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UNITED STATES
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, 1998
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 Identification No.)
incorporation or organization)
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, 1998 was $339,669.
The number of shares outstanding of the registrant's Common Shares as of
June 26, 1998 was 3,044,136.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's Proxy Statement for the August 19, 1998 Annual
Meeting of Shareholders are incorporated by reference in Part III.
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Special Cautionary Notice Regarding Forward-Looking Statements
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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 improve 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.
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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.
During the past year, the Company has focused on manufacturing
applications primarily in the areas of machine condition monitoring and
quality product production monitoring. The Company has been developing new
products which utilize certain existing products to satisfy needs which are
currently not being met in certain niche segments of these markets.
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.
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. Interest is growing
in using 100 percent parts inspection as a method of accomplishing zero-defect
delivery of parts. 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 non-destructive 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.
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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 has entered into
various joint product development arrangements, marketing arrangements and a
credit agreement with A&D of which most have been terminated in the past few
years. The Company benefited from the 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.
In fiscal 1997, 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 Agreements"). A portion of the sale price of the Zeta
Technology was in the form of notes receivable. The last note was paid in
fiscal year 1998. Under the terms of the Zeta Sale Agreements, 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. In fiscal 1998, the royalty amounted to
$2,621.
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. 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 purchased 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 and charges ("Class
B Preferred Stock"). Proceeds of $1,200,000 from the sale of Class B
Preferred Stock were used to repay a short-term bank loan of $600,000 that A&D
guaranteed, the balance of loans payable to A&D totaling $538,203 and related
accrued interest of $61,797. In the event of liquidation or dissolution of
Zonic, the Class A Preferred Stock is entitled to receive $100 per share, and
the Class B Preferred Stock $200 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 per share,
and the Class B shares at $200 per share. Pursuant to the Subscription
Agreement, the Credit Agreement between the Company and A&D dated December 7,
1992, under which A&D made loans to the Company, was terminated and A&D
released its security interest in the Company's assets.
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 in the form of training, 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 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. During fiscal year 1999, the Company will also offer
units with 2, 4, or 6 input channels. 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.
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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 owned by both companies, Zonic sold its
40% interest in the product to A&D in June 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 Dynamics' 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.
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.
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.
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 Test 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 worldwide. Export sales accounted for
26%, 39%, and 56% of the Company's net revenue during the fiscal years ended
March 31, 1998, 1997 and 1996, respectively. See Note G of Notes to Financial
Statements.
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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. The operations of Zonic A&D Company were
merged into Zonic on April 1, 1997. 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. The Company
sells it products to A&D at discounts which vary by product. These discounts
are a vendor-to-agent discount and not a discount to the end-user. Generally,
the discount rates made available to A&D for specific products are greater
than the discount rates made available to non-affiliated international sales
agents in other countries because of the significance of the Japanese market
and because A&D, as a manufacturer of similar products, has significantly more
technical expertise than other agents currently used by the Company.
Accordingly, A&D can provide installation and more technical services to the
end user, which reduces the Company's selling expenses. The Company believes
that the terms made available to A&D as an international sales agent are fair
and are not more favorable than the terms that would be made available to a
non-affiliated sales agent in a similar market and with similar technical
expertise.
Major Customers
There was no customer which accounted for 10% or more of the Company's
total revenues in 1998. See Note H of Notes to Financial Statements.
Manufacturing and Supplies
In manufacturing its systems, the Company utilizes custom-designed
electronic components, custom-machined parts and, to the extent feasible,
commercially available devices such as integrated circuits, power supplies,
and CRT monitors. The Company also purchases engineering work stations and
personal computers which are used in the assembly of its products.
The Company purchases several component parts from single source
suppliers. If these single source suppliers are unable to supply the Company
with needed parts, or to supply them on schedule, material production delays
could occur.
Service, Maintenance and Warranty
The Company provides a one year limited warranty for all hardware
products, and a ninety day limited warranty for software products. The
Company will repair, or at its option, replace defective products returned to
its Milford, Ohio, location. The customer must pay shipping expenses. As an
alternative, service technicians employed by the Company will provide repair
service at the customer's location if the customer pays travel expenses.
Service for products sold overseas is generally provided by the Company's
appointed agent in that country. (see Item 1 Business - Marketing and
Distribution) The Company's warranty expense was 3.0%, 2.0%, and 3.1% of
revenue for fiscal 1998, 1997 and 1996, 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 three 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 and 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 $47,000,
$261,000, and $312,000 were capitalized during fiscal years 1998, 1997 and
1996, respectively. Software construction and product enhancement
amortization expenses for fiscal years 1998, 1997 and 1996 were $139,000,
$779,000, and $722,000, respectively. The Company expensed $196,000, $27,000,
and $12,000 for research and product development for fiscal 1998, 1997, and
1996, respectively.
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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.
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, Data Physics,
Ono Sokki, 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, 1998 and March 31, 1997 was $705,000 and $216,000,
respectively. Approximately two-thirds of this increase related to a 7000
Series order for 8 systems received during the fourth quarter of fiscal 1998.
Only one unit was shipped in fiscal 1998, with the remaining units to be
shipped throughout fiscal 1999. Significant increases in product backlog also
occurred in the Medallion and WCA product lines.
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, 1998, the Company had 16 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.
Item 2. Properties.
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The Company's executive offices and manufacturing facilities are located
at Park 50 TechneCenter, 50 West TechneCenter Drive, Milford, Ohio. The
leased premises consist of approximately 6,500 square feet of which about one-
third is office space. Prior to August 15, 1997, the Company leased
approximately 16,500 square feet in the same building. 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 the
current lease. The current lease agreement commenced September 1, 1997 for a
term of two years with monthly payments of $4,604 versus $16,112 under the
prior lease. 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.
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Item 3. Legal Proceedings.
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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.
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Not Applicable.
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PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters.
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(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, 1998, there were 585 holders of record of the
Company's Common Shares, without par value, the Company's only class of common
equity. On June 26, 1998, 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, 1998 and March 31, 1997.
Item 6. Selected Financial Data.
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The following financial data is provided for the Company and its
subsidiaries for the five preceding fiscal years. See Note C of Notes to
Financial Statements.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net revenues $2,025,938 $3,734,706 $3,639,982 $4,860,036 $4,629,665
Gain on sale
of assets 4,090 3,027,551 1,417,027 - -
Profit (Loss) before
extraordinary
item (315,604) 1,898,113 (9,969) (1,366,481) (6,135,649)
Net profit (loss) $(315,604) $1,898,113 $387,306 $447,648 $(6,135,649)
Basic earnings (loss)
per share:
Profit (Loss) before
extraordinary item $(0.10) $0.62 $0.00 $(0.44) $(1.99)
Extraordinary item -
gain from debt
restructuring net
of taxes $ 0.00 $0.00 $0.13 $0.58 $0.00
Net profit (loss) $(0.10) $0.62 $0.13 $0.14 $(1.99)
Diluted earnings (loss)
per share:
Profit (Loss) before
extraordinary item $(0.10) $0.62 $0.00 $(0.44) $(1.99)
Extraordinary item -
gain from
debt restructuring
net of taxes $ 0.00 $0.00 $0.13 $0.58 $0.00
Net profit (loss) $(0.10) $0.62 $0.13 $0.14 $(1.99)
Total assets $699,597 $2,687,484 $3,242,766 $4,387,721 $5,628,446
Long-term obligations
(including long-term
debt and capital
leases less
current maturities) $30,186 $987,425 $4,070,000 $6,018,761 $7,587,311
Cash dividends declared
per common share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
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The following Management's Discussion and Analysis should be read in
conjunction with the financial statements and notes thereto which follow.
Results of Operations
1998 versus 1997
Revenues. Total revenues decreased $1,709,000 or 46% in fiscal 1998 from
the prior year. Sales decreased across all product lines, except Medallion,
with significant declines in the Company's 7000 Series and Machinery
Monitoring System (MMS) product 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. Revenue from the Medallion product line which was
introduced during 1997 was $1,175,000, an increase of $718,000 over the prior
year. 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 G and H of Notes to Financial
Statements.) Price increases did not have a significant impact on sales. As a
percentage of total revenues, sales to domestic customers increased in 1998 to
74% compared to 61% in 1997. The Company's largest customer in 1998, a
foreign government, accounted for 8% of total sales. A foreign government was
also the Company's largest customer in 1997 which accounted for 29% of total
sales.
Cost of Products and Services Sold. Cost of products and services sold
as a percentage of revenues decreased to 40% in 1998 from 44% in the prior
year. The improved profit margin is the result of higher profit margins on
the sale of Medallion products.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by approximately $236,000 in 1998 from the prior year due primarily
to lower administrative salaries and the reduction of facility-related costs
offset by higher advertising and sales promotion costs. As a percentage of
total revenue, these expenses increased to 51% in 1998 compared to 34% in 1997
due to significantly lower revenues in 1998.
Research and Development and Software Construction and Product
Enhancement Amortization. Research and development expense and software
construction and product enhancement amortization decreased by $471,000 or 58%
in 1998 versus 1997. 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. This reduction has been partially
offset by amortization expense related to Medallion products of $118,000 and
an increase in research and development expense of $169,000 during 1998. The
Company capitalized certain costs related to significant improvements in its
products which were incurred after technological feasibility of the product
was established. Such costs are amortized over the estimated useful life of
the improvements. (See Liquidity and Capital Resources and Note A-4 of Notes
to Financial Statements.)
Interest Expense. Interest expense decreased by $223,000 in 1998 from
the prior year as borrowings decreased substantially during the current year.
In addition, the Company realized benefits for the entire year from the
reduction of debt resulting from the sale of the Company's Zeta Technology in
1997. (See Notes C and D of Notes to Financial Statements.)
Foreign Currency Gains (Losses). Foreign currency (losses) and gains of
$(146) and $26,462 in 1998 and 1997, respectively were due to decreases and
increases in value of the U.S. dollar against the Japanese yen.
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 fiscal 1997 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 a specific region of the world. (See
Notes G and H of Notes to Financial Statements.) Price increases did not have
a significant impact on sales. As a percentage of total revenues, sales to
domestic customers increased in 1997 to 61% compared to 44% in 1996. A
foreign government was the Company's largest customer which accounted for 29%
and 11% of total sales in 1997 and 1996, respectively.
Page 10
</PAGE>
<PAGE>
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 $374,000 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 34% 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 $72,000 or 10% 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 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 Financial
Statements.)
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 Note C of Notes to 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 J of Notes to 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.
Liquidity and Capital Resources.
On June 30, 1997, the Company received payment of $1,500,000 on notes
receivable from A&D, the proceeds of which were used to retire a bank loan
guaranteed by A&D. On September 15, 1997, the Company borrowed $600,000 from
a bank, which was guaranteed by A&D, to make payment on a $600,000 short-term
note payable to another bank. During the fourth quarter of 1998, the Company
used proceeds from the sale of Preferred Stock to A&D to repay this $600,000
short-term note payable and all remaining short-term and long- term debt
guaranteed by A&D, loans payable to A&D and related accrued interest. The
Credit Agreement between the Company and A&D dated December 7, 1992, was
terminated on March 20, 1998 and A&D released its security interest in the
Company's assets. (See Note D of Notes to Financial Statements)
Page 11
</PAGE>
<PAGE>
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 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 payment to the landlord was a $75,000 loan from a
bank. The remaining funds were secured from the sale of rights to receive
royalty payments to a related party. (See Notes F and J of Notes to Financial
Statements)
Working capital as of March 31, 1998 was a negative $832,000 versus a
negative $1,959,000 as of March 31, 1997. The improvement was due to
significant reductions in short-term notes payable and current maturities of
long-term obligations and accrued liabilities. These reductions were offset
by significant reductions in receivables, cash and inventories.
The Company's cash flows from operations used $187,000 in fiscal 1998.
Short-term bank borrowings less repayment obligations provided $49,000 in
fiscal 1998. Investments in software construction and product enhancement
activities used cash of $47,000 in fiscal 1998.
The Company continues to experience serious cash flow problems as a
result of reduced revenues but has been able to reduce certain accrued
liabilities through 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 fund operations and reduce
current liabilities. 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.
Year 2000 Issues
The Company has initiated a review of its computer systems, applications,
and products sold to its customers to determine which, if any, are affected by
the Year 2000 issue. Corrective action will be developed to remedy any
problems. Management does not expect the costs to remedy any problems to have
a material effect on the Company's business, its results of operations or its
financial position.
Market Risk
The Company's operations and cash flow can be affected by, among other
things, interest rate changes and foreign currency fluctuations (primarily in
the exchange rate for the Japanese yen). The impact of any reasonably
possible change in the values of these financial items on the Company's
financial position, its results of operations, and its cash flows would be
immaterial.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
Financial Statements included as part of this Report:
Page No.
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 13
Statements of Operations for the Years Ended
March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . 14
Balance Sheets as of March 31, 1998 and 1997 . . . . . . . . . . 15 - 16
Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . 17
Statements of Shareholders' Equity (Deficit) for the Years Ended
March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . 18
Notes to Financial Statements . . . . . . . . . . . . . . . . . 19
Page 12
</PAGE>
<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, 1998 and 1997 and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended March 31, 1998. 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, 1998 and 1997
and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1998 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 / Deloitte and Touche LLP
Cincinnati, Ohio
June 22, 1998
Page 13
</PAGE>
<PAGE>
Statements of Operations for the Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Products and service revenue $2,025,938 $3,734,706 $3,639,982
Cost of products and services sold 813,600 1,645,985 1,882,848
Selling and administrative expenses 1,031,718 1,268,115 1,642,061
Research and development expenses
and software construction
and product enhancement amortization 335,004 806,048 733,770
Writedown of capitalized software - 400,000 -
Costs related to management change
and product discontinuance - - 455,682
--------- --------- ---------
Total Operating Expenses 2,180,322 4,120,148 4,714,361
---------- --------- ---------
Operating loss (154,384) (385,442) (1,074,379)
Gain on sale and disposal of assets 4,090 3,027,551 1,417,027
Loss from affiliate - (385,000) -
Interest expense (165,164) (388,519) (486,286)
Other income - 3,061 2,318
Foreign currency gains (losses) (146) 26,462 131,351
--------- --------- ---------
Income (Loss) before taxes
and extraordinary item (315,604) 1,898,113 (9,969)
Provision for income taxes - - -
-------- ---------- ---------
Income (Loss) before extraordinary item (315,604) 1,898,113 (9,969)
Extraordinary item - gain
from debt restructuring, net of taxes - - 397,275
-------- --------- ---------
Net profit (loss) $(315,604) $1,898,113 $387,306
========= ========= ========
Basic earnings (loss) per share:
Net income (loss) before
extraordinary item $(0.10) $0.62 $0.00
Extraordinary item - gain from
debt restructuring, net of taxes 0.00 0.00 0.13
------ ----- -----
Net profit (loss) $(0.10) $0.62 $0.13
====== ===== =====
Diluted earnings (loss) per share:
Net income (loss) before
extraordinary item $(0.10) $0.62 $0.00
Extraordinary item - gain
from debt restructuring, net of taxes 0.00 0.00 0.13
------ ------ ------
Net profit (loss) $(0.10) $0.62 $0.13
====== ====== ======
Weighted average
Basic shares outstanding 3,044,136 3,044,136 3,081,497
Diluted shares outstanding 3,044,136 3,044,136 3,081,497
Dividends - none in 1998, 1997, or 1996
The accompanying notes are an integral part of these statements.
Page 14
</PAGE>
<PAGE>
Balance Sheets as of March 31, 1998 and 1997
1998 1997
---- ----
Assets
Current Assets
Cash $79,408 $259,494
Receivables, net of allowance for doubtful accounts
Trade 248,519 266,538
Related parties 1,708 38,873
Unbilled contracts - 14,986
--------- ---------
Total receivables 250,227 320,397
Notes receivable, shareholder - 1,470,000
Inventories
Finished products 144,718 278,412
Work in process 49,111 68,582
Raw material 71,766 72,872
--------- ---------
Total inventory 265,595 419,866
Prepaid expenses 3,734 4,238
--------- ---------
Total current assets 598,964 2,473,995
Property and Equipment-at cost
Furniture and office equipment 452,417 430,297
Machinery and plant equipment 597,022 783,137
Software construction and product enhancements 2,203,070 4,802,522
--------- ----------
3,252,509 6,015,956
Less accumulated depreciation and amortization 3,151,876 5,802,467
--------- ----------
Total net property and equipment 100,633 213,489
--------- ----------
$ 699,597 $2,687,484
========= ==========
The accompanying notes are an integral part of these statements.
Page 15
</PAGE>
<PAGE>
Balance Sheets as of March 31, 1998 and 1997 (continued)
1998 1997
---- ----
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Short term notes payable and
current maturities of long-term obligations $42,365 $2,841,176
Accounts payable - trade 728,062 718,775
Accounts payable - related parties 4,223 3,738
Deferred income 365,258 353,572
Accrued liabilities
Salaries and wages 108,947 126,007
Property and payroll taxes 54,684 78,196
Interest - 76,536
Other 127,052 234,850
--------- ---------
Total accrued liabilities 290,683 515,589
--------- --------
Total current liabilities 1,430,591 4,432,850
Long-term obligations, less current maturities 30,186 987,425
Deferred rent 118,285 231,070
Commitments and Contingencies
Shareholders' Equity (Deficit)
Preferred shares - authorized, 250,000 shares
without par value;
12,000 shares Class A non-voting , redeemable,
convertible, $100 per share 1,200,000 -
6,000 shares Class B non-voting, redeemable,
non-convertible, $200 per share 1,200,000 -
Common shares - authorized, 9,750,000 shares
without par value; issued and outstanding,
3,044,136 shares at March 31, 1998 and 1997
at stated issue price 61,674 61,674
Additional paid in capital 5,727,881 5,727,881
--------- ---------
8,189,555 5,789,555
Accumulated deficit (9,069,020) (8,753,416)
--------- ---------
Total shareholders' equity (deficit) (879,465) (2,963,861)
--------- ---------
$ 699,597 $2,687,484
========= =========
The accompanying notes are an integral part of these statements.
Page 16
</PAGE>
<PAGE>
Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash provided by (used in) operations
Net profit (loss) for year $(315,604) $1,898,113 $387,306
Adjustments to reconcile
net profit (loss) to net cash
provided by operating activities:
Gain from sale of assets (4,090) (3,027,551) (1,417,027)
Gain from debt restructuring - - (397,275)
Depreciation and amortization 21,052 33,486 55,126
Amortization of software construction
and product enhancements 139,179 778,750 722,039
Costs related to management change and
product discontinuance - - 304,573
Write-off of capitalized software costs - 400,000 -
Amortization of deferred income and
deferred rent (220,601) (277,797) (274,809)
Bad debts provision (recovery) - (29,806) 17,135
Amortization of discount on
notes receivable (30,000) - -
Provision for obsolete inventories 33,385 31,111 36,000
Amortization of stock options - - 57,888
Loss from affiliates - 385,000 -
Foreign currency (gain) loss and other 235 (26,646) (170,128)
Increase (decrease) in cash due
to changes in:
Receivables 36,301 321,362 (225,525)
Inventories 120,886 64,595 (164,453)
Prepaid expenses 504 (405) 171
Accounts payable and
accrued liabilities (87,469) (296,605) 388,634
Accrued rent (64,079) (61,615) (61,455)
Deferred revenue (expense) and
advanced billings to customers 183,581 (161,608) 894,817
--------- --------- ---------
Net cash provided by (used in)
operations (186,720) 30,384 153,017
Cash used in investment activities
Purchase of equipment and
leasehold improvements (9,094) (9,166) (16,134)
Proceeds from sale of fixed assets 13,976 72,210 -
Software construction and
product enhancement expenditures (47,198) (261,234) (311,947)
--------- --------- ---------
Net cash used in
investment activities (42,316) (198,190) (328,081)
Cash provided by financing activities
Proceeds from short-term notes payable 75,000 405,000 300,000
Repayment of short-term notes and
long-term obligations (26,050) (6,651) (123,207)
------- ------ --------
Net cash provided by
financing activities 48,950 398,349 176,793
Increase (decrease) in cash (180,086) 230,543 1,729
Cash - beginning of period 259,494 28,951 27,222
-------- -------- -------
Cash - end of period $ 79,408 $ 259,494 $ 28,951
======== ========= =========
Interest paid during the year (net of
amounts capitalized) $ 171,722 $ 349,603 $ 325,683
========= ========= =========
The accompanying notes are an integral part of these statements.
Page 17
</PAGE>
<PAGE>
Statements of Shareholders' Equity (Deficit) for the Years Ended March 31,
1998, 1997 and 1996
Common Preferred Paid in Accumulated
Shares Shares Capital Deficit Total
------ --------- ------- ----------- -----
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 $ 0 $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 $ 0 $5,727,881 $(8,753,416) $(2,963,861)
Preferred shares
Issued - 2,400,000 - - 2,400,000
Net loss for year - - - (315,604) (315,604)
------- --------- --------- --------- ----------
Balance at
March 31, 1998 $61,674 $2,400,000 $5,727,881 $(9,069,020) $ (879,465)
======= ==========
The accompanying notes are an integral part of these statements.
Page 18
</PAGE>
<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. Certain reclassifications have been made to amounts shown
for the prior year to conform to current year classifications which had no
effect on operating losses or net income (loss) for any period.
1. Notes Receivable, Shareholder
The Company had 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 was paid on June 30, 1997 (See Note C of
Notes to Financial Statements). The cash flow from this note was discounted
to maturity at a rate consistent with current outstanding debt. The discount
was 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 costs are 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
$185,000 and $230,670 at March 31, 1998 and 1997, 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 and 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, 1998 and 1997 were:
1998 1997
---- ----
Software construction $44,383 $136,367
Product enhancement - -
------- --------
$44,383 $136,367
======= =========
Capitalized costs of software construction and product enhancement and related
information for fiscal years 1998, 1997 and 1996 follow:
1998 1997 1996
---- ---- ----
Capitalized costs
Software construction and
product enhancement $47,198 $261,234 $306,947
Interest - - 5,000
Amortization
Software construction 139,179 594,918 723,583
Product enhancement - 183,832 99,037
Development funding - - (100,581)
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 195,825 27,298 11,731
Page 19
</PAGE>
<PAGE>
During 1998, the Company wrote-off fully amortized capitalized costs
totaling $2,646,650. There was no effect on the profit and loss statement.
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.
5. Income Taxes
The Company provides for income taxes using the asset and liability
method required under Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes." (See Note I of Notes to 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.
7. Joint Ventures
The Company, along with A&D, had 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 was accounted for under the equity
method of accounting. Under this method, the Company's net income for a
particular accounting period included its proportionate share of the net
income or losses reported by these entities during that period to the extent
of its investment. (See Note J of Notes to 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. There were no contracts in
progress at March 31, 1998 and 1997. Revenue totaling $91,531 was recognized
under contracts in progress during 1996. Billings, as specified in the terms
of a contract, in excess of revenue earned have been recorded as deferred
income. Unbilled contracts of approximately $15,000 at March 31, 1997 related
to amounts retained by the Company's customers pursuant to the terms of their
contracts.
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 J, at March 31, 1998 and 1997 two customers accounted for approximately
58% and 34% 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 1998 and 1997. (See Notes G and H of Notes
to Financial Statements). The Company had an allowance for doubtful accounts
of approximately $26,000 and $41,000 at March 31, 1998 and 1997, respectively.
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. There were no such sales during 1998. Cash proceeds from
the sale of trade receivables were $919,517 during 1997. At March 31, 1997,
all receivables sold were collected from customers.
10. Stock Based Compensation
The Company adopted the "disclosure-only" provisions of Statements of
Financial Accounting Standards (SFAS) No. 123 - Accounting for Stock-Based
Compensation and measures compensation expense for stock-based compensation
using the intrinsic-value-based method under the provisions of the standard.
(See Note E of Notes to Financial Statements.)
Page 20
</PAGE>
<PAGE>
11. Earnings Per Share
The Company implemented SFAS No. 128 during the third quarter of 1998.
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.
Exercise of options and the conversion of Preferred Stock (See Note B of Notes
to Financial Statements) is not assumed when the effect would be anti-
dilutive.
Due to the loss from continuing operations in 1998, Convertible Preferred
Stock outstanding at March 31, 1998 is not included in the diluted earnings
per-share computation as the effect would be anti-dilutive.
At March 31, 1998, 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 for any year as
they would be anti-dilutive.
12. New Standards
The Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" in June 1997. Zonic will adopt
these standards in fiscal year 1999. Adoption of these standards will not
impact the results of operations or financial position of the Company, but may
require additional disclosures.
Note B - Preferred Stock
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. In addition,
A&D purchased 6,000 shares of Class B Non-Voting, Redeemable, Non-Convertible
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 and charges beginning with the year ended March 31,
1999. In the event of liquidation or dissolution of Zonic, the Class A
Preferred Stock is entitled to receive $100 per share, and the Class B
Preferred Stock $200 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. Proceeds from the sale of the stock were used to
retire debt and related accrued interest. These transactions were considered
non-cash transactions on the accompanying Statement of Cash Flow.
Note C - 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 made royalty payments
of $2,621 and $2,578 during 1998 and 1997, respectively.
Page 21
</PAGE>
<PAGE>
The sales price of $3,618,578 consisted of (i) two notes receivable, one
in the amount of $900,000 which was paid on March 31, 1997 and one in the
amount of $1,500,000 which was paid 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 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 was 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. The Company recorded a gain on this sale of
$16,550 in 1997. Due to the contingent nature of the royalty payments, the
Company recognizes such payments when received. The Company received royalty
payments totaling $29,058 during fiscal 1998. Included in this amount was
$25,000 received for the sale of a portion of the rights to receive certain
royalty payments to a current member of the Company's Board of Directors.
Most of these royalty payments would have been received in fiscal 1998
according to the terms of the sale agreement.
Product revenues from sales relating to the Series 7000 and WS7000
products and the Xcite Product Line were as follows:
1998 1997 1996
---- ---- ----
Series 7000 and WS7000 $306,546 $1,296,872 $1,463,922
Xcite Product Line - 240,802 348,730
In June 1995, the Company sold its 40% ownership interest in the WCA
Products to A&D, owner of 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.
Note D - Short-Term Note Payable and Long-Term Obligations
Short-term notes payable and long-term obligations at March 31 consist of the
following:
1998 1997
---- ----
Loan payable to bank $ 53,125 $ -
Guaranteed bank loan and note payable to bank - 3,200,000
Notes payable to A&D - 605,000
Other debt 19,426 23,601
------ ------
72,551 3,828,601
Less current maturities 42,365 2,841,176
------ ---------
$ 30,186 $ 987,425
======== ==========
The loan payable and other debt as of March 31, 1998 mature as follows:
1999 - $42,365; 2000 - $20,417; 2001 - $5,134; and 2002 - $4,635.
Based upon the borrowing rate currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-term
debt outstanding at March 31, 1998 approximates carry value. In 1997, the
fair value of financial instruments was not provided for notes payable and
long-term debt as it was not practicable to estimate such fair values as such
instruments were being transacted with related parties or were guaranteed by
related parties. The Company had not recently secured significant debt from
unrelated parties and accordingly could not estimate, with reasonable
certainty, the rate available to the Company or even if market debt was
available at all. All other financial instruments were carried at an amount
approximating their fair value.
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 remaining
note of $1,500,000 was paid on June 30, 1997. The proceeds from both notes
receivable were used to pay down the Company's guaranteed bank loans.
On April 1 1997, the guaranteed bank loan was amended into two separate
loan agreements. Both of these loans were guaranteed by A&D. One loan for
the amount of $1,500,000 incurred interest expense at approximately 7.2%.
Both interest and principal were paid on June 30, 1997 with proceeds from a
note receivable from A&D. The other loan had a principal balance of $1,100,000
and was to mature on April 1, 2001. This loan required monthly interest
payments commencing May 1, 1997, at a rate equal to the bank's cost of funds
plus 1.3%, or approximately 7.11%. In addition, monthly principal payments
ranged from $22,000 to $29,000 commencing October 1, 1997 until maturity. On
October 31, 1997, A&D loaned the Company $28,446 to make its principal and
interest payment due on this loan. On January 30, 1998, the remaining
principal balance of $1,078,000 and related accrued interest of $26,757 was
paid with proceeds from the sale of Class A Preferred Stock. (See Note B of
Notes to Financial Statements.)
Notes payable to A&D amounted to $633,446 on October 31, 1997 and
incurred interest at the prime rate plus 1%, or 9.25% to 9.5%, during 1998.
On January 30, 1998, a principal payment of $95,243 was made on this loan with
the proceeds from the sale of Class A Preferred Stock. On March 20, 1998, the
remaining balance of this loan, $538,203, and related accrued interest of
$61,797 were paid with proceeds from the sale of Class B Preferred Stock.
(See Note B of Notes to Financial Statements.)
Page 22
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<PAGE>
A $600,000 short-term note payable to a bank which was guaranteed by A&D
incurred interest at 1.50% over the Federal Funds Rate, or approximately 7.3%,
adjusted and payable on a quarterly basis. On September 15, 1997, this note
was repaid. The source of these funds was a $600,000 short-term note payable
from another bank. This note required monthly interest payments computed at
the prime rate less 1% with the principal payable in a lump sum on August 31,
1998 and was guaranteed by A&D. This note was repaid on March 20, 1998 with
proceeds from the sale of Class B Preferred Stock.
The payment of notes receivable from A&D, repayment of bank loans, loans
payable to A&D and related accrued interest as noted above are considered non-
cash transactions on the accompanying Statement of Cash Flows.
On August 30, 1997, the Company borrowed $75,000 from a bank to make
payment on past due rental obligations. 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%. (See Note
F of Notes to Financial Statements)
Other debt for $19,426 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 L of Notes to Financial Statements.)
The Credit Agreement between the Company and A&D dated December 7, 1992
has terminated with the repayment of the loans made and guaranteed by A&D. In
addition, A&D has released its security interest in the Company's assets.
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 expires on March 20, 2004.
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.
The options issued to A&D and the Company's former 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.
Note E - 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 1998 and 1997 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 0.30
Exercised in 1997 - -
Forfeited in 1997 (61,000) 0.98
Outstanding at March 31, 1997 1,706,000 1.70
Granted in 1998 - -
Exercised in 1998 - -
Forfeited in 1998 (148,000) (.61)
Outstanding at March 31, 1998 1,558,000 1.80
Exercisable at March 31, 1997 609,750 1.40
Exercisable at March 31, 1998 1,519,250 1.83
Page 23
</PAGE>
<PAGE>
The following table summarizes information about stock options outstanding at
March 31, 1998.
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 1998 Life Price 1998 Price
------- ------------ ----------- --------- ----------- --------
.30 to .34 75,000 8.0 .33 52,500 .33
.50 to .65 218,000 6.16 .61 201,750 .61
1.75 to 2.50 1,212,500 4.90 2.02 1,212,500 2.02
3.63 52,500 3.67 3.63 52,500 3.63
At March 31, 1998, there were 305,500 incentive options and 1,252,500
non-qualified options outstanding and 244,500 common shares were available for
granting additional options.
During 1994, the Company issued warrants for 100,000 common shares in
connection with the renegotiation of the lease of its facilities. The
warrants are exercisable at $2.00 per share and expire on March 31, 2000.
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, 1998, 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) would have
been the pro forma amounts as follows:
1998 1997 1996
Pro forma income (loss) before
extraordinary item $ (333,078) $1,884,008 $ (23,282)
Pro forma income (loss) before
extraordinary item
per share of common stock $ (.11) $.62 $ (.01)
There were no options granted during 1998. The weighted average per
option fair value of options granted in 1997 and 1996 was $.27 and $.29,
respectively. The fair value of each option grant was 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: 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.
Note F - Operating Lease Commitments
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 a new lease for less space in the same building. The new lease
commenced September 1, 1997 for a period of two years with monthly payments of
$4,604 versus $16,112 under the prior lease. The minimum future rental
commitment under the lease agreement is $55,248 and $23,020 in fiscal 1999 and
fiscal 2000, respectively.
Deferred rent arising from incentives and concessions from the landlord
was $118,285 and $231,070 at March 31, 1998 and 1997, respectively. These
amounts are amortized as a reduction of rent payments charged to expense over
the remaining life of the lease. Rent expense for 1998, 1997 and 1996 was
$91,866, $132,371, and $132,885, respectively. Amortization of deferred rent
for 1998 was $48,706.
The Company had no leases for furniture, fixtures, and computer equipment
under operating leases at March 31, 1998.
Page 24
</PAGE>
<PAGE>
Note G - Foreign Sales
The Company had foreign sales as follows:
Percent of
Amount Total Sales
1998 $519,000 26%
1997 $ 1,445,000 39%
1996 $ 2,027,000 56%
Note H - Sales to Major Customers
Sales to major customers (customers with sales in excess of 10% of total
annual sales) include products and services sold to end-user customers through
the Company's exclusive selling agents for their respective geographic
territories. These selling agents include related parties described in Note J
of Notes to 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.
No single customer accounted for more than 10% of the Company's total
sales in 1998. There were two major customers in 1997, a foreign government
and the U.S. Government, for which sales totaled $1,543,000 or 41% of total
sales. In 1996, a foreign government was the major customer for which sales
totaled $396,000 or 11% of total sales.
Note I - Federal Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
Deferred tax assets have been reduced by a valuation allowance, as it is
uncertain if and when these benefits will be realized. Although the Company
realized profits in 1997, 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:
1998 1997
---- ----
Current deferred tax asset:
Reserves not currently deductible $ 76,878 $102,600
Deferred revenue 96,012 33,134
Accruals not currently deductible 62,294 31,709
Net operating loss carryforward - 7,871
------ --------
Subtotal 235,184 175,314
------- --------
Current deferred tax liability:
Loss from affiliates - (175,314)
-------- --------
Net current deferred tax asset 235,184 -
Less valuation allowance (235,184) -
-------- --------
Net $ - $ -
========= =========
Non-current deferred tax asset:
Net operating loss carryforward $ 2,156,935 $2,305,085
Research, development, and investment tax credits 646,248 650,355
Deferred income 40,909 78,928
---------- ----------
Subtotal $ 2,844,092 $3,034,368
Non-current deferred tax liability - Capital leases
and accelerated depreciation (2,733) (5,015)
--------- ---------
Net non-current deferred tax asset 2,841,359 3,029,353
Less valuation allowance (2,841,359) (3,029,353)
---------- ----------
Net $ - $ -
========== ==========
Page 25
</PAGE>
<PAGE>
The provision for income taxes for the years ended consist of the
following:
1998 1997 1996
---- ---- ----
Deferred (income) expense $ (47,190) $ 756,920 $ 59,636
Increase (Reduction) in
the valuation allowance 47,190 (756,920) (59,636)
-------- -------- -------
Provision for income taxes $ - $ - $ -
======== ======== =======
At March 31, 1998 the Company had net operating loss carryforwards of
approximately $6.3 million for U.S. Federal tax purposes. Such loss
carryforwards, if unused as offsets to future taxable income, will expire
beginning in 2001 and continuing through 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 $646,000 of tax credits primarily comprised of research
and development available for U.S. income tax purposes. These credits expire
at various dates beginning in 1999 and continuing through 2008.
Note J - Related Party Transactions and Bad Debt Expense-Affiliate
The Company has developed a significant relationship with A&D, a 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 had 50% ownership interest and
shared 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 accounted for its investment using the
equity method of accounting and as such recognized losses only to the extent
it was at risk for funding such losses. The Company was not required to
provide any additional funding, but recognized losses up to its funded amount.
The Company's portion of certain prior year profits were 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.
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
had a 50% ownership interest and shared 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.
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 fiscal year 1997. The operations of Zonic A&D Ltd.
were not significant to the Company's financial statements. The partners of
Zonic A&D Ltd. now distribute products in this market directly from their
respective operations.
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 and the distribution of assets and
liabilities occurred during 1998. The Company recorded a provision of
$385,000 during 1997 for losses it expected to incur as a result of the
dissolution. At March 31, 1998, remaining accrued costs of approximately
$8,000 are expected to be paid during fiscal year 1999.
The Company had no amounts due from/to Zonic A&D Company or Zonic A&D
Ltd. at March 31, 1998 and 1997, respectively. During 1997, the Company wrote
off receivables from Zonic A&D Company of $300,850 which was included in the
$385,000 expense provision mentioned above. Also during 1997, the Company
purchased from Zonic A&D Company accounts receivable of $2,053,461 due from
end-user customers in exchange for forgiveness of accounts receivable due from
Zonic A&D Company of the same amount.
Page 26
</PAGE>
<PAGE>
The summarized balance sheets of Zonic A&D Company and the results of
operations for the years ended March 31, 1998, and 1997 is as follows:
Zonic A&D Company
Balance Sheets
1998 1997
---- ----
Assets
Current assets $ 0 $1,275
Fixed and other assets 0 970
------- --------
Total assets $ 0 $2,245
======= ======
Liabilities and Deficit
Current liabilities $ 0 $523,760
Net deficit in owners' capital 0 (521,515)
------- --------
Total liabilities and deficit $ 0 $2,245
======= ======
Statements of Operations
Net revenue $ 0 $370,580
Net expenses 0 352,311
------- --------
Profit from operations $ 0 $ 18,269
======= ========
Revenues from sales to A&D and Zonic A&D Company were $84,000, $2,167,375
and $2,040,206 during 1998, 1997, and 1996, respectively. Revenues during
1998 represent only amounts sold to A&D as the operations of Zonic A&D Company
were merged into Zonic as of April 1, 1997.
The Company sold its products to Zonic A&D Company at its normal gross
profit margins for items resold to customers during 1997 and 1996. The Company
also sold demonstration equipment to Zonic A&D Company at cost during 1997 and
1996. The Company paid commissions to Zonic A&D Company for sales to end-
users. Commission expense for 1997 and 1996 was $370,580 and $353,346,
respectively.
The Company sells its products to A&D at discounts which vary by product
for re-sale to end customers. The Company also purchases components from A&D
used principally in the production of its WCA product line. Such purchases
totaled $32,110, $31,767 and $301,889 during 1998, 1997 and 1996,
respectively. The Company had receivable balances from A&D of $1,708 and
$38,873 and amounts payable to A&D of $4,223 and $3,738 at March 31, 1998 and
1997, respectively.
During 1997, A&D paid the Company $300,000 to promote its WCA products.
The amount was recorded as deferred income and is recorded as a reduction of
selling and administrative expenses as earned. The Company earned $35,000 and
$50,000 during fiscal 1998 and 1997, respectively.
Note K - Retirement Plan
The Company has an employee savings and investment retirement plan
qualified under sections 401 (a) and 401 (k) of the Internal Revenue Code. The
plan covers all employees of the Company age 18 and over who have completed
three months of service and are scheduled to work 1,000 hours or more during
the plan year.
Under the Plan agreement, the Company is required to contribute 30
percent of the voluntary 401 (k) contribution of all participants up to a
maximum of 5% of each employee's salary. One half of this contribution may be
made in Company stock at the discretion of the Company's Board of Directors.
In any plan year, a supplemental contribution may be made if the Company
has a net after tax profit of more than 5% of sales.
The Company made contributions of $10,777, $12,067 and $14,040 for 1998,
1997 and 1996, respectively. None of the contributions were made in Company
stock.
Page 27
</PAGE>
<PAGE>
Note L - Statement of Cash Flows
In addition to those shown in the accompanying Statement of Cash Flows or
Notes B, C and D of Notes to the Financial Statements, the following non-
monetary transactions occurred:
1) The Company offset accounts payable owed to A&D with accounts
receivable from A&D in 1998 and 1997. This offset reduced both current assets
and current liabilities by $33,868 and $74,481 in 1998 and 1997, 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 during 1997.
Note M - Basis of Financial Statement Presentation
The Company has prepared a business plan for fiscal 1999 which
contemplates improved cash flow during the third and fourth quarters due
primarily to an increase in revenue, the benefit of continuing cost reduction
measures achieved to date and significantly reduced interest expense. Specific
to this business plan are increases in sales of specific products, constant
level of staff, and expenditures for product development approximately equal
to 1998.
As the result of continuing operating losses, the Company continues to
experience cash flow problems, but has been able to reduce current liabilities
during 1998 through the overall reduction of operating expenses and sale of
preferred stock. The Company also improved the aging of its account
receivable. 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.
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 29, 1998. 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."
Page 28
</PAGE>
<PAGE>
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
(3) Exhibits
EXHIBIT INDEX
Exhibit No. Description
(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) Confidential "Zeta Technology" Sale Agreement between
A&D Company, Ltd. and the Company
dated December 31, 1996. (incorporated by reference).
(10) (ii) Loan Agreement and Promissory Note between the
Ashikaga Bank, Ltd. and the Company
dated April 1, 1997. (incorporated by reference).
(10) (iii) Loan Agreement and Promissory Note between the
Ashikaga Bank, Ltd. and the Company
dated April 1, 1997. (incorporated by reference).
(10) (iv) Promissory Note of the Company in favor of The Nippon
Credit Bank, Ltd. dated March 11, 1997.
(incorporated by reference).
(10) (v) Lease Termination Agreement, dated August 29, 1997,
between the Company and Duke Realty Limited
Partnership.
(10) (vi) Lease Agreement, dated August 29, 1997, between the
Company and Duke Realty Limited Partnership
(incorporated by reference).
(10) (vii) Subscription Agreement, dated January 30, 1998,
between Zonic Corporation and A&D Company.
(incorporated by reference)
(10) (viii) Contribution Agreement among the Company and A&D
Engineering and Zonic A&D Company, effective
as of December 30, 1997. E-1
(10) (ix) Notice of Abandommant of Partnership Interest by A&D
Engineering, effective March 29, 1998. E-2
(10) (x) Termination Agreement between the Company and A&D
Engineering, effective May 15, 1998. E-3
(11) Computation of earnings per common share -- See
Note A-11 of Notes to Financial Statements.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See subparagraph (a) above.
(d) Financial Statement Schedules.
None.
Page 29
</PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ZONIC CORPORATION
By: /s/ James B. Webb
- ------------------------
James B. Webb, President
Date: June 26, 1998
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.
/s/ James B. Webb,
-------------
James B. Webb President,
Treasurer,Principal Executive
Officer, and Director
Dated: June 26, 1998
/s/ John H. Reifschneider June 26, 1998
---------------------
John H. Reifschneider
Controller and Principal Financial and
Accounting Officer
Dated: June 26, 1998
/s/ Shoichi Sekine
--------------
Shoichi Sekine, Director
Dated: June 26, 1998
/s/ Gerald J. Zobrist
-----------------
Gerald J. Zobrist, Director
Dated: June 26, 1998
Page 30
</PAGE>
<PAGE>
EXHIBIT (10) (viii)
CONTRIBUTION AGREEMENT
by and among
ZONIC CORPORATION, AN OHIO CORPORATION
A & D ENGINEERING, A CALIFORNIA CORPORATION
EFFECTIVE DECEMBER 30, 1997
This CONTRIBUTION AGREEMENT (this "Agreement") is entered into by and
between Zonic corporation ("Zonic"), an Ohio Corporation, A&D Engineering
("A&D"), a California Corporation, and Zonic - A&D Company, an Ohio General
Partnership (the "Partnership") formed under a Partnership Agreement (the
"Partnership Agreement") dated October 7, 1988. This Agreement shall be
effective as of December 30, 1997 ("Contribution Date").
RECITALS
1. A&D and Zonic formed the Partnership in 1988 to act as a distributor
of the Partners' products.
2. The Partnership is indebted to the Partners for goods or services in
the following amounts:
Zonic $438,532
A&D 13,684
The payable to Zonic is referred to as the "Zonic Payable" and the
payable to A&D is referred to as the "A&D Payable." The above payables are
referred to collectively as the "Payables."
3. The Partners desire to contribute their share of the Payables to the
Partnership as additional contributions of captial (the "Contributions").
In consideration of the forgoing and the mutual representations,
warranties, covenants, and agreements herein contained, the Partners and the
Partnership agree as follows:
1. Contribution of Payables to Partnership. Subject to the terms and
conditions of this Agreement, Zonic hereby contributes the Zonic Payable to
the Partnership and A&D hereby contributes the A&D Payable to the Partnership.
The Contributions are intended to constitute tax-free contributions to a
partnership under section 7321 of the Internal Revenue Code of 1986, as
amended ("Code").
2. Effect of Contributions. In exchange for the contribution of the
Payables, Zonic and A&D will receive a credit to their respective capital
accounts in the amount of the respective Payables. Each Partner will continue
to have a 50% percentage interest in the income, gains, losses and deductions
of the Partnership after the Contributions.
3. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instruments and shall become a
binding Agreement when one or more of the counterparts have been signed by
each of the parties and delivered to the other party.
4. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date first set forth above.
ZONIC CORPORATION, A&D ENGINEERING,
AN OHIO CORPORATION A CALIFORNIA CORPORATION
By: /s/ James B. Webb By: /s/ Paul E. Huber
----------------- -----------------
Its: President & CEO Its: President & CEO
--------------- ---------------
Title Title
Page E-1
</PAGE>
<PAGE>
EXHIBIT (10) (ix)
NOTICE OF ABANDONMENT OF PARTNERSHIP INTEREST
By
A&D ENGINEERING, A CALIFORNIA CORPORATION
TO: ZONIC - A&D COMPANY, AN OHIO GENERAL PARTNERSHIP
ZONIC CORPORATION, AN OHIO CORPORATION
PLEASE TAKE NOTICE that A&D Engineering, a California Corporation, hereby
abandons all of its partnership interest in Zonic - A&D Company, an Ohio
General Partnership (the "Partnership"), effective March 29, 1998.
A&D hereby assumes one half of all the partnership's liabilities existing
as of the date of this Notice, and hereby agrees to indemnify and hold Zonic
and the Partnership harmless from A&D's share of any and all currently
existing liabilities of the Partnership.
A&D hereby assigns to the Partnership its entire interest as general
partner of the Partnership including, without limitation, (I) all of its
capital account interest in the Partnership, (ii) all of its rights, title,
and interest in and to all Partnership assets, (iii) all of its rights to
share in the profits, losses, and distributions of the Partnership, and (iv)
all of its rights and obligations as the general partner of the Partnership,
as such rights and obligations are set forth in the Partnership Agreement or
conferred by law.
A&D ENGINEERING,
A CALIFORNIA CORPORATION
By: /s/ Paul E Huber
----------------
Paul E Huber
Its: President & CEO
---------------
Title
Page E-2
</PAGE>
<PAGE>
EXHIBIT (10) (x)
TERMINATION AGREEMENT
The undersigned Zonic Corporation ("Zonic"), and Ohio corporation and A&D
Engineering, Inc. (A&D Engineering"), a California corporation, partners
(collectively, the "Partners"), transacting business as Zonic - A&D Company,
an Ohio general partnership (the "Partnership"), at Part 50 Technecenter
Drive, in the City of Milford, State of Ohio, under a partnership agreement
dated October 7, 1988, as amended (the "Partnership Agreement"), agree that
the Partnership shall be dissolved as soon as practicable. A&D Co., Ltd., a
Japanese corporation, is not a partner and is merely a signatory to this
Agreement for the purposes of indicating its intent to be bound by the
provisions of this Agreement. This agreement is effective as of May 15, 1998
("Effective Date").
WHEREAS, A&D Engineering has abandoned its interest in the Partnership
and the Partners desire to dissolve the Partnership;
WHEREAS, the Partners desire that all of the Partnership's assets be
distributed to Zonic and all of the Partnership's liabilities will be assumed
equally between the Partners;
NOW, THEREFORE, the parties agree as follows:
1. Dissolution of Partnership. The Partners hereby consent and agree to
---------------------------
the dissolution of the Partnership.
a. Zonic shall proceed to windup the affairs of the Partnership, and
terminate the Partnership pursuant to the provisions of the Partnership
Agreement and of applicable law.
b. Each of the Partners agrees to do all things necessary and to
promptly execuate all required documents to effect the dissolution and
termination of the Partnership.
2. Winding Up and Distribution of Assets to Zonic. Promptly upon the
-----------------------------------------------
execution of this Agreement, Zonic shall cause the Partnership
affairs to be wound up and the books of the Partnership closed.
Zonic shall cause the Partnership to distribute to Zonic all its
assets ("Assets"), after the payment or provision for all expenses
and all debts and other obligations of the Partnership to independent
third parties.
3. Assumptions of Liabilities. All liabilities existing shall be shared
---------------------------
by the partners equally. Each Partner hereby indemnifies and holds the
other Partner harmless from such Partner's share of any and all claims,
actions, losses, expenses, liabilities and obligations, including
attorneys' fees, arising out of the Partnership.
4. Employees. Zonic intends to employ substantially all of the
----------
Partnership's employees. However, nothing in this Agreement shall
obligate Zonic to employ any employee of the partnership for any
particular period of time.
5. Mutual Release. Each of the parties hereby releases and forever
---------------
discharges and indemnifies the other, and their directors, officers,
employees, affiliates or agents, from all claims and demands whatsoever,
in any manner arising under the Partnership Agreement, or in any manner
relating to the business of the Partnership, except for the obligations
of the parties set forth in this Agreement. Each of the parties
acknowledges that as of the date hereof it is owned no amount for (I) its
partnership interest or (ii) indebtedness, including interest thereon, of
the Partnership to it whether arising from loans made to the Partnership
of sales of product by the party to the Partnership.
6. Tax Elections and Tax Matters. All elections required or allowed to
------------------------------
be made with respect to the closing of the fiscal year of the Partnership
for federal and state purposes, shall be made by Zonic with A&D
Engineering's written consent. Zonic shall not have authority without
first obtaining the consent of A&D Engineering to do any of the
following:
a. Enter into settlement with the Internal Revenue Service that purports
to bind the partnership or A&D Engineering.
b. File a petition as contemplated in IRC Section 6226(a) or IRC Section
6228.
c. Intervene in any action as contemplated in IRC Section 6226(b)(5).
d. File any request contemplated in IRC Section 6227(b).
e. Enter into an agreement extending the period of limitations as
contemplated in IRC Section 6229(b)(1)(B).
7. Indemnification for Product Liability Claims. Each party
---------------------------------------------
("Indemnitor") hereby indemnifies and holds harmless the other
("Indemnitee"), its officers, directors, employees and agents from and
against any loss, damage, claim, liability or expense (including legal
fees) incurred by the Indemnitee in connection with any product liability
claims for products manufactured by the Indemnitor and sold by the
Partnership on or before the Effective Date.
8. Amendment. This Agreement may be amended, supplemented, or
interpreted at any time only by written instrument duly executed by all
parties.
9. Entire Agreement. This constitutes the entire agreement between the
-----------------
parties with respect to the subject matter thereof.
10. Filing of Certificate of Dissolution. The parties shall execute and
-------------------------------------
file with the Clermont County, Ohio, Recorder a Certificate of
Dissolution giving notice of the dissolution of the Partnership.
11. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the state of Ohio.
12. Further Actions. The parties shall do, execute and deliver, or
----------------
cause to be done, executed and delivered, all such further acts,
documents, transfers and assurances necessary to carry out the terms of
this Agreement.
IN WITNESS WHEREOF, The parties hereto have executed this Agreement on
the day and year first mentioned above written.
ZONIC CORPORATION
By: /s/ James B Webb
------------------
Title: President & CEO
---------------
A&D ENGINEERING, INC.
By: /s/ Paul E. Huber
------------------
Title: President & CEO
---------------
A&D COMPANY, LTD.
By: /s/ Hikaru Furukawa
-------------------
Title: President
---------
Page E-3
</PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 79,408
<SECURITIES> 0
<RECEIVABLES> 276,336
<ALLOWANCES> 26,109
<INVENTORY> 265,595
<CURRENT-ASSETS> 598,964
<PP&E> 3,252,509
<DEPRECIATION> 3,151,876
<TOTAL-ASSETS> 699,597
<CURRENT-LIABILITIES> 1,430,591
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,341,139)
<TOTAL-LIABILITY-AND-EQUITY> 699,597
<SALES> 2,025,938
<TOTAL-REVENUES> 2,025,938
<CGS> 831,600
<TOTAL-COSTS> 1,366,722
<OTHER-EXPENSES> (3,944)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,164
<INCOME-PRETAX> 315,604
<INCOME-TAX> 0
<INCOME-CONTINUING> (315,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315,604)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
<F1>INCLUDES GAIN FROM SALE OF ASSET OF $4,090 AND FOREIGN CURRENCY LOSS
OF $146.
</FN>
</TABLE>
