UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
Commission File Number 0-12283
ZONIC CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-0791199
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
50 West Technecenter Drive, Milford, Ohio 45150
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 248-1911
Not Applicable
--------------
(Former name, address or fiscal year if changed since last report)
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 _____
The total number of shares outstanding of the issuer's common shares, without
par value, as of the date of this report, follow:
3,044,136
Part I - Financial Information
Item 1 - Financial Statements
STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
Products and service
revenues $ 699,308 $950,491 $1,520,103 $3,140,765
Cost of products and
services sold 282,514 434,943 597,259 1,373,635
Selling and administrative
expenses 260,600 320,533 843,197 1,045,801
Research and development
expenses and software
construction and product
enhancement amortization 59,254 618,564 258,011 1,020,855
-------- --------- --------- ---------
602,368 1,374,040 1,698,467 3,440,291
Operating profits (loss) 96,940 (423,549) (178,364) (299,526)
Interest expense, net (50,849) (116,198) (142,169) (347,131)
Foreign currency gain (loss) 612 (11,999) 29 26,462
Gain on sale of asset 3,020,942 3,020,942
Loss from affiliate (385,000) (385,000)
Income (loss) before taxes 46,703 2,084,196 (320,504) 2,015,747
Provision for income taxes - -
------- ---------- ---------- ----------
Net income (loss) $46,703 $2,084,196 $(320,504) $2,015,747
======= ========== ========== ==========
Basic and diluted earnings
(loss) per share 0.02 0.68 (0.11) 0.66
======= ========== ========== ==========
Weighted average shares
outstanding 3,044,136 3,044,136 3,044,136 3,044,136
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements
(continued)
BALANCE SHEETS
As of December 31, 1997 & March 31, 1997
(unaudited)
Dec. 31 March 31
ASSETS 1997 1997
Current Assets
Cash $ 33,157 $ 259,494
Receivables
Trade 217,626 266,538
Related parties - 38,873
Unbilled contracts 14,986 14,986
Total receivables 232,612 320,397
Notes Receivable, shareholder 1,470,000
Inventories
Finished products 215,872 278,412
Work in process 56,788 68,582
Raw material 99,333 72,872
Total inventories 371,993 419,866
Prepaid expenses 15,784 4,238
Total Current Assets 653,546 2,473,995
Property and Equipment-at Cost
Furniture and office equipment 451,722 430,297
Machinery and plant equipment 594,848 783,137
Software construction and product enhancement 4,844,725 4,802,522
--------- ---------
5,891,295 6,015,956
Less accumulated depreciation and amortization 5,756,762 5,802,467
134,533 213,489
Total Assets $ 788,079 $ 2,687,484
BALANCE SHEETS
As of December 31, 1997 & March 31, 1997
(unaudited)
LIABILITIES Dec. 31 March 31
1997 1997
Current Liabilities
Short-term notes payable and
current maturities of
long-term debt $ 1,570,268 $ 2,841,176
Accounts payable - trade 723,948 718,775
Accounts payable - related parties - 3,738
Deferred income 306,845 353,572
Accrued liabilities
Salaries and wages 138,068 126,007
Commissions 111,261 108,363
Property and payroll taxes 90,304 78,196
Interest 76,540 76,536
Provision for closing of affiliated company 51,035 84,150
Other 40,668 42,337
----------- -----------
Total Accrued Liabilities 507,876 515,589
----------- -----------
Total Current Liabilities 3,108,937 4,432,850
Long-Term Obligations, Less Current Maturities 824,348 987,425
Deferred rent 139,159 231,070
SHAREHOLDERS' EQUITY (DEFICIT)
Common shares 61,674 61,674
Additional paid-in capital 5,727,881 5,727,881
----------- -----------
5,789,555 5,789,555
Accumulated deficit (9,073,920) (8,753,416)
----------- -----------
Total Shareholders' Deficit (3,284,365) (2,963,861)
----------- -----------
Total Liabilities and
Shareholders' Deficit $ 788,079 $ 2,687,484
=========== ===========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements
(continued)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the nine months ended December 31, 1997
(unaudited)
Additional
Common Contributed Accumulated
Shares Capital Deficit Total
-------- ----------- ----------- -----------
Balance, March 31, 1997 $ 61,674 $ 5,727,881 $(8,753,416) $(2,963,861)
Net loss for period - - (320,504) (320,504)
-------- ----------- ----------- -----------
Balance, December 31, 1997 $ 61,674 $ 5,727,881 $(9,073,920) $(3,284,365)
======== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements
(continued)
STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(unaudited)
1997 1996
Cash used by operations
Net income (loss) for period $ (320,504) $2,015,747
Adjustments to reconcile net loss
to cash from operations
Gain on sale of assets (3,624) (3,020,942)
Depreciation and amortization 15,467 27,010
Amortization of software construction
and product enhancements 103,000 1,020,855
Amortization of note receivable from shareholder (30,000) -
Loss from affiliate - 385,000
Provision for obsolete inventory 27,000 27,000
Amortization of deferred income (131,540) (220,413)
Foreign currency gain and other (29) (26,462)
Increase (decrease) in cash due to changes in
Accounts receivable 55,916 (10,818)
Inventories 20,873 (95,212)
Prepaid expenses (11,546) (13,690)
Accounts payable 33,333 7,625
Accrued liabilities (2,235) 43,078
Deferred rent (91,911) (45,975)
Deferred income 84,813 (141,268)
---------- ----------
Net cash used by operations (250,987) (48,465)
Cash used in investment activities
Purchase of equipment (6,225) (16,766)
Proceeds from the sale of fixed assets 13,510 -
Increase in software construction and
product enhancements (42,203) (215,804)
---------- ----------
Net cash used in investment activities (34,918) (232,570)
Cash provided by financing activities
Additions to debt obligations 75,000 405,000
Payments on debt obligations (15,432) (6,316)
---------- ----------
Net cash provided by financing activities 59,568 398,684
Increase (decrease) in cash (226,337) 117,649
Cash - beginning of period 259,494 28,951
---------- ----------
Cash - end of period $ 33,157 $ 146,600
========== ==========
Interest paid during period, net of capitalization $ 22,419 $ 268,382
========== ==========
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
1. Presentation of Information
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly Zonic Corporation's (the
"Company") financial position at December 31, 1997 and the results of
operations for the three and nine month periods ended December 31, 1997 and
1996 and its cash flows for the nine-month periods ended December 31, 1997
and 1996. The results of operations for the interim periods are not
necessarily indicative of results to be expected for a full year.
The financial statements are summarized and should be read in conjunction
with the annual report to shareholders and Form 10-K for the year ended
March 31, 1997. Certain reclassifications have been made to amounts shown
for the prior year to conform to current year classifications.
2. Affiliate Company
The Company along with A&D Company Ltd. (A&D) had formed Zonic A&D Company
with each owning 50% to market its products. 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 an expense of
$385,000 during fiscal 1997 for the losses it expected to incur as a result
of the dissolution. Revenue from sales to Zonic A&D Company by the Company
for the three month period ended December 31, 1996 was $609,210. Similar
sales for the nine month period then ended were $1,678,498. Zonic A&D
Company recorded a profit of $9,501 for the three months ended December 31,
1996 and a profit of $18,112 for the nine month period then ended.
The Company accounted for its portion of the earnings of Zonic A&D Company
using the equity method. The Company's recognition of its 50% interest in
the net profits and losses of this affiliate is limited to the investment
in Zonic A&D Company, including the amounts the Company has committed to
fund the operations. The prior period profits were not recorded as Zonic
A&D Company incurred substantial losses prior to 1994 and losses were
recorded in those years to the extent the Company was at risk to fund those
losses.
3. Sale of Asset
In December 1996, the Company sold its Zeta Technology and software 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 the 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 Software 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 and one in the amount of
$1,500,000 due on June 30, 1997, the proceeds of which were 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 extended to the Company under a credit agreement between the
parties; and (iv) the elimination of accrued interest totaling $118,578 on
loans payable to A&D.
4. Earnings Per Share
The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" in the current period. Basic earnings (loss)
per share is based on net income (loss) and the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per
share is based on net income (loss) and the weighted average number of
common shares plus all dilutive potential common shares. At December 31,
1997, there were 1,558,000 stock options and 450,000 warrants outstanding
for the purchase of common shares. These potential common shares are not
included in the diluted earnings per share calculation because they are
anti-dilutive.
5. New Standards
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Zonic will be required
to adopt these standards in 1998. Adoption of these standards will not
impact the reported results of operation or financial position of Zonic,
but may require additional disclosures.
6. Subsequent Event
On January 30, 1998, A&D purchased 12,000 shares of Class A Non-Voting,
Redeemable Convertible Preferred Stock of the Company at a price of $100
per share which is convertible on or after January 30, 1999 at the rate of
one Class A Preferred Share for 100 shares of common stock. Proceeds of
$1,200,000 from this sale were used to repay a bank loan of $1,078,000, and
related accrued interest of $26,757 and to settle a portion of the loans
payable to A&D of $95,243. In addition, A&D will purchase 6,000 shares of
Class B Non-Convertible, Redeemable, Non-Voting Preferred Stock of the
Company at a price of $200 per share with an annual dividend equal to 20%
of the Company's annual after-tax earnings excluding non-recurring earnings
("Class B Preferred Stock"). Proceeds of $1,200,000 from this sale of
Class B Preferred Stock will be used to repay the short-term bank loan of
$600,000, the balance of loans payable to A&D totaling $538,203 and related
accrued interest of $61,797. The purchase of Class B Preferred Stock by
A&D is expected to be completed by February 28, 1998. Upon repayment of
these loans, the Credit Agreement between the Company and A&D dated
December 7, 1992 will be terminated and A&D will release its security
interest in the Company's assets.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
Certain of the matters discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" 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 achievements of the
Company to differ materially from the Company's expectations are disclosed
in this document including, without limitation, the impact of competitive
products and pricing, product demand and market acceptance, and
fluctuations in operating results. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by such factors.
Results of Operations
Product and Services Revenue decreased by $251,183 or 26% for the
three months ended December 31, 1997, when compared to the same period of
the prior year. For the nine months ended December 31, 1997, revenue
decreased by $1,620,662 or 52% when compared to the same prior year period.
Sales decreased across all product lines with significant declines in the
Company's 7000 Series and Machinery Monitoring System (MMS) products lines.
The prior year included revenue from work completed on a large MMS order
received in fiscal year 1996. Revenue from this project was recorded on
the percentage of completion method in accordance with the Company's
revenue recognition policies and the project was completed in December,
1996. The decrease in 7000 Series revenue was attributable to
significantly less orders as the Company focused on the applications of its
Medallion products.
Revenue from the Medallion product line increased $254,635 and $593,150,
respectively, for the three and nine months ended December 31, 1997 when
compared to the same periods of the prior year.
Order backlog amounted to $234,000 at December 31, 1997 compared with
$452,000 at December 31, 1996. This decrease was due mainly to the decline
in 7000 Series orders.
Costs of products and services sold were 40% and 39% respectively of
products and services revenues for the three and nine months ended December
31, 1997 versus 46% and 44% respectively for the prior year. The improved
profit margins are the result of higher profit margins on the sale of
Medallion products.
Selling and administrative expenses decreased by 19% for the three
and nine month periods ended December 31, 1997 versus the same periods for
the prior year. The decline was due mainly to lower administrative
salaries and the continuing reduction of facilities costs offset by higher
advertising and sales promotion costs. However, selling and administrative
expenses were 37% and 55%, respectively, of products and services revenues
for the current three and nine month periods versus 34% and 33%,
respectively, for the same periods of the prior year. The increased
percentage was due mainly to lower revenues in the current periods.
Research and development expenses and software construction and
product enhancement amortization was $59,254 and $258,011
respectively, for the three and nine months ended December 31, 1997 versus
$618,564 and $1,020,855, respectively, for the same periods of the prior
year. This decrease was due to less amortization expense as a result of
the sale of the Company's Zeta technology and software and accompanying
writedown of software construction and product enhancement costs associated
therewith in December, 1996. In addition, the prior year periods included
a provision of $400,000 for the writedown of software construction and
product enhancement costs associated with the decline in MMS revenues.
This reduction has been partially offset by an increase in amortization
expense related to Medallion products, and research and development
expenses of $26,254 and $155,011 for the three and nine months ended
December 31, 1997, respectively. There was no research and development
expense for the three and nine month periods for the prior year related to
Medallion products. See Software Construction and Product Development
under Liquidity and Capital Resources.
Interest expense for the three months ended December 31, 1997 decreased
to $50,849 versus $116,198 for the same period of the prior year. For the
nine months ended December 31, 1997 interest expense decreased to $142,169
from $347,131 for the same period of the prior year. This decrease was due
to the reduction of debt resulting from the sale of the Company's Zeta
Technology. (See Liquidity and Capital Resources).
Foreign currency gains were $612 and $29, respectively, for the three
and nine months ended December 31, 1997 versus a currency loss of $11,999
and a currency gain of $26,462, respectively, for the three and nine month
periods of the prior year. These gains and losses are due to increases and
decreases, respectively, in the value of the dollar against the Japanese
yen.
Income tax expense of $15,879 for the three months ended December 31,
1997 and $708,626 and $685,354, respectively, for the three and nine months
ended December 31, 1996 is offset by net operating loss carryforwards. At
March 31, 1997 and 1996, loss carryforwards totaling $6,800,000 and
$6,500,000, respectively, were available to offset future income taxes.
Also, the Company had tax credits of $650,000 and $667,000 as of March 31,
1997 and 1996, respectively, to offset future income taxes. No benefit
from the Company's deferred tax assets has been provided since it is not
likely that such assets would be realized at this time.
Liquidity & Capital Resources
Software Construction and Product Development
The Company's total unamortized software construction and product
enhancement costs at December 31, 1997 and March 31, 1997 were $75,568 and
$136,364 respectively. Cash outlays for software construction and product
enhancement projects were $42,203 for the nine months ended December 31,
1997 compared to $215,804 for the prior year period. These costs will be
amortized over the estimated useful life of each product capitalized.
Research and development costs are expensed as incurred.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $1,958,855 at March
31, 1997 to a negative $2,455,391 at December 31, 1997 resulting in a
decrease in the current ratio from .56 to .21. The decline was due to
significant reductions in cash and receivables.
The Company's cash flows from operations amounted to a negative $250,987
for the nine months ended December 31, 1997. Investments in software
construction and product enhancement activities used cash of $42,203.
During the current year, A&D paid a note receivable of $1,500,000 to retire
a Company bank loan guaranteed by A&D. On September 15, 1997, the Company
borrowed $600,000 from a bank to make payment on a $600,000 short-term note
payable to another bank. This note requires monthly interest payments
computed at the prime rate less 1% with the principal payable in a lump sum
on August 31, 1998 and is guaranteed by A&D. Proceeds from this loan and
the payment on the note receivable were made directly to the respective
banks. These transactions are considered non-cash transactions for the
Statement of Cash Flows.
On August 15,1997, the Company reached an agreement with its landlord to
terminate its then existing lease agreement and satisfy all outstanding
past due rental obligations with a payment of $100,000 to the landlord and
by signing of a new lease for less space in the same building. The new
lease agreement commenced September 1, 1997 for a period of two years with
monthly payments of $4,604 versus $16,112 under the prior lease. As a
result of the $100,000 payment, deferred rent was reduced by approximately
$39,000 and accounts payable was reduced by $61,000. The remaining balance
of deferred rent will be amortized into income over the term of the new
lease agreement. The main source of funds for the payment to the landlord
was a $75,000 loan from a bank. This loan which matures on August 30, 1999
is secured by the assets of the Company and requires a monthly principal
payment of $3,125 and interest computed at the prime rate plus 2%. The
remaining funds were from the sale of rights to receive royalty payments to
a related party.
On October 31,1997, A&D loaned the Company $28,446. This amount was
forwarded directly to a bank from A&D for payment on one of the Company's
outstanding notes. No repayment date was specified for this loan. This
transaction is considered a non-cash transaction for the Statement of Cash
Flow.
Although the Company has substantially reduced its current and long-term
debt obligations as the result of its recent sale of preferred stock to A&D
(See Note 6 of Notes to Financial Statements), the Company continues to
experience serious cash flow problems and has been unable to improve on the
aging of its accounts payable and certain accrued liabilities. The Company
is seeking additional working capital through additional debt or equity
financing from public or private sources to reduce the delinquency of its
accounts payable and accrued liabilities, and to sustain its operations.
There can be no assurance that the Company will be able to obtain
additional financing on favorable terms, if at all, from any source.
Part II - Other Information
Item 5: Other Information
Pursuant to the terms of a Subscription Agreement between the Company and
A&D, dated January 30, 1998, A&D purchased 12,000 shares of Class A Non-
Voting, Redeemable Convertible Preferred Stock of the Company at a price of
$100 per share which is convertible on or after January 30, 1999 at the
rate of one Class A Preferred Share for 100 shares of common stock. [See
Exhibit (3) (iv) Article FOURTH.] Proceeds of $1,200,000 from this sale
were used to repay a bank loan of $1,078,000, and related accrued interest
of approximately $26,757 and to settle a portion of the loans payable to
A&D of $95,243. In addition, A&D will purchase 6,000 shares of Class B
Non-Convertible, Redeemable, Non-Voting Preferred Stock of the Company at a
price of $200 per share with an annual dividend equal to 20% of the
Company's annual after-tax earnings excluding non-recurring earnings
("Class B Preferred Stock"). [See Exhibit (3) (iv) Article FOURTH.]
Proceeds of $1,200,000 from this sale of Class B Preferred Stock will be
used to repay the short-term bank loan of $600,000, the balance of loans
payable to A&D totaling approximately $538,203 and related accrued interest
of approximately $61,797. In the event of liquidation or dissolution of
Zonic, the Class A Preferred Stock is entitled to receive $100.00 per
share, and the Class B Preferred Stock $200.00 per share, before holders of
common stock receive any amounts. Both classes of Preferred Stock may be
redeemed by the Company upon thirty days prior notice -- the Class A shares
at $100.00 per share, and the Class B shares at $200.00 per share. The
purchase of Class B Preferred Stock by A&D is expected to be completed by
February 28, 1998. Upon repayment of these loans, the Credit Agreement
between the Company and A&D dated December 7, 1992 will be terminated and
A&D will release its security interest in the Company's assets. [See
Exhibit (10) (xxx).]
Item 6: Exhibits and Reports on Form 8-K
Exhibit
(3) (iv) Amended and Restated Articles of Incorporation of Zonic
Corporation
(10) (xxx) Subscription Agreement, dated January 30, 1998, between
Zonic Corporation and A&D Company, Ltd.
(11) Computation of earnings per common share - See Statement of
Operations.
(27) Financial Data Schedule
Reports on Form 8-k - none
SIGNATURES
Pursuant to the requirements 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
------------------------------------
President and Chief Executive Officer
By: /s/ John H. Reifschneider
----------------------------------
Controller
Dated: February 17, 1998
Exhibit (3) (iv)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ZONIC CORPORATION
FIRST. The name of said corporation shall be ZONIC CORPORATION.
SECOND. The place in Ohio where its principal office is to be located is
Milford, Clermont County.
THIRD. The purposes for which it is formed are: To engage in any lawful
act or activity in which corporations may be formed under Section 1701.01
through 1701.98, inclusive, of the Ohio Revised Code and any amendments
thereto.
FOURTH. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is TEN MILLION (10,000,000)
shares, of which TWO HUNDRED FIFTY THOUSAND (250,000) shares shall be
shares of preferred stock without par value, and NINE MILLION SEVEN HUNDRED
FIFTY THOUSAND (9,750,000) shares shall be shares of common stock without
par value. The directors of the Corporation may adopt amendments to the
Articles of Incorporation in respect of any unissued or treasury shares of
common or preferred stock of the Corporation so as to fix or change the
express terms of such shares, which may include but are not limited to:
the division of such shares into series and the designation and
authorization of the number of shares of each series; voting rights which
may be full, limited or denied, except as otherwise required by law; the
dividend rate; the dates of payment of dividends and the dates from which
they are cumulative; redemption rights and price; liquidation price;
sinking fund requirements; conversion rights; and restrictions on the
issuance of shares of any class or series.
The 250,000 authorized preferred shares shall be classified as follows:
(a) 12,000 shares shall be designated as Class A Non-Voting,
Redeemable, Convertible Preferred Stock, no par value, $100.00 per share
(Class A Preferred Stock).
(b) 6,000 shares shall be designated as Class B Non-Convertible,
Redeemable, Non-Voting Preferred Stock, no par value, $200.00 per share
(Class B Preferred Stock).
The express terms of the shares of each class are as follows:
Class A Non-Voting, Redeemable Convertible Preferred Stock
The holder(s) of the Class A Preferred Stock shall not be entitled to any
voting rights. The holder(s) of the Class A Preferred Stock shall also not
be entitled to notice of any meetings of shareholders except meetings
called to consider and act upon subjects or questions with respect to which
the right to notice or voting rights is conferred by law upon the holder(s)
of the shares of Class A Preferred Stock.
The holder(s) of shares of Class A Preferred Stock shall have the right at
the holder's option, to convert such shares into shares of common stock of
the Corporation on the following terms and conditions:
(a) Each share of Class A Preferred Stock shall be convertible at
any time on or after January 30, 1999 into fully paid and non assessable
shares of common stock of the Corporation as constituted at the time of
such conversion, at the Conversion Rate of 100 shares of common stock for
each share of Class A Preferred Stock, subject to adjustment as provided
herein. The Corporation shall not be required to issue fractions of shares
of common stock upon conversion of the Class A Preferred Stock. In the
event any fractional interest in a share of common stock shall be
deliverable upon the conversion of any shares of Class A Preferred Stock,
the Corporation shall, if surplus is available, purchase such fractional
interest for an amount in cash equal to the current market value of such
fractional interest.
(b) So long as any of the shares of Class A Preferred Stock shall
be outstanding, the Corporation will not make any share distribution on its
common stock unless the Corporation, by proper legal action, shall have
authorized and reserved an amount of shares equal to the amount thereof
which would have been declared upon the common stock into which such Class
A Preferred Stock might have been converted, and the Corporation shall, out
of such additional shares so authorized and reserved on account of such
share distribution, upon the conversion of any shares of Class A Preferred
Stock, deliver with any common stock into which shares of Class A Preferred
Stock are converted, but without additional consideration therefor, such
amount of common stock as would have been deliverable to the holder(s) of
the common stock into which such Class A Preferred Stock had been so
converted had such common stock been outstanding at the time of such share
distribution. A share distribution shall mean a dividend payable only in
shares of common stock of the Corporation of the same class as the present
authorized common stock. The right of the Corporation to declare and pay
any dividends whether in cash, shares, or otherwise, shall not be limited
except as specifically otherwise provided herein.
(c) In case of any stock split, combination or other
recapitalization of the Class A Preferred Stock or of the common stock into
a different number of shares of the same or any other class or classes, or
in case of any consolidation or merger of the Corporation with or into
another corporation, or in case of any sale or conveyance to another
corporation of the property of the Corporation as an entity or
substantially as an entirety, the Conversion Rate shall be appropriately
adjusted so that the rights of the holder(s) of Class A Preferred Stock and
of the common stock will not be diluted as a result of such combination,
change, consolidation, merger, sale, or conveyance.
(d) Nothing contained in the foregoing paragraphs shall require
adjustment to the Conversion Rate in the event the Corporation shall issue
any additional shares of common stock not outstanding as of the date
hereof, or Preferred Stock, other than the 12,000 shares of Class A
Preferred Stock and the 6,000 shares of Class B Preferred Stock
contemplated hereunder, at a price per share which is not less than the
then fair market value of said shares as determined by the Board of
Directors of the Corporation.
(e) Adjustments in the rate of conversion shall be calculated to
the nearest one-tenth of a share.
The Class A Preferred Stock at any time outstanding may be redeemed by the
Corporation, in whole or in part, at any time or from time to time, at its
election, by resolution of the directors upon not less than 30 days' prior
notice to the holders of record of the Class A Preferred Stock to be
redeemed, given as provided herein, at $100.00 per share. If less than all
of the outstanding Class A Preferred Stock is to be redeemed, the
redemption may be made either by lot or pro rata or by such other equitable
method as the directors in their discretion may determine. In case of
partial redemption of the Class A Preferred Stock on a pro rata basis,
fractional shares may be disregarded and the nearest number of whole shares
redeemed. Notice of such redemption, stating the number of shares to be
redeemed, the redemption date, the redemption price, and the place of
payment thereof, shall be given to the respective holders of the Class A
Preferred Stock to be redeemed, by mailing it, postage prepaid, to the
holders at their respective addresses as shown on the books of the
Corporation. The notice shall be so mailed not less than 30 and not more
than 60 days prior to the redemption date. If the notice of redemption
shall have been duly given, and if on or before the redemption date
specified in the notice all funds necessary for the redemption shall have
been set aside so as to be available therefor, then, notwithstanding that
any certificate for Class A Preferred Stock so called for redemption shall
not have been surrendered for cancellation, the shares represented thereby
shall no longer be deemed outstanding, and all rights with respect to the
Class A Preferred Stock so called for redemption shall terminate on the
redemption date, except only the right of holders thereof to receive the
amount payable upon redemption, but without interest.
Subject to the provisions and limitations herein contained, the directors
shall have full power and authority to prescribe the manner in which and
the terms and conditions upon which Class A Preferred Stock shall be
redeemed.
In the event of any liquidation, dissolution or winding up of the affairs
of the Corporation, either voluntarily or involuntarily, the amount that
shall be paid to the holder of each share of Class A Preferred Stock shall
be the fixed amount of $100.00 for each such share. Neither the merger nor
consolidation of the Corporation, nor the sale, lease or conveyance of all
or part of its assets, shall be deemed to be a liquidation, dissolution or
winding up of the affairs of the Corporation, either voluntarily or
involuntarily, within the meaning hereof. All shares of common stock shall
be of junior rank in respect of the preferences as to payments upon the
liquidation, dissolution or winding up of the Corporation to all shares of
Class A Preferred Stock, such that each holder of Class A Preferred Stock
shall receive the full liquidation value of $100.00 per share before the
holders of common stock receive any amounts upon liquidation. The rights
of the common stock shall be subject to the preferences and relative rights
of the Class A Preferred Stock. If, in the event of any liquidation,
dissolution or winding up of the Corporation, the Corporation has
sufficient funds to pay creditors, but not all holders of Preferred Stock,
the remaining funds shall be paid to holders of Preferred Stock pro rata
based on the stated capital represented by the number of shares of
Preferred Stock issued, multiplied by the par value per share.
Class B Non-Convertible, Redeemable, Non-Voting Preferred Stock
The holder(s) of the Class B Preferred Stock shall not be entitled to any
voting rights. The holder(s) of the Class B Preferred Stock shall also not
be entitled to notice of any meetings of shareholders except meetings
called to consider and act upon subjects or questions with respect to which
the right to notice or voting rights is conferred by law upon the holder(s)
of the shares of Class B Preferred Stock.
The holder(s) of shares of Class B Preferred Stock shall not be entitled to
any rights to convert such shares into shares of common stock.
The holder(s) of the Class B Preferred Stock shall be entitled to receive,
and the Corporation, shall pay, in preference to and priority over any
dividend on common stock, a fixed dividend, calculated at a rate of twenty
percent (20%) of the Corporation's net after-tax earnings (excluding non-
recurring earnings) per annum, as reflected on the Corporation's annual
audited financial statements, beginning with the year ended March 31, 1999.
The dividend shall be payable annually on or before 120 days after the
Corporation's fiscal year end. Such dividends shall not be cumulative. If
the Corporation's net after-tax earnings are insufficient in any year to
allow for payment of all or part of the dividend on the Class B Preferred
Stock, the holders of Class B Preferred Stock shall have no further right
to the dividend for said year in the future.
The Class B Preferred Stock at any time outstanding may be redeemed by the
Corporation, in whole or in part, at any time or from time to time, at its
election, by resolution of the directors upon not less than 30 days' prior
notice to the holders of record of the Class B Preferred Stock to be
redeemed, given as provided herein, at $200.00 per share plus an amount
equal to the unpaid dividends, if any, thereon, to the redemption date. If
less than all of the outstanding Class B Preferred Stock is to be redeemed,
the redemption may be made either by lot or pro rata or by such other
equitable method as the directors in their discretion may determine. In
case of partial redemption of the Class B Preferred Stock on a pro rata
basis, fractional shares may be disregarded and the nearest number of whole
shares redeemed. Notice of such redemption, stating the number of shares
to be redeemed, the redemption date, the redemption price, and the place of
payment thereof, shall be given to the respective holders of the Class B
Preferred Stock to be redeemed, by mailing it, postage prepaid, to the
holders at their respective addresses as shown on the books of the
Corporation. The notice shall be so mailed not less than 30 and not more
than 60 days prior to the redemption date. If the notice of redemption
shall have been duly given, and if on or before the redemption date
specified in the notice all funds necessary for the redemption shall have
been set aside so as to be available therefor, then, notwithstanding that
any certificate for Class B Preferred Stock so called for redemption shall
not have been surrendered for cancellation, the shares represented thereby
shall no longer be deemed outstanding, the right to receive dividends, if
any, thereon shall cease to accrue from and after the date of redemption,
and all rights with respect to the Class B Preferred Stock so called for
redemption shall terminate on the redemption date, except only the right of
holders thereof to receive the amount payable upon redemption, but without
interest.
Subject to the provisions and limitations herein contained, the directors
shall have full power and authority to prescribe the manner in which and
the terms and conditions upon which Class B Preferred Stock shall be
redeemed.
In the event of any liquidation, dissolution or winding up of the affairs
of the Corporation, either voluntarily or involuntarily, the amount that
shall be paid to the holder of each share of Class B Preferred Stock shall
be the fixed amount of $200.00 for each such share. Neither the merger nor
consolidation of the Corporation, nor the sale, lease or conveyance of all
or part of its assets, shall be deemed to be a liquidation, dissolution or
winding up of the affairs of the Corporation, either voluntarily or
involuntarily, within the meaning hereof. All shares of common stock shall
be of junior rank in respect of the preferences as to payments upon the
liquidation, dissolution or winding up of the Corporation to all shares of
Class B Preferred Stock, such that each holder of Class B Preferred Stock
shall receive the full liquidation value of $200.00 per share before the
holders of common stock receive any amounts upon liquidation. The rights
of the common stock shall be subject to the preferences and relative rights
of the Class B Preferred Stock.
If, in the event of any liquidation, dissolution or winding up of the
Corporation, the Corporation has sufficient funds to pay creditors, but not
all holders of Preferred Stock, the remaining funds shall be paid to
holders of Preferred Stock pro rata based on the stated capital represented
by the number of shares of Preferred Stock issued, multiplied by the par
value per share.
Notwithstanding any provision of the General Corporation Law of Ohio now or
hereafter in effect, no shareholder shall have the right to vote
cumulatively in the election of directors. Without limiting the generality
of the preceding sentence, no shareholder shall have the right at any time
in the election of directors to give one candidate as many votes equal to
the number of directors to be elected multiplied by the number of his votes
or to distribute his votes on the same principle among two or more
candidates.
FIFTH. The amount of the stated capital with which the Corporation shall
begin business is Five Hundred ($500.00) Dollars.
SIXTH. The Corporation shall indemnify each present and future director
and officer, his heirs, executors and administrators, or any person who
serves, or has served at the request of the Corporation, as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, to the maximum extent allowed under the laws of the State of
Ohio. The Corporation may indemnify any employee or agent of the
Corporation or any person who serves or has served at the request of the
Corporation as an employee, agent or trustee of another corporation,
partnership, joint venture, trust or other enterprise to the maximum extent
allowed under the laws of the State of Ohio. The foregoing right of
indemnification shall not be exclusive of other rights to which any
director, officer, employee or agent may be entitled as a matter of law,
under the code of regulations of the Corporation, or any agreement, or
otherwise.
SEVENTH. In the absence of fraud, no contract or other transaction between
this Corporation and any other corporation or any firm, association,
partnership or person shall be affected or invalidated by the fact that any
director or officer of this Corporation is pecuniarily or otherwise
interested in or is a director, member or officer of such other corporation
or of such firm, association or partnership or is a party to, or is
pecuniarily or otherwise interest in such contract or other transaction or
is in any way connected with any person or persons, firm, association,
partnership or corporation pecuniarily or otherwise interested therein;
provided that the fact that he individually or as a director, member or
officer of such corporation, firm, association, or partnership is such a
party or is so interested shall be disclosed to or shall have been known by
the Board of Directors or a majority of such members thereof as shall be
present at a meeting of the Board of Directors at which action upon any
such contract or transaction shall be taken; any director may be counted in
determining the existence of a quorum at any meeting of the Board of
Directors of this Corporation for the purpose of authorizing any such
contract or transaction with like force and effect as if he were not so
interested, or were not a director, member or officer of such other
corporation, firm, association or partnership.
EIGHTH. Any contract, transaction or act of the Corporation or of the
directors which shall be duly ratified at any meeting called for such
purpose, shall, insofar as permitted by law or by the Articles of
Incorporation of the Corporation, be as valid and as binding as though
ratified by every stockholder of the Corporation; provided, however, that
any failure of the stockholders to approve or ratify any such contract,
transaction or act, when and if submitted shall not be deemed in any way to
invalidate the same or deprive the Corporation, its directors, officers and
employees of its or their right to proceed with such contract, transaction
or act.
NINTH. The Corporation may purchase or redeem shares or its stock, or
options, warrants or rights to acquire its stock, from time to time to such
extent, in such manner, and upon such terms as its Board of Directors may
determine, provided the Corporation shall not use any of its funds for such
purpose of repurchase or redemption when there is reasonable ground to
believe that the Corporation is, or by such purchase would be, rendered
insolvent.
TENTH. No stockholder of the Corporation, nor holder of any option,
warrant, or right to acquire or purchase stock of the Corporation, shall by
reason of holding shares or rights to acquire shares of any class have any
pre-emptive or preferential right to purchase or subscribe to any shares of
any class of the Corporation, now or hereafter to be authorized, or any
notes, debentures, bonds or other securities convertible into or carrying
options, rights or warrants to acquire or purchase shares of any class, now
or hereafter to be authorized, whether or not the issuance of said shares,
options, warrants, rights, or such notices, debentures, bonds, or other
securities, would adversely affect the dividend or voting rights of such
stockholder or similar rights of such holder of options, warrants, or
rights to acquire stock of the Corporation, other than such rights, if any,
as the Board of Directors, in its discretion, from time to time may
specifically grant, and at such price as the Board of Directors in its
discretion may fix, and the Board of Directors may issue shares of any
class of the Corporation, or any notes, debentures, bonds, or other
securities convertible into or carrying options, rights or warrants to
purchase shares of any class, without offering any such shares, options,
warrants or rights of any class, either in whole or in part, to the
existing stockholders of any class, or to the holders of any outstanding
options, warrants or rights to acquire stock of any class of the
Corporation.
ELEVENTH. Whenever the vote, consent, waiver or release of the
shareholders shall be required under the General Corporation Law of the
State of Ohio, as the same may be amended from time to time, there shall be
required only an affirmative or negative vote, as the case may be, of the
holders of a majority of the shares entitled to vote thereon for the
particular vote, consent, waiver or release to become effective.
TWELFTH. These Amended and Restated Articles of Incorporation supersede
the existing Articles of Incorporation including all amendments thereto and
as previously amended and restated.
THIRTEENTH. Section 1701.831 of the Ohio Revised Code shall not apply to
any acquisition of the securities of this Corporation.
Exhibit (10) (xxx)
SUBSCRIPTION AGREEMENT
This Subscription Agreement is made as of this 30th day of January, 1998 by
and between Zonic Corporation, an Ohio corporation (the "Company") and A&D
Co., Ltd., a Japanese Company ("A&D").
RECITALS
WHEREAS, A&D has guaranteed the Company's indebtedness to the
Ashikaga Bank, Ltd. in the principal amount of $1,078,000, which final
monthly instrument is due and payable on April 1, 2001, and accrued
interest in the amount of $26,757.33; and
WHEREAS, A&D has guaranteed the Company's indebtedness to The
Provident Bank in the principal amount of $600,000, which is due and
payable on August 31, 1998; and
WHEREAS, the Company currently is indebted to A&D in the principal
amount of $633,445.91 for short term loans and accrued interest in the
amount of $61,796.76; and
WHEREAS, A&D desires to purchase 12,000 shares of Class A Non-Voting,
Redeemable Convertible Preferred Stock of the Company, convertible
one year after the date hereof at the rate of one Class A Preferred Share
for 100 shares of common stock of the Company ("Class A Preferred Stock"),
at a price of $100 per share, and 6,000 shares of Class B Non-Convertible,
Redeemable, Non-Voting Preferred Stock of the Company, with annual dividend
equal to 20% of the Company's after-tax earnings (excluding non-recurring
earnings) ("Class B Preferred Stock"), at a price of $200 per share (the
Class A Preferred Stock and the Class B Preferred Stock are sometimes
referred to herein collectively as the "Shares") in order to provide the
Company with sufficient funds to discharge all of the indebtedness recited
above (the "Debt"); and
WHEREAS, the Company has a sufficient number of authorized shares,
and the Board of Directors has the authority to amend the Articles of
Incorporation to establish the terms of the Class A Preferred Stock and
Class B Preferred Stock and to issue the Shares to A&D, and the Company
desires to do so in exchange for $2,400,000 in cash to be used for
retirement of the Debt;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Issuance of Shares. The Company hereby issues, conveys,
and transfers to Purchaser and Purchaser hereby purchase from Seller the
number of Shares set forth below.
Class A Preferred Stock 12,000
Class B Preferred Stock 6,000
The terms of the Class A and Class B Preferred Stock shall be
as set forth on Exhibits A and B hereto
2. Purchase Price. The total price to be paid by Purchaser to
Seller for the Shares shall be $2,400,000 (the "Purchase Price"), which
shall be paid by Purchaser in cash on the date hereof and allocated to the
Shares as set forth below.
Class A Preferred Stock $1,200,000
Class B Preferred Stock $1,200,000
3. Use of Purchase Price. Each of the parties hereto agrees
that the Purchase Price shall be used to retire the Debt inclusive of
expenses related to retirement of debt and for no other purpose.
4. Release of Security Interest; Termination of Credit
Agreement. Upon the Company repaying the Debt, (1) A&D shall release its
security interest in the Company's assets; (2) A&D shall release the
Company and its directors and officers from any and all claims relating to
the Debt and all accrued or unpaid interest due their on; and (3) the
Credit Agreement between the Company and A&D dated December 7, 1992 shall
be terminated and discharged.
5. Representations and Warranties of A&D. A&D represents
and warrants to the Company as of the date hereof, which representations
and warranties the Company is relying upon, and which shall survive the
date of this Agreement:
a. A&D is acquiring the Shares solely for its own account,
solely for investment and not with a view to or for resale, distribution or
other disposition. A&D has no present plans to enter into any contract,
undertaking, agreement or arrangement for any such resale, distribution or
other disposition.
b. The undersigned has knowledge and experience in financial
and business matters and is capable of evaluating its investment in the
Shares.
c. The undersigned understands that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), or
under any applicable state securities laws, and therefore, the Shares may
not be transferred unless registered under the Act or under any applicable
state securities laws unless in the opinion of counsel to the Company an
exemption from such registration is available. The undersigned agrees that
the certificate for shares will contain such legends as the Company deems
proper and the Company may enforce such restrictions by issuing a stop-
transfer order.
d. The undersigned understands that no state or Federal
governmental authority has made any finding or determination relating to
the fairness for investment of the Shares and that no state or Federal
governmental authority has recommended or endorsed or will recommend or
endorse the Shares for investment.
e. The undersigned acknowledges that it has been provided
access to Company records and has had the opportunity to ask questions of
representatives of the Company relative to this sale in particular and the
Company in general, and that the Company has responded to such questions to
its satisfaction.
6. Conditions. This Agreement will be subject to (1) the
issuance of a "Fairness Opinion" on the terms of this sale, which may be
waived by the parties hereto; (2) the approval by the Board of Directors of
the Company and A&D; and (3) the Board of Directors of the Company amending
its Articles of Incorporation to establish the terms of the Shares.
7. Further Assurances. Each of the parties hereto agrees to
execute and deliver all additional instruments and other documents, and to
take all such further action, as shall be reasonably necessary to implement
the provisions of this Subscription Agreement.
8. Governing Law. This Subscription Agreement shall be
governed by and construed in accordance with the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement as of the date set forth above.
COMPANY:
ZONIC CORPORATION
By: /s/ James B. Webb
-----------------
Title: President and Chief Executive Officer
A&D
A&D Company, Limited,
By: /s/ Hikaru Furukawa
----------------------
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,157
<SECURITIES> 0
<RECEIVABLES> 273,708
<ALLOWANCES> 41,096
<INVENTORY> 371,993
<CURRENT-ASSETS> 653,546
<PP&E> 5,891,295
<DEPRECIATION> 5,756,762
<TOTAL-ASSETS> 788,079
<CURRENT-LIABILITIES> 3,108,937
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (3,346,039)
<TOTAL-LIABILITY-AND-EQUITY> 788,079
<SALES> 1,520,103
<TOTAL-REVENUES> 1,520,103
<CGS> 597,259
<TOTAL-COSTS> 1,101,208
<OTHER-EXPENSES> (29)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,169
<INCOME-PRETAX> (320,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> (320,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (320,504)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>FOREIGN CURRENCY GAIN
</FN>
</TABLE>
