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1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
Commission File Number 33-6859-D
ZEON Corporation
(Exact name of registrant as specified in its charter)
Colorado 84-0827610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1500 Cherry Street Louisville, CO 80027
(Address of principal executive offices) (Zip Code)
(303) 666-9400
(Registrant's telephone number including area code)
(Former name, former address and former fiscal year if changed since last
reported)
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Securities Exchange Act of 1934 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.
[x] Yes [ ] No
Number of shares of Common Stock Outstanding at September 30, 1999
Common Stock, No Par Value 348,665
(Class) (Number of Shares)
Transitional Small Business Disclosure Format (check one):
[ ]Yes [x] No
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ZEON Corporation
INDEX
Page
Part I - Financial Information
Balance Sheet September 30, 1999 and December 31, 1998 3
Statement of Operations - Three Months Ended
September 30, 1999 and 1998 5
Statement of Operations - Nine Months Ended
September 30, 1999 and 1998 6
Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 7
Notes to Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information 13
Signature Page 14
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<TABLE>
ZEON Corporation
BALANCE SHEETS
Sept.30, 1999 December 31, 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 135,434 $ 169,891
Trade Receivables, Net of Allowance
for Doubtful Accounts 413,525 363,608
Inventories 261,427 224,326
Prepaid Expenses and Other 26,732 62,480
TOTAL CURRENT ASSETS 837,118 820,305
Property and Equipment (net of
accumulated depreciation and
amortization) 157,774 173,390
Other 40,108 25,806
TOTAL NON-CURRENT ASSETS 197,882 199,196
TOTAL ASSETS $ 1,035,000 $ 1,019,501
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</TABLE>
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<TABLE>
ZEON Corporation
BALANCE SHEETS (Continued)
Sept.30, 1999 December 31, 1998
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 117,537 $ 95,910
Accrued Expenses 57,383 65,835
Line of Credit 21,700 -0-
Current Portion of Long-Term Debt 6,528 6,528
TOTAL CURRENT LIABILITIES 203,148 168,273
Long-Term Debt (net of current
portion) 20,305 24,596
TOTAL LIABILITIES 223,453 192,869
Shareholders Equity:
Common stock, no par, $.10 stated
value; authorized 100,000,000;
issued 348,665 and 349,137
September 30, 1999 and December 31, 1998 34,862 34,913
Capital in Excess of Stated Value 936,776 938,297
Deficit (160,091) (146,578)
TOTAL SHAREHOLDERS EQUITY 811,547 826,632
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $ 1,035,000 $ 1,019,501
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<TABLE>
ZEON Corporation
STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Net Sales $ 791,243 $ 645,813
Cost of Sales 570,516 436,250
Gross Profit 220,727 209,563
Operating Expenses:
Selling 91,631 83,207
General 115,702 124,385
Research & Development 37,477 36,414
244,810 244,006
Income (Loss) From Operations (24,083) (34,443)
Other Income (Expenses):
Interest Expense (1,673) 1,689
Interest Income 724 (924)
Other Income (Expenses) 8,672 7,684
7,723 6,919
Income Taxes 92
Net(Loss) $(16,452) $(27,524)
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Earning per share:
Net (Loss) $ (.05) $ (.08)
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Weighted Average Common
Shares Outstanding 348,901 349,182
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<TABLE>
ZEON Corporation
STATEMENT OF OPERATIONS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Net Sales $ 2,200,843 $ 2,210,736
Cost of Sales 1,549,416 1,465,506
Gross Profit 651,427 745,230
Operating Expenses:
Selling 245,056 229,990
General 336,515 330,725
Research & Development 109,794 104,392
691,365 665,107
Income (Loss) From Operations (39,938) 80,123
Other Income (Expenses):
Interest Expense (3,207) (1,731)
Interest Income 3,031 2,585
Other Income (Expenses) 27,313 30,066
27,137 30,920
Income Taxes 712 -0-
Net (Loss) Income $ (13,513) $ 111,043
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Earning per share:
Net (Loss) Income $ (.04) $ .32
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Weighted Average Common
Shares Outstanding 348,901 349,182
</TABLE>
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<TABLE>
ZEON Corporation
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
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Cash Flows From Operating Activities:
Net Income (Loss) $ (13,513) $ 111,043
Adjustments to Reconcile Net Income
to Net Cash Provided By (Used
In) Operating Activities:
Depreciation & Amortization 27,136 30,295
Provisions for Losses on
Accounts Receivable 6,750 8,000
Gain from the Sale of Assets -0- (6,000)
Change in Operating Assets & Liabilities:
Decrease (Increase) in Accts Receivable(56,667) (34,584)
Decrease (Increase) in Inventory (37,101) 27,225
Decrease (Increase) in Prepaid Assets 35,748 (13,621)
Increase (Decrease) in Accts Payable (3,994) (28,438)
Increase (Decrease) in Accrued Exps 17,169 (12,503)
TOTAL ADJUSTMENTS: (10,959) (29,626)
Net Cash Provided By (Used In) Operating
Activity: (24,472) 81,417
Cash Flows From Investing Activities:
Proceeds from sale of Fixed Assets 1,300 6,000
Purchase of Capital Assets (27,122) (65,866)
Net Cash Provided by (Used In) Investing
Activities: (25,822) (59,866)
Cash Flows From Financing Activities:
Purchase of Common Stock (1,572) (137)
Debt for Capital Purchases -0- 6,169
Proceeds from Line of Credit 72,000 -0-
Payments on line of Credit (50,300) -0-
Net Increase (Decrease) of
Long-term Debt (4,291) (3,495)
Net Cash Provided By (Used In) Financing
Activities: 15,837 32,537
Net Increase (Decrease) In Cash: (34,457) 54,088
Cash At Beginning of Period: 169,891 181,533
Cash At End of Period: $ 135,434 $ 235,621
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</TABLE>
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ZEON Corporation
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
at standard, which approximates first-in, first-out.
Property, Equipment and Depreciation:
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is calculated using the straight-line method over
the related assets estimated useful lives, which approximates five years.
For income tax reporting purposes, depreciation is calculated using
accelerated methods.
Revenue Recognition:
Sales are recorded in the periods that product is shipped.
Taxes on Income:
The Company follows the provisions of Statement of Financial Accounting
Standards No.109 - Accounting for Income Taxes (SFAS No.109). Under SFAS
No. 109 the Company's policy is to provide deferred income taxes related
primarily to depreciation and other items that result in differences
between the financial reporting and tax basis of assets and liabilities.
Earnings (Loss) Per Share:
Income (loss) per common share is computed on the basis of the weighted
average number of common shares outstanding during each period. The
average number of shares outstanding was 348,901 and 349,182 during each
of the periods ended September 30, 1999 and December 31, 1998,
respectively.
Reclassifications:
Certain reclassifications have been made to the accompanying financial
statements for comparative purposes.
2. Inventories:
Inventories consist of the following:
September 30, December 31,
1999 1998
Finished Goods $ 129,956 $ 60,891
Work-in-process 7,798 19,017
Raw Materials 123,673 144,418
$ 261,427 $ 224,326
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ZEON Corporation
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Notes payable and long-term debt:
The Company has a line-of-credit commitment from its bank for borrowings
of up to $100,000, with interest on any borrowing at 1% above the bank's
reference rate to be paid monthly. The loan commitment, if exercised, is
collateralized by trade receivables, inventories, property and equipment
and intangibles. Under the terms of the agreement, the Company is
subject to certain restrictions, which include, among other things,
restrictions on borrowings and dividend payments. At September 30, 1999
and December 31, 1998, $21,700 and $ -0- amounts were outstanding under
the line of credit agreements, respectively.
A Company vehicle was purchased and financed with a $36,000 loan. Terms
of the debt are five years and an 8 1/4% interest rate.
4. Commitments and related party transactions:
In December 1992, the Company entered into an operating lease to
consolidate its primary manufacturing and office facilities. The property
is leased through January 2003 from a partnership in which T.Bryan Alu,
President and Chief Executive Officer of the Company, is a partner. The
lease contains an option to renew for two additional five-year periods and
requires monthly payments of approximately $8,000 with the Company also
responsible for maintenance and operating costs.
The Company has an operating lease agreement with an unrelated party for
additional manufacturing facilities which requires monthly payments of
approximately $6,100 through December 31, 2000 including renewal options.
The Company entered into a sublease agreement for this space with an
unrelated party through December 31, 2000 for an initial monthly rent of
$9,700 and increasing at 5% per year.
On April 29, 1995, The board of directors of the Company adopted the ZEON
Corporation Stock Option Plan (the "Plan"). The Plan was approved by the
stockholders at the Company's annual shareholders' meeting held on June 21,
1995. The Plan allows the board of directors of the Company to grant
both incentive stock options and options which do not qualify as
incentive stock options to employees and directors of the Company. Thirty-
five thousand (35,000) shares of the Company's common stock are available
for the grant of options pursuant to the Plan. The exercise price for each
incentive stock option granted shall be no less than 100% of the fair
market value (110% of the fair market value for employees owning more
than 10% of the Company's common stock) of the common stock on the day
the option is granted. The exercise price for each non-qualified stock
option granted under the Plan will be the price established by the board
of directors which normally is expected to be no less than 100% of the fair
market value on the date the option is granted. A total of 27,000 non-
qualified options have been granted under the plan for officers and
employees of the Company, which vest ratably over six years based on the
Company achieving certain predetermined financial targets each fiscal year
end. These options were granted on February 27, 1998,at an exercise
price of $2.00 per share. In February 1999, 9,000 of these options had
been terminated because certain predetermined financial targets were not
met.
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ZEON Corporation
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro forma information regarding net income (loss)
and net earnings (loss) per share as if compensation costs for the
Company's stock option plans and other stock awards had been determined
in accordance with fair value based method prescribed in SFAS No. 123.
The Company estimates the fair value of each stock award by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998: no expected dividend yields for
all years; expected volatility of 1.0%; risk-free interest rates of 5.0%;
and expected lives of three years. The fair value of the options granted
during the year ended December 31, 1998 was approximately $.28 per
option.
Effective July 1991 the Company adopted a directors' compensation plan
to allow for the compensation of directors with restricted common stock of
the Company in exchange for services provided. Shares issued are valued
based upon the market value of the stock as determined by the Company. As
of September 30, 1999, no shares had been issued under this plan.
5. Income Taxes:
Final payment of income taxes for 1998 was $10,200 versus the $6,200
provided in the December 31, 1998 financials. The difference of $4,000
was recorded in 1999 as a prior year adjustment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Factors That May Affect Operating Results
The statements contained in this Form 10-QSB that are not purely historical
are forward looking statements within the meaning of federal securities laws,
including statements regarding the Company's expectations, hopes, intentions
or strategies regarding the future. All forward looking statements included
in this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward
looking statements. It is important to note that the Company's actual results
could differ materially from those in such forward-looking statements.
Financial Condition:
The liquidity of ZEON Corporation remains adequate, with a current ratio of
4.1 to 1 as of September 30, 1999, and 4.9 to 1 as of December 31, 1998.
While 1999's first nine months' sales approximated sales for same period last
year, collection experiences and inventory turnover declined slightly.
Inventory levels have increased by $37,000 to address the Company's growing
backlog. Capital expenditures were $26,000 for manufacturing equipment.
Liquidity from on-going operations and the Company's line of credit is
considered adequate to meet the Company's immediate cash requirements.
Results of Operations:
Results of operations for the Three months ending September 30, 1999 and 1998
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
Sales: $ 791,243 $ 645,813
Income: (16,452) (27,524)
Orders received for the quarter were $764,000 or $137,000 greater than third
quarter 1998. Although sales increased 22% over 1998's third quarter, gross
profit percentage fell 4.5 points to 27.9%. Significant product mix (2.9) and
higher production costs (2.6) accounted for the gross profit decrease.
Operating expenses increased by $1,000 over last year's third quarter.
Selling Expense increased from $83,000 to $91,000 from 1998's third quarter to
1999's third quarter. All of this increase resulted from additional
convention and related travel expenses.
Current third quarter General and Administrative Expenses dropped by $8,000 to
$116,000 over same period last year. The decrease was salary office staff
reduction.
Research and Development Expense increase approximately $1,000 to
approximately $37,000, primarily as a result of salary adjustments.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Results of operations for the Nine months ending September 30, 1999 and 1998
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
Sales: $2,200,843 $2,210,736
Income: (13,513) 111,043
Sales for 1999 first nine months decreased by $10,000 from 1998's same period.
Despite the Company having a soft year-end backlog for 1998, orders for the
first nine months of 1999 were $2,2383,000 or 14% over 1998's first nine
months. However, turnover in production assembly and capacity issues hampered
shipments in the 1999's first half. Sales are recognized at the time of
shipment. Shipments were hampered primarily due to the attrition of
production employees and the resulting loss of efficiency while training
replacement personnel. Production capacities are expected to improve in the
beginning of the fourth quarter of 1999, as a result of improved efficiencies
of new production employees and the use of contract production sources.
Gross profit margin, as a percentage of sales in the first nine months of
1999, was 30% or down 4.1 points from 1998's first nine months. This point
drop was due to lower volume/product mix (1.7 points), additional
manufacturing manager/staff payroll (1.8), and significant non-recurring
freight(.6). Gross profit fell $94,000. Increased production capacities and
absence of non-recurring significant freight expense are expected to have a
positive impact on gross profit margins beginning in the fourth quarter. While
the product mix is trending toward higher volume/lower margin accounts, the
gross profit percentageis anticipated to decline; however, the overall gross
margin dollars are expected to improve.
Selling expenses increased by 6.5 percent over first nine months of 1998. The
$15,000 increase resulted from convention and related travel expenses.
General and Administrative expenses increased by $16,000 over same period last
year. The additional expenses were salaries related to reinstatement of full
time Controller and the hiring of a manufacturing manager mid-1998. The
increase was partially offset by reduced office staff. (In the first half of
1998, the Controller's salary was partially allocated to production costs.)
Research and development increased by $5,000 primarily in salaries and
prototype supplies.
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PART II-OTHER INFORMATION
Item 4. Submission of matters to a vote of Security-Holders
The Company had its annual shareholders' meeting on July 30, 1999. The
following sets forth the matters acted upon at such meeting and the voting
results with respect to each matter:
For Withheld
1.) Election of Directors
T. Bryan Alu 284,285 77
Alan M. Bloom 284,285 77
Jay R. Beyer 284,285 77
Item 5. Other information
The Company recently was named as the national supplier of neon and other
related illuminated signs for Heineken USA Inc. by the Ryan Partnership.
The Ryan Partnership designs and coordinates the purchasing of Heineken's
point of purchase merchandise program. The exact annual value of the
Heineken account is contractually confidential and subject to periodic
adjustments and may be terminated by either party given short-term notice.
However, historical annual volumes exceed $1,000,000- potentially
making this the Company's largest account. Shipments to Heineken's
distributors will begin in late 1999 or early 2000.
Item 6. Exhibits and Reports on Form 8-K
Part A. None
Part B. Form 8-K dated August 19,1999 was filed noting a change in
registrant's certifying accountant firm. BDO Seidman, the
former certifying accountant firm, was notified on August 19,
1999 that their services were no longer required.
Another form 8-K dated August 19, 1999 was filed noting the
engagement of Hein + Associates to perform the registrant's
audit services.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 15, 1999 /s/ T. Bryan Alu
T. Bryan Alu
President
/s/ R.G.Routt
R. G. Routt
Corporate Controller
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<ARTICLE> 5
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ZEON CORPORATION'S FIANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 135,434
<SECURITIES> 0
<RECEIVABLES> 437,504
<ALLOWANCES> (23,979)
<INVENTORY> 261,427
<CURRENT-ASSETS> 837,118
<PP&E> 397,257
<DEPRECIATION> 239,483
<TOTAL-ASSETS> 1,035,000
<CURRENT-LIABILITIES> 203,148
<BONDS> 20,305
0
0
<COMMON> 34,8626
<OTHER-SE> 776,685
<TOTAL-LIABILITY-AND-EQUITY> 1,035,000
<SALES> 791,243
<TOTAL-REVENUES> 791,243
<CGS> 570,516
<TOTAL-COSTS> 244,810
<OTHER-EXPENSES> (7,723)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,673
<INCOME-PRETAX> (13,360)
<INCOME-TAX> 92
<INCOME-CONTINUING> (13,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,360)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
