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
Commission File Number 0-12283
For the fiscal year ended March 31, 1999
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. [ x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 11, 1999 was $211,406.
The number of shares outstanding of the registrant's Common Shares as of June
11, 1999 was 3,044,136.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for the July 20, 1999 Annual
Meeting of Shareholders are incorporated by reference in Part III.
<PAGE>
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; and 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.
PART I
Item 1. Business.
General
Zonic Corporation ("Zonic" or the "Company") designs, manufactures and markets
integrated standard systems, which are used to measure and analyze the vibration
and noise characteristics of mechanical structures. These systems are used
worldwide 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.
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.
Relationship
In 1988, the Company entered into a relationship with A&D Co. Ltd., a Japanese
instrument manufacturer, ("A&D"). As part of this relationship, A&D acquired a
28% ownership interest in the Company. The Company had entered into various
joint product development arrangements, marketing arrangements and a credit
agreement with A&D most of which have been terminated in the past few years.
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 ("Class A Preferred
Stock") at a price of $100 per share. The Class A Preferred Stock is currently
convertible 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 introduced 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.
<PAGE>
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 MTS Systems
Corporation's ("MTS") structural analysis software or Spectral Dynamics' STAR
series software. The MTS software 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 MTS and
Spectral Dynamics 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. The Company's sale of its Zeta
Technology and software to A&D in fiscal year 1997 has had an adverse effect on
the marketability of 7000 Series products. However, 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 vibration
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 vibration
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, but principally in the United States,
Canada, the Pacific Rim Countries (Korea, Japan, China, etc.) and India. Export
sales accounted for 10%, 26%, and 39% of the Company's net revenue during the
fiscal years ended March 31, 1999, 1998 and 1997, respectively. See Note G of
Notes to Financial Statements. 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. 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. (See Note J of Notes
to Financial Statements.) 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 were two customers, which accounted for 10% or more of the Company's total
revenues in 1999. 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 workstations and personal computers that
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 from the date of shipment for
all hardware products, and effective January 1, 1999, the limited warranty for
software products was also extended from ninety days to one year. The Company
will repair, or at its option, replace defective products returned to its
Milford, Ohio, location. 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 are generally provided
by the Company's appointed agent in that country. (See Item 1 Business -
Marketing and Distribution) The Company's warranty expense was 2.0%, 3.0%, and
2.0% of revenue for fiscal 1999, 1998 and 1997, respectively.
The Company also sells extended warranty service contracts for Zonic
manufactured equipment and software. These contracts are generally for one year
and extend the original warranty provisions. Effective January 1, 1999, the
price for one year of extended warranty coverage is 10% of the then current
price for the covered equipment and software. All products are on a return to
factory basis and include software, in which case, software updates are provided
at no additional charge. Software updates for customers under extended warranty
are available from the Company's website.
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 reduced its research
and product development and software construction in 1999 and 1998 versus levels
in prior years.
Software construction and product enhancement costs totaling $47,000 and
$261,000 were capitalized during fiscal years 1998 and 1997, respectively. There
were no software construction and product enhancement costs capitalized during
fiscal year 1999. Software construction and product enhancement amortization
expenses for fiscal years 1999, 1998 and 1997 were $44,000, $139,000, and
$779,000, respectively. The Company expensed $163,000, $196,000, and $27,000 for
research and product development for fiscal 1999, 1998, and 1997, respectively.
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. (See Item 1 Business - Products). There are different
competitors in each market segment.
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, 1999 and March 31, 1998 was $309,000 and $705,000, respectively. The
most significant portion of this decrease was 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 shipped throughout fiscal 1999.
Significant decreases in product backlog also occurred in the WCA and standard
Medallion product lines. These decreases were partially offset by orders in
targeted new markets for special systems and test applications using Medallion
products.
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, 1999, 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.
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.
Item 3. Legal Proceedings.
The Company occasionally is involved in ordinary routine litigation incidental
to its business. The Company is not involved in any material pending litigation
not covered by insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's Common Shares are currently listed over-the-counter on the
"OTC Bulletin Board" through the National Daily Quotation Bureau, Inc. under the
symbol "ZNIC"; therefore, there is only limited trading in the Company's Common
Shares. Quarterly trading information is not available.
(b) As of March 31, 1999, there were 571 holders of record of the Company's
Common Shares, without par value, the Company's only class of common equity. On
June 11, 1999, there were 3,044,136 Common Shares of the Company outstanding.
(c) The Company did not pay any dividends on its common shares during the fiscal
years ended March 31, 1999 and March 31, 1998.
Item 6. Selected Financial Data.
The following financial data is provided for the Company and its subsidiaries
for the five preceding fiscal years. See Note C of Notes to Financial
Statements.
<TABLE>
<CAPTION>
<S> ................................... <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------ ------------ ------------- ------------- -------------
Net revenues .......................... $ 2,114,183 $ 2,025,938 $ 3,734,706 $ 3,639,982 $ 4,860,036
Gain on sale of assets ................ $ (6,050) $ 4,090 $ 3,027,551 $ 1,417,027 $ 0
Profit (loss) before
extraordinary item ................. $ 164,207 $ (315,604) $ 1,898,113 $ (9,969) $ (1,366,481)
Net profit (loss) ..................... $ 164,207 $ (315,604) $ 1,898,113 $ 387,306 $ 447,648
Basic earnings (loss) per share:
Profit (loss) before
extraordinary item ................. $ 0.04 $ (0.10) $ 0.62 $ 0.00 $ (0.44)
Extraordinary item - gain from
debt restructuring net of taxes .... $ 0.00 $ 0.00 $ 0.00 $ 0.13 $ 0.58
Net profit (loss) .................. $ 0.04 $ (0.10) $ 0.62 $ 0.13 $ 0.14
Diluted earnings (loss) per share:
Profit (loss) before extraordinary item $ 0.04 $ (0.10) $ 0.62 $ 0.00 $ (0.44)
Extraordinary item - gain from
debt restructuring net of taxes ..... $ 0.00 $ 0.00 $ 0.00 $ 0.13 $ 0.58
Net profit (loss) .................. $ 0.04 $ (0.10) $ 0.62 $ 0.13 $ 0.14
Total assets .......................... $ 568,827 $ 699,597 $ 2,687,484 $ 3,242,766 $ 4,387,721
Long-term obligations
(including long-term debt
and capital leases less
current maturities) ................. $ 10,160 $ 30,186 $ 987,425 $ 4,070,000 $ 6,018,761
Cash dividends declared
per common share .................... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following Management's Discussion and Analysis should be read in conjunction
with the financial statements and notes thereto which follow.
Results of Operations
1999 versus 1998
Revenues. Total revenues increased $88,000 or 4% in fiscal 1999 from the prior
year. Sales increased in the Company's 7000 Series, WCA and Medallion product
lines and decreased in consulting, extended warranty and MMS products. The
increases in 7000 Series and WCA revenues were due to sales resulting from
orders received in fiscal 1998 which were completed during the current year. The
increase in Medallion revenues was due primarily to sales made to a company
under an OEM distribution agreement. The decrease in consulting, extended
warranty and MMS revenues were attributable to the continuing slow down of
orders resulting from the sale of its Zeta technology and software to A&D
Company Ltd. in fiscal 1997. 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 1999 to 90% compared to 74% in 1998. The Company's largest customer in 1999,
a U.S. company, accounted for 16% of total sales. A foreign government was the
Company's largest customer in 1998 that accounted for 8% of total sales.
Cost of Products and Services Sold. Cost of products and services sold as a
percentage of revenues decreased to 37% in 1999 from 40% the prior year. The
improved profit margin was due primarily to higher profit margins on Medallion
product sales resulting from add-on software and equipment options and reduced
production costs.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by approximately $77,000 or 7% in 1999 from the prior year due
primarily to a decrease in rent and other facility related costs, lower
professional services expense and sales commisssion expense resulting from fewer
sales commissionable to sales representatives. As a percentage of total revenue,
these expenses decreased to 45% in 1999 compared to 51% 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 $128,000 or 38% in 1999 versus
1998. This decrease was due to less amortization expense as a result of a
decrease in capitalized software construction and product enhancement costs
during recent years. (See Liquidity and Capital Resources and Note A-3 of Notes
to Financial Statements.)
Interest Expense. Interest expense decreased by $158,000 in 1999 due to
significantly less borrowings during the current year resulting from the
retirement of outstanding current and long-term debt using proceeds from the
sale of preferred stock to A&D in fiscal 1998.
Foreign Currency Gains (Losses). Foreign currency gains and (losses) of $875 and
$(146) in 1999 and 1998, respectively were due to increases and decreases in
value of the U.S. dollar against the Japanese yen.
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 that 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 that 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-3 of Notes to Financial Statements.)
Gain on Sale of Asset. In December 1996, the Company sold its Zeta Technology to
A&D for $3,618,578. The gain from this sale was 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.
Loss From Affiliate. The Company 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.
Interest Expense. Interest expense decreased by $220,000 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.
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.
Liquidity and Capital Resources.
Working capital as of March 31, 1999 was a negative $748,000 versus a negative
$832,000 as of March 31, 1998. The improvement was due to a reduction in the
current maturity of long-term debt, accounts payable and deferred income. These
reductions were partially offset by a decrease in cash.
The Company's cash flow from operations was $5,000 in fiscal 1999. Payments on
long-term debt totaled $42,000 and purchases of equipment totaled $11,000. There
was no investment in software construction and product enhancement activities
during fiscal 1999.
The Company has experienced some improvement in its cash flow resulting from its
operating profit during fiscal 1999, but continues to experience cash flow
problems as current liabilities exceed current assets. The Company continues to
seek additional sources of working capital either through additional debt or
equity financing to sustain operations and reduce current liabilities. There can
be no assurance that the Company will be able to obtain additional financing on
favorable terms, if at all, from any source.
Market Risk
The Company's operations and cash flow can be affected by, among other things,
interest rate changes and foreign currency fluctuations. 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:
<TABLE>
<CAPTION>
Page No.
<S> <C>
Independent Auditors' Report............................................................ 12-13
Statements of Operations for the Years Ended March 31, 1999, 1998 and 1997.............. 14
Balance Sheets as of March 31, 1999 and 1998............................................ 15
Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997.............. 16
Statements of Shareholders' Equity (Deficit) for the Years
Ended March 31, 1999, 1998 and 1997 ............................................... 17
Notes to Financial Statements........................................................... 18
</TABLE>
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio
We have audited the accompanying balance sheet of Zonic Corporation as of March
31, 1999 and the related statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1999 and the
results of its operations and its cash flows for the year then ended 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 / Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
May 18, 1999
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio
We have audited the accompanying balance sheet of Zonic Corporation as of March
31, 1998 and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the two 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 the
results of its operations and its cash flows for each of the two 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>
Statements of Operations for the Years Ended March 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Products and service revenue .............................. $ 2,114,183 $ 2,025,938 $ 3,734,706
----------- ----------- -----------
Cost of products and services sold ........................ 775,638 813,600 1,645,985
Selling and administrative expenses ....................... 954,629 1,031,718 1,268,115
Research and development expenses and software construction
and product enhancement amortization .................... 207,459 335,004 806,048
Writedown of capitalized software ......................... -- -- 400,000
----------- ----------- -----------
Total operating expenses .................................. 1,937,726 2,180,322 4,120,148
----------- ----------- -----------
Operating income (loss) ................................... 176,457 (154,384) (385,442)
Gain (loss) on sale and disposal of assets ................ (6,050) 4,090 3,027,551
Loss from affiliate ....................................... -- -- (385,000)
Interest expense .......................................... (7,075) (165,164) (385,458)
Foreign currency gains (losses) ........................... 875 (146) 26,462
----------- ----------- -----------
Income (loss) before taxes ................................ 164,207 (315,604) 1,898,113
Provision for income taxes ................................ -- -- --
----------- ----------- -----------
Net income (loss) ......................................... 164,207 (315,604) 1,898,113
Less: Dividend payable on preferrred shares ............... (35,698) -- --
----------- ----------- -----------
Net income (loss) available to common shares .............. $ 128,509 ($ 315,604) $ 1,898,113
=========== =========== ===========
Basic earnings (loss) per share: .......................... $ 0.04 ($ 0.10) $ 0.62
=========== =========== ===========
Diluted earnings (loss) per share: ........................ $ 0.04 ($ 0.10) $ 0.62
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Balance Sheets as of March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current Assets
Cash ........................................................................... $ 32,848 $ 79,408
Receivables, net of allowance for doubtful accounts
Trade ...................................................................... 125,786 248,519
Related parties ............................................................ 200 1,708
Unbilled contracts ......................................................... 115,588 --
----------- -----------
Total receivables .............................................................. 241,574 250,227
Inventories
Finished products .......................................................... 96,164 144,718
Work in process ............................................................ 68,128 49,111
Raw material ............................................................... 85,049 71,766
----------- -----------
Total inventory ................................................................ 249,341 265,595
Prepaid expenses ............................................................... 2,702 3,734
----------- -----------
Total current assets ............................................................. 526,465 598,964
Property and Equipment-at cost
Furniture and office equipment ................................................. 133,284 452,417
Machinery and plant equipment .................................................. 264,164 597,022
Software construction and product enhancements ................................. 2,203,070 2,203,070
----------- -----------
2,600,518 3,252,509
Less accumulated depreciation and amortization ................................. 2,558,156 3,151,876
----------- -----------
----------- -----------
Total net property and equipment ................................................. 42,362 100,633
----------- -----------
$ 568,827 $ 699,597
=========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Current maturities of long-term obligations .................................... $ 20,788 $ 42,365
Accounts payable - trade ....................................................... 614,230 728,062
Accounts payable - related parties ............................................. -- 4,223
Deferred income ................................................................ 321,819 365,258
Dividend payable ............................................................... 35,698 --
Accrued liabilities
Salaries and wages ......................................................... 105,514 108,947
Property and payroll taxes ................................................. 41,317 54,684
Other ...................................................................... 135,468 127,052
----------- -----------
----------- -----------
Total accrued liabilities ...................................................... 282,299 290,683
----------- -----------
Total current liabilities ........................................................ 1,274,834 1,430,591
Long-term obligations, less current maturities ................................... 10,160 30,186
Deferred rent .................................................................... 34,789 118,285
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 1,200,000
6,000 shares Class B non-voting, redeemable, non-convertible, $200 per share 1,200,000 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 8,189,555
Accumulated deficit .............................................................. (8,940,511) (9,069,020)
----------- -----------
----------- -----------
Total shareholders' equity (deficit) ............................................. (750,956) (879,465)
----------- -----------
$ 568,827 $ 699,597
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash provided by (used in) operations
Net income (loss) for year .................................... $ 164,207 ($ 315,604) $ 1,898,113
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
(Gain) loss from sale of assets ................................ 6,050 (4,090) (3,027,551)
Depreciation and amortization ................................. 17,704 21,052 33,486
Amortization of software construction and product enhancements 44,383 139,179 778,750
Write-off of capitalized software costs ....................... -- -- 400,000
Amortization of deferred income and deferred rent ............. (200,770) (220,601) (277,797)
Bad debts provision (recovery) ................................ -- -- (29,806)
Amortization of discount on notes receivable .................. -- (30,000) --
Provision for obsolete inventories ............................ 24,000 33,385 31,111
Loss from affiliates .......................................... -- -- 385,000
Foreign currency (gain) loss and other ........................ (875) 235 (26,646)
Increase (decrease) in cash due to changes in:
Receivables ................................................. 4,053 36,301 321,362
Inventories ................................................. (7,746) 120,886 64,595
Prepaid expenses ............................................ 1,032 504 (405)
Accounts payable and accrued liabilities .................... (120,964) (87,469) (296,605)
Accrued rent ................................................ -- (64,079) (61,615)
Deferred revenue (expense) and advanced billings to customers 73,835 183,581 (161,608)
----------- ----------- -----------
Net cash provided by (used in) operations ............... 4,909 (186,720) 30,384
Cash used in investment activities
Purchase of equipment and leasehold improvements .............. (10,891) (9,094) (9,166)
Proceeds from sale of fixed assets ............................ 1,025 13,976 72,210
Software construction and product enhancement expenditures .... -- (47,198) (261,234)
----------- ----------- -----------
Net cash used in investment activities .................. (9,866) (42,316) (198,190)
Cash provided by (used in) financing activities
Proceeds from short-term and long-term notes payable .......... -- 75,000 405,000
Repayment of long-term debt obligations ....................... (41,603) (26,050) (6,651)
----------- ----------- -----------
Net cash provided by (used in) financing activities ..... (41,603) 48,950 398,349
Increase (decrease) in cash ..................................... (46,560) (180,086) 230,543
Cash - beginning of period ...................................... 79,408 259,494 28,951
----------- ----------- -----------
=========== =========== ===========
Cash - end of period ............................................ $ 32,848 $ 79,408 $ 259,494
=========== =========== ===========
=========== =========== ===========
Interest paid during the year ................................... $ 7,075 $ 171,722 $ 349,603
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Statements of Shareholders' Equity (Deficit) for the Years Ended March 31, 1999,
1998 and 1997
<TABLE>
<CAPTION>
Common Preferred Paid in Accumulated
Shares Shares Capital Deficit Total
<S> <C> <C> <C> <C> <C>
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)
Net income for year ................................ -- -- -- 164,207 164,207
Dividends payable on preferred shares .............. -- -- -- (35,698) (35,698)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 .......................... $ 61,674 $ 2,400,000 $ 5,727,881 ($ 8,940,511) ($ 750,956)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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. 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 $179,000 and
$185,000 at March 31, 1999 and 1998, respectively.
2. Depreciation
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives under the
straight-line method. Estimated remaining useful lives range from one to five
years.
3. 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.
There were no unamortized costs for software construction and product
enhancement at March 31, 1999. At March 31, 1998, there was $44,383 of
unamortized costs for software construction and product enhancement.
Capitalized costs of software construction and product enhancement and related
information for fiscal years 1999, 1998 and 1997 follow:
1999 1998 1997
-------- -------- --------
Capitalized costs
Software construction and product enhancement . -- $ 47,198 $261,234
Amortization
Software construction ....................... $ 44,383 139,179 594,918
Product enhancement ......................... -- -- 183,832
Reductions of capitalized software construction
and product enhancement costs .............. -- -- 446,585
Net book value of assets sold ................. -- -- 271,552
Research and development expenses ............. $163,076 $195,825 $ 27,298
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.
4. Income Taxes
The Company provides for income taxes using the asset and liability method
required under Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." (See Note I of Notes to Financial Statements.)
5. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
6. 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 two contracts in progress at
March 31, 1999. Unbilled receivables relating to these contracts at March 31,
1999, were $115,588. There were no contracts in progress at March 31, 1998.
Billings, as specified in the terms of a contract, in excess of revenue
earned have been recorded as deferred income.
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.
7. 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. At March 31, 1999 and 1998 two customers accounted for approximately
64% and 58% 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 1999 and 1998. (See Notes G and H of Notes to
Financial Statements). The Company had an allowance for doubtful accounts of
approximately $25,000 and $26,000 at March 31, 1999 and 1998, respectively.
8. 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).
9. 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.
Computation of basic and diluted earnings (loss) per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) .................................... $ 164,207 $ (315,604) $ 1,898,113
Class B preferred stock dividend ..................... (35,698) -- --
----------- ----------- -----------
Net income (loss) available to common shareholders ... $ 128,509 $ (315,604) $ 1,898,113
=========== =========== ===========
Weighted average of common shares outstanding ........ 3,044,136 3,044,136 3,044,136
Dilutive potential common shares:
Class A convertible preferred stock .... 200,000 -- --
Stock options .......................... 10,046 -- --
----------- ----------- -----------
Adjusted weighted average of common shares outstanding 3,254,182 3,044,136 3,044,136
=========== =========== ===========
Basic earnings (loss) per share ...................... $ 0.04 $ (0.10) $ 0.62
Diluted earnings (loss) per share .................... $ 0.04 $ (0.10) $ 0.62
</TABLE>
At March 31, 1999, there were 1,252,500 additional stock options and 450,000
warrants outstanding for the purchase of common shares. These potential common
shares were not included in the diluted earnings per share calculation for 1999
as their effect was anti-dilutive. Stock options and warrants outstanding at
March 31, 1998 and 1997 were not included in the diluted earnings per share
calculation for 1998 and 1997 as their effect was anti-dilutive. (See Note E of
Notes to the Financial Statements)
<PAGE>
10. New Standards
The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" during the current year. Under the
provisions of this Statement, all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners are reported as comprehensive income. As
required by the statement, comprehensive income should be reported as net income
and other comprehensive income with a total amount displayed in the financial
statements. Since the Company has no items of other comprehensive income during
the current year, comprehensive income is not reported.
The Company also implemented Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in the annual financial statements of the current year. This statement requires
disclosure of certain information for each operating segment of a business
enterprise. Specific criteria is included in this statement to determine
reportable segments of the business. The Company has a single reportable
segment. Revenues and the profit for this segment are reported in the
accompanying Statement of Operations. Adoption of the statement did not impact
the reported results of operations of the Company.
The Financial Accounting Standards Board has proposed an interpretive release on
several issues that are not specifically addressed in APB No. 25, "Accounting
for Stock Issued to Employees." The proposed guidance for accounting for the
repricing of employee stock options could result in significant accounting
changes for the Company as a result of the repricing of options which occurred
in February 1999. (See Note E of Notes to the Financial Statements). The Company
would be required to record an expense (compensation costs) equal to the
difference between the modified exercise price and any subsequent increase in
the price of the Company's common stock. This accounting would be applied from
the date of issuance until the exercise date of the option. The final
Interpretation would be effective upon issuance (probably in September), but
will cover events that occurred after December 15, 1998. The impact on the
Company's financial statements would depend on the market value of the common
stock. At March 31, 1999, the market value of the Company's common stock was
less than the exercise price of the repriced options, and as such, there would
be no additional expense.
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.
The Company has recorded an annual dividend amount of $35,698 in 1999 relating
to the Class B Preferred Stock.
Note C - Year 2000 Issues
The Company defines Year 2000 compliance as proper functionality, or performance
of a system, process, or equipment that is not adversely affected by dates prior
to, during, and after the year 2000. Due to memory constraints, early
programmers represented years by the last two digits of the century. Thus the
year 1970 is represented by the number "70" in many older software programs. At
the turn of the century, the year will become "00" and the computer or system
will interpret this as the year 1900 and not the year 2000. Many systems have
electronic components that utilize a date to control the function it serves.
Most computer software, including the Company product offerings, utilize date
identification.
The Company has initiated a comprehensive review and evaluation of all relevant
internal and external systems, processes, and third party providers to determine
their compliance or progress toward Year 2000 compliance. If a system, process
or third party provider is deemed significant to the operations of the Company
and Year 2000 compliance is in question, the Company will develop a contingency
plan to address the issue. At this time the Company has not encountered nor
anticipates any significant Year 2000 issues requiring a contingency plan.
The Company's product offerings utilize date reference for the identification of
printed and stored data. A date reference problem will result in stored data
being tagged with an incorrect date, or printed data indicating an incorrect
date. The Company has determined that certain legacy products will not be
reviewed for Year 2000 compliance. All current products will be Year 2000
compliant. This information has been provided to the Company's clients and the
information is available on the company's website. This review process was 95%
complete at March 31, 1999 and the Company has discovered no material Year 2000
compliance issues. The Company has not incurred nor anticipates any additional
significant expenses as a result of its on-going Year 2000 work.
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:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Loan payable to bank .. $15,625 $53,125
Other debt ............ 15,323 19,426
------- -------
30,948 72,551
Less current maturities 20,788 42,365
------- -------
$10,160 $30,186
======= =======
</TABLE>
The loan payable and other debt as of March 31, 1999 mature as follows: 2000 -
$20,788; 2001 - $5,134; and 2002 - $5,026.
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%.
Other debt for $15,323 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.
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 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
<S> <C> <C>
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
Granted in 1999 30,000 .14
Exercised in 1999 -- --
Forfeited in 1999 (15,000) .30
Outstanding at March 31, 1999 1,573,000 1.69
Exercisable at March 31, 1998 1,519,250 1.83
Exercisable at March 31, 1999 1,550,500 1.72
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding at
March 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------- ---------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Exercise March 31, Contractual Exercise March 31, Exercise
Prices 1999 Life Price 1999 Price
------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
.14 320,500 5.76 .14 298,000 .14
2.00 1,140,000 3.95 2.00 1,140,000 2.00
2.50 62,500 3.33 2.50 62,500 2.50
3.63 50,000 2.67 3.63 50,000 3.63
</TABLE>
On February 19, 1999, the Board of Directors re-priced 290,500 incentive stock
options for common shares shares at $0.14 per share, the fair market value of
the stock as of that date. Nothing else was changed about the options.
At March 31, 1999, there were 320,500 incentive options and 1,252,500
non-qualified options outstanding and 229,500 common shares were available for
granting additional options.
As consideration for entering into the Credit Agreement between the company and
A&D dated December 7, 1992 which was terminated in 1998, the Company granted A&D
a stock option to purchase 1,000,000 shares of the company's stock at $2.00 per
share. The option expires on March 20, 2005.
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 stock at $2.00 per share.
This option expires December 7, 2002.
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 in connection with the
extinguishment of certain long-term debt obligations. These warrants are
exercisable at $2.00 per share and expire on March 31, 2000. None of these
warrants have been exercised.
At March 31, 1999, 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:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma income (loss) ................................ $ 152,001 $ (333,078) $1,884,008
Pro forma income (loss) available to common stockholders $ 116,303 $ (333,078) $1,884,008
Pro forma income (loss) per share of common stock ...... $ .04 $ (.11) $ .62
</TABLE>
The weighted average per option fair value of options granted in 1999 and 1997
was $.14 and $.27, respectively. There were no options granted during 1998. The
fair value of each option grant was estimated on the date of the grant and using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1999 and 1997: no expected dividend yield and expected option lives of
ten years for both years; expected volatility of 112% and 99%; and risk-free
interest rates of 5.0% and 6.5%, 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. The minimum
future rental commitment under the lease agreement is $23,020 in fiscal 2000.
Deferred rent arising from incentives and concessions from the landlord was
$34,789 and $118,285 at March 31, 1999 and 1998, respectively. These amounts are
amortized as a reduction of rent payments charged to expense over the remaining
life of the lease. Rent expense for 1999, 1998 and 1997 was $ 55,506, $91,866,
and $132,371, respectively. Amortization of deferred rent for 1999 and 1998 was
$83,496 and $48,706, respectively.
The Company also has computer equipment under an operating lease at March 31,
1999. Leased equipment expense under this lease was $1,576 for 1999. Minimum
future rental commitments under this lease are 2000 - $6,303, 2001 - $6,303, and
2002 - $4,727.
Note G - Foreign Sales
The Company had foreign sales as follows:
Percent of
Amount Total Sales
---------- ----------
1999 $ 215,000 10%
1998 $ 519,000 26%
1997 $1,445,000 39%
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.
Two U.S. companies accounted for more than 29% of the Company's total sales in
1999. There were no major customers in 1998. There were two major customers in
1997, a foreign government and the U.S. Government, which accounted for 41% 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 1999, 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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current deferred tax asset:
Reserves not currently deductible $ 74,275 $ 76,878
Deferred revenue 109,418 96,012
Accruals not currently deductible 58,851 62,294
----------- -----------
Subtotal 242,544 235,184
Less valuation allowance (242,544) (235,184)
----------- -----------
Net $ -- $ --
=========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 2,279,920 $ 2,156,935
Tax credits 666,205 646,248
Deferred income 12,150 40,909
----------- -----------
Subtotal $ 2,958,275 $ 2,844,092
Non-current deferred tax liability - Capital leases and accelerated depreciation (2,867) (2,733)
----------- -----------
Net non-current deferred tax asset 2,955,408 2,841,359
Less valuation allowance (2,955,408) (2,841,359)
----------- -----------
Net $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes for the years ended consist of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Deferred (income) expense $(121,409) $ (47,190) $ 756,920
Increase (Reduction) in the valuation allowance 121,409 47,190 (756,920)
--------- --------- ---------
Provision for income taxes $ - $ -- $ --
========= ========= =========
</TABLE>
At March 31, 1999 the Company had net operating loss carryforwards of
approximately $6.7 million for U.S. Federal tax purposes. Such loss
carryforwards, if unused as offsets to future taxable income, will expire
beginning in 2002 and continuing through 2013.
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 $666,000 of tax credits primarily comprised of research and
development available for U.S. income tax purposes. These credits expire at
various dates beginning in 2000 and continuing through 2008.
Note J - Related Party Transactions
A&D, a 28.6% shareholder, sells the company's products in the Japanese market.
The Company sells its products to A&D at discounts which vary by product for
re-sale to end customers. Revenues from sales to A&D were $2,800, $84,000 and
$114,000 during 1999, 1998, and 1997 respectively. In 1997, the Company sold its
products in the Western Hemisphere through Zonic A&D Company, a joint venture
between the Company and A&D Engineering Inc., a wholly owned subsidiary of A&D.
The Company and A&D Engineering Inc. each had 50% ownership. The Company sold
its products to Zonic A&D Company at its normal profit margins for resale to its
customers and paid commissions to Zonic A&D Company for those sales. Revenues
from sales to Zonic A&D Company were $2,053,000 in 1997 and commission expense
paid on those sales was $370,580. The operations of Zonic A&D Company were
merged into Zonic as of April 1, 1997. During 1997, the Company recorded
expenses of $385,000 related to uncollected old accounts receivable from Zonic
A&D Company and costs expected to be incurred in the dissolution of this
affiliate.
The Company is also the exclusive distributor of the WCA Product owned by A&D in
the Western Hemisphere and purchases components from A&D used principally in the
production of its WCA product line. Such purchases totaled $48,085, $32,110 and
$31,767 during 1999, 1998 and 1997, respectively. The Company had a receivable
balances from A&D of $200 and $1,708 at March 31, 1999 and 1998, respectively,
and an amount payable to A&D of $4,223 at March 31, 1998.
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 expenses are incurred. The Company recorded
$35,000 and $50,000 of this amount during fiscal 1998 and 1997, respectively as
a reduction of selling and administrative expenses.
In December 1996, the Company sold its Zeta Technology to A&D for $3,618,578.
The gain from this sale was 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. Revenues from the sales
of 7000 products, including Zeta software, were $390,408, $306,546 and
$1,296,872 in 1999, 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 $ 16,757, $10,777 and $12,067 for 1999, 1998
and 1997, respectively. None of the contributions were made in Company stock.
The 1999 contribution included a supplemental contribution of $7,315.
Note L - Statement of Cash Flows
In addition to those shown in the accompanying Statement of Cash Flows and Note
B 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 1999 and 1998. This offset reduced both current assets and current
liabilities by $4,600 and $33,868 in 1999 and 1998, 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.
3) Amortization of discount on notes receivable of $30,000 in 1998 was due
to a non-interest bearing note receivable from A&D resulting from the sale if
its Zeta Technology and software which was paid on June 30, 1997. The discount
was recorded as a reduction in interest expense.
<PAGE>
Note M - Basis of Financial Statement Presentation
The Company has made significant progress in returning to consistent
profitability during 1999 and expects similar and possibly improved results
during fiscal year 2000. Revenue is expected to increase slightly with gross
margins and operating expenses to remain at constant levels.
The Company has experienced improvement in its cash flow resulting from its
operating profit during the current year, but continues to experience some cash
flow problems as current liabilities exceed current assets. 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.
Effective December 17, 1998, the Board of Directors of Zonic Corporation
dismissed its former auditor and selected Clark, Schaefer, Hackett & Co.,
located in Cincinnati, Ohio as the sole auditor for the Company for the fiscal
year ending March 31, 1999. Since November 11, 1991 Deloitte & Touche LLP
("Deloitte"), also located in Cincinnati, Ohio acted as the Company's auditor.
The decision to change auditors was recommended by the Board of Directors based
on management's belief that the Company could substantially reduce its
accounting fees by selecting a regional rather than a national accounting firm.
Deloitte's report on the financial statements of the Company has not contained
an adverse opinion or a disclaimor of opinion, and was not qualified or modified
as to uncertainity, audit scope, or accounting principles, except that
Deloitte's reports for the last six fiscal years expressed uncertainity as to
the Company's ability to continue as a going concern. The Company had no
disagreements with Deloitte on any matter of accounting principles or practices,
financial disclosure, or auditing scope or procedures which, if not resolved to
Deloitte's satisfaction, would have caused it to make a reference to the subject
matter of the disagreement in connection with its audit report.
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 June 18,
1999. The information being incorporated by reference is set forth under the
captions: "Outstanding Voting Securities"; "Election of Directors"; "Executive
Officers of the Company"; and "Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)
The following documents are filed as a part of this Report or incorporated by
reference:
(1) All financial statements required to be filed by Item 8 of this
Form and included in this Report have been listed previously.
(2) Financial Statements and Financial Statement Schedules Required: none
(3) Exhibits Required by Item 601 of Regulations S-K:
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) (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. (incorporated by reference)
(10) (ix) Notice of Abandonment of Partnership Interest by A&D
Engineering, effective March 29, 1998.
(incorporated by reference)
(10) (x) Termination Agreement between the Company and A&D
Engineering, effective May 15, 1998.
(incorporated by reference)
(11) Computation of earnings per common share --
See Note A-9 of Notes to Financial Statements.
(16) Letter of Deloitte & Touche agreeing to changes in
Certifying Accountant (incorporated by reference)
(23) Independent Auditor's Consent
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
(c) Exhibits. See subparagraph (a) above.
(d) Financial Statement Schedules.
None.
<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
Date: June 18, 1998 James B. Webb, President
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.
Signature Title Date
/s/ James B. Webb President, Treasurer, June 18, 1999
- ------------------------- Principal Executive Officer,
James B. Webb and Director
/s/ John H. Reifschneider Controller and June 18, 1999
- ------------------------- Principal Financial and
John H. Reifschneider Accounting Officer
/s/ Shoichi Sekine Director June 18, 1999
- -------------------------
Shoichi Sekine
/s/ Gerald J. Zobrist Director June 18, 1999
- --------------------------
Gerald J. Zobrist
<PAGE>
E-1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-45686 of Zonic Corporation on Form S-8 of our report dated June 22, 1998,
appearing in this Annual Report on Form 10-K of Zonic Corporation for the year
ended March 31, 1999.
Cincinnati, Ohio
June 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This scheule contains summary financial information extracted from Form 10-K for
the year ended march 31,1 999 and is qualified in its entirity by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 32,848
<SECURITIES> 0
<RECEIVABLES> 266,358
<ALLOWANCES> 24,784
<INVENTORY> 249,341
<CURRENT-ASSETS> 526,465
<PP&E> 397,448
<DEPRECIATION> 355,084
<TOTAL-ASSETS> 568,828
<CURRENT-LIABILITIES> 1,274,836
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,212,631)
<TOTAL-LIABILITY-AND-EQUITY> 568,828
<SALES> 2,114,183
<TOTAL-REVENUES> 2,114,183
<CGS> 775,638
<TOTAL-COSTS> 1,162,088
<OTHER-EXPENSES> 5,175 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,075
<INCOME-PRETAX> 164,207
<INCOME-TAX> 0
<INCOME-CONTINUING> 164,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,207
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1> Includes loss from sale of assets of $6,050 and foreign currency gain
of $875.
</FN>
</TABLE>
