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, 2000
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 12, 2000 was $316,263.
The number of shares outstanding of the registrant's Common Shares as of June
12, 2000 was 3,044,136.
DOCUMENTS INCORPORATED BY REFERENCE
--------------------------------------------------------------------------------
Portions of the Registrant's Proxy Statement for the August 9, 2000 Annual
Meeting of Shareholders are incorporated by reference in Part III.
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------------------------
Certain of the matters discussed under the captions "Business," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation" may constitute forward-looking statements for purposes
of the Securities Act of 1933 and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Important
factors that could cause the actual results, performance or achievement of the
Company to differ materially from the Company's expectations include, without
limitation, the following: 1) the Company is unable to 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 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, industrial blowers
and other types of 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 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 3527 Series - This is a line of single channel, hand-held, FFT analyzers
which the Company imports from A&D in Japan for distribution in the Western
Hemisphere. The products are used both as engineering test instruments and
incorporated in production testing systems and range in price from $4,000 to
$8,000 depending on options and accessories.
Zonic Medallion Series - Originally introduced in February 1996 as a mobile,
eight channel FFT analyzer, the Medallion series has been expanded by the
Company to two, four, six and in the last fiscal year, sixteen channels. The
Medallion has also served as the basic platform for the Company's Machine
Condition Monitoring Systems and Non Destructive test Systems. The basic
analyzer consists of a signal conditioning module which interfaces to a personal
computer via a PCMCIA card which resides in the customers' personal computer.
The software controlling the analyzer and providing the user interface depends
on the intended use of the analyzer.
For general structural analysis such as design conformance testing, the Company
provides it's Fundamental Acquisition Software, or FAS, with every Medallion
system. The capabilities of the system can be extended through the purchase of
additional, add-on packages. In the case of general structural analysis, the
Company's RECORDER software turns the system into a multi-channel digital signal
recorder with the personal computer hard drive serving as the data storage
medium. For general rotating machinery analysis, the Company's ROTATE software,
which was originally developed for the Company by another local firm, offers
extensive signal analysis and data reduction capabilities for the data acquired
by the Medallion and RECORDER software.
In addition to Zonic authored software, the Company is an authorized re-seller
of various third party packages which are used for specific test purposes such
as Modal Analysis and Acoustic Intensity Analysis. Generally, these products are
sold to the end user at the third party list price with the Company buying the
packages at a re-seller discount. Warranty and support obligations remain with
the original provider of the software packages and the Company incurs no
additional liability.
For manufacturing product conformance testing, the Company provides its
proprietary eZ-NDT software and accessories to facilitate manufacturing tests
such as impact hammers, accelerometers and microphones. These systems range in
complexity from a simple two channel analyzer with a computer and software to
fully integrated systems with conveyors,, programmable logic controllers,
pneumatic devices, industrial grade computers with TFT touch screens, and
Medallion FFT analyzers. In the latter case, the systems are generally built to
order, however, the software which forms the core of the application is standard
Zonic product. In all cases, the systems utilize large amounts of third party
materials and the Company has developed several sources of supply for such
components.
For machinery monitoring, the Company employs its own Medallion analyzers as
well as personal computers and signal transducers from others. The Company's
TOMAS software is bundled with the systems and forms the core analysis
functions. These systems are generally used to trouble shoot problem machinery
either by direct on-line analysis or post event analysis by highly skilled
machinery diagnosticians.
Medallion based systems range in price from $6,000 to over $50,000 depending on
the intended application as described above and the amount of ancillary
equipment supplied by the Company.
A&D WCA (World Class Analyzer) - The WCA was originally developed under a joint
development agreement between the Company and A&D, and was intended to be based
on the Apple Macintosh. The Company sold its 40% interest in the product to A&D
in June of 1995. A&D has subsequently re-designed the product to operate with
personal computers running the Microsoft Windows NT operating system and the
Company imports components for configuration and sale to customers in the
Western Hemisphere. The product is configurable from two to 32 channels and
provides extensive signal analysis capabilities primarily for design
verification testing. Prices range from $30,000 to $90,000.
Zonic 7000 Series - This line of products was originally developed in the late
1980's and provided a cost effective solution to those customers requiring large
channel count systems in the range of 32 to more than 500 channels. The line is
being phased out of the Company's product offerings, however, it continues to
contribute revenues though system upgrades and warranty contracts. Original
system prices ranged from $35,000 to over $1,000,000. Current upgrades and
warranty contracts are in the $10,000 to $25,000 range.
Marketing and Distribution
The Company markets its Design Test and Manufacturing 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 9%, 10%, and 26% of the Company's net revenue during the
fiscal years ended March 31, 2000, 1999 and 1998, respectively. See Note G of
Notes to Financial Statements. In the United States and Canada, the Company
maintains a network of manufacturers representatives who are trained on the use
of the Company's product and who can help potential customers in the selection
of the right equipment for their application. The Representatives solicit orders
on the Company's behalf. The Company sells its products and services directly to
the end customer and pays the representative a commission.
In addition to sales of its own system, the Company sells its Medallion analyzer
to third party packaging companies who employ the Medallion in their systems.
Generally, these third party companies add significant value in the form of
system integration and their own software with the Medallion providing key high
speed data acquisition functions.
Outside of the United States and Canada, the Company utilizes both
representatives and distributors, depending on the particular country and
strength of the representative in that country. In the case of representatives,
the end users place orders directly with Zonic and the Company pays the
representative a commission. Distributors purchase materials from the Company at
a discount from the Company's Export Price List and then re-sell the products to
the end user. The level of discount varies from distributor to distributor
depending on the individual capabilities of the distributor.
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. 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 one customer, which accounted for 10% or more of the Company's total
revenues in 2000. 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 its products. 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 2.4%, 2.0%, and 3.0% of revenue for fiscal 2000, 1999 and
1998, 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. 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.
Software construction and product enhancement costs totaling $67,000 and $47,000
were capitalized during fiscal years 2000 and 1998, 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 2000, 1999 and 1998 were $4,000, $44,000, and $139,000,
respectively. The Company expensed $148,000, $163,000, and $196,000 for research
and product development for fiscal 2000, 1999, and 1998, 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 can be a secondary
consideration, however 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).
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, 2000 and March 31, 1999 was $168,000 and $309,000, respectively. The
prior year backlog included orders totaling $150,000 for products which the
Company no longer actively markets.
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, 2000, the Company had 14 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. The lease expires August 31, 2001.
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, 2000, there were 554 holders of record of the Company's
Common Shares, without par value, the Company's only class of common equity. On
June 12, 2000, 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, 2000 and March 31, 1999.
Item 6. Selected Financial Data.
The following financial data is provided for the Company and its subsidiaries
for the five preceding fiscal years.
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues ...................... $ 1,846,018 $ 2,114,183 $ 2,025,938 $ 3,734,706 $ 3,639,982
Gain (loss) ....................... $ (4,372) $ (6,050) $ 4,090 $ 3,027,551 $ 1,417,027
Profit (loss) before extraordinary $ 42,875 $ 164,207 $ (315,604) $ 1,898,113 $ (9,969)
Net profit (loss) ................. $ 42,875 $ 164,207 $ (315,604) $ 1,898,113 $ 387,306
Basic earnings (loss) per share:
Profit (loss) before extraordinary $ 0.01 $ 0.04 $ (0.10) $ 0.62 $ 0.00
Extraordinary item - gain from debt $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.13
Net profit (loss) .............. $ 0.01 $ 0.04 $ (0.10) $ 0.62 $ 0.13
Diluted earnings (loss) per share:
Profit (loss) before extraordinary $ 0.01 $ 0.04 $ (0.10) $ 0.62 $ 0.00
Extraordinary item - gain from debt $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.13
Net profit (loss) .............. $ 0.01 $ 0.04 $ (0.10) $ 0.62 $ 0.13
Total assets ...................... $ 500,524 $ 568,827 $ 699,597 $ 2,687,484 $ 3,242,766
Long-term obligations (including .. $ 5,029 $ 10,160 $ 30,186 $ 987,425 $ 4,070,000
Cash dividends declared ........... $ 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
2000 versus 1999
Revenues. Total revenues decreased $268,000 or 13% in fiscal 2000 from the prior
year. Sales decreased primarily in the Company's 7000 Series and WCA product
lines as the Company focused its sales and development efforts during the
current year on its Medallion product line. There were also small declines in
consulting and extended warranty revenues. These decreases were partially offset
by a 9% or $105,000 increase in Medallion product sales. 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 2000 to 91% compared to 90% in 1999. The
Company's largest customer in 2000, a U.S. company, accounted for 12% of total
sales. A different U.S. company accounted for 16% of total sales in 1999.
Cost of Products and Services Sold. Cost of products and services sold as a
percentage of revenues increased to 40% in 2000 from 37% the prior year. The
reduced profit margin was due primarily to higher costs on the sale of certain
Medallion based custom designed systems during the current year.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by approximately $62,000 or 7% in 2000 from the prior year due
primarily to less sales commission expense as a result of more sales made by
Company employees versus outside sales representatives during the current year
and lower professional service and advertising expenses. As a percentage of
total revenue, however, these expenses increased to 48% in 2000 compared to 45%
in 1999 due to lower revenues during the current year.
Research and Development and Software Construction and Product Enhancement
Amortization. Research and development expense and software construction and
product enhancement amortization decreased by $56,000 or 27% in 2000 versus
1999. This decrease was due primarily 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 increased by $2,500 in 2000 due to higher
bank borrowings and discounts given to customers forearly payment of invoices.
Foreign Currency Gains (Losses). Foreign currency gains and (losses) of $(12)
and $875 in 2000 and 1999, respectively were due to increases and decreases in
value of the U.S. dollar against the Japanese yen.
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 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 commission 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
Liquidity and Capital Resources.
Working capital as of March 31, 2000 was a negative $809,000 versus a negative
$748,000 as of March 31, 1999. The decrease in working capital was due primarily
to increases in short-term borrowings which was partially offset by a decline in
accounts payable, deferred income and accrued liabilities.
The Company's cash flow from operations was a negative $38,000 in fiscal 2000.
The Company borrowed $135,000, made payments on long-term debt totaling $21,000
and purchased equipment totaling $7,000. Investment in software construction and
product enhancement activities used $67,000 of cash during fiscal 2000.
The Company has experienced some improvement in its cash flow resulting from its
operating profits during fiscal 2000 and 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. (See Note M
of Notes to the Financial Statements.)
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:
Page No.
Independent Auditors' Report.............................................. 12-13
Statements of Operations for the Years Ended March 31, 2000, 1999 and 1998 .. 14
Balance Sheets as of March 31, 2000 and 1999 ................................ 15
Statements of Cash Flows for the Years Ended March 31, 2000, 1999 and 1998 .. 16
Statements of Shareholders' Equity (Deficit) for the Years
Ended March 31, 2000, 1999 and 1998 .................................... 17
Notes to Financial Statements ............................................... 18
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, 2000 and 1999 and the related statements of operations, shareholders'
deficit, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 2000 and 1999
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that 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
April 28, 2000
Independent Auditors' Report
To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio
We have audited the balance sheet of Zonic Corporation as of March 31, 1998 and
the related statements of operations, shareholders' deficit, and cash flows for
the year ended March 31, 1998 (not presented separately herein). 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, 1998 and the
results of its operations and its cash flows for the year 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
<TABLE>
<CAPTION>
Statements of Operations for the Years Ended March 31, 2000, 1999, and 1998
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Products and service revenue .......................... $ 1,846,018 $ 2,114,183 $ 2,025,938
----------- ----------- -----------
Cost of products and services sold .................... 745,185 775,638 813,600
Selling and administrative expenses ................... 892,368 954,629 1,031,718
Research and development expenses and software
construction and product enhancement amortization ... 151,602 207,459 335,004
----------- ----------- -----------
Total operating expenses .............................. 1,789,155 1,937,726 2,180,322
----------- ----------- -----------
Operating income (loss) ............................... 56,863 176,457 (154,384)
Gain (loss) on sale and disposal of assets ............ (4,372) (6,050) 4,090
Interest expense ...................................... (9,604) (7,075) (165,164)
Foreign currency gains (losses) ....................... (12) 875 (146)
----------- ----------- -----------
Income (loss) before taxes ............................ 42,875 164,207 (315,604)
Provision for income taxes ............................ -- -- --
----------- ----------- -----------
Net income (loss) ..................................... 42,875 164,207 (315,604)
Less: Dividend payable on preferrred shares ........... (8,575) (35,698) --
----------- ----------- -----------
Net income (loss) available to common shares .......... $ 34,300 $ 128,509 ($ 315,604)
=========== =========== ===========
Basic earnings (loss) per share: ...................... $ 0.01 $ 0.04 ($ 0.10)
=========== =========== ===========
Diluted earnings (loss) per share: .................... $ 0.01 $ 0.04 ($ 0.10)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
Balance Sheets as of March 31, 2000 and 1999
2000 1999
----------- -----------
<S> <C> <C>
Current Assets
Cash ........................................................................... $ 34,578 $ 32,848
Receivables, net of allowance for doubtful accounts
Trade ...................................................................... 101,662 125,786
Related parties ............................................................ 27,751 200
Unbilled contracts ......................................................... -- 115,588
----------- -----------
Total receivables .............................................................. 129,413 241,574
Inventories
Finished products .......................................................... 137,628 96,164
Work in process ............................................................ 18,561 68,128
Raw material ............................................................... 81,229 85,049
----------- -----------
Total inventory ................................................................ 237,418 249,341
Prepaid expenses ............................................................... 1,896 2,702
----------- -----------
Total current assets ............................................................. 403,305 526,465
Property and Equipment-at cost
Furniture and office equipment ................................................. 102,217 133,284
Machinery and plant equipment .................................................. 219,381 264,164
Software construction and product enhancements ................................. 2,270,008 2,203,070
----------- -----------
2,591,606 2,600,518
Less accumulated depreciation and amortization ................................. 2,494,387 2,558,156
----------- -----------
----------- -----------
Total net property and equipment ................................................. 97,219 42,362
----------- -----------
$ 500,524 $ 568,827
=========== ===========
Liabilities and Shareholders' Deficit
Current Liabilities
Note payable ................................................................... $ 135,000 $ --
Current maturities of long term obligations .................................... 5,133 20,788
Accounts payable - trade ....................................................... 567,958 614,230
Deferred income ................................................................ 244,098 321,819
Dividend payable ............................................................... 8,575 35,698
Accrued liabilities
Salaries and wages ......................................................... 88,693 105,514
Property and payroll taxes ................................................. 33,777 41,317
Other ...................................................................... 128,917 135,468
----------- -----------
----------- -----------
Total accrued liabilities ...................................................... 251,387 282,299
----------- -----------
Total current liabilities ........................................................ 1,212,151 1,274,834
Long-term obligations, less current maturities ................................... 5,029 10,160
Deferred rent .................................................................... -- 34,789
Commitments and Contingencies
Shareholders' 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, 2000 and 1999 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 .............................................................. (8,906,211) (8,940,511)
----------- -----------
----------- -----------
Total shareholders' deficit ...................................................... (716,656) (750,956)
----------- -----------
$ 500,524 $ 568,827
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
Statements of Cash Flows for the Years Ended March 31, 2000, 1999 and 1998
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash provided by (used in) operations
Net income (loss) for year .................................... $ 42,875 $ 164,207 ($315,604)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
(Gain) loss from sale and disposal of assets ................... 4,372 6,050 (4,090)
Depreciation and amortization ................................. 11,277 17,704 21,052
Amortization of software construction and product enhancements 3,819 44,383 139,179
Amortization of deferred income and deferred rent ............. (138,538) (200,770) (220,601)
Amortization of discount on notes receivable .................. -- -- (30,000)
Provision for obsolete inventories ............................ 24,000 24,000 33,385
Foreign currency (gain) loss and other ........................ 12 (875) 235
Increase (decrease) in cash due to changes in:
Receivables ................................................. 101,732 4,053 36,301
Inventories ................................................. (12,077) (7,746) 120,886
Prepaid expenses ............................................ 806 1,032 504
Accounts payable and accrued liabilities .................... (102,465) (120,964) (87,469)
Accrued rent ................................................ -- -- (64,079)
Deferred revenue and advanced billings to customers ......... 26,028 73,835 183,581
--------- --------- ---------
Net cash provided by (used in) operations ............... (38,159) 4,909 (186,720)
Cash used in investment activities
Purchase of equipment and leasehold improvements .............. (7,387) (10,891) (9,094)
Proceeds from sale of fixed assets ............................ -- 1,025 13,976
Software construction and product enhancement expenditures .... (66,938) -- (47,198)
--------- --------- ---------
Net cash used in investment activities .................. (74,325) (9,866) (42,316)
Cash provided by (used in) financing activities
Proceeds from note payable .................................... 135,000 -- 75,000
Repayment of long-term obligations ............................ (20,786) (41,603) (26,050)
--------- --------- ---------
Net cash provided by (used in) financing activities ..... 114,214 (41,603) 48,950
Increase (decrease) in cash ..................................... 1,730 (46,560) (180,086)
Cash - beginning of period ...................................... 32,848 79,408 259,494
--------- --------- ---------
========= ========= =========
Cash - end of period ............................................ $ 34,578 $ 32,848 $ 79,408
========= ========= =========
Interest paid during the year ................................... $ 9,604 $ 7,075 $ 171,722
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
Statements of Shareholders' Deficit for the Years Ended March 31, 2000, 1999 and 1998
Common Preferred Paid in Accumulated
Shares Shares Capital Deficit Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
Net income for year ..................... -- -- -- 42,875 42,875
Dividends payable on preferred shares ... -- -- -- (8,575) (8,575)
--------- ----------- ----------- ----------- -----------
Balance at March 31, 2000 ............... $ 61,674 $ 2,400,000 $ 5,727,881 ($8,906,211) ($ 716,656)
========== =========== =========== ============ ===========
</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.
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 $134,500 and
$179,000 at March 31, 2000 and 1999, 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.
At March 31, 2000, there was $63,119 of unamortized costs for software
construction and product enhancement. There were no unamortized costs for
software construction and product enhancement at March 31, 1999.
Capitalized costs of software construction and product enhancement and related
information for fiscal years 2000, 1999, and 1998 follow:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Capitalized costs
Software construction and product enhancement $ 66,938 -- $ 47,198
Amortization
Software construction ....................... $ 3,819 $ 44,383 139,179
Research and development expenses .............. $147,783 $163,076 $195,825
</TABLE>
During 1998, the Company wrote-off fully amortized capitalized costs totaling
$2,646,650. There was no effect on the profit and loss statement.
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.
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 no contracts in progress at
March 31, 2000. There were two contracts in progress at March 31, 1999. Unbilled
receivables relating to these contracts at March 31, 1999, were $115,588.
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, 2000 five customers accounted for approximately 82% of
total accounts receivable and at March 31, 1999 two customers accounted for
approximately 64% of total accounts receivable. The Company's credit risk is not
concentrated in any one industry and the significant receivables were from
different customers in 2000 and 1999. (See Notes G and H of Notes to Financial
Statements). The Company had an allowance for doubtful accounts of approximately
$25,000 at March 31, 2000 and 1999, 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>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) .................................... $ 42,875 $ 164,207 ($ 315,604)
Class B preferred stock dividend ..................... (8,575) (35,698) --
----------- ----------- -----------
=========== =========== ===========
Net income (loss) available to common shareholders ... $ 34,300 $ 128,509 ($ 315,604)
=========== =========== ===========
Weighted average of common shares outstanding ........ 3,044,136 3,044,136 3,044,136
Dilutive potential common shares:
Class A convertible preferred stock .... 1,200,000 200,000 --
Stock options .......................... 45,877 10,046 --
----------- ----------- -----------
=========== =========== ===========
Adjusted weighted average of common shares outstanding 4,290,013 3,254,182 3,044,136
=========== =========== ===========
Basic earnings (loss) per share ...................... $ 0.01 $ 0.04 ($ 0.10)
Diluted earnings (loss) per share .................... $ 0.01 $ 0.04 ($ 0.10)
</TABLE>
At March 31, 2000 and 1999, there were 1,252,500 additional stock options
for the purchase of common shares. At March 31, 1999, there were 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 2000
and 1999 as their effect was anti-dilutive. Stock options and warrants
outstanding at March 31, 1998 were not included in the diluted earnings per
share calculation for 1998 as their effect was anti- dilutive. (See Note E of
Notes to the Financial Statements)
10. New Standards
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Option No. 25." This Interpretation
clarifies the application of Opinion 25 for only certain issues, including the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award. This Interpretation is effective July 1, 2000, but
covers specific events that occurred after December 15, 1998. This
Interpretation affects the Company as a result of the repricing of options which
occurred in February 1999 (See Footnote E). Commencing July1, 2000, the repriced
options will be accounted for as variable until the date the awards are
exercised, are forfeited, or expire unexercised. Compensation cost will be
recognized immediately after July 1, 2000 to the extent that the stock price
exceeds the stock price on July 1, 2000. Future changes in the market value of
the Company's stock will directly affect the amount of compensation expense
recorded by the Company. The magnitude of the impact on the Company's financial
statements will depend on the market value of the common stock as of July 1,
2000 and thereafter.
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 annual dividend amounts of $8,575 and $35,698 in 2000
and 1999, respectively, relating to the Class B Preferred Stock.
Note C - Note Payable
On August 29,1999, the Company signed a revolving line of credit agreement with
its local bank. The maximum amount is $150,000 and is secured by all the assets
of the Company. Interest is computed at the prime rate plus 2% (11% at March 31,
2000) and is payable monthly. The agreement expires on August 1, 2000. The
amount borrowed at March 31, 2000 is $135,000.
Note D - Long-Term Obligations
Long-term obligations consist of a promissory note for the purchase of a company
vehicle with a balance of $10,162 and $15,323 at March 31, 2000 and 1999
respectively. Monthly principal and interest payments are $473, with the final
payment due March 11, 2002. Also included in long-term obligations at March 31,
1999 was a loan payable to the Company's local bank of $15,625 which matured and
was paid in full on August 31, 1999.
Long-term obligations as of March 31, 2000 mature as follows: 2001 - $5,133; and
2002 - $5,029.
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 2000,
1999 and 1998 follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Options Exercise Price
---------- --------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1997 ........ 1,706,000 1.70
Granted in 1998 ...................... -- --
Exercised in 1998 .................... -- --
Forfeited in 1998 .................... (148,000) 0.61
Outstanding at March 31, 1998 ........ 1,558,000 1.80
Granted in 1999 ...................... 30,000 0.14
Exercised in 1999 .................... -- --
Forfeited in 1999 .................... (15,000) 0.30
Outstanding at March 31, 1999 ........ 1,573,000 1.69
Granted in 2000 ...................... -- --
Exercised in 2000 .................... -- --
Forfeited in 2000 .................... (16,000) 0.14
Outstanding at March 31, 2000 ........ 1,557,000 1.71
Exercisable at March 31, 1999 ........ 1,550,500 1.72
Exercisable at March 31, 2000 ........ 1,547,000 1.72
</TABLE>
The following table summarizes information about stock options outstanding at
March 31, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Exercise Outstanding at Weighted Average Weighted Average Exercisable Weighted Average
Prices March 31, 2000 Remaining Exercise Price March 31, 2000 Exercise Price
Contractual Life
<S> <C> <C> <C> <C> <C>
.14 304,500 4.74 .14 294,500 .14
2.00 1,140,000 2.95 2.00 1,140,000 2.00
2.50 62,500 2.33 2.50 62,500 2.50
3.63 50,000 1.67 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.
The Company adopted a new incentive stock option plan in fiscal 2000. Under the
plan, 250,000 common shares are available to key employees at the fair market
value at the date of the grant of the option. There were no options granted
under this plan during 2000. The 1989 incentive stock option plan expired during
fiscal 2000, except for options previously granted thereunder. At March 31,
2000, there were 304,500 incentive options and 1,252,500 non-qualified options
outstanding and 370,000 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 were
exercisable at $2.00 per share and expired 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 were
exercisable at $2.00 per share and expired on March 31, 2000.
At March 31, 2000, the Company has reserved common shares sufficient to cover
the exercise of outstanding stock options.
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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Pro forma income (loss) ................................ $ 42,225 $ 152,001 $(333,078)
Pro forma income (loss) available to common stockholders $ 33,650 $ 116,303 $(333,078)
Pro forma income (loss) per share of common stock ...... $ .01 $ .04 $ (.11)
</TABLE>
The weighted average per option fair value of options granted in 1999 was $.14.
There were no options granted during 2000 and 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: no
expected dividend yield and expected option lives of ten years; expected
volatility of 112%; and risk-free interest rate of 5.0%.
Note F - Operating Lease Commitments
On June 29, 1999, the Company extended the lease for its current premises
through August 31, 2001. Effective September 1, 1999, the monthly rent increased
to $4,685. The previous monthly rent was $4,604. All other terms and conditions
of the lease remained the same. The minimum future rental commitment under the
lease agreement is $56,220 and $23,425 in fiscal 2000 and 2001, respectively.
Deferred rent arising from incentives and concessions from the landlord was
$34,789 at March 31, 1999. There was no deferred rent as of March 31, 2000.
Deferred rent was amortized as a reduction of rent payments charged to expense
through August, 1999. Rent expense for 2000, 1999 and 1998 was $56,043, $55,506,
and $91,866, respectively. Amortization of deferred rent for 2000 and 1999 was
$34,789 and $83,896, respectively.
The Company also has computer equipment under an operating lease at March 31,
2000. Leased equipment expense under this lease was $6,303 and $1,576 for 2000
and 1999, respectively. Minimum future rental commitments under this lease are
2001 - $6,303, and 2002 - $4,727.
Note G - Foreign Sales
The Company had foreign sales as follows:
<TABLE>
<CAPTION>
Percent of
Amount Total Sales
-------- -----------
<S> <C> <C>
2000 $172,000 9%
1999 $215,000 10%
1998 $519,000 26%
</TABLE>
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.
One U.S. company accounted for about 12% of the Company's total sales in 2000,
while two U.S. companies accounted for more than 29% of the Company's total
sales in 1999. There were no major customers in 1998.
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 2000 and
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>
2000 1999
--------- ---------
Current deferred tax asset:
<S> <C> <C>
Reserves not currently deductible $ 59,257 $ 74,275
Deferred revenue ................ 82,993 109,418
Accruals not currently deductible 56,541 58,851
--------- ---------
Subtotal .......................... 198,791 242,544
Less valuation allowance ........... (198,791) (242,544)
--------- ---------
Net .......................... $ -- $ --
========= =========
</TABLE>
<TABLE>
<CAPTION>
Non-current deferred tax asset:
<S> <C> <C>
Net operating loss carryforward .. 2,318,423 2,279,920
Tax credits ...................... 662,625 666,205
Deferred income .................. 457 12,150
---------- ----------
Subtotal ......................... 2,981,505 2,958,275
Non-current deferred tax liability -
Capital leases and accelerated
depreciation .................. (2,149) (2,867)
----------- -----------
----------- -----------
Net non-current deferred tax asset.. 2,979,356 2,955,408
Less valuation allowance ........... (2,979,356) (2,955,408)
=========== ===========
=========== ===========
Net ........................... $ -- $ --
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes for the years ended consist of the following:
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Deferred (income) expense ......... 19,805 (121,409) (47,190)
Increase (Reduction) in the
valuation allowance .......... (19,805) 121,409 47,190
--------- --------- ---------
========= ========= =========
Provision for income taxes ........ $ -- $ -- $ --
========= ========= =========
</TABLE>
At March 31, 2000 the Company had net operating loss carryforwards of
approximately $6.8 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 2014.
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 $663,000 of tax credits primarily comprised of research and
development available for U.S. income tax purposes. These credits expire at
various dates beginning in 2001 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 $38,000, $2,800 and
$84,000 during 2000, 1999, and 1998 respectively.
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 $536, $48,085 and
$32,110 during 2000, 1999 and 1998, respectively. The Company had a receivable
balances from A&D of $27,751 and $200 at March 31, 2000 and 1999, respectively.
There was no amounts payable to A&D at March 31, 2000 and 1999, 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 expenses are incurred. The Company recorded
$21,000 and $35,000 of this amount during fiscal 2000 and 1998, respectively as
a reduction of selling and administrative expenses.
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 six 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 $10,683, $16,757 and $10,777 for 2000, 1999
and 1998, 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 transaction
occurred: the Company offset amounts payable to A&D with accounts receivable
from A&D in 2000, 1999 and 1998. This offset reduced both current assets and
current liabilities by $10,417, $4,600 and $33,868 in 2000, 1999 and 1998,
respectively, resulting in no gain or loss.
Note M - Basis of Financial Statement Presentation
The Company has made significant progress in returning to consistent
profitability during 1999 and 2000 and expects improved results during fiscal
year 2001. Revenue is expected to increase slightly with gross margins and
operating expenses to remain at constant levels.
The Company has experienced some improvement in its cash flow resulting from its
operating profits during fiscal 2000 and 1999, but continues to experience 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 20,
2000. 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).
(4) (iv) 1999 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)
(10) (xi) First Lease Amendment dated June 29, 1999.
(10) (xii) Promissory Note dated August 29, 1999 between the
Company and The Provident Bank.
(10) (xiii) Security Agreement dated August 29, 1999 between the
Company and The Provident Bank.
(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.
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 20, 2000
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 20, 2000
------------------
James B. Webb Principal Executive Officer,
and Director
/s/ John H. Reifschneider Controller and June 20, 2000
------------------------- Principal Financial and
John H. Reifschneider Accounting Officer
/s/ Shoichi Sekine Director June 20, 2000
--------------
Shoichi Sekine
/s/ Gerald J. Zobrist Director June 20, 2000
---------------------
Gerald J. Zobrist
EXHIBITS
Exhibit 10 (xi)
FIRST LEASE AMENDMENT
THIS FIRST LEASE AMENDMENT (the "Amendment") is executed this 29 day of June,
1999, by and between DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited
partnership ("Landlord"), and ZONIC CORPORATION, and Ohio corporation
("Tenant").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant entered into a certain Lease dated August 29, 1997
(the "Lease"), whereby Tenant leased from rentable square feet of space (the
"Leased Premises") in a building commonly known as Park 50 TechneCenter,
Building No. 20, located at 50 West TechneCenter Drive, Suite K, Milford, Ohio
45150, and
WHEREAS, Landlord and Tenant desire to extend the Lease Term; and
WHEREAS, Landlord and Tenant desire to amend certain provisions of the Lease to
reflect such extension, changes and additions;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants
herein contained and each act performed hereunder by the parties, Landlord and
Tenant hereby agree that the Lease is amended as follows:
1. Incorporation of Recitals. The above recitals are herby incorporated
into this Amendment as if fully set forth herein.
2. Extension of Lease Term. The Lease Term is hereby extended through
August 31, 2001.
3. Amendment of Paragraph 2. Term. Paragraph 2 of the Lease is hereby
------------------------ ---- -----------
deleted in its entirely and the following is substituted in lieu thereof:
"2. TERM. The term of this Lease commenced on September 1, 1997
(The Commencement Date") and shall expire on August 31, 2001
(the "Lease Term")."
4. Amendment of Paragraph 4. Minimum Rent. Commencing September 1, 1999,
Paragraph 4 of the Lease is hereby deleted in its entirety and the following is
substituted in lieu thereof:
"4. MINIMUM RENT. Tenant hereby agrees to pay as minimum rent for
the Leased Premises the sum of Four Thousand Six Hundred Eighty-five Dollars and
Forty-two Cents ($4,685.42) per month from September 1, 1999 through August 31,
2001 in advance without sett off or deduction on the first day of each calendar
month (the "Minimum Rent"). The Minimum Rent shall be prorated for any partial
month."
5. Tenant's Representations and Warranties. The undersigned represents and
warrants to Landlord that (i) Tenant is duly organized, validly existing and in
good standing in accordance with the laws of the state under which it was
organized; (ii) all action necessary to authorize the execution of the Amendment
has been taken by Tenant; and (iii) the individual executing and delivering this
Amendment on behalf of Tenant has been authorized to do so, such execution and
delivery shall bind Tenant. Tenant, at Landlord's request, shall provide
Landlord with evidence of such authority.
6. Examination of Amendment. Submission of this instrument for examination
or signature to Tenant does not constitute a reservation or option, and it is
not effective until execution by and delivery to both Landlord and Tenant.
7. Definitions. Except as otherwise provided herein, the capitalized terms
used in this Amendment shall have the definitions set forth in the Lease.
8. Incorporation. This Amendment shall be incorporated into and made a part
of the Lease, and all provisions of the Lease not expressly modified or amended
hereby shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on the
day and year first written above.
LANDLORD:
WITNESSES: DUKE REALTY LIMITED PARTNERSHIP,
/s/ Joan Wolpin an Indiana limited partnership
/s/ Naomi Gump By: Duke Investments, Inc., its general partner
By: /s/ Kenneth A. Schuermann,
Vice President and General Manager
TENANT:
WITNESSES: ZONIC CORPORATION,
/s/ Sharman Tenpenny an Ohio corporation
/s/ John H Reifschneider By: /s/ James B. Webb
President & CEO
Exhibit (10) (xii)
The Provident Bank
PROMISSORY NOTE
COMMERCIAL LOAN
150,000.00 CINCINNATI, OHIO AUGUST 1999
The undersigned, for value received, promises to pay to the order of The
Provident Bank, at any of its offices, the sum of ONE HUNDRED FIFTY THOUSAND AND
00/100 Dollars ($150,000) the "Maximum Credit") or so much thereof as is loaned
by the holder pursuant to the provisions hereof, together with interest until
demand or maturity at the rate of TO VARY WITH PROVIDENT BANK'S PRIME RATE PLUS
2% per year computed on basis of a year of 360 days for the actual number of
days elapsed, and after default hereunder, demand or maturity, whether at stated
maturity or by acceleration, at a rate four (4) percentage points greater than
the stated rate (the "Default Rate"). Interest shall be due and payable MONTHLY
BEGINNING SEPTEMBER 1, 1999, and at maturity. Principal shall be due and payable
AT MATURITY, AUGUST 1, 2000. The undersigned hereby state(s) that the purpose of
the loan evidenced by this Note is WORKING CAPITAL.
XX Revolving Credit: If this box is check, this Note is a revolving credit
subject to the terms of this paragraph. Subject to the conditions hereof and of
any other agreements between the parties relating hereto and until demand, if
the principal is payable on demand, or maturity (whether at scheduled or
accelerated maturity), if the principal is payable other than on demand, the
undersigned may borrow and reborrow from the holder and the holder may, in its
sole discretion, lend and relend to the undersigned such amounts not to exceed
the Maximum Credit as the undersigned may at any time and from time to time
request upon satisfactory notice to the holder.
Notwithstanding anything to the contrary contained herein or in any other
agreement between the undersigned and the holder, if this Notes provides that
the principal hereof is payable on demand, then this Note is a demand Note due
and owing immediately, without prior demand of the holder and immediate action
to enforce its payment may be taken at any time, without notice and without
reason. If any payment of principal or interest is not paid when due, or if the
holder deems itself insecure for any reason, including but not limited to, the
insolvency, bankruptcy, business failure, death, default in the payment of other
obligations or receivership of or concerning any maker, guarantor or indorser
hereof, this Note shall, if payable other than on demand, at the option of its
holder, become immediately due and payable, without demand or notice. The
undersigned shall promptly provide such financial information as the holder
shall reasonably request from time to time.
As collateral security for the payment of the amounts from time to time owing
hereunder, the undersigned and all indorsers hereby grant to the holder a
security interest in (i) all property in which the holder now or hereafter holds
a security interest pursuant to any and all assignments, pledges and security
agreements between the undersigned and the holder and (ii) all accounts,
securities and properties now and hereafter in the possession of the holder and
in which the undersigned or any indorsers haver any interest. Upon this Note
becoming due under any of its terms and provisions, and not being fully paid and
satisfied, the total sum then due hereunder may, at any time and from time to
time, be charged against any account or accounts maintained with the holder
hereof by any of the undersigned or any indorser, without notice to or further
consent from any of them, and the undersigned and all indorsers agree to be and
remain jointly and severally liable for all remaining indebtedness represented
by this Note in excess of the amount or amounts so applied. The undersigned and
the holder intend that this indebtedness shall be secured by any and all
mortgages heretofore or hereafter granted by the undersigned in favor of the
holder.
There will be a minimum finance charge of $50.00 for each billing period. Prime
rate is that annual percentage rate of interest which is established by The
Provident Bank from time to time as its prime rate, whether or not such rate is
publicly announced, and which provides a base to which loan rates may be
referenced. Prime rate is not necessarily the lowest lending rate of The
Provident Bank. A rate based on the prime rate will change each time and as of
the date that the prime rate changes. If any payment of principal or interest is
not paid when due or if the undersigned shall otherwise default in the
performance of it obligations hereunder or under any other note or agreement
with the holder, the holder at its option, may charge and collect, or add to the
unpaid balance hereof, a late charge up to the greater of $250 or .1% of the
unpaid balance of this Note at the time of such delinquency for each such
delinquency to cover the extra expense incident to handling delinquent accounts,
and/or increase the interest rate on the unpaid balance to the Default Rate. The
holder may charge interest at the rate provided herein on all interest and other
amounts owing hereunder which are not paid when due.
The undersigned, all indorsers hereof, any other party hereto, and any guarantor
hereof (collectively "Obligors") each (i) wave(s) presentment, demand, notice of
demand, protest, notice of dishonor and any other notice required to be given by
law in connection with the delivery, acceptance, performance, default or
enforcement of this Note, of any indorsement or guaranty of this Note or of any
document or instrument evidencing any security for payment of this Note; and
(ii) consent(s) to any and all delays, extensions, renewals or other
modifications of this Note or waivers of any term hereof or release or discharge
by the holder of any of Obligors or release, substitution or exchange of any
security for the payment hereof or the failure to act on the part of the holder
or any indulgence shown by the holder, from time to time and in one or more
instances, (without notice to or further assent from any of Obligors) and
agree(s) that no such action, failure to act or failure to exercise any right or
remedy, on the part of the holder shall in any way affect or impair the
obligations of any Obligors or be construed as a waiver by the holder of, or
otherwise affect, any of the holder's rights under this Note, under any
indorsement or guaranty of this Note or under any document or instrument
evidencing any security for payment of this Note. The undersigned and all
indorsers further agree to reimburse the holder for all advances, charges, costs
and expenses, including reasonable attorneys' fees, incurred or paid in
exercising any right, power or remedy conferred by this Note, or in the
enforcement thereof. If the undersigned are more than one (1) , the liability of
the undersigned heron is joint and several, and the term "undersigned", as used
herein, means any one or more of them.
The undersigned and all indorsers authorize any attorney at law, including an
attorney engaged by the holder, to appear in any court of record in the State of
Ohio or any other State or Territory of the United States, after the
indebtedness evidenced hereby, or any part thereof, becomes due and waive the
issuance and service of process and confess judgment against any one or more
than one of the undersigned and all indorsers in favor of the holder, for the
amount then appearing due, together with costs of suit and, thereupon, to
release all errors and waive all rights of appeal and stay of execution, but no
such judgment or judgments against any one of the undersigned shall be a bar to
a subsequent judgment or judgments against any one or more than one of such
persons against whom judgment has not been obtained hereon. This warrant of
attorney to confess judgment is a joint and several warrant of attorney. The
foregoing warrant of attorney shall survive any judgment; and if any judgement
be vacated for any reason, the holder hereof nevertheless may hereafter use the
foregoing warrant of attorney to obtain an additional judgment or judgments
against the undersigned and all indorsers or any one or more of them. The
undersigned and all indorsers hereby expressly waive any conflict of interest
that the holder's attorney may have in confessing such judgment against such
parties and expressly consent to the confessing attorney receiving a legal fee
from the holder for confessing such judgment against such parties.
If the undersigned or any indorser or guarantor hereof would have the right to
rescind the loan evidenced by this Note pursuant to a right so to do under the
Truth-in-Lending Act because one or more mortgages now exist in favor of the
holder hereof covering the principal home or homes of the undersigned or any
indorser or guarantor hereof, the holder's acceptance of this Note shall
constitute a waiver of its right under any such mortgage to treat such principal
home or homes as security for the repayment or guaranty of this Note except for
the principal home or homes descried in the Mortgage dated ________________. THE
PROVISIONS OF THIS NOTE SHALL BE GOVERNED BY AND INTERPREED IN ACCORDANCE WITH
THE LAWS OF OHIO. AS A SPECIFICALLY BARGAINED INDUCEMENT FOR THE HOLDER TO
EXTEND CREDIT TO BORROWER, AND AFTER HAVING THE OPPORTUNITY TO CONSULT COUNSEL,
THE UNDERSIGNED AND ALL INDORSERS HEREBY EXPRESSLY WAIVE THE RIGHT TO TRIAL BY
JURY IN ANY LAWSUIT OR PROCEEDING RELATED TO THIS NOTE OR ARISING IN ANY WAY
FROM ANY INDEBTEDNESS OR OTHER TRANSACTIONS INVOLVING THE HOLDER AND THE
UNDERSIGNED. THE UNDERSIGNED HEREBY DESIGNATE(S) ALL COURTS OF RECORD SITTING IN
CINCINNATI, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER, STATE AND
FEDERAL, AS FORUMS WHERE ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING
FROM OR OUT OF THIS NOTE, ITS MAKING, VALIDITY OR PERFORMANCE, MAY BE PROSECUTED
AS TO ALL PARTIES, THEIR SUCCESSORS AND ASSIGNS, AND BY THE FOREGOING
DESIGNATION THE UNDERSIGNED CONSENT(S) TO THE JURISDICTION AND VENUE OF SUCH
COURTS.
WARNING- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.
ZONIC CORPORATION
BY: /s/ James B. Webb, President
50 West TechneCenter Drive
Cincinnati, OH 45150
Exhibit (10) (xiii)
SECURITY AGREEMENT
This SECURITY AGREEMENT by PROVIDENT BANK ("Secured Party") and ZONIC
CORPORATION ("Debtor").
1. Security Interest.
Debtor hereby assigns, pledges and transfers to Secured Party and grants
Secured Party a continuing security interest in all of the property described in
this section 1, all of which properties are hereafter called "Collateral". Each
of the types of Collateral described in Sections 1.1, 1.2, 1.3, 1.4 and 1.5
hereof are included unless the phrase "not included" is inserted in the place
provided.
1.1 _____ All of Debtor's accounts (as that term is defined in the Uniform
Commercial Code), accounts receivable, chattel paper, contract rights, documents
and instruments; all other obligations or indebtedness owed to Debtor from
whatever source arising; all guarantees of any of the foregoing and all security
therefor; all of the right, title and interest of Debtor in and with respect to
the goods, services or other property which gave rise to or which secure any of
the foregoing and all insurance policies and proceeds relating thereto; all of
the foregoing whether now owned by Debtor or hereafter acquired or in existence.
1.2 _____ All of Debtor's inventory (as that term is defined in the Uniform
Commercial Code), including, without limitation, all goods, merchandise and
other personal property which are held for sale or lease, or are furnished or to
be furnished under any contract of service by Debtor, or are raw materials,
work-in-progress, supplies or materials used or consumed in Debtor's business
and all products thereof, and all substitutions, replacements, additions and
accessories thereto, all whether now owned or hereafter acquired by Debtor; and
all of Debtors right, title and interest in and to any leases or rental
agreements for such inventory.
1.3 _____ All of Debtor's equipment (as that term is defined in the Uniform
Commercial Code), including, without limitation, all furniture, fixtures,
machinery and other equipment of any kind and all substitutions and replacements
thereof and accessories and parts therefor, all whether now owned or hereafter
acquired by Debtor.
1.4 _____ All of Debtor's general intangibles (as that term is defined in the
Uniform Commercial Code), including, without limitation, all goodwill, patents,
formulas, blueprints, proprietary manufacturing processes, trademarks, licenses,
franchises, beneficial interests in trusts, joint venture interests, partnership
interests, rights to tax refunds, pension plan overfundings, literary rights and
other contractual rights of Debtor, all whether now owned or hereafter acquired
by Debtor
1.5 _____ All of Debtor's investment property (as that term is defined in the
Uniform Commercial Code) including, without limitation, all securities, whether
certificated or uncertificated, all security entitlements, all securities
accounts, all commodity contracts and all commodity accounts owned by Debtor or
in which Debtor has an interest, all whether now owned or hereafter acquired by
Debtor.
1.6 _________________________________________________________________________
1.7 _____, together with all dividends, distributions, income, interest ,
premiums, monies, claims for monies, stock dividends and stock splits, now or
hereafter due and payable thereon, and all proceeds thereof, all securities
issued in replacement thereof, and all other securities substituted therefor
(all of which are hereinafter sometimes collectively referred to as "Pledged
Stock"). Debtor covenants that the Pledged Stock shall have a market value at
all times of not less than ___% of the indebtedness.
1.8 All instruments, documents, securities, cash, property, deposit accounts,
certificates of deposit and the proceeds of any of the foregoing, owned by
Debtor or in which Debtor has an interest, which now or hereafter are at any
time in the possession or control of Secured Party or in transit by mail or
carrier to or from Secured Party, or in possession of any third party acting on
behalf of Secured Party, without regard to whether Secured Party received same
in pledge, for safekeeping, as agent for collection or transmission or otherwise
or whether Secured Party had conditionally released the same. 1.9 All ledger
sheets, files, records, documents, blueprints, drawings and instruments
(including without limitation, computer programs, tapes and related electronic
data processing software) evidencing an interest in or relating to the
Collateral described in this Section 1.
1.10 All proceeds and products of the Collateral described above in this Section
1, including, without limitation, all claims against third parties for damage to
or loss or destruction of any of the foregoing, including insurance proceeds,
and accounts, contracts rights, chattel paper and general intangibles arising
out of any sale, lease or other disposition of any of the foregoing.
2. Indebtedness.
The security interests granted hereby are granted to secure all of debtor's
debts, obligations, or liabilities of every kind, nature, class and description
to Secured Party, now due or to become due, direct or indirect, absolute or
contingent, presently existing or hereafter arising, joint or several, secured
or unsecured, consumer or commercial, purchase money or non-purchase money,
related or unrelated, similar or dissimilar, whether for payment or performance,
regardless of how the same arise or by what instrument, agreement or book
account they may be evidenced, or whether evidenced by any instrument, agreement
or book account, including, without limitation, all loans (including any loan by
renewal or extension), all overdrafts, all guarantees, all bankers acceptances,
all agreements, all letters of credit issued by Secured Party for Debtor and the
applications relating thereto, all indebtedness of Debtor to Secured Party, all
undertakings to take or refrain from taking any action, and all indebtedness,
liabilities and obligations owing from Debtor to others which Secured Party may
obtain by purchase, negotiation, discount, assignment or otherwise, further
including, without limitation, the following obligations (all of which
obligations are collectively referred to herein as the "Indebtedness"): 2.1 A
loan to Debtor by Secured Party of $150,000.00 evidenced by a promissory note
dated AUGUST, 1999 and all renewals, extensions and modifications thereof;
2.2 All costs incurred by Secured Party to obtain, preserve, and/or enforce the
security interests granted by this Agreement; to collect the obligations secured
hereby, and to maintain and preserve the Collateral, with such costs including,
but not limited to, expenditures made by Secured Party for taxes, assessments,
insurance premiums, repairs, reasonable attorney's fees and other legal
expenses, storage costs, rents, and expenses of sale, together with interest on
the above amounts at the highest rate being paid by Debtor on any of its
obligations to Secured Party, all of which Debtor agrees to pay to Secured
Party; and
2.3 ________________________________________________________________________
Notwithstanding the foregoing, Secured Party waives any rights arising out
of this Security Agreement to the Collateral as security for any indebtedness of
an individual Debtor to which the Truth-In-Lending Act and Regulation Z
promulgated thereunder apply.
3. Debtor's Warranties
3.1 Except for the security interests granted herein, Debtor represents and
warrants that it is, and as to the Collateral to be acquired after the date
hereof, shall be, the owner of the Collateral free from any lien, security
interest or encumbrance, and Debtor shall defend the Collateral and its proceeds
and products against all claims and demands of all persons at any time claiming
the same of any interest therein adverse to Security Party, and shall preserve
the Collateral free from any subsequent liens, encumbrances or security
interests.
3.2 Debtor represents and warrants that at the time any account becomes subject
to a security interest in favor of Secured Party, said account shall be a good
and valid account representing a bona fide outright sale of goods by Debtor or
services performed by Debtor and such goods shall have been shipped to the
respective account debtors or the services have been performed for the
respective account debtors. Each account shall not be subject to any claim for
credit, allowance or adjustment by account debtor or any setoff, defense or
counterclaim. Debtor shall immediately notify Secured Party in the event of the
refusal of any goods which are the subject of any such account, and of the
bankruptcy, insolvency or financial embarrassment of any account debtor and of
any claim asserted for credit, allowance, adjustment, setoff or counterclaim.
4. Debtor's Obligations.
4.1 Debtor shall keep accurate and complete records and accounts in accordance
with sound accounting practices of all of its Collateral, and shall at all
reasonable times allow Secured Party to inspect the Collateral, to examine,
audit or make extracts from Debtor's books and records, and to arrange for
verification of the Collateral under reasonable procedures directly with account
debtors and other persons or by other procedures. Debtor will furnish to Secured
Party on request additional statements of any account together with all notes or
other documents and information relating thereto.
4.2 Debtor shall keep the Collateral insured against such causalities, and in
such amount an on such terms as Secured Party shall require and the policies
shall provide for at least 30 days written notice of cancellation to Secured
Party. Debtor shall furnish Secured Party with satisfactory evidence of such
Insurance and Secured Party shall be added to any such insurance as loss payee.
Debtor shall promptly pay when due all taxes and assessments imposed on, or with
respect to the Collateral, and shall maintain the Collateral in good condition
and repair. If Debtor fails to pay the premiums on any such insurance or such
taxes when due, or to maintain the Collateral in good condition and repair, the
Secured Party may do so for Debtor's account and add the amount of its
expenditures with respect thereto to Debtor's outstanding obligations, which
amount shall be payable on demand with interest at the highest rate being paid
by Debtor on any of its obligations to Secured Party. Secured Party shall have
the right to settle and compromise any and all claims under any of the insurance
policies required to be maintained by Debtor hereunder and Debtor hereby
irrevocably appoints Secured Party as its attorney-in-fact, with power to
demand, receive and receipt for all monies payable thereunder, to execute in the
name of the Debtor any proof of loss, notice, draft, and other instruments in
connection with such policies or loss thereunder, and generally to do and
perform any and all acts as Debtor could perform in connection with such
policies.
4.3 Debtor shall execute such financing statements and other documentation as
shall reasonably be requested by Secured Party in order to perfect the security
interests granted Secured Party hereunder and to carry out the terms of this
Agreement. A photocopy of this Security Agreement shall be sufficient as a
financing statement and may be filed in any appropriate office in lieu thereof.
4.4 Upon request of Secured Party, Debtor shall furnish Secured Party:
a. Within 90 days after the end of Debtor's fiscal year, a financial
statement, including a balance sheet, and statements of income, retained
earnings and changes in financial position, each prepared in accordance
with generally accepted accounting principles consistently applied,
certified by Debtor's chief financial officer or certified public account;
b. Within 45 days after the close of each quarter, financial statements
similar to those in (a) above and certified by Debtor's chief financial
officer,
c. Promptly, such other information as Secured Party may reasonably request
from time to time, including, without limitation, at the end of each month,
financial statements similar to those in (a) above; and
d. Promptly, in the case of a Debtor who is a natural person, financial
statements in a form acceptable to Secured Party.
5. Debtor's Rights with Respect to Collateral.
5.1 With respect to the Collateral specified in Section 1.1, Debtor is
authorized to collect the proceeds of such Collateral and utilize them in the
ordinary course of business, provided that Secured Party shall have the right at
any time, before or after default, to notify account debtors, and to notify such
account debtors to make payments of such accounts directly to Secured Party. At
the request of Secured Party, Debtor shall so notify such account debtors and
indicate on all billings that the accounts are payable directly to Secured
Party. In addition, Debtor shall, at the request of Secured Party, hold all
proceeds from collection of accounts in trust for Secured Party without
commingling the same with other funds, and shall promptly turn over the same to
Secured Party in the identical form received, endorsed by Debtor to Secured
Party. The proceeds of such Collateral shall be applied to the indebtedness in
such order as Secured Party determines in its sole discretion.
5.2 Debtor shall also have the right to utilize the Collateral as specified in
Section 1.2 in the ordinary course of business, and to sell such Collateral in
the ordinary course of business, provided that such Collateral is replaced with
Collateral of like kind and quality, with a fair market value equal to or in
excess of that sold, provided, however, the Secured Party may, by notice to
Debtor, require that no such sales be made without the prior written approval of
Secured Party.
5.3 Until default, Debtor shall have the right to use, consume, or sell any
items of the collateral described in Section 1.3 in the regular course of
business but not to otherwise dispose of such Collateral.
5.4 In the event Debtor receives any certificates, proceeds or other property
constituting Pledged Stock after the date hereof, Debtor shall hold such Pledged
Stock in trust for Secured Party and shall promptly deliver the same to Secured
Party; provided, however, that the Debtor may retain any cash dividends, other
than liquidating dividends or distributions of return of capital and interest,
so long as no event of default has occurred hereunder.
6. Default.
If the indebtedness is due other than on demand, upon the happening of any one
or more of the following events or conditions, Secured Party may, at its option,
declare the entire amount of Indebtedness of Debtor to it then outstanding due
and payable immediately without notice to Debtor, and Secured Party may proceed
to enforce payment of the same, and to exercise all of the rights and remedies
of a Secured Party under the Ohio Uniform Commercial Code in addition to the
rights and remedies provided herein. The events of default hereunder are as
follows:
6.1 The failure of Debtor to pay any of the Indebtedness when due.
6.2 The failure of Debtor to observe or perform any of the provisions of this
Agreement or any other agreement between the Debtor and the Secured Party.
6.3 If any warranty, representation, certificate, schedule, financial statement
or other information given to Secured Party hereunder shall prove to be untrue
or materially misleading.
6.4 The death of any person signing as Debtor to this Agreement or of any
guarantor.
6.5 If any proceedings are instituted by or against Debtor under any insolvency
laws, or if Debtor shall become insolvent or otherwise suffer such changes in
his condition or affairs as in the sole discretion of Secured Party impairs
Secured Party's security interests hereunder, or increases its risk as to
repayment of any item of the indebtedness, or if Secured Party shall otherwise
deem itself insecure with respect to the Indebtedness.
If the indebtedness is due on demand, the Secured Party may proceed to enforce
payment of same and exercise all of the remedies provided herein at any time,
without notice and without reason.
Secured Party's remedies include, but are not limited to, the right to take
possession of the collateral or any part thereof, and Debtor hereby grants
Secured Party authority to enter upon any premises on which the Collateral or
any part thereof may be situated, and remove the Collateral from such premises
or use such premises, together with the materials, supplies, books and records
of Debtor, to maintain possession and/or the condition of the Collateral and to
prepare the Collateral for sale. Debtor shall, upon demand by Secured Party,
assemble the Collateral specified in Section 1.2 hereof, and make it available
at a place designated by Secured Party and convenient to both parties. All
rights and remedies of Secured Party hereunder shall be cumulative, not
exclusive, and shall be enforceable alternatively, successively or concurrently
with any other remedy available hereunder or otherwise available at law or in
equity.
7. Power of Attorney
Debtor hereby irrevocably appoints Secured Party as Debtor's true and lawful
attorney-in-fact, with full power of substitution, for Debtor, and in Debtor's
name, place and stead, upon the occurrence of any event of default as defined in
Section 6 above, and in the event that Secured Party elects to exercise any
rights granted to it hereunder. As attorney-in-fact, Secured Party may act for
Debtor with respect to the Collateral as if Secured Party where the owner
thereof, and may endorse and cash promissory notes, checks and other
instruments, institute legal proceedings, make, adjust, and settle claims, and
do all other acts necessary and incidental to the exercise of its rights
provided hereunder, or otherwise available to it in the event of default.
Neither Secured Party nor its agents shall be liable for any act or omissions or
for any error of judgement or mistake of fact or law in its capacity as such
attorney-in-fact.
8. Miscellaneous
Any required notices to Debtor, including notice of the sale of any of the
Collateral, shall be deemed to be reasonable if mailed to Debtor at the address
shown below, or such other address furnished Secured Party in writing, at least
five (5) business days prior to the action which is the subject of the notice.
The term "Debtor" as used herein shall include the singular as well as the
plural, and other words in the singular shall include the plural and words of
one gender shall include the other gender when the sense requires. The term
"Uniform Commercial Code" as used herein shall mean the Uniform Commercial Code
as adopted by the State of Ohio. No waivers by Secured Party of any default
shall be effective unless given in writing, and shall not operate as a waiver of
any other default. The rights of Secured Party shall inure to the benefit of its
successors and assigns, and the obligation of Debtor shall bind Debtor's heirs,
executors, administrators, successors and assigns. If there is more than one
Debtor, their obligations hereunder shall be joint and several.
This Agreement contains the entire understanding between the parties hereto with
respect to the transactions contemplated herein and such understanding shall not
be modified except in a writing signed by or on behalf of the parties hereto.
This Agreement shall be deemed to be a contract entered into and made pursuant
to the laws of the State of Ohio and shall in all respects be governed,
construed, applied and enforced in accordance with the laws of said state.
As a specifically bargained inducement for Secured Party to extend credit to
Debtor: (i) THE DEBTOR HEREBY EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
LAWSUIT OR PROCEEDING RELATED TO THIS SECURITY AGREEMENT OR ARISING IN ANY WAY
FROM THE INDEBTEDNESS OR TRANSACTIONS INVOLVING SECURED PARTY AND THE DEBTOR AND
(ii) THE DEBTOR HEREBY DESIGNATE(S) ALL COURTS OF RECORD SITTING IN CINCINNATI,
OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER, STATE AND FEDERAL. AS
FORUMS WHERE ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING FROM OR OUT
OF THIS SECURITY AGREEMENT, ITS MAKING, VALIDITY OR PERFORMANCE, MAY BE
PROSECUTED AS TO ALL PARTIES. THEIR SUCCESSORS AND ASSIGNS, AND BY THE
FOREGOINGD ESIGNATION THE DEBOR CONSENT(S) TO THE JURISDICTION AND VENUE OF SUCH
COURTS.
Executed at CINCINNATI, __ on the 29 day of AUGUST, 1999
ALL TERMS AND CONDITIONS ON THE REVERSE SIDE OF THIS AGREEMET ARE A PART HEREOF
AND ARE BINDING UPON THE PARTIES HERETO.
THE PROVIDENT BANK ("Secured Party")
BY: /s/ Richard E. Wirthlin, Vice President
ADDRESS: One East Fourth Street
Cincinnati, Hamilton County, Ohio 45202
DEBTOR: ZONIC CORPORATION
BY: /s/ James B. Webb, President
ADDRESS: 50 West TechneCenter Drive
Cincinnati, OH 45150
Exhibit (23)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-85109 and 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, 2000.
Deloitte & Touche
Cincinnati, Ohio
June 15, 2000
