UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO ___________
Commission file number 0-14328
ZING TECHNOLOGIES, INC.
-----------------------
(Exact name of Small Business Issuer in Its charter)
<TABLE>
<S> <C>
New York 13-2650621
- -------------------------------------------------------------------------- ----------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
115 Stevens Avenue, Valhalla, NY 10595
- -------------------------------------------------------------------------- ----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Issuer's Telephone Number, Including Area Code (914) 747-7474
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class on Which Registered
- ---------------------------- -------------------------------------
Common Stock, $.01 Par Value Nasdaq National Market
- ---------------------------- -------------------------------------
Securities registered under Section 12(g) of the Exchange Act: None.
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $21,773,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of bid and asked price of the
stock as of September 23, 1998 was $8,371,456.
The number of shares of common stock, $.01 par value, outstanding as of
September 23, 1998 was 2,414,613.
Transitional small business disclosure format Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
TABLE OF CONTENTS
PART I
Item 1 - Description of Business...........................................3
Item 2 - Description of Properties.........................................6
Item 3 - Legal Proceedings.................................................7
Item 4 - Submission of Matters to a Vote of Security Holders...............7
PART II
Item 5 - Market for Registrant's Common Stock and Related
Stockholder Matters...............................................8
Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................8
Item 7 - Financial Statements.............................................15
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................34
PART III
Items
9-12 - Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain
Beneficial Owners and Management; Certain Relationships
and Related Transactions.........................................34
Item 13 - Exhibits and Reports on Form 8-K.................................34
Signatures ...............................................................35
2
<PAGE>
PART I
Item 1. Description of Business
General
Zing Technologies, Inc. ("Zing" or the "Company") is a holding company
with one wholly-owned operating subsidiary, Omnirel LLC ("Omnirel"). The
Company, through Omnirel, engages in the manufacture and sale of "high
reliability" multi-chip power semiconductor components, integrated power modules
and packaged semiconductor components in its military and industrial markets and
has expanded its distribution into the high-end commercial markets as well.
Prior to June 30, 1997, the Company owned 98% (84% on a fully diluted basis) of
its Omnirel subsidiary, and 90% of its Transition Analysis Component Technology,
Inc. subsidiary ("TACTech"). Commencing on June 30, 1997, the Company
distributed its 90% ownership interest in TACTech to the Company's shareholders.
The Company restructured its ownership in its Omnirel subsidiary by merging
Omnirel Corporation with and into Omnirel LLC, the Company's newly-formed wholly
owned subsidiary. In the Omnirel restructuring, the minority interests in
Omnirel Corporation were obtained by the Company in exchange for shares of the
Company's common stock, and certain options to purchase Omnirel Corporation
common stock became exercisable for the Company's common stock. See Note B to
the Company's Consolidated Financial Statements contained in this Report for
more information concerning the distribution of the Company's TACTech shares and
the restructuring of the Omnirel subsidiary. Zing was incorporated in New York
on October 17, 1969.
Omnirel produces both standard and custom products in a clean room
environment and is certified to MIL-PRF 19500 for discrete semiconductors; and
MIL-PRF 38534 for hybrid circuit modules, and is registered to ISO 9001.
Omnirel's products are used where circuit density (including miniaturization),
electrical performance and reliability are critical design requirements, such as
in the defense, aerospace, commercial transportation, medical device industries
and high end communication systems. Omnirel's products are also used in the
production of industrial controls and power supplies where these same criteria
are needed.
"High reliability" multi-chip power semiconductors and integrated power
modules are electronic components and are single-package devices with a power
dissipation of five watts or more. They combine active power semiconductor
components and passive components (such as capacitors and resistors) which form
integrated intelligent power electronic circuits which control, drive and
regulate the input and output of power (electricity) in motion control and power
supply applications for use in electronic systems and equipment. Omnirel
manufacturing techniques and design standards for its niche in the military and
high reliability industrial markets are more exacting than is the case for
commercial general purpose hybrid circuit components. The products manufactured
by Omnirel include custom designed products as well as standard commodity
products.
The operations of the Company included TACTech through June 30, 1997.
TACTech licenses proprietary computer software databases to military
semiconductor manufacturers, the Department of Defense and defense contractors.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
3
<PAGE>
Competition
The market for high reliability power semiconductor multi-chip modules
is fragmented. There is no single firm which maintains a dominant position,
either in technology or in market share. Based on various industry publications,
the total market for power hybrids was approximately $300,000,000 in the fiscal
year ended June 30, 1998. The market for power hybrid products which Omnirel
addresses is in excess of $200,000,000 a year and approximately 65% of the sales
to such market are made by five manufacturers (including Omnirel) of power
hybrid components. Omnirel is the only such manufacturer whose primary focus is
on high reliability power semiconductor multi-chip modules. The principal
competitors of Omnirel are other hybrid component manufacturers, original
equipment manufacturers with internal capability and power semiconductor
manufacturers who offer multi-chip modules as a complementary product line.
Omnirel distinguishes itself in the marketplace principally on the strength of
its focus on power applications. It has complete design, manufacturing and high
reliability screening capabilities in-house, and has developed a reputation for
innovative solutions for customer needs. The Company also competes on the basis
of pricing and delivery.
Marketing and Sales
Omnirel markets its products through nine regional sales managers in
the United States and twenty-two sales representative organizations world-wide.
Omnirel sells both standard and custom products to approximately two hundred
customers world-wide. Standard products are sold both through distributors and
directly to customers. Custom products are sold directly to customers.
Omnirel publishes and distributes to its existing customers and new
customers a catalogue of its standard products. Omnirel also publishes its
standard products on the Internet. Through the end of its 1998 fiscal year,
Omnirel management had focused its marketing effort in the United States through
the coordination by Omnirel's sales management of 14 independent sales
representatives. Key accounts were also covered by area managers in each sales
region. Beginning in July 1998, Omnirel concentrated on direct marketing efforts
in the United States. Three independent sales representatives remain engaged by
Omnirel. Eight representatives/distributors are currently in place outside of
the United States marketing Omnirel's products.
Omnirel's customers are primarily major electronic equipment and
systems manufacturers such as General Electric, Lockheed Martin, Allied Signal,
Hughes, Boeing, Texas Instruments, Raytheon and Motorola. Sales to General
Electric for transportation systems aggregated 27% of Omnirel's sales revenues
for fiscal year 1998. Arrow Electronics is Omnirel's primary distributor in the
Continental United States of its single and multi-chip semiconductor devices.
Sales to Zeus Electronics (an Arrow company) aggregated 8% of Omnirel sales
revenue for fiscal year 1998.
Omnirel's export sales are as follows:
<TABLE>
<CAPTION>
(000's omitted)
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Canada $ 852 $1,193 $230
Europe 1,465 735 258
Mid East (Israel) 109 104 172
Far East (Japan) 45 -- 7
----------------------------------
Total $2,471 $2,032 $667
==================================
</TABLE>
4
<PAGE>
For the fiscal years 1998, 1997, and 1996 Omnirel did not enter into
any contracts with either customers of the United States Government or any
agency of the United States Government. Omnirel sells its products to
subcontractors of certain government agencies through customer purchase orders.
Cancellation of purchase orders from time to time is customary in the power
semiconductor industry. Under standard industry practices, in the event of
cancellation, Omnirel is entitled to reimbursement of costs incurred and a
reasonable profit for work performed prior to the cancellation.
The sale of Omnirel products is not seasonal.
Supplier and Materials Used
Unpackaged semiconductors, in chip form, and other components such as
capacitors and resistor chips or surface mount devices, combined with metal,
plastic packages and ceramic packaging materials are used by Omnirel in the
manufacture of its products. These materials and components, none of which are
presently in short supply, are purchased from time to time on the open market,
and Omnirel has no long term commitments for their purchase. Omnirel is not
dependent on any one supplier for a primary material. Omnirel has agreements
with a number of premier semiconductor manufacturers which allow Omnirel to buy
products directly from such manufacturers. These agreements allow Omnirel to be
apprised of technological advances and developments.
Product Warranty
Omnirel warrants that its products are free from defects in workmanship
and meet the agreed upon specifications supplied by the customer or Omnirel's
current published specifications. Omnirel's liability for defective products is
limited solely to replacement thereof upon receipt from the customer of notice
of breach of warranty within periods varying between three (3) and twenty-four
(24) months of the date of shipment, depending upon the product. Omnirel
disclaims any liability for a customer's cost of replacement of defective
products, lost profits, loss of use and consequential damages. Omnirel also
disclaims any warranty of merchantability and all other warranties, expressed or
implied. The enforceability of these limitations of warranty have not been
tested in court and there can be no assurance that such limitations will be
judicially upheld.
Patents, Trademarks and Licenses
Omnirel has applied for and has received a patent pending notification
from the United States Department of Commerce on its CERMOD product, a
hermetically sealed, high power IGBT or Mosfet module. Although Omnirel does not
possess any other patents, Omnirel believes that its proprietary processes and
product technologies are such that they give it a unique position in the design
and manufacture of power semiconductor modules and multi-chip modules using
semiconductor technology. Omnirel has applied for federal trademark registration
of its name and logo as well as the product names CERMOD, MCPM, and OMNITHERM.
Inventory
Omnirel follows industry standards for procurement, sale and return of
its inventory. Materials are procured based upon purchase orders which have
standard terms and conditions including the right of return for inferior quality
or non-compliance with purchase order terms. Omnirel inventory is maintained at
its principal place of business in storage facilities with temperature and
humidity controls. Omnirel stocks inventory for standard products, and for
certain of its custom products.
5
<PAGE>
Environmental Compliance
Omnirel believes that its operations are in compliance with applicable
environmental laws and regulations involving the discharged of potentially
hazardous materials.
Research and Development
Generally, Omnirel's research and development expenditures involve
engineering and design of custom products for specific applications, development
of new packaging techniques and development of packaging for new semiconductor
devices. Research and development expenditures for the fiscal years ended June
30, 1998, 1997 and 1996 were $1,843,000, $1,773,000 and $1,361,000,
respectively, or 8.5%, 9.3% and 5.2% of sales in the respective years.
Employees
As of June 30, 1998, Zing had 179 employees, 122 of whom were employed
by Omnirel in a manufacturing capacity and 52 in clerical, administrative,
engineering or sales positions at Omnirel. The Company employs 5 people in
executive or administrative functions. None of Zing's or Omnirel's employees are
covered by a collective bargaining agreement.
Item 2.
Description of Properties
Real Properties
The Company maintains its executive office in Valhalla, New York,
leasing 1,500 square feet at a modern office building at an annual rent of
$30,000. The lease expired on October 31, 1997 and was renewed at the same
rental terms for a two year period ending October 31, 1999. The Company uses all
of the leased space.
Omnirel owns a 6.5 acre parcel of land with a 48,000 square foot, one
story, modern facility located in Leominster, Massachusetts, where Omnirel
manufactures its products in a clean-room environment. Approximately 15,000
square feet of the Company's facility is rated and certified as a class 10,000
clean-room environment. This location houses all of the operations of Omnirel.
The clean room facility is equipped with design, manufacturing, electrical test
and environment screen equipment which are state-of-the-art. Omnirel utilizes
all of its available space within the facility.
Investment Policies
The Company does not currently have a formal policy in place
specifically addressing investments in real estate and real estate related
products. Current investments do not include real estate or real estate related
products other than real property discussed above. The Company has a policy of
investing its liquid assets in equity securities primarily tradable on the New
York and other major stock exchanges. The Company's policy is to invest in
companies whose securities have a significant public float providing
6
<PAGE>
liquidity in the event of sale. The investment portfolio at June 30, 1998
consists primarily of preferred stock.
The Company's investing activities have been limited by resolution of
the Board of Directors. The Company's Board directed that the Company cannot
invest more than 25% of its invested capital in common stocks, and cannot invest
in common stocks issued by companies other than companies engaged in the field
of electronic equipment manufacturing and/or semiconductor manufacturing or
distribution. The Board authorized the Company to maintain a margin account to
provide the Company with additional funds used to facilitate the purchase of
stock. The Board authorization additionally provides that dividend returns on
the preferred stock so purchased must exceed the interest expense on the debt
incurred to purchase the securities. Subject to the limitations imposed by the
Board of Directors, which may be changed by the Board at any time, the Company
can alter its investment policies and investment portfolio at any time without
shareholder consent.
Item 3.
Legal Proceedings
The Company is not a party to any material pending legal proceedings
nor, to the Company's knowledge, is any material proceeding threatened.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
7
<PAGE>
PART II
Item 5.
Market for the Registrant's Common Stock and Related Stockholder Matters
The Common Stock of the Company is traded on the National Market System
(NMS) of NASDAQ, under the symbol ZING. The following table sets forth the high
and low closing prices of the Company's Common Stock on the NMS for each
quarterly period during the last two years.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal Year Ended June 30, 1997
First Quarter 10 3/4 9 1/8
Second Quarter 10 3/8 8
Third Quarter 13 1/4 8
Fourth Quarter 10 3/8 8
Fiscal Year Ended June 30, 1998
First Quarter 11 9 1/4
Second Quarter 10 1/2 7 3/4
Third Quarter 9 1/4 7 1/2
Fourth Quarter 9 7 1/2
Fiscal Year Ended June 30, 1999
First Quarter 8 7/8 8
</TABLE>
There were 2,414,643 shares of Common Stock outstanding and 79 holders
of record, and at least 610 beneficial owners of the shares as of September 23,
1998.
No cash dividends have been paid on the Company's Common Stock for the
fiscal years ended June 30, 1998 and 1997. On June 30, 1997, the Company
completed a spin off of the common stock of its 90% owned subsidiary, TACTech,
through the distribution of a dividend to Company stockholders, pursuant to
which TACTech became a separate publicly-held company as of July 1, 1997. The
present policy of the Company is to retain earnings to provide funds to
facilitate acquisitions by the Company or its operating businesses, and for the
operations and expansion of those businesses.
Item 6.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
The following table sets forth for the period indicated the percentage
relationship to net sales of certain items from the Company's consolidated
statements of operations.
8
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30
1998 (a) 1997 (b) 1997 (a) 1996 (b)
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 63.1 56.9 63.5 54.8
----------------- ------------------ ------------------ -----------------
Gross profit 36.9 43.1 36.5 45.2
Selling, general and administrative
expenses 32.7 37.7 32.3 28.0
Depreciation and amortization of
property, plant and equipment 2.6 2.8 2.9 2.1
Interest expense 4.8 4.7 5.2 1.1
Interest and other income, net (11.1) (16.9) (18.8) (11.9)
----------------- ------------------ ------------------ -----------------
Income before income taxes and item
shown below 7.8 14.8 14.9 25.9
Cost in connection with acquisition of
minority interest of subsidiary -- 5.8 6.4 --
----------------- ------------------ ------------------ -----------------
Income before income taxes 7.8 9.0 8.5 25.9
Provision for income taxes 0.8 1.5 1.1 9.0
----------------- ------------------ ------------------ -----------------
Net income 7.0% 7.5% 7.4% 16.9%
================= ================== ================== =================
</TABLE>
(a) Without TACTECH (see Note B (ii) in the consolidated financial statements)
(b) Actual
Results of Operations - Fiscal 1998 Compared to Fiscal 1997
Zing Technologies, Inc., a holding company with one wholly owned
operating subsidiary, Omnirel LLC, realized net income of $1,523,000 or $.60 per
share (basic and diluted) for the fiscal year ended June 30, 1998. During the
year ended June 30, 1997, the Company also owned 90% of Transition Analysis
Component Technology, Inc. ("TACTech"), which ownership was distributed to the
Zing shareholders on June 30, 1997. TACTech licenses proprietary computer
software databases to military semiconductor manufacturers, the Department of
Defense and defense contractors. The databases provide end users with
information useful in determining the projected life cycle of microcircuits and
discrete semiconductor devices used primarily in the manufacture of systems for
military and aerospace applications. TACTech software also enables users to
identify functionally interchangeable devices from various manufacturers.
For the fiscal year ended June 30, 1997, the Company realized income of
$1,608,000 or $.64 per share (basic and diluted), after deducting a charge
relating to the Omnirel restructuring of $1,227,000 or $.32 after tax benefit
per share (see Note B (i) to the consolidated financial statements). Exclusive
of TACTech operations, the Company realized income of $1,409,000 or $.56 per
share (basic and diluted).
9
<PAGE>
Sales of Omnirel for the fiscal year ended June 30, 1998 increased to
$21,773,000. Sales for the Company for the fiscal year ended June 30, 1997 were
$21,300,000, comprised of net sales from Omnirel of $19,094,000 and sales from
TACTech of $2,206,000.
Included in Omnirel sales are revenues generated by the continued
fulfillment of a series of orders placed by General Electric for multi-chip
power modules containing hybrid components. The increase in Omnirel's fiscal
year 1998 sales revenue of 14% from the prior fiscal year is attributed to
increases in revenues generated by the General Electric orders. Sales to General
Electric in the fiscal years ended June 30, 1998 and 1997 were $5,929,000 and
$4,476,000 respectively, representing 27% and 24% respectively of Omnirel's
total sales.
The Company's gross profit for the fiscal year ended June 30, 1998 was
$8,029,000. The $9,184,000 gross profit for the fiscal year ended June 30, 1997
was comprised of $2,206,000 gross profit from TACTech and $6,978,000 of gross
profit from Omnirel. The increase in Omnirel's gross profit of $1,051,000 for
the fiscal year ended June 30, 1998 is attributed to the increase in sales
volume.
Omnirel's cost of goods sold expressed as a percentage of sales was 63%
in both fiscal year ended June 30, 1998 and 1997. Material costs increased
approximately $900,000 from period to period primarily attributable to product
mix, although expressed as a percentage of sales, remained at 33% for each of
the reporting periods. Similarly, manufacturing overhead, expressed as a
percentage of sales was 22% for each of the fiscal years ended June 30, 1998 and
1997, although increasing approximately $600,000 in absolute dollars. This
increase was primarily attributable to increases in the General Electric
revenue, thereby necessitating increases in testing expenses and in the
provision for warranty reserves in the approximate amounts of $71,000 and
$238,000 respectively. A significant portion of the balance of the increase in
the approximate amount of $220,000 is attributable to increase in staff and
related expense (including depreciation) for the manufacture of the Company's
new hermetic high voltage IGBT module to be sold to users requiring high
reliability power modules required to operate in extreme environments.
For the fiscal year ending June 30, 1998, the selling and general
administrative expenses were $7,122,000 as compared to $6,267,000 (or $8,030,000
including TACTech) for the fiscal year ending June 30, 1997. Of this $855,000
increase, approximately $478,000 is attributable to Omnirel's conversion to
regional direct sales forces in lieu of selling through independent sales
representatives. This included the hiring of sales management, recruiting costs
and additional staff at the corporate headquarters to service the additional
sales personnel. Other increases during the current fiscal year were in research
and development and management incentive bonuses of $70,000 and $398,000
respectively. The increase was partially offset by a decrease in professional
fees at Zing of approximately $225,000.
Interest expense increased approximately $48,000 to $1,041,000 during
the fiscal year ended June 30, 1998 as compared to $993,000 for the fiscal year
ended June 30, 1997. During each of the fiscal years 1998 and 1997, 68% of the
interest expense is attributable to financing incurred by the holding company,
the proceeds of which were used to finance the investment portfolio.
Interest and other income, which includes dividends received from the
investment portfolio, decreased approximately $1,188,000 to $2,409,000 during
the fiscal year ended June 30, 1998 from $3,597,000 in the prior comparable
period. Interest and other income is primarily comprised of revenues from
dividends and interest and from realized gains and losses on the sales of
securities, each of which declined $634,000 and $454,000, respectively, during
the current reporting period. Effective April 3,
10
<PAGE>
1993, Zing sold the net assets of its high reliability electronic component
distribution business to Arrow Electronics, the sales price of which included a
$3,000,000 premium over the net book value transferred in respect to a five year
non-compete agreement which terminated during the fiscal year ended June 30,
1998. The company recognized revenues attributable to the non-compete agreement
during the fiscal year 1998 and 1997 in the amounts of $500,000 and $600,000
respectively.
For the fiscal year ended June 30, 1998, an adjustment to the valuation
allowance reduced the effective tax rate to 11% as compared to 16% for the
comparable prior reporting period.
Results of Operations Fiscal 1997 Compared to Fiscal 1996
The Company reported net income of $1,608,000 or $.64 per share (basic
and diluted), for the fiscal year ended June 30, 1997, after deducting a
restructuring charge of $1,227,000 or $.32 after tax benefit per share (see Note
B(i) to the consolidated financial statements) as compared to net income of
$4,413,000 or $1.69 per share-basic and $1.62 per share-diluted, which included
the realization by the Company of an additional $2,000,000 or $.49 after tax per
share, from the sale of the net assets of its high reliability electronic
semiconductor component distribution and value added services business to Arrow
Electronics in May 1993.
Consolidated net sales decreased to $21,300,000 from the prior
comparable years reportable net sales of $26,049,000. Omnirel's net sales in
1997 fiscal year accounted for 90% of consolidated net sales as compared to 94%
of consolidated net sales in fiscal 1996. The balance of consolidated net sales
in each period is attributable to the operations of TACTech, the spun off
subsidiary.
There was a net decrease in Omnirel revenue from the 1996 fiscal year
in the approximate amount of $5,300,000. Included in Omnirel's revenue is a
continued fulfillment of a series of orders placed by General Electric for
multi-chip power module systems which accounted for 24% of Omnirel's revenues
for the year ended June 30, 1997 as compared to 57% in the 1996 fiscal year. The
decrease in General Electric-related revenue in fiscal 1997 was offset, in part,
by an increase of approximately 40% (or $4,300,000) in revenues from other
products in fiscal 1997 compared to fiscal 1996. This increase was primarily
attributed to an increase in products sold through Omnirel's exclusive
distributor, Zeus Electronics, (an Arrow company) and the addition of a
significant customer. Product sold to such distributor and new customer
represented approximately 18% of sales volume in fiscal 1997 as compared to 5%
in fiscal 1996.
Revenues for the former TACTech subsidiary for the fiscal year ended
June 30, 1997 were $2,206,000 as compared to $1,601,000 for the fiscal year
ended June 30, 1996. This 38% increase in revenues is primarily attributed to a
combination of a larger subscriber base and a general increase in subscription
services as subscribers renew their subscriptions.
11
<PAGE>
The following data indicates the licensing activity for each period:
<TABLE>
<CAPTION>
Fiscal year ended June 30,
1997 1996
------------------- ------------------
<S> <C> <C>
Subscribers at beginning of period 73 60
Subscribers who did not renew (12) (14)
Subscribers added during period 34 27
------------------- ------------------
Subscribers at end of period 95 73
=================== ==================
</TABLE>
Gross profit for the fiscal year ended June 30, 1997 at Omnirel and
TACTech represented 76% and 24%, respectively, of the consolidated gross profit
of $9,184,000, as compared to 86% and 14%, respectively, of the consolidated
gross profit of $11,777,000 for fiscal year 1996. Omnirel's cost of goods sold
increased approximately 5% as a percentage of net sales for the current
reporting period as compared to the comparable period in 1996. This was
primarily attributed to both the reduction of production volume and unit sales
price on the series of orders placed by General Electric, and a change in
product mix, which had the effect of increasing labor and manufacturing overhead
rates (expressed as a percentage of net sales) 1.8% and 1.7%, respectively.
The consolidated selling, general and administrative expenses were
approximately $8,030,000, representing an increase of approximately $750,000
over the prior reporting period. The factors primarily affecting this category
have been increases in research and development at the Omnirel subsidiary of
approximately $412,000 and an increase in personnel cost of approximately
$390,000 at the former TACTech subsidiary.
Consolidated interest expense grew to $993,000 during the fiscal year
ended June 30, 1997 from $287,000 in the comparable 1996 reporting period.
Approximately $522,000 of the increase is attributable to borrowings from a bank
and a brokerage house for capital, the proceeds of which were used to increase
and maintain the Company's investment portfolio. In addition, approximately
$175,000 of this increase is attributable to a mortgage executed at the end of
calendar year 1995 on Omnirel's plant and facility located in Leominster,
Massachusetts, which mortgage was increased during the current fiscal year to
finance the construction of an additional 10,000 square feet of facility.
For the fiscal year ended June 30, 1997, interest and other net income
grew to $3,597,000 primarily attributable to realized gains (net of unrealized
losses) from the sale of securities and dividend income. For the fiscal year
ended June 30, 1996, interest and other income - net was $3,100,000 of which
$2,000,000 was the realization by the Company of the additional purchase price
on the sale of the net assets of its high reliability electronic semiconductor
component distribution and value added services business to Arrow Electronics in
May 1993. Thus, excluding the $2,000,000 received from Arrow Electronics,
interest and other income-net increased in fiscal 1997 over fiscal 1996 by
$2,497,000, comprised of an increase in dividend and interest income of
$1,052,000, and realized and unrealized gains and losses from the sale of
securities of $1,445,000.
Provision for income taxes in fiscal 1997 amounted to $320,000,
representing an effective rate of approximately 16% as compared to $2,345,000
and an approximate effective rate of 35% in fiscal 1996.
12
<PAGE>
As a result of the redemption of all of its preferred stock portfolio in the
third quarter of fiscal 1997, the Company generated a capital loss for tax
purposes, which significantly offset the reportable recognizable gain for fiscal
1997. This, coupled with the fact that other income includes non taxable
dividends of approximately $1,300,000 and a covenant not to compete of $600,000
previously taxed in its entirety in 1993, contributed to the reduction in the
effective tax rate. The Company's provision for income taxes for fiscal 1997 is
a result of a reduction in the deferred tax asset, net of an increase to its
deferred tax liability, each of which has been created pursuant to FASB 109.
Liquidity and Capital Resources
During the year ended June 30, 1998, proceeds from sales of marketable
securities along with cash provided from operations were used to repurchase
shares of the Company's common stock in the open market at a total cost of
$2,087,000 or approximately $9.67 per share, to reduce bank debt and to acquire
equipment. Management expects that the Company's internally generated funds and
available credit facilities will be sufficient to finance the acquisition of
fixed assets and equipment, and the continued operations of the Company. The
Company does not expect that it will be obligated to make any payments under its
guaranty of the TACTech credit facility described in Note B to the consolidated
financial statements. Recent volatility in the securities markets has not
materially adversely affected the Company's liquidity. See Note Q of Notes to
Consolidated Financial Statements.
Impact of Year 2000
Some of the Company's computer systems and electronic devices are based
on software programs which were written using two digits rather than four to
define the applicable year. As a result of how those computer programs store and
manipulate dates, such systems and devices may assume that all years occur only
in the 20th century. This could cause a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has completed an assessment of this problem and will have
to modify or replace portions of its software programs so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost is estimated at approximately
$100,000 for the purchase of new software that will be expensed as incurred.
The project is estimated to be completed not later than June 1999,
which is prior to any anticipated impact on the Company's operating systems. The
Company believes that with modifications to existing software and systems, and
conversions to new software and systems, the Year 2000 issue will not pose
significant operational problems for the Company's computer systems, but assumes
that its principal suppliers and customers will themselves timely achieve Year
2000 compliance, of which there can be no guarantee.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ
13
<PAGE>
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
Impact of Inflation
Inflation did not have significant impact on the operations of the
Company for all periods presented.
14
<PAGE>
Item 7.
Financial Statements
Zing Technologies, Inc.
Index to Financial Statements
June 30, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors...........................................16
Audited Consolidated Financial Statements
Consolidated Balance Sheets..............................................17
Consolidated Statements of Income........................................18
Consolidated Statements of Stockholders' Equity..........................19
Consolidated Statements of Cash Flows....................................20
Notes to Consolidated Financial Statements...............................21
</TABLE>
15
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Zing Technologies, Inc. and Subsidiaries
Valhalla, New York
We have audited the accompanying consolidated balance sheets of Zing
Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Zing
Technologies, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
Ernst & Young, LLP
Ernst & Young, LLP
September 15, 1998
White Plains, NY
16
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
1997 1998
-------------------- ---------------------
(000's omitted)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 857 $ 1,092
Marketable securities 21,935 19,462
Accounts receivable, less allowances of $79 and $72, respectively 2,098 2,451
Inventories 4,785 5,188
Prepaid expenses 204 192
Other current assets 766 511
------------------------------------------
Total current assets 30,645 28,896
Property, plant and equipment 10,800 11,657
Less: accumulated depreciation and amortization 5,671 6,417
------------------------------------------
5,129 5,240
Deferred income taxes, net of valuation allowance 800 771
Excess of cost over assets acquired, net of accumulated
amortization of $1,172 and $1,325, respectively 1,363 1,210
Other assets 70 54
------------------------------------------
Total assets $ 38,007 $ 36,171
==========================================
Total Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,672 $ 1,418
Accrued expenses 801 719
Accrued compensation expense 617 811
Loans payable bank 7,500 7,700
Due to broker 3,674 2,993
Current portion of long-term obligations 370 502
------------------------------------------
Total current liabilities 14,634 14,143
Long-term obligations, less current portion 2,903 3,013
Deferred income -- non-compete agreement 500 --
Stockholders' equity:
Common stock (par value $.01 per share; authorized 12,000,000
shares; issued 3,058,037 shares as of June 30, 1997 and 1998) 30 30
Additional paid-in capital 15,111 15,113
Notes receivable from stockholders (170) (383)
Net unrealized loss on marketable securities, net (474) (654)
Retained earnings 7,915 9,438
Less treasury shares at cost (399,918 shares -- 1997,
615,638 shares -- 1998) (2,442) (4,529)
------------------------------------------
19,970 19,015
==========================================
Total liabilities and stockholders' equity $ 38,007 $ 36,171
==========================================
</TABLE>
See Notes to consolidated financial statements.
17
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
----------------- ------------------ -----------------
(000's omitted, except per share data)
<S> <C> <C> <C>
Net sales $ 26,049 $ 21,300 $ 21,773
Cost of goods sold 14,272 12,116 13,744
----------------- ------------------ -----------------
Gross profit 11,777 9,184 8,029
Selling, general and administrative expenses 7,280 8,030 7,122
Depreciation and amortization of property,
plant and equipment 552 603 571
Interest expense 287 993 1,041
Interest and other income -- net (3,100) (3,597) (2,409)
----------------- ------------------ -----------------
Income before income taxes and item
shown below 6,758 3,155 1,704
Costs in connection with acquisition of minority
interest of subsidiary -- 1,227 --
Income before income taxes 6,758 1,928 1,704
Provision for income taxes 2,345 320 181
----------------- ------------------ -----------------
Net income $ 4,413 $ 1,608 $ 1,523
================= ================== =================
Net income per common share - basic $ 1.69 $ .64 $ .60
================= ================== =================
Net income per common share - diluted $ 1.62 $ .64 $ .60
================= ================== =================
Average number of outstanding shares - basic 2,610,000 2,500,273 2,529,557
================= ================= ==================
Average number of outstanding shares - diluted 2,628,782 2,526,889 2,552,875
================= ================= ==================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(000's omitted)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable
---------------------------- Paid-in From Retained
Shares Amount Capital Stockholders Earnings
-------------- -------------- --------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,597 $ 28 $ 13,466 $ (250) $ 2,354
Net income 4,413
Net unrealized gain on marketable securities
Repurchase of common stock for treasury (55)
Repayment of note receivable from stockholder 80
Exercise of warrants 77 394
-------------- -------------- --------------------------------- --------------
Balance at June 30, 1996 2,619 28 13,860 (170) 6,767
Net income 1,608
Net unrealized (loss) on marketable securities
Repurchase of common stock for treasury (145)
Issuance of common stock on restructuring of
subsidiary 164 1 1,226
Exercise of warrants 20 1 25
Dividend distribution of subsidiary common stock (460)
-------------- -------------- --------------------------------- --------------
Balance at June 30, 1997 2,658 30 15,111 (170) 7,915
Net income 1,523
Net unrealized loss on marketable securities, net
Repurchase of common stock for treasury (216)
Loans to stockholders (213)
Exercise of warrants 2
-------------- -------------- --------------------------------- --------------
Balance at June 30, 1998 2,442 $ 30 $ 15,113 $ (383) $ 9,438
============== ============== ================================= ==============
<CAPTION>
Net Unrealized
Gain (Loss) on Total
Treasury Marketable Stockholders'
Stock Securities Equity
--------------- -------------------- -------------------
<S> <C> <C>
Balance at June 30, 1995 $ (469) $ 15,129
Net income 4,413
Net unrealized gain on marketable securities $ 220 220
Repurchase of common stock for treasury (514) (514)
Repayment of note receivable from stockholder 80
Exercise of warrants 394
--------------- -------------------- -------------------
Balance at June 30, 1996 (983) 220 19,722
Net income 1,608
Net unrealized (loss) on marketable securities (694) (694)
Repurchase of common stock for treasury (1,459) (1,459)
Issuance of common stock on restructuring of
subsidiary 1,227
Exercise of warrants 26
Dividend distribution of subsidiary common stock (460)
--------------- -------------------- -------------------
Balance at June 30, 1997 (2,442) (474) 19,970
Net income 1,523
Net unrealized loss on marketable securities, net (180) (180)
Repurchase of common stock for treasury (2,087) (2,087)
Loans to stockholders (213)
Exercise of warrants 2
--------------- -------------------- -------------------
Balance at June 30, 1998 $ (4,529) $ (654) $ 19,015
=============== ==================== ===================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
----------------- ------------------------------------
(000's omitted)
<S> <C> <C> <C>
Operating activities
Net income $ 4,413 $ 1,608 $ 1,523
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 907 953 899
Amortization of non-compete agreement (600) (600) (500)
Deferred income taxes 189 295 29
Costs in connection with acquisition of minority
interest subsidiary -- 1,227 --
Changes in operating assets and liabilities:
Accounts receivable 1,181 (165) (353)
Inventories (473) (495) (403)
Prepaid expenses and other current assets 142 (631) 267
Other assets (26) (32) 16
Accounts payable and accrued expenses 2,730 (369) (142)
Other, net 291 28 --
Net cash provided by operating activities 8,754 1,819 1,336
Investing activities
Purchases of property and equipment (974) (1,298) (857)
Net sales (purchases) of marketable securities (14,431) (2,701) 2,293
Net cash provided by (used in) investing activities (15,405) (3,999) 1,436
----------------- ------------------ -----------------
Financing activities
Increase in loans receivable from stockholders -- -- (213)
Proceeds from borrowings 7,375 10,006 1,457
Reductions of borrowings (1,032) (6,130) (1,696)
Exercise of warrants 103 26 2
Repayment of note receivable from stockholder 80 -- --
Repurchase of common stock for treasury (514) (1,459) (2,087)
Dividend of investment in subsidiary common stock -- (133) --
----------------- ------------------ -----------------
Net cash provided by (used in) financing activities 6,012 2,310 (2,537)
----------------- ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (639) 130 235
Cash and cash equivalents at beginning of year 1,366 727 857
----------------- ------------------ -----------------
Cash and cash equivalents at end of year $ 727 $ 857 $ 1,092
================= ================== =================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1998
Note A. Organization and Summary of Significant Accounting Policies
Business Segment Information
Zing Technologies, Inc. (the "Company") operates primarily in one business
segment -- sales of high reliability power semiconductor multi-chip modules for
use in military/aerospace and high-end industrial applications. The Company also
marketed a turnkey software package and database of pertinent component
information through its fiscal year ending June 30, 1997 (see Note B).
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Omnirel LLC ("Omnirel"). Income Statements for the
fiscal years ended June 30, 1997 and 1996 included its formerly 90% owned
subsidiary Transition Analysis of Component Technology, Inc. ("TACTech"). All
significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
The Company recognizes sales at the time products are shipped and services are
provided. Consistent with industry practice, Omnirel warrants that its products
are free from defects in workmanship and meet the agreed upon specifications
supplied by the customer or Omnirel's current published specifications. As of
June 30, 1997 and 1998, the Company has warranty reserves of $77,000 and
$170,000 respectively.
Cash and Cash Equivalents
The Company considers all short-term liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Marketable Securities
Debt securities that the Company has both the positive intent and ability to
hold to maturity are classified as "held to maturity" and are carried at
amortized cost. Debt securities that the Company does not have the positive
intent and ability to hold to maturity are classified as "available for sale"
and are carried at fair value. All marketable equity securities are classified
as available-for-sale and are carried at fair value. Unrealized holding gains
and losses on securities classified as available for sale are carried as a
separate component of shareholders' equity, net of applicable income taxes. As
of June 30, 1997 and 1998, all marketable securities are held as available for
sale.
21
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note A. Organization and Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment, including equipment leased under capital leases,
are stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the assets, ranging from three to twenty five years.
Leasehold improvements are amortized over the terms of the respective leases or
the service lives of the improvements, whichever is shorter.
Excess of Cost Over Assets Acquired
The excess cost over assets acquired is being amortized over fifteen years. The
Company periodically reviews the carrying value of the excess of cost over
assets acquired for recoverability in relation to future earnings.
Net Income Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented in accordance with and where
appropriate, restated to conform to the SFAS No. 128 requirements.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and accrued
expenses reasonably approximate fair value due to the short maturity of these
items; marketable securities are based upon quoted market prices. The carrying
amounts of loans payable bank and long-term obligations also approximate fair
value in that the credit facilities bear interest at current rates.
Impairments
During the year ended June 30, 1997, the Company implemented the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Company records impairment losses on
long-lived assets when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. There have been no
such impairment losses through June 30, 1998.
22
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note A. Organization and Summary of Significant Accounting Policies (continued)
Impact of New Accounting Standard
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
(SFAS No. 130) and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS No. 131). SFAS No. 130 and SFAS No. 131 are
effective for financial statements for fiscal years beginning after December 15,
1997. The Company is studying the application of the new statements to evaluate
the disclosure requirements. The adoption of these statements will have no
impact on the Company's consolidated results of operations, financial position
or cash flow.
Note B. Organization
(i) Omnirel
During fiscal 1997, the Company purchased the balance of the outstanding
ownership interests of its Omnirel Corporation subsidiary (the predecessor to
Omnirel LLC) not owned by the Company (2% outstanding and 16% on a fully diluted
basis). In connection therewith, Omnirel Corporation was merged into Omnirel,
LLC (a newly formed Delaware limited liability corporation) and became a wholly
owned subsidiary of the Company. The Company issued approximately 164,420 shares
of its Common Stock in exchange for the minority interests in Omnirel (including
132,603 shares in exchange for options to purchase Omnirel Common Stock) to
effect the purchase. As a result, the Company incurred a pre-tax charge against
earnings in the fourth quarter ending June 30, 1997 of approximately $1.2
million representing compensation paid to the employee option holders equal to
the value of the shares issued in exchange for options held by such employees.
In connection with the transaction, certain Omnirel optionees elected to retain
their options which (assuming full vesting) are exercisable for up to 60,041
shares of Company common stock.
(ii) TACTech
The Board of Directors of the Company declared a dividend distribution (the
"Distribution") to the Company shareholders of record as of June 17, 1997 on the
basis of one share of TACTech Common Stock for each 5.0024 shares of the
Company's Common Stock. The distribution was effective June 30, 1997 and
following the distribution, TACTech commenced operations on a stand alone basis.
During fiscal 1997, TACTech filed a registration statement on Form SB-1 and
Prospectus for the purpose of distributing the Common Stock of TACTech to the
stockholders of the Company.
The Company made an additional investment of its intercompany advances,
excluding taxes as of the effective date of the distribution, of approximately
$553,000, which amount has been included in additional paid-in capital of
TACTech.
As of the Distribution Date, the Company and TACTech entered into several
agreements to take certain other actions for purposes of governing certain of
the ongoing relationships between the two companies following the Distribution,
including reciprocal indemnification obligations, and the engagement of
23
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note B. Organization (continued)
certain Company employees by TACTech on a part time basis. In addition, the
Company has assisted TACTech in obtaining a $1.5 million credit facility (the
"TACTech Facility") from a bank and provided a guaranty of indebtedness incurred
by TACTech thereunder. Pursuant to an indemnification agreement entered into
between the Company and TACTech in connection with the Distribution, TACTech
agreed to indemnify the Company against all expenses and liabilities resulting
from (i) the operations of TACTech from and after the distribution, (ii) the
Company's operations of TACTech's business prior to the Distribution other than
those based upon the tax consequences of the Distribution and (iii) any claim,
suit or other type of proceeding based upon, arising out of or in connection
with any information furnished by TACTech concerning TACTech for inclusion in
the Prospectus relating to the Distribution; and the Company agreed to indemnify
and save harmless TACTech and its directors, officers, employees, agents and/or
affiliates for any claims incurred or suffered, directly or indirectly, by them
resulting from or attributable to, among other things (i) the operation of the
Company from after the Distribution (ii) any claim, suit or other type of
proceeding based upon, arising out of or in connection with the operation of the
Company's business (other than TACTech's business) prior to the Distribution,
and (iii) any claims, suit or other type of proceeding based upon arising out of
or in connection with any information concerning the Company in the Prospectus
or any information furnished by the Company concerning the Company for inclusion
in the Prospectus.
The TACTech Facility was obtained on August 28, 1997 and has a three year term.
Interest on the borrowings is at a variable rate tied to the Bank's prime rate.
All TACTech's personal property collateralizes the borrowings under such
facility. As of June 30, 1998 TACTech had $620,000 outstanding under the
facility.
The net assets transferred at June 30, 1997 in TACTech were as follows:
<TABLE>
<S> <C>
Current Assets (a) $671,000
Non-Current Assets 190,000
Liabilities (401,000)
--------
Net Assets $460,000
========
</TABLE>
(a) Includes $108,000 of prepaid registration costs.
The consolidated financial statements of the Company for the years ended June 30
include the following applicable to TACTech, before eliminations:
<TABLE>
<CAPTION>
1996 1997
------------------ ------------------
<S> <C> <C>
Revenues $ 1,601,255 $ 2,205,679
Expenses 1,444,054 1,902,809
Charges in lieu of taxes 50,015 103,400
------------------ ------------------
Net Income $ 107,186 $ 199,470
================== ==================
</TABLE>
24
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note C. Notes Receivable from Stockholders
During 1991, the Company loaned $250,000 to an officer/director of Omnirel
Corporation and the Company, to purchase Common Stock of the Company on the open
market, in exchange for a non-interest bearing note. The note is due July 1,
2001, is secured by the 84,000 shares of the Company's Common Stock owned by the
officer/director, and is classified as a reduction of equity. During the 1996
fiscal year $80,000 of this note was repaid. No payments were made in fiscal
years ending June 30, 1997 and 1998.
During fiscal year 1998, the Company loaned approximately $201,000 to
stockholders who were issued shares in the Omnirel transaction (see Note B). The
notes are due June 30, 2002 and bear interest at 6.65%. Accrued interest of
approximately $12,000 is included in the loan balance.
Note D. Inventories
Inventories consists of the following:
<TABLE>
<CAPTION>
June 30
1997 1998
--------------- ----------------
(000's omitted)
<S> <C> <C>
Raw materials $ 2,540 $ 2,585
Work in process 1,381 1,795
Finished goods 864 808
--------------- ----------------
$ 4,785 $ 5,188
=============== ================
</TABLE>
Note E. Property, Plant and Equipment
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
June 30
1997 1998
----------------- -----------------
(000's omitted)
<S> <C> <C>
Land $ 300 $ 300
Building and improvements 3,302 3,302
Equipment 6,216 6,735
Furniture and fixtures 433 564
Leasehold improvements 549 756
----------------- -----------------
$ 10,800 $ 11,657
================= =================
</TABLE>
25
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note F. Credit Facilities
Credit facilities consist of the following:
<TABLE>
<CAPTION>
June 30
1997 1998
----------------- -----------------
(000's omitted)
<S> <C> <C>
Loans payable bank:
Revolving line of credit $ -- $ 200
Line of credit 7,500 7,500
$ 7,500 $ 7,700
================= =================
Long-term obligations:
Mortgage payable to bank $ 1,838 $ 1,803
Term loans - bank 1,435 1,712
Less current portion (370) (502)
----------------- -----------------
$ 2,903 $ 3,013
================= =================
</TABLE>
In March 1998, Omnirel replaced a $5,000,000 credit facility with a new
$5,750,000 facility (the "Loan Facility") comprised of (a) a $3,000,000
revolving line of credit maturing on November 30, 1999, (b) a $750,000 term
loan, maturing November 30, 2004 and (c) a $2,000,000 standby term loan expiring
November 30, 1999. At the Company's option, interest rates are selected at the
time of each advance, (8.5% on the revolving line of credit and 7.6% on the term
loan at June 30, 1998). As of June 30, 1998, the outstanding balance on the
revolving line of credit was $200,000 and $351,000 was outstanding with respect
to term loan provisions of the facility.
The Loan Facility requires maintenance of certain financial ratios and contains
other restrictive covenants, including a restriction on the payment of
dividends. Substantially all assets, excluding real estate and related fixtures,
have been pledged as collateral.
Omnirel has various term loans outstanding under prior credit facilities, the
proceeds from which were used to finance equipment acquisitions. These loans are
payable through various dates through November 2002 at interest rates ranging
from 7.5% to 8%. At June 30, 1998 and 1997 $1,361,000 and $1,435,000 was
outstanding on these term loans, respectively.
Omnirel obtained a mortgage on its real estate and related fixtures in December
1995. During fiscal year 1997, an additional $390,000 was added to its existing
mortgage. The outstanding balance on the mortgage at June 30, 1997 and 1998 was
$1,838,000 and 1,803,000, respectively. The mortgage matures on December 18,
2000 and monthly payments are made for principal, using a twenty year
amortization, and for interest based on the bank's lending rate plus 1.5% (10%
at June 30, 1998). Omnirel's mortgage is guaranteed by the Company. In April
1997, the Company entered into a $7,500,000 line of credit (the "Line of
Credit") with an interest rate equal to either the prime rate less .75% or LIBOR
plus .70% with an expiration date of March 2, 1998. Proceeds from the loan were
used to reduce borrowings under the
26
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note F. Credit Facilities (continued)
Company's brokerage margin account. Simultaneously with the borrowing of the
Line of Credit, the Company purchased an interest cap for $38,000, which capped
the LIBOR at 5.875% through the original expiration date of the Line of Credit.
Effective April 1, 1998, the Line of Credit was extended through April 1, 2000,
on similar terms and conditions as the original Line of Credit, except for the
interest rate. The interest rate during the extended period is based on an
interest rate comparing a floating rate index USD One-Month LIBOR-BBA plus .70%,
to a fixed rate of 6.61%. The applicable LIBOR rate at June 30, 1998 was
6.35234%. Marketable securities, principally preferred stocks with a fair market
value of approximately $15,000,000 were used to collateralize the borrowings of
$7,500,000 at June 30, 1998.
The annual principal payment requirements on the mortgage, credit facilities
equipment loans and lines of credit subsequent to June 30, 1998 are as follows
(000's omitted):
<TABLE>
<S> <C>
1999 $ 502
2000 8,222
2001 2,192
2002 208
2003 91
</TABLE>
The Company made aggregate interest payments relating to credit facilities of
$287,000, $560,000 and $820,000 during the fiscal years ended June 30, 1996,
1997 and 1998, respectively.
Note G. Income Taxes
The Company records taxes under the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Omnirel's net operating loss carryforwards for federal income tax purposes of
approximately $2,570,000 at June 30, 1998 expire through 2007, subject to annual
limitations under Section 382 of the Internal Revenue Code.
Income tax provision consists of the following:
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
------------------ ---------------- ----------------
(000's omitted)
<S> <C> <C> <C>
Current Federal $ 1,706 $ -- $ 120
Current State 450 25 32
Deferred Federal 189 232 23
Deferred State -- 63 6
------------------ ---------------- ----------------
$ 2,345 $ 320 $ 181
================== ================ ================
</TABLE>
27
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note G. Income Taxes (continued)
The income tax benefit of $89,000 recorded in the fourth quarter of 1998
primarily reflects a change in the Company's consideration of its ability to
utilize its net operating loss carryforwards.
The reconciliation of the differences between the tax provision and the amounts
computed by applying the statutory Federal income tax rate to pre-tax income
follows:
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
----------------------------------- ----------------
(000's omitted)
<S> <C> <C> <C>
Federal income tax at statutory rate (34%) $ 2,298 $ 656 $ 579
State income tax net of Federal tax benefit 297 17 67
Adjustment to valuation allowance (173) -- (300)
Permanent differences resulting from purchase
accounting 68 68 52
Non taxable dividends (228) (455) (235)
Foreign taxes withheld -- -- 22
Other-net 83 34 (4)
------------------ ---------------- ----------------
$ 2,345 $ 320 $ 181
================== ================ ================
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30
1997 1998
------------------ -------------------
(000's omitted)
<S> <C> <C>
Net operating losses $ 1,221 $ 874
Noncompete agreement 198 --
Purchase accounting basis differences (268) --
Warranty reserves 30 67
Inventory reserves 165 193
Unrealized loss on marketable securities 196 259
Accumulated depreciation (130) (392)
Federal tax credits -- 233
Other 202 123
----------------- -------------------
Deferred tax asset 1,614 1,357
Valuation allowance (814) (586)
----------------- -------------------
Net deferred tax asset $ 800 $ 771
================= ===================
</TABLE>
28
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note G. Income Taxes (continued)
Unrealized losses on marketable securities, not affecting the Company's results
of operations, increased the valuation allowance by $187,000 and $72,000 for the
years ended June 30, 1997 and 1998, respectively.
In 1996, 1997 and 1998, income tax payments aggregated $1,950,000, $250,000 and
$63,000, respectively.
Note H. Stockholders' Equity
Treasury stock outstanding is as follows:
<TABLE>
<CAPTION>
Fiscal Year Average Price
Ended June 30, Shares Total Cost Per Share
- ---------------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
1993 2,600 $ 5,200 $ 2.00
1994 11,500 43,125 3.75
1995 185,818 421,090 2.27
--------------- -------------------
199,918 469,415
1996 55,100 513,522 9.32
--------------- -------------------
255,018 982,937
1997 144,900 1,459,902 10.07
--------------- -------------------
399,918 2,442,839
1998 215,720 2,086,651 9.67
--------------- -------------------
615,638 $ 4,529,490
=============== ===================
</TABLE>
Warrant activity is as follows:
<TABLE>
<CAPTION>
Warrants Price
------------------ --------------------
<S> <C> <C>
Outstanding at June 30, 1996 20,910 $ 1.34
Exercised - fiscal 1997 (19,500) $ 1.34
------------------
Outstanding at June 30, 1997 1,410
Exercised - fiscal 1998 (1,410) $ 1.34
------------------
Outstanding at June 30, 1998 --
==================
</TABLE>
Options outstanding represent options to purchase Omnirel Common Stock. In
connection with the Omnirel transaction (see Note B), the options to purchase
Omnirel stock which were not repurchased by the Company became, subject to
vesting limitations, exercisable for Company Common Stock at the rate of 1.6889
shares for each $10 option and each $8 option.
29
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note H. Stockholders' Equity (continued)
Option activity is as follows:
<TABLE>
<CAPTION>
1995
Non-Qualified 1995
Exchange Non-Qualified
Options Options
($8) ($10) Total
------------------- --------------------- ----------------------
<S> <C> <C> <C>
Options outstanding, July 1, 1995 134,000 17,000 151,000
Granted - 10,000 10,000
------------------- --------------------- ----------------------
Options outstanding, June 30, 1996 134,000 27,000 161,000
Granted - 10,000 10,000
Forfeited (4,100) (14,000) (18,100)
Repurchased by the Company (117,350) - (117,350)
------------------- --------------------- ----------------------
Options outstanding, June 30, 1997 12,550 23,000 35,550
------------------- --------------------- ----------------------
Options outstanding, June 30, 1998 12,550 23,000 35,550
=================== ===================== ======================
Number of shares of Company Common Stock
which outstanding options are exercisable
pursuant to the Omnirel transaction described
above 21,196 38,845 60,041
=================== ===================== ======================
Omnirel options exercisable at June 30, 1998 12,550 9,800 22,350
=================== ===================== ======================
Number of shares of Company Common Stock
which exercisable options are exercisable
at June 30, 1998 pursuant to the Omnirel
transaction described above 21,196 16,551 37,747
=================== ===================== ======================
Vesting 3 years 5 years
Contractual Life 10 years 10 years
</TABLE>
The fair value for the $10 options granted during fiscal 1997 and fiscal 1996
were estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rates of
6.25%; divided yields of 0%; volatility factors of the expected market price of
the Company Common Stock of .683; and a weighted average expected life of the
options of five years. The estimated weighted average fair value per option is
approximately $5.08. Pro forma information related to stock option grants in
1997 and 1996 has not been presented since the impact of the fair value of the
stock option grants was not material to the results of operations.
30
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note I. Marketable Equity Securities
For the years ended June 30, 1997 and 1998, marketable securities consist of
equity securities carried at market value. Marketable securities had a cost of
$22,284,000 as of June 30, 1997 and $20,060,000 as of June 30, 1998. As of June
30, 1998 gross unrealized gains and losses were $150,000 and $804,000,
respectively.
Included in the determination of net income for the years ended June 30, 1996,
1997 and 1998 were realized gains of $478,000, $1,899,000 and $1,180,000,
respectively, and realized losses of $587,000, $1,004,000 and $782,000,
respectively.
During fiscal 1996, the Company engaged in one short sale which obligated the
Company to replace securities borrowed by purchasing additional securities at
the then current market value. At June 30, 1996, the Company's short sale
obligation aggregated $1,026,000. Included in the determination of fiscal 1996
net income was a gain of $94,000 related to the difference between the proceeds
from the short sale and the related obligation at June 30, 1996. During 1997,
the Company covered its short sale obligation and realized additional gains of
$649,000 related to the aforementioned transaction.
During fiscal 1996, 1997 and 1998, realized losses of $578,000, $43,000 and $0,
respectively, were charged to income representing a reduction in the market
value of certain marketable securities which was deemed to be other than
temporary.
Note J. Employee Benefit Plans
The Company has a deferred compensation program for all employees, which is
qualified under Section 401(k) of the Internal Revenue Code. Under the program,
contributions to be made by the Company are at the discretion of the Board of
Directors of the Company and were $10,500 for 1996, $18,000 for 1997 and $14,700
for 1998. The Company does not maintain post-retirement benefit plans.
Note K. Leases
The Company has a noncancelable operating lease expiring October 31, 1999 at an
annual rent of $35,000. As of June 30, 1998 the Company had no other significant
operating leases. Rental expense for all operating leases was $59,000 for 1996,
$67,000 for 1997 and $35,000 for 1998.
Note L. Research and Development
During fiscal 1996, 1997 and 1998, research and development expenditures of
Omnirel, which are included in selling, general and administrative expenses,
were $1,361,000, $1,773,000 and $1,843,000, respectively.
Note M. Concentration of Credit Risk
Sales to one customer aggregated 27% of the net sales of the Company for fiscal
1998 as compared to sales to the same customer in fiscal 1997 and 1996,
aggregating 24% and 58%, respectively.
31
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note M. Concentration of Credit Risk (continued)
Sales to another customer aggregated 12% of net sales of the Company for fiscal
1997.
Note N. Related Party Transactions
During the years ended June 30, 1996, 1997 and 1998, the Company incurred costs
for legal services rendered by a law firm (a principal of which is a member of
the Board of Directors of the Company) amounting to $228,000, $372,000 and
$131,000, respectively.
Note O. Interest and Other Income, Net
Interest and other income, net, is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
------------------ ---------------- ----------------
(000's omitted)
<S> <C> <C> <C>
Proceeds from sale of business $ 2,000 $ -- $ --
Amortization of non-compete agreement 600 600 500
Dividend and interest income 1,093 2,145 1,511
Unrealized and realized gains (losses) from sale/
redemption of securities (593) 852 398
------------------ ---------------- ----------------
$ 3,100 $ 3,597 $ 2,409
================== ================ ================
</TABLE>
32
<PAGE>
Zing Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note P. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year ended June 30
1996 1997 1998
------------------ ---------------- ----------------
(000's omitted, except share data)
<S> <C> <C> <C>
Numerator
Numerator for basic earnings per share - income
available to common stockholders $ 4,413 $ 1,608 $ 1,523
Income attributable to minority interest in subsidiary (161) -- --
------------------ ---------------- ----------------
Numerator for diluted earnings per share $ 4,252 $ 1,608 $ 1,523
================== ================ ================
Denominator
Denominator for basic earnings per share - weighted-
average shares 2,610,000 2,500,273 2,529,557
Effect of dilutive securities
Warrants 18,782 1,212 --
Subsidiary options exercisable into Zing common shares -- 25,404 23,318
------------------ ---------------- ----------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 2,628,782 2,526,889 2,552,875
================== ================ ================
Basic earnings per share $ 1.69 $ .64 $ .60
================== ================ ================
Diluted earnings per share $ 1.62 $ .64 $ .60
================== ================ ================
</TABLE>
Note Q. Subsequent Events
During July and August 1998, the Company acquired for its treasury 28,756 shares
of its common stock for approximately $241,200 at an average price of $8.39 per
share (including brokerage costs).
During July and August 1998, the Company sold various marketable securities
which it held at June 30, 1998 for proceeds of approximately $1,467,000, at a
realized loss of approximately $194,000. As of August 31, 1998, the Company's
investment portfolio had a net unrealized loss of approximately $1,100,000, as
compared to a net unrealized loss of $654,000 as shown in the Balance Sheet as
of June 30, 1998.
33
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Information required under items 9 through 12 of this part will be
incorporated by reference from the Company's definitive Proxy Statement or by
amendment on Form 10-KSB/A, to be filed within 120 days following the end of the
Company's June 30, 1998 fiscal year.
Item 13. Exhibits and Reports on Form 8-k
(a) Exhibits
Exhibit 10.1 - Amendment No. 1 to Employment Agreement
with John Catrambone.
Exhibit 10.2 - Omnirel LLC Appreciation Rights Agreement.
Exhibit 11 - Statement Re: Computation of per share
earnings (see Note P of Notes
to Consolidated Financial Statements).
(b) Reports on Form 8-K:
None.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ZING TECHNOLOGIES, INC.
Date: October 8, 1998 By: Robert E. Schrader
---------------------------------------
Robert E. Schrader
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Robert E. Schrader President, Chief Executive October 8, 1998
- -------------------------------------------- Officer and Chairman of the Board
Robert E. Schrader (Principal Executive Officer)
Martin S. Fawer Treasurer and Director October 8, 1998
- -------------------------------------------- (Principal Financial Officer)
Martin S. Fawer
Deborah J. Schrader Secretary and Director October 8, 1998
- --------------------------------------------
Deborah J. Schrader
John F. Catrambone Director October 8, 1998
- --------------------------------------------
John F. Catrambone
Laurence Higgitt Director October 8, 1998
- --------------------------------------------
Laurence Higgitt
Henry A. Singer Director October 8, 1998
- --------------------------------------------
Henry A. Singer
</TABLE>
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT effective as of the 2nd day of
January, 1998, by and among OMNIREL, LLC, a Delaware limited liability company
with offices at 205 Crawfors Street, Leominster, Massachusetts (the "Company");
JOHN F. CATRAMBONE, residing at 167 South Street, Carlisle, Massachusetts 01741
("Executive"); and ZING TECHNOLOGIES, INC. ("Zing").
RECITALS
Executive has been President and Chief Executive Officer of the Company
since 1985 and possesses valuable experience, skills and know-how with respect
to all aspects of the Company's business. The parties hereto are party to an
Employment Agreement dated as of June 26, 1991 (the "Employment Agreement"), as
amended by Amendment No. 1 to the Employment Agreement effective as of June 27,
1995, and desire to further amend to Employment Agreement as hereinafter set
forth. The Company desires to continue to employ Executive on the terms and
conditions set forth in the Employment Agreement, as amended by Amendment No. 1
to the Employment Agreement and this Amendment No. 2 to the Employment
Agreement, and Executive is willing to continue such employment on such terms
and conditions.
It is therefore hereby agreed by and among the parties as follows:
1. Amendments to Employment Agreement.
(a) Section 2 of the Employment Agreement is hereby amended and
restated to read as follows:
"2. Term of Employment.
Executive's term of employment under this Agreement shall commence
on the date hereof and, subject to the terms hereof, shall continue until
Jun 30, 2000, and shall be automatically extended from year to year
thereafter unless either party shall first provide twelve (12) months
prior written notice of termination of such employment. The later of June
30, 2000, or the date of the expiration of the term of employment as
determined above is referred to as the "Expiration Date.""
(b) The introductory clause of Section 3.1 of the Employment
Agreement which reads "Base Salary. For performing the services to be rendered
by Executive hereunder, the Company shall pay Executive a base salary ("Base
Salary") at the rate of $125,000 per year,"
Page 1 of 4
<PAGE>
is hereby amended to read as follows:
"Base Salary. For performing the services to be rendered by Executive
hereunder, the Company shall pay Executive a base salary at the rate
of $175,000 per year, which base salary shall be reviewed yearly by the
special committee of the Zing board responsible for supervision of
management of the Company under the Company's operating agreement in order
to determine to what extent, if any, such base salary should be adjusted.
(The base salary as in effect from time to time is hereinafter referred to
as "Base Salary.")"
(c) The "Base Salary Digit" set forth in Section A.1. of Schedule A
to the Employment Agreement, for purposes of calculating the Executive's
Incentive Bonus, is hereby amended and restated to read as follows:
<TABLE>
<CAPTION>
"Fiscal Year Ended Base Salary Digit
------------------ -----------------
<S> <C>
1992 60%
1993 65%
1994 70%
1995 75%
1996 80%
1997 85%
1998 90%
1999 95%
2000 100%"
</TABLE>
(d) In the event that during the term of this Agreement the Company
acquires another business entity, then the foregoing bonus provisions shall be
renegotiated with the Executive with a view to reflecting equitably his
increased responsibilities, if any, resulting from such acquisition; provided,
however, that in no event shall any post-acquisition bonus be less than a bonus
computed in accordance with the provisions of this Agreement had no such
acquisition occurred.
(e) Executive's Incentive Bonus shall be prorated for any fiscal
year of the Company during which the Executive dies or is no longer capable of
substantially performing each of the duties customarily performed by him
hereunder for a period of 90 days.
(f) Section 3.5 of the Employment Agreement is hereby deleted in
its entirety.
(g) Section 7.4 of the Employment is hereby amended to read in its
entirety as follows:
"7.4 Resignation for Good Reason: Termination without Cause. If Executive
resigns for Good Reason or is discharged without Cause, he shall be
entitled to receive as if this
Page 2 of 4
<PAGE>
Agreement had not been terminated the Base Salary, and continue to receive
the medical insurance then being paid ("Surviving Benefits"), as same is
from time to time changed for all executives participating in such plan,
until such time as he has secured alternate employment or until one year
after the Expiration Date, whichever first occurs, but no other benefits to
which he would otherwise be entitled hereunder during the term hereof."
(h) The first sentence of Section 8.2(a) of the Employment
Agreement is hereby amended to read in its entirety as follows:
"Executive covenants and agrees that he shall not engage in "Competition"
against the Company, Zing, or any of their respective subsidiaries during
the period commencing on the date hereof and ending on (i) if Executive's
term of employment expires as provided in Section 2, one year after the
Expiration Date, (ii) if Executive is terminated or resigns pursuant to
paragraph 7.4 hereof, then the date of such termination or resignation, as
the case may be, or (iii) if Executive is terminated or resigns pursuant to
paragraph 7.3 hereof, then the later to occur of (A) July 1, 2000 and (B)
the two-year anniversary of such termination or resignation. In
consideration of such non-competition agreement, and in the event that
Executive's term of employment expires as provided in clause (i) above,
Executive shall be entitled to continue to receive his Base Salary and
Surviving Benefits for a period of one year after the Expiration Date."
(g) The address of Zeus Components, Inc. in Section 13 of the
Employment Agreement is hereby amended to read as follows:
"Zing Technologies, Inc.
115 Stevens Avenue
Valhalla, NY 10595
(h) All references in the Employment Agreement to "Zeus Components,
Inc." and "Zeus" are hereby amended to read "Zing Technologies, Inc." and
"Zing", respectively.
2. Reaffirmation of Employment Agreement.
Except as provided herein, this Amendment No. 2 shall not
constitute a waiver or modification of any term, provision or condition of the
Employment Agreement as amended by Amendment No. 1 to the Employment Agreement,
and all terms, conditions, agreements, provisions, representations and
warranties contained in the Employment Agreement as amended by Amendment No. 1
to the Employment Agreement shall remain in full force and effect.
3. Governing Law.
The Amendment No. 2 shall be construed, interpreted and governed in
accordance with the laws of the State of New York, without reference to rules
relating to conflicts of law.
Page 3 of 4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2,
effective as of January 2, 1998.
OMNIREL LLC
By:
------------------------------
Name: J. Catrambone
Title: President
/s/ John F. Catrambone
---------------------------------
JOHN F. CATRAMBONE
ZING TECHNOLOGIES, INC.
By: /s/ Robert E. Schneider
------------------------------
Name: Robert E. Schneider
Title: Chairman
Page 4 of 4
OMNIREL, L.L.C.
APPRECIATION RIGHTS PLAN
Section 1. Establishment of Plan. Omnirel L.L.C., a Delaware limited
liability company (the "Company") hereby establishes the Omnirel, L.L.C.
Appreciation Rights Plan (the "Plan") dated and effective as of July 1, 1997
providing for the grant of appreciation units pursuant to the Plan
("Appreciation Units").
Section 2. Purposes of Plan. The purpose of the Plan is to build and
retain a solid long term management team and to retain the best personnel of the
Company by providing incentive and reward to a limited group of key executives,
management employees and personnel to promote the success of the Company and its
100% owner, Zing Technologies, Inc. ("Zing"). The Company expects that it will
benefit from the added flexible incentive which these persons will have in the
welfare of the Company as a result of their benefits under this Plan being
determined by reference to the appreciation in the value of the Membership
Interests.
"Membership Interest" means a single membership interest in the Company
(or, if the Company has been converted (by any means whatsoever) into another
form of entity, the equity interest succeeding such membership interest). For
purposes of this Plan, "Membership Units" means the sum of (a) the number of
actual Membership Interests outstanding from time to time plus (b) the number of
Appreciation Units ("Appreciation Units") awarded or available to be awarded
from time to time pursuant to this Plan.
As of the effective date of this Plan, the total number of Membership
Units deemed to be outstanding equals 1,164,760 of which 1,049,760 are actual
Membership Interests owned by Zing and 115,000 are the number of Appreciation
Units available to be awarded pursuant to this Plan. The total number of
Appreciation Units that may be granted under the Plan may be increased from time
to time by the Committee established pursuant to Section 3 below.
Section 3. Administration. The Plan will be administered by a committee
(the "Committee") appointed by the Board of Directors of Zing and consisting of
three members who shall administer the plan and serve at the pleasure of the
Board of Directors of Zing. Initially, the Committee shall consist of Robert E.
Schrader, Martin S. Fawer and John F. Catrambone. At all times, the President of
the Company shall be a member of the Committee. The Committee will hold its
meetings at such times and places as it may determine and will maintain written
minutes of its meetings. A majority of the members of the Committee will
constitute a quorum at any meeting of the Committee, provided that all members
of the Committee have received reasonable advanced notice of the meeting. All
determinations of the Committee will be made by the vote of a majority of the
committee members who participate in a meeting. The members of the Committee may
participate in a meeting of the Committee in person or by conference telephone
or similar communications equipment by means of which all members can hear each
other. Any
<PAGE>
decision or determination by written consent of all of the members of the
Committee will be as effective as if it had been made by a vote of a majority of
the members who participate in a meeting.
Subject to the provisions of this Plan, the Committee shall have full
power and authority, (a) to designate Participants (as defined below) in the
Plan, which may include employees, officers and consultants of the Company, (b)
to interpret and construe the provisions of the Plan and to supervise the
administration of the Plan, (c) to determine whether a Triggering Event (as
defined in Section 5.5 hereof) has occurred, (d) to determine the amount of
Sales (as defined in Section 5.5 hereof) of the Company, and (e) to take all
actions in connection with or relating to or interpreting the Plan as the
Committee deems to be necessary or appropriate. All decisions, interpretations
and designations of the Committee shall be conclusive and binding on all
persons. No member of the Committee shall be liable for any act or omission in
connection with the administration of the Plan unless it resulted from that
Committee member's willful misconduct.
Section 4. Eligibility. Key employees, officers and consultants to the
Company who are responsible for the management, growth and protection of the
business of the Company and/or its subsidiaries as determined by the Committee
are eligible to be granted awards of Appreciation Units under the Plan. The
persons participating in the Plan are hereinafter referred to individually as a
"Participant" and collectively as the "Participants."
Section 5. Appreciation Units.
5.1 Grant. The Committee, in its sole discretion, shall from time to time
prior to the termination of the Plan determine which Participants, from among
those eligible, shall be granted Appreciation Units under the Plan. As promptly
as practicable after a Participant is granted Appreciation Units, the Committee
shall send the Participant a document executed by a majority of the Committee
and in the form attached hereto (the "Notice of Grant") setting forth the terms
of the grant, including, without limitation, the effective date of grant (the
"Date of Grant"), the number of Appreciation Units granted, and the base price
(the "Base Price") of one Appreciation Unit. The Base Price shall be set by the
Committee in its sole discretion and may vary from Participant to Participant
and need not be related to the Fair Market Value (as defined below) of a
Membership Interest as of the Date of Grant.
5.2 Value. Each Appreciation Unit granted under the Plan shall, subject to
the other provisions of this Plan and the Notice of Grant, constitute a right to
receive a payment equal to the appreciation in (i) the Fair Market Value of one
Membership Unit as determined as of the date of the exercise of such
Appreciation Unit, over (ii) the Base Price of one Appreciation Unit as
specified in the Notice of Grant with respect to the Participant. The
determination of Fair Market Value shall be made in accordance with Section 5.5
hereof.
<PAGE>
5.3 Vesting. A Participant's right to payment for any Appreciation Units
granted to him or her shall, unless otherwise specified by the Committee in the
Notice of Grant, vest in the following percentages of Appreciation Units awarded
to such Participant on the following anniversaries of the Date of Grant of such
Appreciation Units, provided that such Participant is actively employed by the
Company (or consulting with the Company pursuant to a then effective written
consulting agreement) on each such anniversary.
Percentage of Appreciation Anniversary
Units Awarded to Participant of
which are Vested Date of Grant
- ---------------------------- -------------
10% First
25% Second
45% Third
70% Fourth
100% Fifth
5.4 Forfeiture of Appreciation Units. In furtherance of the objectives of
this Plan, each Participant acknowledges that he/she is a key member of the
management group of the Company and that such group is an important factor in
enhancing the value of the Company (and, therefore, the value of the
Appreciation Units issued to the Participants pursuant to this Plan). Each
Participant acknowledges that to engage in a Prohibited Activity (hereinafter
defined) would adversely affect the value of the Company and the value of each
of the Appreciation Units issued to the Participants hereunder. Therefore, if
the Committee determines that a Participant has engaged in a Prohibited
Activity, the Committee may, subject to ratification of such action by a
majority in interest of the other Participants, terminate the rights under this
Plan of the Participant who engaged in such Prohibited Activity and the
Appreciation Units of such Participant shall be forfeited and deemed null and
void and ab initio as if no Appreciation Unit had ever been granted to such
Participant. Nothing herein shall prohibit the Committee from waiving such
termination if the Committee determines such waiver to be appropriate.
"Prohibited Activity" means that (a) a Participant has violated any
confidentiality or non-disclosure agreement or non-competition agreement with
the Company or has otherwise disclosed confidential information of the Company
or Zing, or (b) a Participant's employment/consultancy with the Company is
terminated for Cause (hereinafter defined), or (c) that a Participant has
engaged in a Competitive Activity (hereinafter defined).
"Cause" means: (i) any action by a Participant involving malfeasance or
breach of such Participant's fiduciary duties in connection with such
Participant's employment by the Company; (ii) the conviction of a Participant of
a felony or of a fraud; (iii) substantial and continuing refusal or neglect by a
Participant to perform the duties requested of him or her provided such are
duties
<PAGE>
ordinarily performed by a person employed in a similar capacity (other than as a
result of death, illness or other objective incapacity) which refusal or neglect
continues for a period of ten (10) days after written notice thereof to the
Participant from the Committee or the President of the Company or substantially
reappears after cure; or (iv) termination of a Participant's
employment/consultancy for cause in accordance with provisions of his or her
employment/consultancy agreement, if any, with the Company.
"Competitive Activity" means the Participant enters into a business
relationship with a direct competitor of the Company or entity which intends to
become a direct competitor of the Company, whether as an employee, consultant,
owner, partner, venturer, or agent, whether through stock ownership, investment
of capital, lending of money or property, rendering of services or otherwise
during his/her term of employment/consultancy with the Company or within a
period of six (6) months after termination of such employment/consultancy.
5.5 Computation of Fair Market Value. "Fair Market Value" of a
Membership Unit shall be determined as follows:
(i) if the Membership Interests are Publicly Traded in a market in
which actual transactions are reported, the mean of the high and low prices at
which the Membership Interests are reported to have traded on the relevant date
in all markets on which trading in the Membership Interests is reported, or if
there is no reported sale of the Membership Interests on the relevant date, the
mean of the highest reported bid price and lowest reported asking price for the
Membership Interests on the relevant date,
(ii) if the Membership Interests are Publicly Traded but only in
markets in which there is no reporting of actual transactions, the mean of the
highest reported bid price and lowest reported asked price for the Membership
Interests on the relevant date, or
(iii) if the Membership Interests are not Publicly Traded and the
Appreciation Unit is not being exercised concurrently with a Triggering Event,
the value of each Membership Unit as reasonably determined by the Committee in
good faith, which, in the absence of evidence which in the good faith discretion
of the Committee would indicate a lower Fair Market Value, shall equal the
quotient obtained by dividing the Sales (hereinafter defined) of the Company by
the number of Membership Units deemed to be outstanding on the relevant date.
(iv) if an Appreciation Unit is being exercised concurrently with or
after the occurrence of a Triggering Event, the Fair Market Value of Membership
Units shall be (A) if the Triggering Event resulted from a Sale of Stock or a
Sale of Assets, the aggregate consideration (net of all expenses of the
transaction) paid or distributable to the Membership Interests in connection
with such transaction, divided by the number of Membership Units then deemed
outstanding or (B) if the Triggering Event resulted from a Public Offering, the
public offering
<PAGE>
price net of underwriting commissions and expenses of the offering per
Membership Interest in such Public Offering.
For purposes of measuring the Fair Market Value in connection with a
Triggering Event, the date as of which Fair Market Value shall be determined
shall be the effective date of the transaction giving rise to the Triggering
Event; provided that in the event that a Public Offering causes the Triggering
Event; the effective date of such transaction shall be the date that the Company
and/or the selling security holders (as the case may be) receive the net
proceeds of such Public Offering. In determining Fair Market Value of a
Membership Unit (other than pursuant to the Sales valuation method) an amount
shall be added to each Fair Market Value determination per Membership Unit equal
to the amount obtained by dividing (X) the total amount of all assets (other
than securities of the Company) distributed in respect of Membership Interests
after the Date of Grant and prior to the valuation date by (Y) the total number
of Membership Units deemed outstanding on the valuation date.
"Publicly Traded" means that a class of stock (or equity interest) is
required to be registered under Section 12 of the Securities Exchange Act of
1934, as amended or that stock (or equity interest) of that class has been sold
within the preceding twelve months in an underwritten public offering.
"Public Offering" means the consummation of the sale for at least
$5,000,000 (net to the Company and/or the sellers of the Membership Interests)
of the Membership Interests pursuant to a registration statement declared
effective under the Securities Act of 1933, as amended.
"Sales" shall mean the sales of the Company as reported in Zing's Forms
10-QSB and 10-KSB for the 12-month period ending concurrently with the end of
the fiscal quarter during which the subject date pf exercise occurred but
excluding any sales attributable to acquisitions of other businesses by the
Company (or any of its affiliates) acquired after the date hereof, provided that
the Committee shall be free to provide for a different definition of Sales at
the time of grant of subject Appreciation Units.
"Sale of Assets" means the sale of all or substantially all of the assets
of the Company.
"Sale of Stock" means with respect to the Company or Zing, the sale,
transfer or disposition for value by the equity owners of the subject company or
by the subject company to an unaffiliated third party of an amount of equity
interests such that, after giving effect to such sale, transfer or other
disposition, such that (regardless of the form of the transaction, including
without limitation, a cash-out merger or a merger, recapitalization or
consolidation) Zing ceases to own at least 51% of the Membership Interests of
the Company or Robert E. Schrader and members of his family (or any trusts,
family limited partnership interests, private foundations, or other similar
entities which are for the benefit of or controlled by Robert E. Schrader or
members
<PAGE>
of his family) cease to beneficially own (as such term is defined under Rule
13d-3 promulgated under the Securities Act of 1933, as amended) at least 30% of
the voting stock of Zing.
"Triggering Event" means the first to occur of a Sale of Stock, Public
Offering and Sale of Assets.
Section 6. Exercise; Payments, etc.
6.1 Exercise. Each Participant may exercise any or all vested Appreciation
Units awarded to him or her by causing the Company to redeem the same at any
time from time to time during the Exercise Period.
"Exercise Period" means, subject to Section 5.4, with respect to a vested
Appreciation Unit:
(i) if the Participant is employed by or a consultant to the Company
at the time of exercise, the period (A) commencing on the first to occur of a
Triggering Event or the fifth anniversary of the Date of Grant and (B) ending on
the tenth (10th) anniversary of the Date of Grant;
(ii) if a Participant's employment/consultant's relationship with
the Company has been terminated, regardless of whether a Triggering Event occurs
after such termination, the period commencing with the date of such termination
and ending on the first to occur of (A) the first anniversary of the date of
termination and (B) the tenth (10th) anniversary of the Date of Grant.
Whenever a Participant desires to exercise any or all of his or her vested
Appreciation Units, such Participant shall give the Company at least ten (10)
business days prior written notice during the Exercise Period to the Company of
his or her election to do so, which notice shall (x) be irrevocable (y) specify
the date of exercise and number of vested Appreciation Units being exercised and
(z) be accompanied by a certification that no event has occurred which would
cause the rights of the Participant to be forfeited pursuant to Section 5.4.
6.2 Payment. The amount to which such Participant is entitled by virtue of
such exercise shall be paid, net of taxes, as provided in Section 6.4 below, by
payment of cash in four successive equal quarterly installments, without
interest, with the first such installment to be paid within 60 days after the
end of the fiscal quarter in which the notice of exercise delivered is pursuant
to Section 6.1.
<PAGE>
Exercise notices shall be addressed to Omnirel L.L.C., Leominster, MA
01453, Attn: President and shall be delivered by hand (and receipt thereof
acknowledged by the Company) or by certified mail return receipt requested.
6.3 Withholding and Other Tax Matters. Payments under the Plan shall be
considered ordinary income to the recipient. The Company shall include all
payments made pursuant to the Plan in determining each Participant's
compensation for services rendered and shall reflect such amount in such
Participant's Form W-2. From all such payments, the Company shall withhold all
taxes as required by Federal, state and local income tax laws.
6.4 Source of Payments. All payments under the Plan shall be from the
general assets of the Company, and no special or separate fund is being
established or segregated to assure or otherwise guaranty such payments
hereunder.
Section 7. Beneficiaries. Designation of beneficiaries to receive any
amounts payable under the Plan subsequent to the death of a Participant shall be
made in writing and filed with the Company in such form and manner as the
Committee may from time to time prescribe. Beneficiary designations may be
changed by a Participant or former Participant in the same manner at any time
prior to death, and may thereafter, with respect to the interest of a surviving
beneficiary eligible to receive a payment, be designated or changed by such
surviving beneficiary unless a successor beneficiary to such surviving
beneficiary has been designated by the Participant, former Participant or prior
beneficiary. If a Participant, former Participant or beneficiary eligible to
receive any payment under the Plan dies without a surviving beneficiary having
been designated, or with his or her estate or a trust designated as beneficiary,
his or her Appreciation Units, which shall remain subject to the exercise and
vesting limitations set forth in this Plan, shall be exercisable by the legal
representative of his or her estate, or to the trustee of any such trust.
Section 8. Changes in Capitalization; Adjustments to Measurement Value.
(a) In the event there is a change in the number of Membership Interests
as a result of a distribution, split, reverse split, subdivision,
recapitalization, reorganization, separation or liquidation of the Company, or
merger or consolidation of the Company with or into any partnership,
corporation, or other entity (other than a merger or consolidation in which the
Company is the survivor and which does not result in any reclassification or
change of outstanding Membership Interests), combination or exchange of equity
interests of the Company, the maximum aggregate number of Appreciation Units
which may be granted under the Plan, the number of outstanding Appreciation
Units, the Exercise Price and the determination of Fair Market Value of any
Appreciation Units shall be appropriately adjusted as the Committee may
determine to give effect to such change; provided, however, no adjustment to
outstanding Appreciation Units or the Exercise Price shall be made unless, and
then only to the extent that, such adjustment, together with all respective
prior adjustments which were not made as a result of this proviso, involves a
net change of more than ten percent.
<PAGE>
(b) To the extent practicable, the Company shall give each Participant
holding unexercised Appreciation Units granted pursuant to this Plan at least
thirty (30) days prior written notice of any Triggering Event. Unless the
Company cancels the Appreciation Units as provided in Section 8(c) below, such
Appreciation Units shall continue to be exercisable in accordance with the terms
of this Plan, and, subject to the vesting limitations set forth in Section 5.3
above.
(c) In the event a Triggering Event occurs, the Company, (by action of the
Committee or the Member(s) of the Company), in its sole discretion, may vest all
unvested Appreciation Units issued pursuant to this Plan as of the effective
date of any such Triggering Event in which event the Company shall pay in
respect of each such vested Appreciation Unit the excess of the Fair Market
Value over the applicable Base Price thereof, whether or not exercised, as set
forth in this Plan; whereupon all outstanding Appreciation Units shall be deemed
canceled and of no further force and effect.
(d) In the case of liquidation (other than a liquidation in which the
Company's members receive equity interests of an entity which is the successor
in interest to the Company as a part of a merger, consolidation or
recapitalization) or upon dissolution of the Company (each of which shall not be
deemed a "Triggering Event" under this Plan), each Appreciation Unit outstanding
hereunder shall terminate; provided, however each Participant shall have 30 days
prior written notice of such event, during which time he or she shall have a
right to exercise his or her partly or wholly unexercised Appreciation Units (in
each case, subject to the exercise and vesting limitations set forth in this
Plan).
(e) The Committee shall make all determinations under this Section 8, and
all such determinations, absent bad faith or manifest error, shall be conclusive
and binding.
Section 9. Amendment and Termination of Plan. No further grants of
Appreciation Units may be made after December 31, 2004. Prior to such date, the
Company (by action of the Committee or the Member(s) of the Company), in its
sole discretion and at any time, may terminate the Plan or adopt such written
amendments or modifications of the Plan and any award of Appreciation Units
under the Plan as it may deem advisable, effective at any date the Company (by
action of the Committee or the Member(s) of the Company) determines; provided,
however, that no such termination, amendment or modification shall without the
consent of the Participant, deprive the Participant of any right or benefit to
which he or she has previously been granted under the Plan. After December 31,
2004, payments shall be permitted to be made with respect to Appreciation Units
granted prior to such date.
Section 10. No Rights Created. No employee, consultant or any other person
shall have any claim or right to be granted any Appreciation Units under the
Plan. Nothing herein is intended or shall be interpreted to give any Participant
the right to be employed, reemployed or continued to be employed by (or remain a
consultant of) the Company or Zing or any of its
<PAGE>
subsidiaries or to interfere with or restrict in any way the rights of the
Company or Zing or any of its subsidiaries to discharge any employee/consultant
at any time for any reason whatsoever, with or without Cause. Nothing herein
shall confer any right or benefit or any entitlement to any benefit on any
Participant unless and until a benefit is actually vested pursuant to the Plan.
The adoption and maintenance of the Plan shall not be deemed to constitute a
contract of employment, consultancy or otherwise between the Company or Zing or
any of its subsidiaries and any employee, or to be a consideration for or any
inducement or condition of any employment.
Section 11. No Trust Created. Neither the provisions of the Plan nor any
action taken by the Company or Zing or the Committee pursuant to the provisions
of the Plan shall be deemed to create any trust, express or implied, or any
fiduciary relationship between or among the Company, Zing, the Committee, any
member of the Committee, or any Participant, former Participant or beneficiary
of either.
Section 12. Voting and Distribution Rights. No Participant, former
Participant or beneficiary of either shall be deemed a member of the Company or
have any Membership Interest or any right to receive any Membership Interest (or
interest therein) or any of the rights of a holder of Membership Interests
including, without limitation, to any voting rights, any rights to receive any
distributions in respect of Membership Interests or any right to any other
attribute of equity ownership provided for by applicable state law.
Section 13. Non-Alienation of Benefits. No right or benefits under this
Plan shall be subject to alienation, transfer, sale, assignment, pledge,
encumbrance, charge, security interest, hypothecation, levy, attachment or
execution of a judgment of any kind, otherwise than by will or the laws of
descent and distribution. No right or benefit under the Plan shall in any manner
be liable for or subject to the debts, contract liabilities or torts of any
Participant, former Participant or beneficiary of either.
Section 14. Applicable State Law. All questions pertaining to the Plan
shall be determined under the laws of the State of Delaware without regard to
such State's conflicts of law principles.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Jun-30-1998
<CASH> 1,092,000
<SECURITIES> 19,462,000
<RECEIVABLES> 2,523,000
<ALLOWANCES> (72,000)
<INVENTORY> 5,188,000
<CURRENT-ASSETS> 29,896,000
<PP&E> 11,657,000
<DEPRECIATION> (6,417,000)
<TOTAL-ASSETS> 36,171,000
<CURRENT-LIABILITIES> 14,143,000
<BONDS> 3,013,000
0
0
<COMMON> 30,000
<OTHER-SE> 18,985,000
<TOTAL-LIABILITY-AND-EQUITY> 36,171,000
<SALES> 21,773,000
<TOTAL-REVENUES> 21,773,000
<CGS> 13,744,000
<TOTAL-COSTS> 13,744,000
<OTHER-EXPENSES> 5,284,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,041,000
<INCOME-PRETAX> 1,704,000
<INCOME-TAX> 181,000
<INCOME-CONTINUING> 1,523,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,523,000
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
</TABLE>
