expenses 4,120,148 4,714,361 5,371,282
--------- --------- ---------
Operating loss (385,442) (1,074,379) (511,246)
Gain on sale and disposal of assets 3,027,551 1,417,027 -
Loss from affiliate (385,000) - -
Interest expense (388,519) (486,286) (749,964)
Other income 3,061 2,318 3,189
Foreign currency gains (losses) 26,462 131,351 (108,460)
--------- --------- ---------
Income (Loss) before taxes and
extraordinary item 1,898,113 (9,969) (1,366,481)
Provision for income taxes - - -
--------- --------- ---------
Income (Loss) before
extraordinary item 1,898,113 (9,969) (1,366,481)
Extraordinary item - gain from debt
restructuring, net of taxes - 397,275 1,814,129
--------- --------- ---------
Net profit $1,898,113 $ 387,306 $ 447,648
========== ========= ==========
Primary earnings per share $ 0.62 $ 0.13 $ 0.14
========== ========= ==========
Fully diluted earnings (loss) per share
Net income (loss) before
extraordinary item $0.62 $ - $(0.44)
Extraordinary item - gain from
debt restructuring, net of taxes - 0.13 0.58
--------- --------- ---------
Net profit $0.62 $0.13 $0.14
========== ========= ==========
Weighted average:
Primary shares outstanding 3,044,136 3,081,497 3,094,136
Fully diluted shares outstanding 3,044,136 3,081,497 3,094,136
Dividends - none in 1997, 1996, or 1995
The accompanying notes are an integral part of these statements.
Page 20<PAGE>
Balance Sheets
as of March 31, 1997 and 1996
March 31
1997 1996
Assets ---- ----
Current Assets
Cash $ 259,494 $ 28,951
Receivables, net of allowance
for doubtful accounts
Trade 266,534 642,311
Related parties 38,873 334,781
Unbilled contracts 14,986 56,788
--------- ---------
Total receivables 320,397 1,033,880
Notes receivable, shareholder 1,470,000 -
Inventories
Finished products 278,412 296,762
Work in process 68,582 102,418
Raw material 72,872 309,737
--------- ---------
Total inventory 419,866 708,917
Prepaid expenses 4,238 3,833
--------- ---------
Total current assets 2,473,995 1,775,581
Property and Equipment-at cost
Furniture and office equipment 430,297 465,421
Machinery and plant equipment 783,137 1,046,580
Software construction and product enhancements 4,802,522 7,260,451
--------- ---------
6,015,956 8,772,452
Less accumulated depreciation and amortization 5,802,467 7,305,267
--------- ---------
213,489 1,467,185
---------- ----------
$2,687,484 $3,242,766
========== ==========
The accompanying notes are an integral part of these statements
Page 21
<PAGE>
Balance Sheets as of March 31, 1997 and 1996 (continued)
March 31
1997 1996
---- ----
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Short term notes payable and
current maturities of long-term obligations $2,841,176 $ 806,316
Accounts payable - trade 718,775 844,685
Accounts payable - related parties 3,738 611,823
Deferred income 353,572 792,977
Accrued liabilities
Salaries and wages 126,007 142,813
Property and payroll taxes 78,196 86,429
Interest 76,536 111,060
Other 234,850 345,952
--------- ---------
Total accrued liabilities 515,589 686,254
--------- ---------
Total current liabilities 4,432,850 3,742,055
Long-term obligations, less current maturities 987,425 4,070,000
Deferred rent 231,070 292,685
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, 1997
and 1996 at stated issue price 61,674 61,674
Additional paid in capital 5,727,881 5,727,881
---------- ----------
5,789,555 5,789,555
Accumulated deficit (8,753,416) (10,651,529)
---------- ----------
Total shareholders' equity (deficit) (2,963,861) (4,861,974)
---------- ----------
$2,687,484 $3,242,766
========== ==========
The accompanying notes are an integral part of these statements.
Page 22
<PAGE>
Statements of Cash Flows
for the Years Ended March 31, 1997, 1996 and 1995
Years ended March 31
1997 1996 1995
---------- ---------- ----------
Cash provided by operations
Net profit for year $1,898,113 $ 387,306 $ 447,648
Adjustments to reconcile net profit
to net cash provided by
operating activities:
Gain from sale of assets (3,027,551) (1,417,027) -
Gain from debt restructuring - (397,275) (1,814,129)
Depreciation and amortization 33,486 55,126 112,153
Amortization of software construction
and product enhancements 778,750 722,039 852,685
Costs related to management change and
product discontinuance - 304,573 -
Write-off of capitalized software costs 400,000 -
Amortization of deferred income (277,797) (274,809) (278,850)
Bad debts provision (recovery) (29,806) 17,135 (12,014)
Provision for obsolete inventories 31,111 36,000 60,000
Amortization of stock options - 57,888 63,144
Loss from affiliates 385,000 - -
Foreign currency (gain) loss and other (26,646) (170,128) 109,751
Increase (decrease) in cash
due to changes in:
Receivables 321,362 (225,525) (17,296)
Inventories 64,595 (164,453) 513,260
Prepaid expenses (405) 171 1,379
Accounts payable and
accrued liabilities (296,605) 388,634 486
Accrued rent (61,615) (61,455) (55,450)
Deferred revenue (expense) and
advanced billings to customers (161,608) 894,817 359,535
--------- --------- ---------
Net cash provided by operations 30,384 153,017 342,302
Cash used in investment activities
Purchase of equipment and
leasehold improvements (9,166) (16,134) (22,171)
Proceeds from sale of fixed assets 72,210 - 41,068
Software construction and
product enhancement expenditures (261,234) (311,947) (276,016)
--------- --------- ---------
Net cash used in investment activities (198,190) (328,081) (257,119)
Cash provided by (used in)
financing activities
Proceeds from short-term notes payable 405,000 300,000 600,000
Repayment of short-term notes and
long-term obligations (6,651) (123,217) (680,647)
--------- --------- ---------
Net cash provided by (used in)
financing activities 398,349 176,783 (80,647)
Increase in cash 230,543 1,729 4,536
Cash - beginning of period 28,951 27,222 22,686
-------- -------- --------
Cash - end of period $259,494 $ 28,951 $ 27,222
======== ======= ========
Interest paid during the year
(net of amounts capitalized) $349,603 $325,683 $419,023
======== ======== ========
The accompanying notes are an integral part of these statements.
Page 23
<PAGE>
Statements of Shareholders' Equity (Deficit)
for the Years Ended March 31, 1997, 1996 and 1995
Additional
Common Preferred Paid in Accumulated
Shares Shares Capital Deficit Total
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)
Net income
for year - - - 1,898,113 $1,898,113
Balance at
March 31, 1997 $61,674 $ - $5,727,881 $(8,753,416) $(2,963,861)
The accompanying notes are an integral part of these statements.
Page 24
<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. Notes Receivable, Shareholder
The Company has a non-interest bearing note receivable from A&D
Company, Ltd. (A&D) resulting from the sale of its Zeta Technology and
software (Zeta Technology) which matures on June 30, 1997 (See Note B of Notes
to the Financial Statements). The cash flow from this note has been
discounted to maturity at a rate consistent with current outstanding debt.
The discount is being amortized on a monthly basis to maturity and recorded as
a reduction in interest expense.
2. 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
$230,670 and $199,559 at March 31, 1997 and 1996, respectively.
3. 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.
4. 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, 1997 and 1996 were:
1997 1996
---- ----
Software construction $136,367 $1,188,184
Product enhancement 0 183,832
-------- ----------
$136,367 $1,372,016
======== ==========
Page 25
<PAGE>
Capitalized costs of software construction and product enhancement and
related information for fiscal years 1997, 1996 and 1995 follow:
1997 1996 1995
---- ---- ----
Capitalized costs
Software construction and
product enhancement $261,234 $306,947 $255,852
Interest - 5,000 20,164
Amortization
Software construction 594,918 723,583 1,112,929
Product enhancement 183,832 99,037 138,928
Development funding - (100,581) (399,172)
Reductions of capitalized
software construction
and product enhancement costs 446,585 79,049 -
Net book value of assets sold 271,552 582,973 -
Research and development expenses - 11,731 35,123
The reduction of capitalized software construction and product
enhancement costs in 1997, was due to the estimated useful lives of certain
products being reduced to reflect management's projection of future revenues.
The 1996 amount was due to the write-off of costs related to a development
project that was not completed, and is included in costs related to management
change and product discontinuance on the accompanying statement of operations.
In 1996, the Company purchased a new product, Medallion, for $60,000.
This amount was included with software construction and product enhancement
costs on the balance sheet.
5. Income Taxes
The Company provides for income taxes using the asset and liability
method required under of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." (See Note H of Notes to the Financial
Statements.)
6. 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 26
<PAGE>
7. Joint Ventures
The Company, along with 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 I of Notes to the Financial Statements for
information relating to the termination of these joint ventures.)
8. 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 for
which production spans more than one fiscal quarter and are material 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.
9. 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. In addition to related party receivables discussed in
Note I, at March 31, 1997 and 1996 two customers accounted for approximately
34% and 56% of total accounts receivable, respectively. The Company's credit
risk is not concentrated in any one industry and the significant receivables
were from different customers in 1997 and 1996. (See Notes F and G of Notes
to the Financial Statements.)
At March 31, 1997 the Company had an allowance for doubtful accounts of
$41,096. At March 31, 1996 such allowances amounted to $1,165,889, including
$1,094,988 related to affiliate receivables. (See Note I of Notes to the
Financial Statements.)
The Company sells 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 were
$919,517 and $605,728 during 1997 and 1996, respectively. At March 31, 1997,
all receivables sold were collected from customers. The amount of receivables
sold which remain uncollected from customers at March 31, 1996, was $66,699 of
which $56,694 was received as proceeds from the sale and reduced the amount of
receivables reported on the balance sheet.
Page 27
<PAGE>
10. Stock Based Compensation
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 - Accounting for Stock-Based
Compensation. The Company has adopted the "disclosure-only" provisions of
SFAS No. 123 during 1997, and continues measuring compensation expense for
stock-based compensation using the intrinsic-value-based method under the
provisions of the standard. (See Note D of Notes to the Financial
Statements.)
11. Earnings Per Share
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 - Earnings per Share in February 1997.
The Company is required to adopt the provisions of SFAS No. 128 during the
third quarter of 1998. The effect of implementing SFAS No. 128 is not
expected to be material. 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 - Sale of Assets
In December 1996, the Company sold its Zeta Technology to A&D. Principal
assets sold included the core software and all the application software and
associated techniques and know-how employed within the collection of software
that the Company has developed and designed for its System 7000 and WS 7000
product lines. Under terms of the sale, the Company has the right to
distribute Zeta Technology by paying a royalty payment to A&D equal to 15% of
Zeta Technology sales made by the Company. The Company is not, however,
obligated to sell the Zeta product.
The sales price of $3,618,578 consisted of (i) two notes receivable, one
in the amount of $900,000 due on March 31, 1997, which has been paid in full,
and one in the amount of $1,500,000 due on June 30, 1997, the proceeds of
which will be used to pay down the Company's outstanding bank debt; (ii) a
$530,000 reduction of accounts payable owed to A&D by the Company; (iii) a
$570,000 reduction of loans A&D has extended to the Company under a Credit
Agreement (the "Credit Agreement") between the parties dated December 17,
1992; and (iv) the elimination of accrued interest totaling $118,578 on loans
payable to A&D. The gain from this sale is net of the unamortized portion of
capitalized software and product enhancement costs for the Zeta software, a
$46,585 writedown of software construction and product enhancement costs
associated with the expected decline in 7000 product revenue, a provision of
$150,000 for the write-off of excess and obsolete 7000 product inventory, and
other expenses related to the sale resulting in a gain of $3,020,942. This
transaction is considered a non-cash transaction on the accompanying Statement
of Cash Flows.
During 1997, the Company requested and received several offers for the
purchase of its Xcite Product line. Management accepted the offer from Xcite
Systems Corporation, 50% of which is owned by a corporation controlled by a
significant shareholder of the Company and current member of the Company's
Board of Directors. The sale price consisted of $70,000 in cash and royalty
payments based on future sales. Due to the contingent nature of the royalty
payments, the Company will recognize any such payments when received. The
Company recorded a gain on this sale of $16,550.
Page 28
<PAGE>
Product revenues from sales relating to the Series 7000 and WS7000
products and the Xcite Product Line were as follows:
1997 1996 1995
---- ---- ----
Series 7000 and WS7000 $ 1,296,872 $ 1,463,922 $ 1,704,807
Xcite Product Line 240,802 348,730 449,892
In June 1995, the Company sold its 40% ownership interest in the WCA
Products to 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.
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 C of Notes to the Financial
Statements)
Note C - Short-Term Note Payable and Long-Term Obligations
Short-term note payable and long-term obligations at March 31 consist of
the following:
1997 1996
----------- -----------
Note payable to bank $ 600,000 $ 600,000
Guaranteed bank loan 2,600,000 3,500,000
Notes payable to A&D 605,000 770,000
Other debt 23,601 6,316
---------- ----------
3,828,601 4,876,316
Less current maturities 2,841,176 806,316
---------- ---------
$ 987,425 $4,070,000
========== ==========
In December 1996, proceeds from the sale of Zeta Technology to A&D
totaling $570,000 were used to reduce outstanding loans to A&D to $605,000.
In addition, the Company received two notes receivable from A&D, one in the
amount of $900,000 which was due and paid on March 31, 1997, the proceeds of
which were used to pay down the Company's guaranteed bank loan. The remaining
note in the amount of $1,500,000 is due on June 30, 1997, and the entire
proceeds will be used to further reduce the Company's guaranteed bank loan.
On April 1 1997, the guaranteed bank loan was amended into two separate
loan agreements. One loan for the amount of $1,500,000 bears interest at
1.25% over the Term FED Funds Rate and both interest and principal are due on
June 30, 1997. The rate for this loan at April 1, 1997 was 7.19%. The other
loan which has a principal balance of $1,100,000 matures on April 1, 2001.
This loan requires monthly interest payments commencing May 1, 1997, at a rate
equal to the bank's cost of funds plus 1.3%. The rate at May 1, 1997 was
7.11%. In addition, monthly principal payments ranging from $22,000 to
$29,000 commence October 1, 1997 until maturity. Both of these loans are
guaranteed by A&D.
Page 29
<PAGE>
Notes payable to A&D amounting to $605,000 bear interest at the prime
rate plus 1%. The prime rate at March 31, 1997 and 1996 was 8.50% and 8.25%,
respectively. No specific date has been set for repayment of these notes.
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, 1997 and 1996 was 7.31% and 7.18%,
respectively. Principal and interest are due on September 15, 1997.
Other debt for $23,601 is a promissory note for the purchase of a company
vehicle. Monthly principal and interest payments are $473, with the final
payment due March 11, 2002. (See Note K of Notes to the Financial Statements.)
The 1996 balance represented a capitalized lease obligation which was paid-off
during 1997.
In fiscal 1996, 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 the Credit Agreement. 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 a 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.
The Company's ability to request additional advances or guarantees under
the Credit Agreement terminated March 31, 1997. The Credit Agreement also
provides that A&D under certain circumstances and using their sole reasonable
judgment may declare the Company in default of the Credit 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 Credit 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 are equal to or less than $3,000,000, and the Company can no
longer request loans as advances under the Credit Agreement. The Credit
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 Credit 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 Credit 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.
Page 30
<PAGE>
The options issued to A&D and the Company's President in connection with
the Credit Agreement were valued by an independent appraiser at $.18 per
share, or $205,200. This amount was recorded as a reduction of long-term debt
and credited to paid-in capital in the accompanying statements and was
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 1995.
In fiscal 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 shares of common stock. At
the time of the extinguishment of debt, the Company was in compliance with all
the covenants of the loan agreement.
Notes payable mature as follows:
Notes Payable
-------------
1998 $ 2,841,176
1999 286,473
2000 322,793
2001 344,133
2002 34,026
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
significant 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.
Note D - Stock Options
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 1997 and 1996 follows:
Number of Weighted Average
Options Exercise Price
--------- -----------
Outstanding at March 31, 1995 1,651,750 1.78
Granted in 1996 190,000 .41
Exercised in 1996 0 -
Forfeited in 1996 (89,750) .77
Outstanding at March 31, 1996 1,752,000 1.68
Granted in 1997 15,000 .30
Exercised in 1997 0 -
Forfeited in 1997 (61,000) .98
Outstanding at March 31, 1997 1,706,000 1.70
Exercisable at March 31, 1996 543,750 1.56
Exercisable at March 31, 1997 609,750 1.40
Page 31
<PAGE>
The following table summarizes information about stock options
outstanding at March 31, 1997.
Options Outstanding Options Exercisable
------------------------------------ ---------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise March 31, Contractual Exercise March 31, Exercise
Prices 1997 Life Price 1997 Price
- ------ ------ ------ ------- -------- -------
.30 to .45 105,000 8.95 .33 48,750 .34
.46 to .65 331,000 6.64 .61 291,000 .63
1.75 to 2.50 1,217,500 5.89 2.02 217,500 2.13
3.63 52,500 4.67 3.63 52,500 3.63
At March 31, 1997, there were 453,500 incentive options and 1,252,500
non-qualified options outstanding and 119,500 shares were available for
granting additional options.
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, 1997, the Company has reserved common shares sufficient to
cover the exercise of outstanding stock options and warrants.
The Company has adopted the "disclosure only" provisions of SFAS No. 123,
therefore no compensation expense has been recognized for stock option grants.
Had compensation expense been determined based upon the fair value (determined
using the Black-Sholes option pricing model) at the grant date, consistent
with the provisions of SFAS No, 123, the Company's income (loss) from
continuing operations would have been the pro forma amounts as follows:
1997 1996
---- ----
Pro forma income (loss) from continuing operations
before extraordinary item $1,884,008 $(23,282)
Pro forma income (loss) from continuing operations
before extraordinary item
per share of common stock $.62 $(.01)
The weighted average fair value of options granted was $.27 in 1997 and
$.29 in 1996. The fair value of each option grant is estimated on the date of
the grant using the Black-Sholes option-pricing model with the following
assumptions used for grants in 1997 and 1996; there is no expected dividend
yield and expected option lives of ten years for both years; expected
volatility of 99% and 80% and risk-free interest rates of 6.5% and 6.0%,
respectively.
Page 32
<PAGE>
Note E - Operating Lease Commitments
In 1995, the Company relocated its operations. The new facilities lease
agreement results in the 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 $231,070 and $292,685 at March 31, 1997 and
1996, 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:
1998 $ 206,124
1999 193,344
2000 193,344
2001 145,008
Rent expense including deferred rent for 1997, 1996 and 1995 was
$132,371, $132,885, and $205,591, respectively.
Note F - Foreign Sales
The Company had foreign sales as follows:
Percent of
Amount Total Sales
------ -----------
1997 $1,445,000 39%
1996 2,027,000 56%
1995 1,957,000 40%
Note G - Sales to Major Customers
The Company had sales to major customers as follows:
Percent of
Customers Amount Total Sales
--------- ------ -----------
1997 2 $1,543,000 41%
1996 1 396,000 11%
1995 1 619,000 13%
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 I
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 and a U.S. company were the Company's largest
customers in 1997 while a foreign government and the U.S. Government were the
major customers in 1996 and 1995, respectively.
Page 33
<PAGE>
Note H - 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 if and when these benefits will be realized. Although the Company
realized profits in 1997 and 1996, 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:
1997 1996
---- ----
Current deferred tax asset:
Reserves not currently deductible $ 102,600 $ 484,015
Deferred revenue 33,134 50,726
Accruals not currently deductible 31,709 77,412
Net operating loss carryforward 7,871 -
--------- --------
Subtotal 175,314 612,153
Current deferred tax liability
Loss from affiliates (175,314) -
--------- --------
Net current deferred tax asset - 612,153
Less valuation allowance - (612,153)
--------- ---------
Net $ - $ -
========== =========
Non-current deferred tax asset:
Net operating loss carry-forward $ 2,305,085 $ 2,205,360
Research, development, and
investment tax credits 650,355 667,278
Write-off and reserve for
software construction and product - 370,139
Deferred income 78,928 99,877
---------- ----------
Subtotal 3,034,368 3,342,654
--------- ---------
Non-current deferred tax liability:
Loss from affiliates - (164,696)
Capital leases and accelerated depreciation (5,015) (3,838)
--------- ---------
Subtotal (5,015) (168,534)
Net non-current deferred tax asset 3,029,353 3,174,120
Less valuation allowance (3,029,353) (3,174,120)
---------- ----------
Net $ - $ -
=========== ===========
Page 34
<PAGE>
The provision for income taxes for the years ended consist of the
following:
1997 1996 1995
---- ---- ----
Deferred expense $ 756,920 $ 59,636 $ 153,157
Reduction in the valuation allowance (756,920) (59,636) (153,157)
Provision for income taxes $ - $ - $ -
At March 31 1997 the Company had net operating loss carry-forwards of
approximately $6.8 million for U.S. Federal tax purposes. Such loss carry-
forwards, if unused as offsets to future taxable income, will expire beginning
in 2001 and continuing through 2012.
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 $650,355 of tax credits primarily comprised of research and
development available for U.S. income tax purposes. These credits expire at
various dates beginning in 1998 and continuing through 2008.
Note I - Related Party Transactions and Bad Debt Expense-Affiliate
The Company has developed a significant relationship with A&D, a 28.1%
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. 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 portion of current and prior year profits are not
recorded as these amounts offset unrecorded losses. The Company's investment
in Zonic A&D Company was zero at March 31, 1997 and 1996 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 1997, the Company and A&D agreed to dissolve Zonic A&D Company to
simplify operations and reduce operating costs. All daily operations were
merged with the Company on April 1, 1997. The dissolution which includes the
distribution of assets and liabilities will occur during 1998. The Company
recorded a provision of $385,000 during 1997 for losses it expects to incur as
a result of the dissolution.
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 35
<PAGE>
Due to continuing losses, the operations of Zonic A&D Ltd. were
significantly reduced in recent years. The partners of Zonic A&D Ltd. now
distribute products in this market directly from their respective operations.
None of the amounts due the Company from Zonic A&D Ltd. are considered
collectable and have been written off. During 1997, Zonic A&D Ltd. was
liquidated. Management had previously recorded a provision for potential
liabilities associated with the reduction and eventual liquidation of these
operations, and as a result incurred no additional expense during the current
year. The operations of Zonic A&D Ltd. were not significant to the Company's
financial statements.
The total reserve against affiliate receivables at March 31, 1997 and
1996 was zero and $1,094,988, respectively. During 1997, the Company wrote
off receivables from Zonic A&D Company of $300,850 which is included in the
$385,000 expense provision mentioned above.
The Company had the following amounts due from/to related parties at the
balance sheet dates:
March 31 March 31
1997 1996
---- ----
Receivable from:
A&D $ 38,873 $ 974
Zonic A&D Company 0 471,375
Zonic A&D Limited 0 957,420
--------- ---------
Total 38,873 1,429,769
Allowance for doubtful accounts - (1,094,988)
-------- ----------
Net receivables $ 38,873 $ 334,781
======== ==========
Accounts payable-A&D $ 3,738 $ 611,823
======== ==========
During 1997 and 1996, the Company purchased from Zonic A&D Company
accounts receivable of $2,053,461 and $1,903,227, respectively, due from end-
user customers in exchange for forgiveness of accounts receivable due from
Zonic A&D Company of the same amount.
The accounts payable to A&D balance was reduced in 1997 due primarily to
$530,000 of sales proceeds resulting from the Company's sale of its Zeta
Technology and software to A&D.
Page 36
<PAGE>
The summarized balance sheets of Zonic A&D Company at March 31, 1997 and
1996 and the results of operations for the years then ended follows:
Zonic A&D Company
Balance Sheets
1997 1996
---- ----
Assets
Current assets $ 1,275 $ 1,104
Fixed and other assets 970 18,226
--------- ---------
Total assets $ 2,245 $ 19,330
========= =========
Liabilities and Deficit
Current liabilities $ 523,760 $ 559,114
Net deficit in owners' capital (521,515) (539,784)
-------- --------
Total liabilities and deficit $ 2,245 $ 19,330
========= =========
Statements of Operations
Net revenue $ 370,580 $ 353,346
Net expenses 352,311 306,518
--------- ---------
Profit from operations $ 18,269 $ 46,828
========= =========
The following summarizes revenues from sales by the Company to A&D, Zonic A&D
Company, and Zonic A&D Ltd. in the aggregate:
Sales for Resale to End-Users
-----------------------------
1997 $ 2,167,375
1996 $ 2,040,206
1995 $ 3,207,032
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
1997, 1996 and 1995 was $370,580, $353,346 and $545,932, respectively.
The Company also purchases components from A&D used principally in the
production of its WCA product line. Such purchases totaled $31,767, $301,889
and $218,990, for 1997, 1996 and 1995, respectively.
Note J - 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.
Page 37
<page
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 $12,067, $14,040 and $15,432 for 1997,
1996 and 1995, respectively. None of the contributions were made in Company
stock.
Note K - 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 1997 and 1996. This offset reduced both current assets
and current liabilities by $74,481 and $156,326 in 1997 and 1996,
respectively, resulting in no gain or loss.
2) The Company received a direct loan for the purchase of fixed
assets in the amount of $23,936.
Note L - Percentage of Completion Contracts
The Company had no contracts in progress at March 31, 1997. With regard
to contracts in progress at March 31, 1996, the Company recognized the
following:
1996
----
Total revenue recognized $ 91,531
Total billings 732,810
-------
Under (Over) billed receivables $ (641,279)
========
Total costs incurred $ 42,518
========
Billings, as specified in the terms of a contract, in excess of revenue
earned have been recorded as deferred income. Unbilled contracts at March 31,
1997 and 1996 include $15,000 and $57,000, respectively, related to amounts
retained by the Company's customers pursuant to the terms of their contracts
Note M - Basis of Financial Statement Presentation
The Company has prepared a business plan for fiscal 1998 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 approximately equal to 1997.
Page 38
<PAGE>
As the result of continuing operating losses, 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 1997 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 N - 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. However, Mr. Zobrist continues to
guarantee past due rents under the Company's prior facilities lease agreement.
(See Note E of Notes to the Financial Statements.) The Company has recorded
$156,640 as costs related to his resignation. Also, in connection with the
change of 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,
1997 and 1996, related accrued costs were zero and $122,931, respectively.
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 21, 1997. 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:
None
Page 39
<PAGE>
(3) Exhibits
EXHIBIT INDEX
Page No. Where
Located in
Sequential
Numbering
Exhibit No. Name of Exhibit System
(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) Sales Promotional Fee Contract,
dated October 7, 1988, between
the Company and A&D Co., Ltd.
(incorporated by reference).
(10)(iv) Distribution Agreement, dated
February 26, 1988, between the
Company and A&D Co., Ltd.
(incorporated by reference).
(10)(v) Shareholder Agreement, dated
February 21, 1991, between the
Company and A&D Co., Ltd.
(incorporated by reference).
(10)(vi) Distribution Agreement, dated
February 21, 1991, between the
Company and A&D Co., Ltd.
(incorporated by reference).
Page 40
<PAGE>
Page No. Where
Located in
Sequential
Numbering
Exhibit No. Name of Exhibit System
(10)(vii) Amended and Restated Distribution
Agreement, dated March 1, 1992,
between the Company and Zonic A&D
Company, Ltd. (incorporated
by reference).
(10)(viii) Termination Agreement, dated
March 31, 1992, between the
Company and A&D Co., Ltd.
(incorporated by reference).
(10)(ix) Value Added Reseller U.S. Sales
Agreement, dated October 10,
1991, between the Company and
Apple Computer, Inc. (incorporated
by reference).
(10)(x) Credit Agreement, dated December 7,
1992, between the Company and A&D
Co., Ltd.(incorporated by reference).
(10)(xi) Non-Qualified Stock Option granted to
A&D Co., Ltd. dated December 7, 1992
(incorporated by reference).
(10)(xii) Services Agreement, dated December 7,
1992, between the Company and A&D Co.,
Ltd.(incorporated by reference).
(10)(xiii) 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)(xiv) Warrant, dated September 1, 1993,
between the Company and Duke
Associates No. 55 Limited Partnership
(incorporated by reference).
(10)(xv) Amendment to Partnership Agreement,
dated May 31, 1990, between the Company,
A&D Engineering, Inc. and A&D Co., Ltd.
(incorporated by reference).
(10)(xvi) Second Amendment to the
Partnership Agreement, dated
September 30, 1994, between the
Company and A&D Engineering, Inc.
(incorporated by reference).
Page 41
<PAGE>
Page No. Where
Located in
Sequential
Numbering
Exhibit No. Name of Exhibit System
(10)(xvii) 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)(xviii) 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).
(10)(xix) WCA Rights Sale Agreement, dated June
30, 1995, between A&D Company, Ltd. and
the Company. (incorporated by reference).
(10)(xx) Amendment to Credit agreement, dated June
30, 1995, between the Company and A&D
Company, Ltd. (incorporated by reference).
(10)(xxi) Amendment to Distribution Agreement,
dated June 30, 1995, between the Company
and A&D Company, Ltd. (incorporated by
reference).
(10)(xxii) WCA Software Source Agreement,
dated June 30, 1995, between A&D
Company, Ltd. and the Company.
(incorporated by reference).
(10)(xxiii) WCA Manufacturing Agreement, dated
June 30, 1995, between A&D Company,
Ltd. and the Company. (incorporated
by reference).
(10)(xxiv) OEM Distribution and Confidentiality
Agreement, dated February 12, 1996
between Spectral Dynamics, Inc. and
the Company. (incorporated by reference).
(10)(xxv) Confidential "Zeta Technology" Sale
Agreement between A&D Company, Ltd.
and the Company dated December 31,
1996. (incorporated by reference).
(10)(xxvi) Loan Agreement and Promissory Note
between the Ashikaga Bank, Ltd.
and the Company dated April 1, 1997. E-1 - E-6
Page 42
<PAGE>
Page No. Where
Located in
Sequential
Numbering
Exhibit No. Name of Exhibit System
(10)(xxvii) Loan Agreement and Promissory Note
between the Ashikaga Bank, Ltd.
and the Company dated April 1, 1997. E-7 - E-12
(10)(xxviii) Promissory Note of the Company in
favor of The Nippon Credit Bank,
Ltd. dated March 11, 1997. E-13 - E-16
(27) Financial Data Schedule E17 - E17
(b) Reports on Form 8-K.
The Company filed a Form 8-K, dated January 14, 1997 reporting the
sale of its Zeta technology and software to A&D Company, Ltd. effective
December 31, 1996. No financial statements were filed with the Form 8-K.
(c) Exhibits.
See subparagraph (a) above.
(d) Financial Statement Schedules.
None.
Page 43
<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: July 8, 1997
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: July 8, 1997
By: /s/ John H. Reifschneider
---------------------------
John H. Reifschneider,
Controller and Principal
Financial and Accounting Officer
Date: July 8, 1997
By: /s/ Shoichi Sekine
-------------------------
Shoichi Sekine, Executive
Vice-President and Director
Date: July 8, 1997
By: /s/ Gerald J. Zobrist
--------------------------
Gerald J. Zobrist, Director
Date: July 8, 1997
Page 44
<PAGE>
EXHIBIT xxvi
LOAN AGREEMENT
THIS LOAN AGREEMENT (as amended from time to time, the "Agreement"),
dated as of the 1st day of April, 1997, between THE ASHIKAGA BANK, LTD., New
York Branch (the "Bank") and ZONIC CORPORATION (the "Borrower"),
WITNESSETH:
WHEREAS, the Borrower desires to borrow an aggregate principal amount of
U.S. One Million Five Hundred Thousand ($1,500,000); and
WHEREAS, subject to the condition that the Borrower cause A&D Company,
Limited, to provide a guaranty to the Bank and upon the terms and conditions
set forth in this Agreement, the Bank is willing to lend the Borrower
$1,500,000;
NOW, THEREFORE, ion consideration of the mutual promises contained herein
and for other valuable considerations, the parties hereto agree as follows:
SECTION 1. LOAN
1.01. Loan. Subject to and upon the terms and conditions set forth in
this Agreement, the Bank agrees to lend to the Borrower an aggregate principal
amount of U.S. One Million Five Hundred Thousand Dollars ($1,500,000)(the
"Loan").
1.02. Repayment. The Borrower shall repay to the Bank the aggregate
principal balance of the Loan outstanding on June 30, 1997 (the "Maturity
Date).
1.03. Interest.
(a) The Borrower agrees to pay interest on the principal balance of
the Loan outstanding on each payment date at a rate per annum equal to the
Term Fed Funds Rate as notified by the Bank to the Borrower plus one and one-
quarter percent (1.25%)(the "Interest Rate"). The interest payment date shall
be the Maturity Date.
(b) All computations of interest shall be made by the Bank on the
basis of a year of 360 days for the actual number of days elapsed.
(c) If any amount owed by the Borrower hereunder is not paid when due,
the Borrower shall pay interest on all such past amounts due at a rate equal
to the Interest Rate plus 2% per annum, payable on demand of the Bank.
1.04. Prepayment and Payments.
(a) Prepayment. The Borrower may prepay the principal of the Loan in
whole or in part before the Maturity Date, without penalty, upon five days'
prior written notice to the Bank.
(b) Payments. Payments of principal of or interest on the Loan and all
other amounts shall be made to the Bank at its office located at One World
Trade Center, New York, New York, in the lawful money of the United Sates and
in immediately available funds. If any payment hereunder is due on a day
which is not a business day, then such payment shall be made on the next
succeeding business day.
Page E-1
<PAGE>
(c) Increased Costs. The Borrower shall pay to the Bank, upon demand,
such amount or amounts as shall be sufficient to compensate the Bank for any
loss, cost or expense incurred by it as a result of (i) any prepayment (or
repayment prior to stated maturity, whether as a result of acceleration or
otherwise) of principal or (ii) increased costs incurred by the Bank as a
result of any change in any applicable law, regulation or interpretation
thereof which imposes requirements in relation to any deposits or extensions
of credit, taxes or other charges, or other conditions with respect to this
Agreement or to the Loan.
SECTION 2. NOTE
Prior to the making of the Loan and as further evidence of the obligation
of the Borrower to pay the principal of and interest on the Loan, the Borrower
shall have issued and delivered to the Bank as of the date hereof a new
promissory note in substantially the form of EXHIBIT A hereto in the principal
amount of the Loan and dated as of the date hereof (the "Note"). Payments
under the Note shall discharge pro tanto the corresponding obligations of the
Borrower hereunder.
SECTION 3. GUARANTY
As security for the due and punctual performance and payment by the Borrower
of all of its obligations hereunder, the Borrower agrees to cause A&D Company,
Limited, having its principal office at Daihatsu-Nissay Ikebukuro Bldg. 5F,
23-24, Higashi-Ikebukuro 3-chome, Toshima-ku, Tokyo 170, Japan (the
"Guarantor"), to provide a new guaranty in accordance with the Bank's standard
form of guaranty (the "Guaranty").
SECTION 4. CONDITION PRECEDENT
The obligation of the Bank to make the Loan is subject to the condition
that the Bank shall have received on or before the date of execution of this
Agreement the following, each dated and effective as of the date hereof and in
form and substance satisfactory to the Bank:
(a) The Note;
(b) The Guaranty;
(c) The latest financial statements of the Borrower; and
(d) Such other documents as the Bank shall reasonably require.
SECTION 5. REPRESENTATION AND WARRANTIES
The Borrower represents and warrants as follows:
(a) Corporate Status. The Borrower is a corporation duly incorporated
and validly existing under the laws of the jurisdiction of its incorporation.
(b) Corporate Power and Authority. The execution, delivery and
performance by the Borrower of this Agreement and the Note are within the
corporate powers of the Borrower, have been duly authorized by all necessary
corporate action, and do not contravene the charter documents of the Borrower
or any law or contractual restriction binding on or affecting the Borrower.
Page E-2
<PAGE>
(c) Approvals. No authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by the Borrower of
this Agreement or the Note.
(d) Legal, Valid and Binding Obligations. This Agreement is, and the Note
when delivered hereunder shall be, legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with the respective
terms thereof.
(e) Litigation. There is no pending or threatened action or
proceeding affecting the Borrower before any court, governmental agency or
arbitrator that may materially and adversely affect the financial condition or
operations of the Borrower.
(f) No Material Misstatement. Neither this Agreement, nor any
documents, financial statements, reports, notices, schedules, certificates,
statements or other writings furnished to the Bank by the Borrower in
connection with this Agreement or the Note contain any untrue or misleading
statement of fact in any material respect. The latest financial statements of
the Borrower which have been furnished to the Bank, fairly present the
financial conditions of the Borrower as of such date and results of the
operations of the Borrower for the period ended on such date, all in
accordance with generally accepted accounting principles consistently applied,
and there has been no material adverse change in such condition or operations.
(g) No Default. There does not exist and will not exist at the closing
date of this Agreement any Event of Default (as defined herein) or any event
which would constitute such an Event of Default but for the passage of time,
the giving of notice, or both.
SECTION 6. AFFIRMATIVE COVENANTS
(a) Financial Statement and Reporting Requirements. The Borrower shall
furnish to the Bank; (i) as soon as available and in any event within 120 days
after the end of each fiscal year of the Borrower, a copy of the annual report
for such year for the Borrower containing financial statement for such year
certified in a manner acceptable to the Bank; and (ii) such other information
respecting the condition or operation, financial or otherwise, of the Borrower
as the Bank may form time to time reasonably request.
(b) Notice. The Borrower shall promptly give notice to writing to the
Bank of (i) the occurrence of a default hereunder or the occurrence of any
event which with notice or the passage of time or both would result in the
occurrence of a default hereunder, (ii) any material adverse condition
affecting the Borrower's operation and (iii) any action, condition or event
known to the Borrower which may materially and adversely affect its
performance of the Agreement.
(c) Further Acts. The Borrower agrees to do such further reasonable
acts and things, and to execute and deliver such assignment, agreement and
instruments, as the Bank may at any time reasonably request in connection with
the administration of enforcement of this Agreement or any part thereof or in
order better to assure and confirm to the Bank its rights, power and remedies
hereunder.
Page E-3
<PAGE>
(d) Payment of Taxes. The Borrower shall pay all amounts payable on
account of the Loan, free and clear of, and without deduction or withholding
for or on account of, any present and future taxes, levies, imposts, duties,
fees, assessments or other charges ("Taxes") imposed, assessed, levied or
collected by or for any governmental authority. If any Taxes shall be
required by law to be deducted or withheld from any payment, the Borrower
shall increase the amount paid so that the Bank receives when due (and is
entitled to retain), after deduction or withholding for or on account of such
Taxes, the full amount of the payments provided for in the Loan.
(e) Pari Passu. The obligations of the Borrower under this Agreement
and the Note are direct, unconditional and general obligations of the
Borrower, which do and will rank until paid in full at least pari passu to all
other unsecured indebtedness of the Borrower.
SECTION 7. EVENTS OF DEFAULT; REMEDIES
If any of the following events shall have occurred:
(a) The Borrower or the Guarantor defaults in the payment of any amount
hereunder in respect of any payment when due, whether at maturity, by
acceleration or otherwise;
(b) Any representation or warranty made to the Bank by the Borrower or
the Guarantor in this Agreement or otherwise, shall prove to have been
incorrect in any material respect;
(c) The Borrower or the Guarantor shall be in default under the terms
of any other obligation for borrowed money or any guaranty or indemnity by
which it is contingently liable which default causes or permits to occur any
acceleration of the obligation thereunder;
(d) The Borrower or the Guarantor shall generally not pay its debts as
such debts become due; the Borrower or the Guarantor shall admit in writing
its inability to pay its debts as they become due, or shall make a general
assignment for the benefit of creditors; or the Borrower or the Guarantor
shall be dissolved, liquidated or wound up or shall cease its corporate
existence; or any proceeding shall be instituted by or against the Borrower or
the Guarantor seeking to adjudicate it bankrupt or insolvent, or seeking its
liquidation, winding up, reorganization, or suspension of payment of its debts
under any law relating to bankruptcy, insolvency, suspension of payments or
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, or other similar official,
for it or for any substantial part of its property; or the Borrower or the
Guarantor shall take any corporate action to authorize any of the actions set
forth above in this subsection;
(e) The Guaranty is not in full force or effect or the Guarantor
disaffirms its obligations thereunder;
(f) At any time, in the reasonable opinion of the Bank, the financial
responsibility of the Borrower or the Guarantor shall become materially
impaired or the value of any security shall materially decline;
Page E-4
<PAGE>
THEN, and in each such Event of Default, the Bank may by written notice
to the Borrower, declare its obligation to make the Loan available to be
terminated and declare to be forthwith due and payable, without further
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower, (a) the outstanding principal of the
Loan (b) interest accrued thereon to the date of payment and (c) all other
amounts payable to the Bank under this Agreement, whereupon the same shall
become forthwith due and payable.
SECTION 8. SET-OFF
Upon the occurrence and during the continuance of any Event of Default,
the Bank is hereby authorized at any time and from time to time, without
notice to the Borrower (any such notice being hereby expressly waived by the
Borrower), to set off and apply any and all credit balances and deposits
(general or special, time or demand, provisional or final) at any time held
and other indebtedness at any time owing by the Bank to or for the credit or
the account of the Borrower against any and all obligations and liabilities of
the Borrower to the Bank now or hereafter existing, regardless of whether the
Bank shall have made any demand and even though such obligations and
liabilities may be unmatured. The Bank agrees promptly to notify the Borrower
after any such set-off and application, provided that the failure to give such
notice shall not affect the validity of such set-off and application.
SECTION 9. GOVERNING LAW
This Agreement and the Note shall be governed by and construed in
accordance with the laws of the State of New York.
SECTION 10. MISCELLANEOUS
(a) No Waiver; Remedies Cumulative. No failure on the part of the Bank
to exercise, and no delay in exercising, any right, power or privilege under
this Agreement shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege under this Agreement
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any other
remedies provided by law.
(b) Payment of Expenses. The Borrower shall reimburse the Bank upon
demand for the Bank's expenses of collection, including legal fees and
disbursements of counsel, in case of default in the payment when due of the
principal of or interest on the Loan.
(c) Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or transfer its rights
hereunder.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior communications, understandings and agreements relating
thereto, including, but not limited to, the Existing Loan Agreements, except
as otherwise herein provided.
(e) Amendment. This Agreement may not be modified or amended in any
way except by agreement in writing between the Bank and the Borrower.
Page E-5
<PAGE>
(f) Consent to Jurisdiction. THE BORROWER AGREES THAT ANY LEGAL ACTION
OR PROCEEDINGS AGAINST THE BORROWER WITH RESPECT TO THE LOAN OR THE NOTE MAY
BE BROUGHT IN THE SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK
OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK.
THE BORROWER AGREES THAT PROCESS IN ANY LEGAL ACTION OR PROCEEDINGS WITH
RESPECT TO THE LOAN OR THE NOTE, MAY BE SERVED ON THE BORROWER WITHIN OR
OUTSIDE SUCH COURTS TERRITORIAL JURISDICTION BY REGISTERED OR CERTIFIED MAIL
OR BY PERSONAL SERVICE AT THE BORROWER'S ADDRESS SET FORTH HEREIN. THE
BORROWER FURTHER WAIVES ANY OBJECTIONS TO THE VENUE AND CONVENIENCE OF THE
FORUM WITH RESPECT TO ANY SUCH ACTION REFERRED TO IN THIS PARAGRAPH WHICH IS
BROUGHT BEFORE A COURT SITTING IN NEW YORK.
(g) Notices. Any notices required to be furnished hereunder shall be
mailed, telegraphed, sent by telex with answer back or delivered to the
address set forth on the signature page hereof. All notices shall be
effective upon actual receipt by the addressee, except for telexes which shall
be effective upon receipt of answer back by the sender.
(h) Counterparts. This Agreement may be signed in two counterparts,
each of which when so executed by all the parties hereto shall be deemed an
original.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized.
ZONIC CORPORATION THE ASHIKAGA BANK, LTD.
50 West Technecenter Drive New York Branch
Milford, Ohio 45150-9777 One World Trade Center
Attention: Mr. James B. Webb New York, New York 10048
Attention: Mr. H. Soeta
Facsimile: (513) 248-1589
Facsimile: (212) 432-5400
By: / s / James Webb By: / s / Shoichi Mori
Name: James Webb Name: Shoichi Mori
Title: President Title: General Manager
Page E-6
<PAGE>
EXHIBIT xxvii
LOAN AGREEMENT
THIS LOAN AGREEMENT (as amended from time to time, the "Agreement"),
dated as of the 1st day of April, 1997, between THE ASHIKAGA BANK, LTD., New
York Branch (the "Bank") and ZONIC CORPORATION (the "Borrower"),
WITNESSETH:
WHEREAS, the Borrower desires to borrow an aggregate principal amount of
U.S. One Million One Hundred Thousand ($1,100,000); and
WHEREAS, subject to the condition that the Borrower cause A&D Company,
Limited, to provide a guaranty to the Bank and upon the terms and conditions
set forth in this Agreement, the Bank is willing to lend the Borrower
$1,100,000;
NOW, THEREFORE, ion consideration of the mutual promises contained herein
and for other valuable considerations, the parties hereto agree as follows:
SECTION 1. LOAN
1.01. Loan. Subject to and upon the terms and conditions set forth in
this Agreement, the Bank agrees to lend to the Borrower an aggregate principal
amount of U.S. One Million One Hundred Thousand Dollars ($1,100,000)(the
"Loan").
1.02. Repayment. The Borrower shall repay to the Bank the principal
balance of the Loan outstanding on April 1, 2001 (the "Maturity Date") and on
principal repayment dates prior to the Maturity Date in the amounts and on the
dates specified in the Schedule of Repayments attached hereto as Schedule 1,
or on such earlier date as may be required pursuant to other provisions of
this Agreement.
1.03. Interest.
(a) The Borrower agrees to pay interest on the principal balance of
the Loan outstanding on each payment date at a rate per annum equal to the
Bank's cost of funds as notified by the Bank to the Borrower plus one and
three-tenths percent (1.30%) (the "Interest Rate). The Interest Rate shall be
reset every month on the date which is two business days prior to the first
day of such one month period. The first interest payment shall be May 1,
1997, and subsequent interest payment dates shall occur every month thereafter
and on the Maturity Date.
(b) All computations of interest shall be made by the Bank on the
basis of a year of 360 days for the actual number of days elapsed.
(c) If any amount owed by the Borrower hereunder is not paid when due,
the Borrower shall pay interest on all such past amounts due at a rate equal
to the Interest Rate plus 2% per annum, payable on demand of the Bank.
1.04. Prepayment and Payments.
(a) Prepayment. The Borrower may prepay the principal of the Loan in
whole or in part before the Maturity Date, without penalty, upon five days'
prior written notice to the Bank.
Page E-7
<PAGE>
(b) Payments. Payments of principal of or interest on the Loan and all
other amounts shall be made to the Bank at its office located at One World
Trade Center, New York, New York, in the lawful money of the United Sates and
in immediately available funds. If any payment hereunder is due on a day
which is not a business day, then such payment shall be made on the next
succeeding business day.
(c) Increased Costs. The Borrower shall pay to the Bank, upon demand,
such amount or amounts as shall be sufficient to compensate the Bank for any
loss, cost or expense incurred by it as a result of (i) any prepayment (or
repayment prior to stated maturity, whether as a result of acceleration or
otherwise) of principal or (ii) increased costs incurred by the Bank as a
result of any change in any applicable law, regulation or interpretation
thereof which imposes requirements in relation to any deposits or extensions
of credit, taxes or other charges, or other conditions with respect to this
Agreement or to the Loan.
SECTION 2. NOTE
Prior to the making of the Loan and as further evidence of the obligation
of the Borrower to pay the principal of and interest on the Loan, the Borrower
shall have issued and delivered to the Bank as of the date hereof a new
promissory note in substantially the form of EXHIBIT A hereto in the principal
amount of the Loan and dated as of the date hereof (the "Note"). Payments
under the Note shall discharge pro tanto the corresponding obligations of the
Borrower hereunder.
SECTION 3. GUARANTY
As security for the due and punctual performance and payment by the
Borrower of all of its obligations hereunder, the Borrower agrees to cause A&D
Company, Limited, having its principal office at Daihatsu-Nissay Ikebukuro
Bldg. 5F, 23-24, Higashi-Ikebukuro 3-chome, Toshima-ku, Tokyo 170, Japan (the
"Guarantor"), to provide a new guaranty in accordance with the Bank's standard
form of guaranty (the "Guaranty").
SECTION 4. CONDITION PRECEDENT
The obligation of the Bank to make the Loan is subject to the condition
that the Bank shall have received on or before the date of execution of this
Agreement the following, each dated and effective as of the date hereof and in
form and substance satisfactory to the Bank:
(a) The Note;
(b) The Guaranty;
(c) The latest financial statements of the Borrower; and
(d) Such other documents as the Bank shall reasonably require.
SECTION 5. REPRESENTATION AND WARRANTIES
The Borrower represents and warrants as follows:
(a) Corporate Status. The Borrower is a corporation duly incorporated
and validly existing under the laws of the jurisdiction of its incorporation.
Page E-8
<PAGE>
(b) Corporate Power and Authority. The execution, delivery and
performance by the Borrower of this Agreement and the Note are within the
corporate powers of the Borrower, have been duly authorized by all necessary
corporate action, and do not contravene the charter documents of the Borrower
or any law or contractual restriction binding on or affecting the Borrower.
(c) Approvals. No authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by the Borrower of
this Agreement or the Note.
(d) Legal, Valid and Binding Obligations. This Agreement is, and the
Note when delivered hereunder shall be, legal, valid and binding obligations
of the Borrower enforceable against the Borrower in accordance with the
respective terms thereof.
(e) Litigation. There is no pending or threatened action or
proceeding affecting the Borrower before any court, governmental agency or
arbitrator that may materially and adversely affect the financial condition or
operations of the Borrower.
(f) No Material Misstatement. Neither this Agreement, nor any
documents, financial statements, reports, notices, schedules, certificates,
statements or other writings furnished to the Bank by the Borrower in
connection with this Agreement or the Note contain any untrue or misleading
statement of fact in any material respect. The latest financial statements of
the Borrower which have been furnished to the Bank, fairly present the
financial conditions of the Borrower as of such date and results of the
operations of the Borrower for the period ended on such date, all in
accordance with generally accepted accounting principles consistently applied,
and there has been no material adverse change in such condition or operations.
(g) No Default. There does not exist and will not exist at the closing
date of this Agreement any Event of Default (as defined herein) or any event
which would constitute such an Event of Default but for the passage of time,
the giving of notice, or both.
SECTION 6. AFFIRMATIVE COVENANTS
(a) Financial Statement and Reporting Requirements. The Borrower shall
furnish to the Bank; (i) as soon as available and in any event within 120 days
after the end of each fiscal year of the Borrower, a copy of the annual report
for such year for the Borrower containing financial statement for such year
certified in a manner acceptable to the Bank; and (ii) such other information
respecting the condition or operation, financial or otherwise, of the Borrower
as the Bank may form time to time reasonably request.
(b) Notice. The Borrower shall promptly give notice to writing to the
Bank of (i) the occurrence of a default hereunder or the occurrence of any
event which with notice or the passage of time or both would result in the
occurrence of a default hereunder, (ii) any material adverse condition
affecting the Borrower's operation and (iii) any action, condition or event
known to the Borrower which may materially and adversely affect its
performance of the Agreement.
Page E-9
<PAGE>
(c) Further Acts. The Borrower agrees to do such further reasonable
acts and things, and to execute and deliver such assignment, agreement and
instruments, as the Bank may at any time reasonably request in connection with
the administration of enforcement of this Agreement or any part thereof or in
order better to assure and confirm to the Bank its rights, power and remedies
hereunder.
(d) Payment of Taxes. The Borrower shall pay all amounts payable on
account of the Loan, free and clear of, and without deduction or withholding
for or on account of, any present and future taxes, levies, imposts, duties,
fees, assessments or other charges ("Taxes") imposed, assessed, levied or
collected by or for any governmental authority. If any Taxes shall be
required by law to be deducted or withheld from any payment, the Borrower
shall increase the amount paid so that the Bank receives when due (and is
entitled to retain), after deduction or withholding for or on account of such
Taxes, the full amount of the payments provided for in the Loan.
(e) Pari Passu. The obligations of the Borrower under this Agreement
and the Note are direct, unconditional and general obligations of the
Borrower, which do and will rank until paid in full at least pari passu to all
other unsecured indebtedness of the Borrower.
SECTION 7. EVENTS OF DEFAULT; REMEDIES
If any of the following events shall have occurred:
(a) The Borrower or the Guarantor defaults in the payment of any amount
hereunder in respect of any payment when due, whether at maturity, by
acceleration or otherwise;
(b) Any representation or warranty made to the Bank by the Borrower or
the Guarantor in this Agreement or otherwise, shall prove to have been
incorrect in any material respect;
(c) The Borrower or the Guarantor shall be in default under the terms
of any other obligation for borrowed money or any guaranty or indemnity by
which it is contingently liable which default causes or permits to occur any
acceleration of the obligation thereunder;
(d) The Borrower or the Guarantor shall generally not pay its debts as
such debts become due; the Borrower or the Guarantor shall admit in writing
its inability to pay its debts as they become due, or shall make a general
assignment for the benefit of creditors; or the Borrower or the Guarantor
shall be dissolved, liquidated or wound up or shall cease its corporate
existence; or any proceeding shall be instituted by or against the Borrower or
the Guarantor seeking to adjudicate it bankrupt or insolvent, or seeking its
liquidation, winding up, reorganization, or suspension of payment of its debts
under any law relating to bankruptcy, insolvency, suspension of payments or
reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a receiver, trustee, or other similar official,
for it or for any substantial part of its property; or the Borrower or the
Guarantor shall take any corporate action to authorize any of the actions set
forth above in this subsection;
(e) The Guaranty is not in full force or effect or the Guarantor
disaffirms its obligations thereunder;
Page E-10
<PAGE>
(f) At any time, in the reasonable opinion of the Bank, the financial
responsibility of the Borrower or the Guarantor shall become materially
impaired or the value of any security shall materially decline;
THEN, and in each such Event of Default, the Bank may by written notice
to the Borrower, declare its obligation to make the Loan available to be
terminated and declare to be forthwith due and payable, without further
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower, (a) the outstanding principal of the
Loan (b) interest accrued thereon to the date of payment and (c) all other
amounts payable to the Bank under this Agreement, whereupon the same shall
become forthwith due and payable.
SECTION 8. SET-OFF
Upon the occurrence and during the continuance of any Event of Default,
the Bank is hereby authorized at any time and from time to time, without
notice to the Borrower (any such notice being hereby expressly waived by the
Borrower), to set off and apply any and all credit balances and deposits
(general or special, time or demand, provisional or final) at any time held
and other indebtedness at any time owing by the Bank to or for the credit or
the account of the Borrower against any and all obligations and liabilities of
the Borrower to the Bank now or hereafter existing, regardless of whether the
Bank shall have made any demand and even though such obligations and
liabilities may be unmatured. The Bank agrees promptly to notify the Borrower
after any such set-off and application, provided that the failure to give such
notice shall not affect the validity of such set-off and application.
SECTION 9. GOVERNING LAW
This Agreement and the Note shall be governed by and construed in
accordance with the laws of the State of New York.
SECTION 10. MISCELLANEOUS
(a) No Waiver; Remedies Cumulative. No failure on the part of the Bank
to exercise, and no delay in exercising, any right, power or privilege under
this Agreement shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege under this Agreement
preclude any other or further exercise of any right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any other
remedies provided by law.
(b) Payment of Expenses. The Borrower shall reimburse the Bank upon
demand for the Bank's expenses of collection, including legal fees and
disbursements of counsel, in case of default in the payment when due of the
principal of or interest on the Loan.
(c) Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that the Borrower may not assign or transfer its rights
hereunder.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior communications, understandings and agreements relating
thereto, including, but not limited to, the Existing Loan Agreements, except
as otherwise herein provided.
Page E-11
<PAGE>
(e) Amendment. This Agreement may not be modified or amended in any
way except by agreement in writing between the Bank and the Borrower.
(f) Consent to Jurisdiction. THE BORROWER AGREES THAT ANY LEGAL ACTION
OR PROCEEDINGS AGAINST THE BORROWER WITH RESPECT TO THE LOAN OR THE NOTE MAY
BE BROUGHT IN THE SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK
OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK.
THE BORROWER AGREES THAT PROCESS IN ANY LEGAL ACTION OR PROCEEDINGS WITH
RESPECT TO THE LOAN OR THE NOTE, MAY BE SERVED ON THE BORROWER WITHIN OR
OUTSIDE SUCH COURTS TERRITORIAL JURISDICTION BY REGISTERED OR CERTIFIED MAIL
OR BY PERSONAL SERVICE AT THE BORROWER'S ADDRESS SET FORTH HEREIN. THE
BORROWER FURTHER WAIVES ANY OBJECTIONS TO THE VENUE AND CONVENIENCE OF THE
FORUM WITH RESPECT TO ANY SUCH ACTION REFERRED TO IN THIS PARAGRAPH WHICH IS
BROUGHT BEFORE A COURT SITTING IN NEW YORK.
(g) Notices. Any notices required to be furnished hereunder shall be
mailed, telegraphed, sent by telex with answer back or delivered to the
address set forth on the signature page hereof. All notices shall be
effective upon actual receipt by the addressee, except for telexes which shall
be effective upon receipt of answer back by the sender.
(h) Counterparts. This Agreement may be signed in two counterparts,
each of which when so executed by all the parties hereto shall be deemed an
original. IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized.
ZONIC CORPORATION THE ASHIKAGA BANK, LTD.
50 West Technecenter Drive New York Branch
Milford, Ohio 45150-9777 One World Trade Center
Attention: Mr. James B. Webb New York, New York 10048
Attention: Mr. H. Soeta
Facsimile: (513) 248-1589
Facsimile: (212) 432-5400
By: / s / James Webb By: / s / Shoichi Mori
Name: James Webb Name: Shoichi Mori
Title: President Title: General Manager
Page E-12
<PAGE>
EXHIBIT xxviii
PROMISSORY NOTEUS
$600,000.00 March 11, 1997
Zonic Corporation ("Borrower") promises to pay to the order of the Nippon
Credit Bank, Ltd., New York Branch ("Bank") at its office at 245 Park Avenue,
New York, New York 10167, or at such other place as Bank may designate in
writing, in lawful money of the United States of America, the principal sum of
six hundred thousand Dollars ($600,000.00), or so much thereof as may be
advanced (at the sole and absolute discretion of Bank) and outstanding as is
reflected on the schedule attached hereto, with interest on each advance under
this Note from the date it is disbursed until maturity, whether scheduled or
accelerated. Interest on each advance hereunder shall, until its stated
maturity, accrue at the interest rate equal to 1.50% over the Applicable
Interest Rate. "Applicable Interest Rate" shall mean a rate per annum, fixed
for a period equal to the period during which such advance is outstanding (the
"Advance Period"), at the interest rate either LIBOR interest rate determined
by Bank (NCB's LIBOR Rate") on the first day of the Advance Period or Federal
Funds Rate determined by Bank ("NCB's Federal Funds Rate") on the first day of
the Advance Period at Borrower's option; provided however that Bank and
Borrower may agree to use NCB's LIBOR Rate or NCB's Federal Funds Rate of the
date which is one or two days prior to the first date of such Advance Period.
Bank shall have no obligation to lend any amount hereunder, under any
circumstances, to Borrower, except if Bank shall determine, in its sole and
absolute discretion, to advance any sum.
During the term of this Note, Borrower may borrow, repay and re-borrow as
Borrower may elect, subject to all limitations, terms and conditions contained
herein and in any other agreements or documents executed in connection with
this Note; provided, however, that the outstanding principal balance of this
Note shall at no time exceed the maximum principal amount stated above.
Further, if Borrower should repay any advance prior to its stated maturity,
Borrower shall reimburse Bank for all costs incurred by Bank (as determined by
Bank) as a result of the timing of such prepayment, including but not limited
to, any funding losses. No advance hereunder shall have a term longer than
six months.
Principal and interest on each advance shall be due and payable on the
last day of the relevant advance period and, in the case of an advance with
the period of more than three months' duration payable on the day that
interest would have been payable had successive advance period of three-month
duration. No advances shall, under any circumstances, be made after August
29, 1997. In any case, all advances and interest thereon shall be due and
payable on September 30, 1997. The principal of and interest on each advance
shall be evidenced by entries on the schedule attached hereto for such
purpose. Each payment on and any other credits with respect to the principal
of and interest on each advance shall be evidenced by entries on such
schedule. Such schedule shall be conclusive evidence thereof.
Each advance shall be made to one of Borrower's accounts, as Borrower
shall direct Bank in writing.
Page E-13
<PAGE>
Advances may be requested in writing, by telephone, telex or otherwise on
behalf of Borrower. Borrower recognizes and agrees that Bank cannot
effectively determine whether a specific request purportedly made by or on
behalf of Borrower is actually authorized or authentic. As it is in
Borrower's best interest that Bank advance funds in response to these forms of
request, Borrower assumes all risks regarding the validity, authenticity and
due authorization of any request purporting to be made by or on behalf of
Borrower. Borrower promises to repay any sums, which interest, that are
advanced by Bank pursuant to any request, which Bank in good faith believes to
be authorized, or when the proceeds of any advance are deposited to the
account of Borrower with Bank, regardless of whether any individual or entity
("Person") other than Borrower may have authority to draw against such
account.
The obligation of Bank to make any advance to Borrower the proceeds of
which are, at Borrower's request, to be wire transferred to Borrower or any
other Person, shall be subject to all applicable laws and regulations, and the
policy of the Board of Governors of the Federal Reserve System on Reduction of
Payments System Risk in effect from time to time ("Applicable Law and
Policy"). Borrower acknowledges that, as a result of Applicable Law and
Policy, the transmission of the proceeds of any advance which Borrower has
requested to be wire-transferred may be significantly delayed.
The unpaid principal balance and all payments of interest on this Note
shall bear interest from their respective maturities, whether scheduled or
accelerated, at a fluctuating rate per annum at all times equal to the Prime
Rate plus 2%, until paid in full, whether before or after judgment. The
"Prime Rate" is the fluctuating rate per annum at all times equal to the rate
Bank from time to time establishes as its prime rate, the Prime Rate to change
as and when such prime rate is changed by Bank. The Prime Rate is a rate set
by Bank based upon various factors including general economic and market
conditions, and is used as a reference point for pricing certain loans, it
being understood and agreed that Bank may price its loans at, above, or below
the Prime Rate.
Interest and fees shall be calculated for actual days elapsed on the
basis of a 360-day year. In no event shall Borrower be obligated to pay
interest at a rate in excess of the highest rate permitted by applicable law
from time to time in effect.
The occurrence of any of the following shall, at Bank's option, (1) make
all sums of interest, principal and any other amounts owing under any Loan
Documents immediately due and payable without notice of default, presentment
or demand for payment, protest or notice of nonpayment or dishonor or any
other notices or demands; and (2) give Bank the right to exercise any other
right or remedy provided by contract or applicable law;
(a) Borrower shall fail to make any payment of principal or
interest when due under this Note or to pay any fees or other charges when
due. Or Borrower or any other Person shall fail to provide Bank with, or to
perform any obligation under this Note or any contract, instrument, addendum
or document executed in connection with this Note, including without
limitation any guaranty (including this Note, each a "Loan Document").
Page E-14
<PAGE>
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower or any guarantor
("Guarantor") of the obligations evidenced by this Note ("Obligations") shall
prove to have been false or misleading.
(c) Borrower or Guarantor shall file any petition or action for
relief under any bankruptcy, insolvency, reorganization, moratorium, creditor
composition law, or any other law for the relief of or relating to debtors; an
involuntary petition shall be failed under any bankruptcy law against Borrower
or any Guarantor, or a custodian, receiver, trustee, assignee for the benefit
or creditors, or other similar official, shall be appointed to take
possession, custody or control of the properties of Borrower or any Guarantor,
or the death, incapacity, dissolution or termination of the business of
Borrower or any Guarantor.
(d) Borrower or Guarantor shall fail to make any payment in
respect of any material indebtedness (other than that evidenced hereby or
arising hereunder) when due or any event or condition shall occur which
results in the acceleration of the maturity of any such indebtedness or
enables (or, with the giving of notice or lapse of time or both, would enable)
the holder of such indebtedness or any Person acting on such holder's behalf
to accelerate the maturity thereof; or any guaranty of the Obligations shall
cease to be in full force and effect for any reason whatsoever.
(e) Any governmental or regulatory authority shall take any
material action, any defined benefit pension plan maintained by Borrower or
any Guarantor shall have any unfunded liabilities; any of which, in the
reasonable judgment of Bank, might have a material adverse effect on the
financial condition or business of Borrower of any Guarantor.
(f) Any sale, transfer or other disposition of all or a
substantial or material part of the assets of Borrower or any Guarantor,
including without limitation to any trust or similar entity, shall occur.
(g) Any Person shall fail to perform its obligations under the
terms of any promissory note, contract or other obligation that is held by
Bank as Collateral for the Obligations.
(h) Any material judgment(s) shall be entered against Borrower or
any Guarantor, or any involuntary lien(s) of any kind or character shall
attach to any assets or property of Borrower or any Guarantor, any of which,
in the reasonable judgment of Bank, might have a material adverse effect on
the financial condition or business of Borrower of any Guarantor.
(i) Without Bank's prior written consent: if Borrower is a
corporation, Borrower's shareholders of record as of the date of this Note
shall cease to own a majority of the voting interest in Borrower; or any
change shall occur in the executive management or managing partner(s) of
Borrower; or any change shall occur in the corporate or legal structure of
Borrower.
(j) Borrower shall fail to perform any of its duties or
obligations under any Loan Document not specifically referenced herein below.
Page E-15
<PAGE>
No failure or delay on the part of Bank in exercising any power, right or
privilege under any Loan Document shall operate as a waiver thereof, and no
single or partial exercise of any such power, right or privilege shall
preclude any further exercise thereof or the exercise of any bother power,
right or privilege.
Borrower shall reimburse Bank for all costs and expenses, including without
limitation reasonable attorneys' fees, expended or incurred by Bank in any
arbitration, judicial reference, legal action or otherwise in connection with
(a) the enforcement of the Loan Documents, including without limitation during
any workout, attempted workout, and/or in connection with the rendering of
legal advise as to Bank's rights, remedies and obligations under the Loan
Documents; (b) collecting any sum which becomes due Bank under any Loan
Document; (c) any proceeding for declaratory relief, any counter claim to any
proceeding, or any appeal; or (d) the protection, preservation or enforcement
of any rights or remedies of Bank.
Borrower, endorser and Guarantor of this Note hereby waive diligence,
presentment for payment, demand, notice of non-payment and dishonor, protest
and notice of protest and (to the full extend permitted by law) the right to
plead any statute of limitations as a defense to any demand hereunder or in
connection with any security herefore, waive trail by jury in any action or
proceeding arising on, out of, under or by reason of this Note; and consent to
any renewals and extensions before or after the maturity hereof and partial
payments of this Note or the indebtedness for which it is given without notice
to them and consent that no such renewals, extensions or partial payment shall
discharge any party hereto from liability hereto in whole or in part.
Borrower hereby irrevocably submits to the non-exclusive jurisdiction of
the United States District Court for the Southern District of New York and of
any New York State Court sitting in New York City for purposes of all legal
proceedings arising out of or relating to this Note. Borrower irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York.
Zonic Corporation
By: / s / James B. Webb
Names: James B. Webb
Title: President & Treasurer
Page E-16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRITY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 259,494
<SECURITIES> 0
<RECEIVABLES> 1,831,493
<ALLOWANCES> 41,096
<INVENTORY> 419,866
<CURRENT-ASSETS> 2,473,995
<PP&E> 6,015,956
<DEPRECIATION> 5,802,467
<TOTAL-ASSETS> 2,687,484
<CURRENT-LIABILITIES> 4,432,850
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (3,025,535)
<TOTAL-LIABILITY-AND-EQUITY> 2,687,484
<SALES> 3,734,706
<TOTAL-REVENUES> 3,734,706
<CGS> 1,645,985
<TOTAL-COSTS> 2,474,163
<OTHER-EXPENSES> (2,669,013)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385,458
<INCOME-PRETAX> 1,898,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,898,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,898,113
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<FN>
<F1>INCLUDES GAIN FROM SALE OF ASSET OF $3,027,551, LOSS FROM AFFILIATE OF $385,000
AND FOREIGN CURRENCY GAIN OF $26,462.
</FN>
</TABLE>
