U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998
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 No.)
1500 Cherry Street, Louisville, Colorado 80027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 666-9400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Check whether the issuer: (1) has filed all reports required to be filed by
Section 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
Check if 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]
The issuer's revenues for its most recent fiscal year ended December 31, 1998
were $2,865,800.
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the average of bid and ask price on March 15, 1999) was
approximately $960,100.
As of March 15, 1999, the number of shares outstanding of the registrant's
common stock, no par value, $.10 stated value was 349,137.
Transitional Small Business Disclosure Format:
[] Yes [X] No
Documents Incorporated By Reference
None.
<PAGE>
PART I
Item 1. Business
Introduction: The statements contained in this Form 10-KSB 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.
ZEON Corporation (formerly Data Display Corporation) was incorporated under
the laws of the State of Colorado on September 19, 1980.
The Company operates in a single industry segment: sign manufacturing.
The Company is engaged entirely in the manufacture and sale of neon and
fluorescent backlit illuminated signs and related products. In May 1995,
the Company sold its Electronic Display Division to Colorado Time System,
Inc., a Colorado Company in the electronic display business. The Company
recognized an one time gain on the sale of this Division's assets of
approximately $44,000 in 1995.
The Company entered into the neon glass tubebending business in July 1988 by
acquiring the assets of a local neon business. The Company converted this
business from a wholesale operation (primarily forming neon tubes for local
sign companies) to a volume production shop, manufacturing finished neon
window and interior signs for national accounts. The Company operates its
neon business as Neon Glassworks Division.
At the June 1994 stockholders' meeting, a 1-for-100 reverse stock split was
approved. The reverse stock split changed the outstanding stock shares from
35,334,711 to 353,384.
As of December 31, 1998, the Company had 27 full-time employees.
The following sets forth sales revenue from unaffiliated customers:
<TABLE>
<CAPTION>
Neon Sales
<S> <C> <C>
1998 $2,865,800
1997 2,674,300
1996 2,152,700
</TABLE>
<PAGE>
Manufacturing. The Company manufactures all of its neon window signs at its
facilities in Louisville, Colorado.
The neon signs are composed of phosphor-coated hollow glass tubes that are
heated to a molten state and formed into letters or designs. The formed
tubes are then filled with neon or argon gas to achieve the desired colors.
The glass is then mounted onto a thermal-formed plastic backpanel and
illuminated by a high-voltage transformer that is attached to the back of
the sign. The materials and components are all readily available from
multiple sources.
Markets. The Neon Glassworks Division markets primarily to the national
chain/franchise market for point-of-purchase products and logo signs.
The custom signs are used by our customers as product/service promotion
and customer name/brand recognition. Neon Glassworks also markets
"generic" signs, such as OPEN signs, in various markets.
Distribution. The neon products are marketed by the Company's in-house staff
through direct contact and presence at selected trade shows. Dealers are
being used as a distribution channel for the Zeon Neo-grid product line,
described below under "Developments".
Competition. The industry in which the Company competes is highly
fragmented,very competitive and primarily characterized in all market
segments with small, privately held companies, of a comparable size and
financial strength as ZEON Corporation. The competition is primarily based
on product quality, service and price.
Developments. The Company has been broadening its product line of
illuminated signs to address new markets. The Zeon Neo-grid introduced in
1994 is a changeable neon sign that lets the user use different message faces
to be placed in front of and backlit by the grid. A compliment to the Zeon
Neo-grid was developed in 1995, using fluorescent tubes instead of neon
tubes. A unique process of combining the fluorescent tubes with specular
reflectors enables this new illuminated sign to successfully emulate the
brightness of neon while offering the cost advantages and visual flexibility
of a traditional lightbox. A patent on this new illuminated sign has been
applied for. The commercial introduction of this new product began in the
first quarter of 1996. Development continued in 1997 on the redesign of the
Company's neon signs to meet or exceed UL requirements. While the overall
industry uses "UL listed" components, ZEON Corporation offers complete UL
signs in 95% of its product offerings.
In 1998, the Company developed the "edge light" product line. This product
line concentrates an illumination source on an etched plexiglass face
allowing the customer to present a streamline and effective message.
The Company spent $137,700 and $120,000 for 1998 and 1997, respectively, for
research and product design development.
<PAGE>
Product Warranty. The components of the Company's products are warranted by
the Company as to material and workmanship for a period of up to two years.
This warranty is similar in duration to the warranty provided by the
Company's competitors. To date, the Company has had no material costs
associated with warranty claims.
Item 2. Properties.
Effective December 1992, the Company leased 15,600 square feet, located at
1500 Cherry Street in Louisville, Colorado, for its combined manufacturing
and office operations at a monthly rental of approximately $8,000. The
lease runs through January 1, 2003. The facility is leased from a
partnership in which T.Bryan Alu, President, Chief Executive Officer and a
principal shareholder of the Company, is a 50% partner. The Company feels
that this office/manufacturing space is adequate for its current operations.
Effective March 1992, the Company leased approximately 17,000 square feet as
a production facility in Boulder, Colorado at a monthly rate of approximately
$6,100 from an unrelated party. The original term of this lease expired in
February 1996, with the option for five one-year renewals. To date, all of
the renewal options have been exercised. The Company vacated this facility
in December 1992, and subleased the entire space for a monthly rate of
$9,700. The sublease expires on December 31, 2000. A real estate commission
for the long-term sublease amounted to $52,000 that was partially financed
by a note held by the real estate company. This note was paid off in 1996.
Item 3. Legal Proceedings.
There are no legal proceedings pending against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no items submitted to a vote of security holders during the last
quarter of the Company's fiscal year ended December 31, 1998.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The common stock of the Company is traded in the over-the-counter market.
SEC regulations regulate the solicitation procedures for "penny stocks" and
have severely curtailed the trading and liquidity of ZEON Corporation
shares. In addition, the National Association of Security Dealers increased
the requirements for a NASDAQ listing which would require ZEON Corporation
to roughly quadruple in size before qualifying. During 1998, the Company had
as many as five market makers, each quoting different bid and ask prices.
The following over-the-counter bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission, and may not
necessarily represent actual transactions. Due to the lack of trading
activity in ZEON Corporation stock, the quotes listed below may not reflect
accurate market values. The following table sets forth the high and low bid
prices for the periods indicated based on a sampling of quotes from various
market makers:
<TABLE>
<CAPTION>
<S> <C> <C>
High Low
Fourth quarter ended December 31, 1998 $2.00 $2.00
Third quarter ended September 30, 1998 2.00 2.00
Second quarter ended June 30, 1998 2.00 2.00
First quarter ended March 31, 1998 2.50 2.00
Fourth quarter ended December 31, 1997 3.00 .50
Third quarter ended September 30, 1997 3.50 .50
Second quarter ended June 30, 1997 4.00 1.00
First quarter ended March 31, 1997 4.00 1.00
</TABLE>
On March 15, 1999, the closing bid and ask price of common stock of the
Company was $2.75.
At March 15, 1999, there are approximately 500 recordholders of the Company's
common stock.
Item 6. 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-KSB 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.
<PAGE>
Financial Condition
The liquidity of ZEON Corporation continues to remain adequate to meet the
Company's obligations with a current ratio of 5.0 to 1 at December 31, 1998,
compared to a 3.6 to 1 at December 31, 1997.
The cash decrease for 1998 was $11,600 whereas operations provided sufficient
cash to cover operational and capital expenditures. Capital expenditures for
1998 were $ 88,900 for factory equipment, which will add capacity and better
quality. Capital expenditures for 1999 are anticipated to be approximately
$75,000 for facility improvements, production equipment and tooling. The
Company believes that during the next twelve months, cash generated by
operating activities, cash and cash equivalents currently on deposit of
$170,000 and the Company's $100,000 bank line of credit commitment will be
sufficient for its capital and operating needs.
Results of Operations:
Results of Operations 1998 Compared to 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
Sales $2,865,800 $2,674,300
Gross Profit Margin 34% 36%
Net Income $ 115,500 $ 180,000
</TABLE>
Neon's 1998 sales rose 7% over 1997, due mainly to an increase in 1998
franchise orders. The gross profit decline of 2% was primarily product mix
(1%) and added production management (1%).
Operating Expenses increased from 1997's $803,000 to 1998's $900,800, or 12%.
General and Administrative expenses rose by $73,500 from 1997's $392,000 to
1998's $465,500. Increased salaries, manufacturing manager relocation
expenses, bad debt, insurance and other general expenses contributed to such
increase.
Selling Expenses increased by $6,300 due to franchise promotional and
convention expenses.
Research and Development Expense increased by $18,000 over prior year levels
due mainly to the increased payroll costs resulting from bringing marketing
brochure design inhouse.
Other income noted an increase in $11,500, which resulted from additional
rental income on subleased property and sale of used factory equipment. The
Company also provided for $6,200 in income taxes.
<PAGE>
Recent Accounting Pronouncements
The FASB has recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 established standards for
recognizing all derivative instruments including those for hedging activities
as either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. SFAS No. 133 is effective for
fiscal years beginning after June 30, 1999. Management believes the adoption
of this statement will have no impact on the Company's consolidated financial
statements.
Income taxes
A valuation allowance equal to the net deferred tax asset recognized was
recorded as management is unable to determine if it is more likely than not
that the deferred tax asset will be realized. See Note 4 to the financial
statements.
<PAGE>
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
the existing computer systems as the Year 2000 approaches. The "Year 2000"
problem is concerned with whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. The Year 2000 problem is pervasive and complex as
the computer operation of virtually every company will be affected in some
way.
The Company has reviewed its business, accounting and other software systems
relative to their compliance with potential year 2000 issues. The Company
believes that it has identified substantially all of the material software
programs, which require modification in order to become year 2000 compliant,
and has purchased compliant replacement software for a total cost of $10,000.
However, there can be no assurance the Year 2000 problems will not occur with
respect to the Company's computer systems. Maintenance or modification will
be expensed as incurred, while the costs of new software was capitalized and
will be amortized over the software's useful life.
The Company has not investigated whether its vendors or suppliers are year
2000 compliant since the Company can obtain all necessary supplies and raw
material inventories from multiple sources. The Year 2000 problem may impact
other entities with which the Company transacts business, and the Company
cannot predict the effect of the Year 2000 problem on such entities or the
resulting effect on the Company. If the Company encounters material problems
with a vendor, the Company plans to obtain the affected supplies from other
vendors.
ITEM 7. Financial Statements.
See the Financial Statements of ZEON Corporation included herein and
referenced on the Index to Financial Statements set forth in Item 13 of this
Form 10-KSB.
ITEM 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
<PAGE>
PART III
Item 9. Directors and Executive Officers; Compliance with Section 16(a) of
the Exchange Act.
Name Age Position (Director Since)
T. Bryan Alu 48 President, CEO and Chairman of the Board (1980)
Alan M. Bloom 48 Executive VP, VP of Marketing, Secretary/Treasurer
and Director (1980)
Ruel G. Routt 49 Corporate Controller
Jay R. Beye 37 Director (1996)
T. Bryan Alu has been President, Chief Executive Officer and Chairman of the
Board of Directors of the Company since its organization in 1980. He is
responsible for the general management of the Company, as well as devoting
time to handling sales and marketing, as related to specific key accounts.
Alan M. Bloom has been Vice President of Marketing, Executive Vice President
and a Director on the Board since the Company's organization in 1980. Mr.
Bloom has been Secretary of the Company since February 28, 1985 and Treasurer
since April 22, 1986.
Ruel G. (Jerry) Routt joined ZEON Corporation in December 1992. Prior to
joining the Company, Mr. Routt held various controller positions with
Honeywell, Inc., Square D Company and Fibrotek, Inc. Mr. Routt is also a
certified public accountant having worked with Coopers and Lybrand. Mr.
Routt is responsible for the financial and administrative controls and
providing financial counsel to the Company and its management.
Mr. Jay R. Beyer is an independent patent agent in Boulder, Colorado
practicing in the areas of patent preparation and prosecution in the
mechanical, electrical and software fields of technology. From 1992 to 1994,
he operated a company he founded which introduced and marketed a patented
portable trade show showcase of his own invention. From 1984 to 1988, Mr.
Beyer also held various managerial positions with ZEON Corporation (formerly
Data Display Corporation).
Since the Company Stock is not registered under section 12 of the Exchange
Act, the Company is not subject to section 16a. of such Exchange Act.
<PAGE>
ITEM 10. Executive Compensation
The following table sets forth a summary of all compensation for each of the
last three calendar years with respect to the Company's Chief Executive
Officer. All such compensation was in the form of cash. No other officer of
the Company has earned an annual compensation greater than $100,000 annually
for any of the periods depicted. The Company has no long-term compensation
plans.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Summary Compensation Table
Name and Principal Position Year Salary Bonus
T. Bryan Alu, 1998 $111,500 $ 3,600
President, C.E.O. 1997 99,500 18,000
1996 93,800 -0-
</TABLE>
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 shareholder's 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. As of the date of filing this 10-KSB, a total of 27,000
non-qualified options have been granted under the plan for officers and
employees of the Company. These options were granted on February 27, 1998,
at an exercise price of $2.00 per share. The fair market of the 27,000
options at the date of grant is valued at $7,560. As of February 1999, 9,000
options terminated without being exercised, leaving 18,000 outstanding under
the plan's terms.
Effective July 1991 the Company adopted a directors' compensation plan
whereby directors can be compensated 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
December 31, 1998, no shares have been issued under this plan.
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following tables set forth certain information as of March 15, 1999, with
respect to the beneficial ownership of the Company's common stock by each
person known by the Company to be the beneficial owner of more than 5 percent
of its outstanding common stock, by each director and executive officer and
by the directors and executive officers of the Company as a group. Unless
otherwise indicated, all shareholders have sole voting and investment power
with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
<S> <C> <C>
No. Of Shares
Beneficially Percentage
Name and Address Owned Of Class
T. Bryan Alu 175,669 (1) 50.3%
737 8th Street
Boulder, CO 80302
Alan M. Bloom 21,808 (2) 6.2%
6028 Flagstaff Road
Boulder, CO 80302
All Directors and 197,477 56.5%
Executive Officers
as a Group (2)
(1) The amounts and percentages of shares held by T. Bryan Alu excludes 500
shares held by Dana and Tom Kennedy, his sister and brother-in-law, as
separate property over which T. Bryan Alu exercises no control and has no
beneficial ownership.
(2) The amounts and percentages of shares held by Alan M. Bloom excludes 399
shares held by Hildred Bloom, his mother, and 80 shares held by Andrew Bloom,
his brother, as separate property over which Alan M. Bloom exercises no
control and has no beneficial ownership.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Effective December 1992, the Company signed a 10-year lease with renewal
options for approximately 15,600 square feet located at 1500 Cherry Street,
Louisville, Colorado. The lease commenced on December 15, 1992 and ends
January 1, 2003. The annual rent is $95,600 plus maintenance and operating
costs. This building is owned by a partnership in which T.Bryan Alu, the
President, Chief Executive Officer and a principal shareholder of the
Company, is a 50% partner. The annual rent was confirmed as reasonable by an
independent appraisal.
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) or (2) Index to Financial Statements
The financial statements included in this Item are indexed
on page F-1, "Index to Financial Statements".
(a) (3) [Numbered in accordance with Item 601 of Regulation S-B]
(3) Articles of incorporation and by-laws (Incorporated by reference to
Exhibit 3.1 and 3.2 to Form S-18 Registration which became effective
September 10, 1986: file #33-6859-D).
- Amendments to articles of incorporation (Incorporated by reference to
Exhibit A to June 30, 1988 form 10-Q).
- Amendments to articles of incorporation (Incorporated by reference to
Exhibit A to December 31, 1994 form 10-KSB).
(99) Stock Option Plan (Incorporated by reference to Exhibit B to December
31, 1994 form 10-KSB).
(b) Reports on form 8-K.
There were no reports on Form 8-K filed for the quarter ended December
31, 1998.
(c) Financial data schedule 27.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZEON CORPORATION
BY: /s/ T. Bryan Alu
T. Bryan Alu
Chairman of the Board, Director, Chief Executive Officer and President
DATE: March 29, 1999
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
BY: /s/ T. Bryan Alu
T. Bryan Alu
Chairman of the Board, Director, Chief Executive Officer and President
DATE: March 29, 1999
BY: /s/ Alan M. Bloom
Alan M. Bloom
Treasurer and Director
DATE: March 29, 1999
BY: /s/ Ruel G. Routt
Ruel G. Routt
Corporate Controller
DATE: March 29, 1999
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 1998 F-3 - F-4
Statements of Income for the years ended
December 31, 1998 and 1997 F-5
Statements of Shareholders' Equity for the years ended
December 31, 1998 and 1997 F-6
Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-7
Summary of Accounting Policies F-8 - F-10
Notes to Financial Statements F-11 - F-15
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors
ZEON Corporation
Louisville, Colorado
We have audited the accompanying balance sheet of ZEON Corporation as of
December 31, 1998, and the related statements of income, shareholders'
equity, and cash flows for each of the two years in the period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of ZEON
Corporation at December 31, 1998, and the results of its operations
and its cash flows for each of the two years in the period then ended,
in conformity with generally accepted accounting principles.
/S/ BDO Seidman, LLP
Denver, Colorado
February 15, 1999
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
<S> <C>
December 31, 1998
Assets (Note 2)
Current:
Cash and cash equivalents $ 169,891
Trade receivables, less allowance of
$16,000 for possible losses 363,608
Inventories (Note 1) 224,326
Prepaid expenses and other 62,480
Total current assets 820,305
Property and equipment:
Machinery and equipment 262,579
Leasehold improvements 59,280
Vehicles 41,168
Furniture and fixtures 8,408
371,435
Less accumulated depreciation and amortization 198,045
Net property and equipment 173,390
Other assets 25,806
$1,019,501
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet
<S> <C>
December 31, 1998
Liabilities and Shareholders' Equity
Current:
Accounts payable $ 95,910
Accrued expenses:
Payroll and payroll 8,111
Income taxes 6,200
Other 21,876
Customer deposits 25,621
Current maturities of long-term debt (Note 5) 6,528
Total current liabilities 164,246
Long-term debt, less current maturities (Note 5) 24,596
Total liabilities 188,842
Commitments (Note 2)
Shareholders' equity (Note 3):
Common stock, no par ($.10 stated value);
shares authorized, 100,000,000;
outstanding, 349,137 34,913
Additional paid-in capita 938,297
Accumulated deficit (142,551)
Total shareholders' equity 830,659
$1,019,501
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
<S> <C> <C>
Years Ended December 31, 1998 1997
Net sales $2,865,754 $2,674,310
Cost of sales 1,884,313 1,720,760
Gross profit on sales 981,441 953,550
Operating expenses:
General and administrative 465,513 391,953
Selling 297,523 291,220
Research and development 137,739 119,869
Total operating expenses 900,775 803,042
Income from operations 80,666 150,508
Other income:
Interest, net 685 2,920
Miscellaneous 40,325 26,612
Total other income 41,010 29,532
Income before income taxes 121,676 180,040
Taxes on income (Note 4) 6,200 -
Net income $ 115,476 $180,040
Net income per share of
common stock:
Basic $ .33 $ .51
Diluted $ .33 $ .51
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Shareholder's Equity
<S> <C> <C> <C> <C> <C>
Common Stock Additional Total Share
---------------- Paid-In Accumulated holders
Years Ended December 31, Shares Amount Capital Deficit Equity
1998 and 1997
Balance, Jan 1, 1997 350,205 $ 35,020 $ 939,338 $(438,067) $536,291
Acquisition and (1,000) (100) (912) - (1,012)
retirement of stock
Net income - - - 180,040 180,040
Balance, Dec 31, 1997 349,205 34,920 938,426 (258,027) 715,319
Acquisition and (68) (7) (129) - (136)
retirement of stock
Net income - - - 115,476 115,476
Balance, Dec 31, 1998 349,137 $34,913 $938,297 $(142,551) $830,659
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
<S> <C> <C>
Years Ended December 31, 1998 1997
Operating activities:
Net income $ 115,476 $ 180,040
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 47,985 33,756
Provisions for losses on trade receivables 23,500 6,000
Changes in operating assets and liabilities:
Trade receivables (66,208) (92,787)
Inventories 64,287 (88,328)
Prepaid expenses and other (25,816) 475
Accounts payable (107,420) 44,590
Accrued expenses (26,062) 2,456
Customer deposits 20,565 (6,497)
Net cash provided by operating activities 46,307 79,705
Investing activities:
Proceeds from note receivable - 9,347
Purchase of property and equipment (88,937) (40,285)
Net cash used in investing activities (88,937) (30,938)
Financing activities:
Proceeds from long-term debt 36,169 -
Principal payments on long-term debt (5,045) -
Acquisition and retirement of common stock (136) (1,012)
Net cash provided by (used in) financing activities 30,988 (1,012)
Net increase (decrease) in cash and cash equivalents (11,642) 47,755
Cash and cash equivalents, beginning of year 181,533 133,778
Cash and cash equivalents, end of year $ 169,891 $ 181,533
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
Summary of Accounting Policies
Organization ZEON Corporation (the "Company") is engaged in the business of
developing, manufacturing and marketing neon signs to
customers located throughout the United States and Europe.
Use of The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Financial Financial instruments which potentially subject the Company to
Instruments concentrations of credit risk consist primarily of cash,
and Credit temporary cash investments and trade receivables. The Company
Risk invests temporary cash in demand deposits and interest
Concentration bearing money market accounts with quality financial
institutions. Such deposit accounts, at times, may exceed
federal insured limits. The Company has not experienced any
losses in such accounts. Concentrations of credit risk with
respect to trade receivables are limited due to the large
number of customers, generally short payment terms, and their
dispersion across geographic areas. As of December 31,
1998, three customers made up 53% of accounts receivable.
Approximately 53% of the Company's total revenue for the year
ended December 31, 1998 was derived from the the independently
owned and operated franchises of four franchise organizations.
Inventories Inventories are valued at the lower of cost or market. Cost is
determined at standard, which approximates first-in, first-out.
Property, Property and equipment are stated at cost. For financial
Equipment and reporting purposes, depreciation is calculated using the
Depreciation straight-line method over the related assets' estimated useful
lives, which approximate five years. For income tax reporting
purposes, depreciation is calculated using accelerated
methods.
Revenue
Recognition Sales are recorded in the periods in which products are shipped.
<PAGE>
Taxes on The Company follows the provisions of Statement of Financial
Income Accounting Standards ("SFAS") No. 109, "Accounting For Income
Taxes". Under SFAS No. 109, the Company's policy is to provide
deferred income taxes on differences between the financial
reporting and tax basis of assets and liabilities. A valuation
allowance is provided to reduce the deferred tax asset to its
estimated realizable amount.
Cash and The Company considers cash and all highly liquid investments
Cash purchased with an original maturity of three months or less to
Equivalents be cash equivalents. For the years ended December 31, 1998
and 1997, cash paid for interest approximated interest expense.
Long-Lived The Company applies SFAS No. 121, "Accounting for the Impairment
Assets of Long-Lived Assets". Under SFAS No. 121, long-lived assets
and certain identifiable intangibles are reported at the lower
of the carrying amount or their estimated recoverable amounts.
Stock The Company applies APB Opinion 25, "Accounting for Stock Issued
Option to Employees", and related interpretations in accounting for all
Plans stock option plans. Under APB Opinion 25, no compensation cost
has been recognized for stock options issued to employees as the
exercise price of the Company's stock options granted equals or
exceeds the market price of the underlying common stock on the
date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation",
requires the Company to provide pro forma information regarding
net income as if compensation cost for the Company's stock
options plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the
required pro forma information, the Company estimates the fair
value of each stock option at the grant date by using the
Black-Scholes option-pricing model.
Income The Company applies SFAS No. 128, "Earnings Per Share". SFAS No.
Per Share 128 provides for the calculation of "Basic" and "Diluted" income
per share. Basic income per share includes no dilution and is
computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the
period. The weighted average number of shares outstanding was
349,171 and 349,372 during the years ended December 31, 1998 and
1997. Diluted income per share reflects the potential dilution
of securities that could share in the earnings of an entity.
<PAGE>
At December 31, 1998, 27,000 outstanding options were not
included in diluted income per share because the exercise
contingency had not been met. See Note 3 for further discussion.
There were no potentially dilutive securities outstanding at
December 31, 1997.
Compre- During 1998, the Company adopted SFAS No. 130, "Reporting
hensive Comprehensive Income". The implementation of SFAS No. 130
Income required comparative information for earlier years to be restated.
Comprehensive income is comprised of net income and all changes
to shareholders' equity, except those due to investments by
shareholders, changes in paid-in capital and distributions to
shareholders. The adoption of this statement had no material
impact on the Company's financial statements.
Accounting The FASB has recently issued SFAS No. 133, "Accounting for
Pronoun- Derivative Instruments and Hedging Activities". SFAS No. 133
cements established standards for recognizing all derivative instruments
including those for hedging activities as either assets or
liabilities in the statement of financial position and measuring
those instruments at fair value. SFAS No. 133 is effective
for fiscal years beginning after June 30, 1999. Management
believes the adoption of this statement will have no impact on
the Company's consolidated financial statements.
<PAGE>
1. Inventories Inventories are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1998
Finished goods $ 60,891
Work in process 19,017
Raw materials 144,418
$224,326
</TABLE>
2.Commitments The Company has a line-of-credit from its bank for borrowings
and Related of up to $100,000, with interest on any borrowing at 1% above
Party the bank's reference rate, to be paid monthly. The line-of-
Transactions credit is collateralized by trade receivables, inventories,
property and equipment and intangibles and the Company is
subject to certain restrictions which include, among other
things, restrictions on borrowings and dividend payments. No
amounts were borrowed under this line-of-credit during the year
ended December 31, 1998. The line-of-credit expires on
September 22, 1999.
The Company leases its primary manufacturing and office
facilities through January 2003 from an entity in which T.
Bryan Alu, President and Chief Executive Officer of the
Company, is a 50% partner. The lease requires monthly payments
of approximately $8,000 and contains an option to renew
for two additional five year periods. The Company is responsi-
ble for maintenance and operating costs.
The Company has an operating lease agreement with an unrelated
party which requires monthly payments of approximately $6,100
through December 2000 including renewal options. The Company
has entered into a sublease agreement for this space with an
unrelated party through December 2000 at an initial monthly
rate of approximately $9,700, increasing at 5% per year.
<PAGE>
Rent expense for operating leases, less related sublease
income, was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31, 1998 1997
Related party lease $ 102,295 $101,084
Unrelated party lease 72,589 70,116
Less sublease rentals (116,406) (110,863)
$ 58,478 $ 60,337
</TABLE>
Future lease commitments are: 1999 - $51,965; 2000 - $51,965; 2001 -
$95,603; 2002 - $95,603; 2003 - $95,603; and thereafter - $95,603.
3.Stock Option Stock Option Plan
and Award
Plans The Company has a Stock Option Plan (the "Plan"), expiring June
21, 2004, reserving for issuance 35,000 shares of the Company's
common stock. The Plan provides for grants to either employees
or non-employee directors, at the discretion of a committee of
the Board of Directors, of incentive or nonstatutory stock
options to purchase common stock of the Company at a price not
less than fair market value on the date of grant. Any options
granted under the Plan must be exercised within ten years of
the date they were granted. The Company granted 27,000 stock
options in February 1998 to three employees, exercisable at
$2.00 a share, which vest ratably over three years based on the
Company achieving certain predetermined financial targets each
fiscal year end. In February 1999, 9,000 of these options had
expired because certain predetermined financial targets were not
met.
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
<PAGE>
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.
Directors' Compensation Plan
The Company has a directors' compensation plan whereby directors
can be compensated with restricted common stock of the Company
in exchange for services provided. Shares issued will be valued
based upon the market value of the stock as determined by the
Company. As of December 31, 1998, no shares have been issued
under this plan.
4. Taxes on Taxes on income for the years ended December 31 consisted of the
Income following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997
Current:
Federal $ 4,400 $ -
State 1,800 -
Deferred:
Federal 88,000 49,000
State 9,000 5,000
103,200 54,000
Decrease in valuation
allowance (97,000) (54,000)
Taxes on income $ 6,200 $ -
</TABLE>
A reconciliation of income taxes at the federal statutory rate to
<PAGE>
the effective tax rate is as follows:
<TABLE>
<captions>
<S> <C> <C> <C>
1998 1997
Income taxes computed at the
federal statutory rate $ 41,000 $ 61,000
Expiration of unused tax credits 45,000 -
Change in valuation allowance (97,000) (54,000)
Other 17,200 (7,000)
Taxes on income $ 6,200 $ -
The types of temporary differences between the tax basis of assets and
liabilities that give rise to a significant portion of the deferred tax
asset and their approximate tax effects are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997
Property and equipment $ 15,000 $ 15,000
Deferred revenue 10,000 2,000
Tax operating loss carryforwards - 44,000
Tax credit carryforwards - 45,000
Other 12,000 28,000
37,000 134,000
Valuation allowance (37,000) (134,000)
$ - $ -
</TABLE>
As of December 31, 1998, a valuation allowance equal to the net deferred
tax asset has been recorded, as management is unable to determine that it
is more likely than not that the deferred tax asset will be realized.
<PAGE>
5. Long-term Long-term debt consisted of the following:
Debt
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1998
8.25% note payable to a bank, monthly
payments of $741, including interest
through February 2003, secured by
a vehicle. $ 31,124
Less current maturities 6,528
$ 24,596
</TABLE>
Future maturities of long-term debt are: 1999 - $6,528; 2000 - $7,087;
2001 - $7,695; 2002 - $8,354; and 2003 - $1,460.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM ZEON CORPORATION'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31,1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 169,891
<SECURITIES> 0
<RECEIVABLES> 379,608
<ALLOWANCES> 16,000
<INVENTORY> 224,326
<CURRENT-ASSETS> 820,305
<PP&E> 371,435
<DEPRECIATION> 198,045
<TOTAL-ASSETS> 1,019,501
<CURRENT-LIABILITIES> 164,246
<BONDS> 0
0
0
<COMMON> 34,913
<OTHER-SE> 795,746
<TOTAL-LIABILITY-AND-EQUITY> 1,019,501
<SALES> 2,865,754
<TOTAL-REVENUES> 2,865,754
<CGS> 1,884,313
<TOTAL-COSTS> 900,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 121,676
<INCOME-TAX> 6,200
<INCOME-CONTINUING> 115,476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,476
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
