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, 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 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, 1999
were $3,014,900.
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, 2000) was
approximately $517,100.
As of March 15, 2000, the number of shares outstanding of the registrant's
common stock, no par value, $.10 stated value was 344,717.
Transitional Small Business Disclosure Format:
[] Yes [X] No
Documents Incorporated By Reference
None.
1
<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.
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, 1999, the Company had 30 full-time employees.
The following sets forth sales revenue from unaffiliated customers:
Sales
----------
1999 $3,014,900
1998 $2,865,800
1997 $2,674,300
Manufacturing. The Company manufactures its neon window signs at its facilities
in Louisville, Colorado. The Company began importing neon signs components in
1999, and began subcontracting completed sign products to offshore suppliers.
The Company expects to increase the use of these offshore resources as a
compliment to its internal production capacity.
2
<PAGE>
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 Company 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. ZEON
Corporation also markets "generic" signs, such as OPEN signs, in various
markets.
ZEON Corporation expanded its marketing in 1999 to attract high volume neon sign
customers, primarily in the beverage industry. The Company was successful in its
efforts securing a contract in the fourth quarter to provide neon signs for
Heineken USA. The sales of this contract are expected to exceed one million
dollars over the year 2000.
Distribution. The neon products are marketed by the Company's in-house staff
through direct contact and presence at selected trade shows. Independent sales
representatives are also used as a selling channel. Dealers are being used as a
distribution channel for the Zeon(R) Neo-grid(R) 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. A compliment to the Zeon Corporation's neon products 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.
In 1999, the Company continued development on a unique neon power supply design,
for which a patent was applied for in 1998. The commercial introduction of the
power supply is expected to be in late 2000. The Company spent $154,500 and
$137,700 for 1999 and 1998, respectively, for research and product design
development.
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.
3
<PAGE>
Item 2. Properties.
Effective December 1992, the Company leased 17,500 square feet, located at 1500
Cherry Street in Louisville, Colorado, for its combined manufacturing and office
operations. In April 2000, the Company will expand its facilities to include
9,600 square feet of additional space adjacent to existing manufacturing and
office facility. A new ten (10) year lease with a five (5) year option has been
executed for a total monthly rent of $15,995 for the entire space. The rent for
each term is increased by 3.5% annually. The total 22,100 square feet 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.
Effective March 1992, the Company leased approximately 17,000 square feet as a
production facility in Boulder, Colorado at a monthly rate of approximately
$6,200 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 $10,700. 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, 1999.
4
<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:
High Low
----- -----
Fourth quarter ended December 31, 1999 $ NQ $ NQ
Third quarter ended September 30, 1999 NQ NQ
Second quarter ended June 30, 1999 NQ NQ
First quarter ended March 31, 1999 2.75 2.75
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
NQ= no qoute available
On March 15, 2000, the closing bid and ask price of common stock of the Company
was $ 1.50.
At March 15, 2000, 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.
5
<PAGE>
Financial Condition
The liquidity of ZEON Corporation continues to remain adequate to meet the
Company's obligations with a current ratio of 2.5 to 1 at December 31, 1999,
compared to a 5.0 to 1 at December 31, 1998. The 1999 current ratio declined due
to the line of credit balance ($ 220,811) existing at December 31, 1999.
The cash decrease for 1999 was $24,370; however, operations funding and line of
credit financing provided sufficient cash to cover operational and capital
expenditures. Capital expenditures for 1999 were $ 36,200 for factory equipment,
which will add capacity and better quality.
The Company believes that during the next twelve months, new business demands
will require significant funding to address new market expansion needs and to
purchase related inventories. Capital expenditures for 2000 are anticipated to
be approximately $75,000 for facility improvements/expansion, production
equipment and tooling. Cash generated by operating activities, cash and cash
equivalents and the Company's $500,000 bank line of credit commitment will be
sufficient for its immediate capital and operating needs. However, the Company
has requested and has been approved for an increased line of credit from
$500,000 to $750,000.
Results of Operations:
Results of Operations 1999 Compared to 1998
1999 1998
---- ----
Sales $3,014,900 $2,865,800
Gross Profit Margin 32% 34%
Net Income $ 82,800 $ 115,500
The 1999 sales rose 5% over 1998, due mainly to additional sales from new
customers in the newly added beverage markets. The gross profit decline of 2%
was primarily product mix (1%) and added production management (1%). With future
sales being anticipated from our new beverage customers, inhouse production
complimented by foreign suppliers are being increased to meet the demand. The
higher volume incremental sales are expected to modestly lower our overall gross
profit margin.
Operating Expenses increased from 1998's $900,800 to 1999's $927,600, or 3%.
General and Administrative expenses declined by $13,500 from 1998's $465,500 to
1999's $452,000. Overall expenses, i.e. bad debt, insurance and supplies
decrease was partially offset by modest salaries increases.
Selling Expenses increased by $23,500 due to conventions and related travel and
commissions. Marketing efforts were expanded to serve the beverage industry.
6
<PAGE>
Research and Development Expense increased by $16,800 over prior year levels due
mainly to the development of power supply accessory and overseas travel to
qualify a key supplier. Development costs include outside design services and
related travel expense.
Other income decreased from $1998's 41,000 to 1999's $33,100. Interest incurred
from line of credit advances and the absence of prior year equipment sale
contributed to the decrease. The Company recognized a total income tax benefit
in 1999 of $27,900. Prior to 1999, the Company provided for a total valuation
allowance on its deferred tax assets, as management was unable to determine that
it was more likely than not that the deferred tax asset would have been
realized. Management believes that consistent income performance and projected
future income has warranted recognition of a deferred tax asset with no
valuation allowance as of December 31, 1999. Accordingly, the Company recognized
a tax benefit of $37,000 in 1999.
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.
Year 2000 Effects
The Company did not experience any material adverse effects from the Year 2000
computer problem. The Company purchased replacement software during 1999 to
address the Year 2000 issue for a total cost of $10,000.
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.
7
<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 49 President, CEO and Chairman of the Board (1980)
Alan M. Bloom 49 Executive VP, VP of Marketing, Secretary/Treasurer
and Director (1980)
Ruel G. Routt 50 Corporate Controller
Jay R. Beyer 38 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.
8
<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.
Summary Compensation Table
Name and Principal Position Year Salary Bonus
- --------------------------- ---- ------ -----
T. Bryan Alu, 1999 $112,800 $ -0-
President, C.E.O. 1998 111,500 3,600
1997 99,500 18,000
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 2000, 18,000 options terminated without being exercised, leaving 9,000
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, 1999, no
shares have been issued under this plan.
9
<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.
No. Of Shares
Beneficially Percentage
Name and Address Owned Of Class
- ---------------- -------------- ----------
T. Bryan Alu 175,894 (1) 51.0%
727 8th Street
Boulder, CO 80302
Alan M. Bloom 22,033 (2) 6.4%
6028 Flagstaff Road
Boulder, CO 80302
All Directors and 197,927 57.4%
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.
Item 12. Certain Relationships and Related Transactions.
Effective December 1992, the Company leased 17,500 square feet, located at 1500
Cherry Street in Louisville, Colorado, for its combined manufacturing and office
operations. In April 2000, the Company will expand its facilities to include
9,600 square feet of additional space adjacent to existing manufacturing and
office facility. A new ten (10) year lease with a five (5) year option has been
executed for a total monthly rent of $15,995 for the entire space. The rent for
each term is increased by 3.5% annually. The total 22,100 square feet 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.
10
<PAGE>
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,
1999.
(c) Financial data schedule 27.
11
<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, 2000
--------------
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, 2000
--------------
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
--------------
12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report..............................................F-2
Balance Sheet - December 31, 1999.........................................F-3
Statements of Income - For the Years Ended
December 31, 1999 and 1998................................................F-4
Statements of Shareholders' Equity -
For the Years Ended December 31, 1999 and 1998............................F-5
Statements of Cash Flows - For the Years Ended
December 31, 1999 and 1998 ...............................................F-6
Notes to Financial Statements.............................................F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
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, 1999, and the related statements of income, shareholders' equity,
and cash flows for the years ended December 31, 1999 and 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 financial position of ZEON Corporation as of December
31, 1999, and the results of its operations and its cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
March 17, 2000
F-2
<PAGE>
ZEON CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,521
Trade receivables, less allowance of $25,645 for possible losses 467,320
Inventories 429,848
Prepaid inventory 110,590
Prepaid expenses and other 59,666
----------
Total current assets 1,212,945
PROPERTY AND EQUIPMENT:
Machinery and equipment 294,309
Leasehold improvements 59,280
Vehicles 45,668
Furniture and fixtures 8,408
----------
407,665
Less accumulated depreciation and amortization (251,471)
----------
Net property and equipment 156,194
OTHER ASSETS 28,360
----------
TOTAL ASSETS $1,397,499
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 160,708
Accrued expenses 69,683
Customer deposits 20,694
Revolving line-of-credit 220,811
Current maturities of long-term debt 6,528
----------
Total current liabilities 478,424
LONG-TERM DEBT, less current maturities 18,069
----------
TOTAL LIABILITIES 496,493
COMMITMENTS (Note 4)
SHAREHOLDERS' EQUITY:
Common stock, no par value; ($.10 stated value) 100,000,000 shares
authorized; 344,717 outstanding 34,471
Additional paid-in capital 926,310
Accumulated deficit (59,775)
----------
Total shareholders' equity 901,006
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,397,499
==========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
ZEON CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
NET SALES $ 3,014,879 $ 2,865,754
Cost of sales 2,065,531 1,884,313
------------- ---------
GROSS PROFIT ON SALES 949,348 981,441
OPERATING EXPENSES:
General and administrative 451,965 465,513
Selling 321,135 297,523
Research and development 154,480 137,739
------------- -------------
Total operating expenses 927,580 900,775
------------- -------------
INCOME FROM OPERATIONS 21,768 80,666
OTHER INCOME:
Interest, net (2,524) 685
Other income, net 35,632 40,325
------------- -------------
Total other income 33,108 41,010
------------- -------------
INCOME BEFORE INCOME TAXES 54,876 121,676
INCOME TAX BENEFIT (EXPENSE)
Current (9,100) (6,200)
Deferred 37,000 -
------------- -------------
Total income tax benefit (expense) 27,900 (6,200)
------------- -------------
NET INCOME $ 82,776 $ 115,476
============= =============
NET INCOME PER SHARE OF COMMON STOCK:
(Basic and diluted) $ .24 $ .33
============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(Basic and Diluted) 348,125 349,171
============= =============
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
ZEON CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK Additional Total
-------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
---------- ------------- ------------ --------------- ------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 349,205 $34,920 $938,426 $(258,027) $715,319
Acquisition and retirement of common stock (68) (7) (129) - (136)
Net income - - - 115,476 115,476
------- ------- -------- -------- --------
BALANCES, December 31, 1998 349,137 34,913 938,297 (142,551) 830,659
Acquisition and retirement of common stock (4,420) (442) (11,987) - (12,429)
Net income - - - 82,776 82,776
------- ------- -------- -------- --------
BALANCES, December 31, 1999 344,717 $34,471 $926,310 $(59,775) $901,006
======= ======= ======== ======== ========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
ZEON CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,776 $ 115,476
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 53,426 47,985
Provisions for losses on trade receivables 9,000 23,500
Deferred tax asset (37,000) -
Changes in operating assets and liabilities:
Trade receivables (112,712) (66,208)
Inventories (205,521) 64,287
Prepaid expenses and other (73,330) (25,816)
Accounts payable 64,798 (107,420)
Accrued expenses 33,496 (26,062)
Customer deposits (4,927) 20,565
-------- --------
Net cash (used in) provided by operating activities (189,994) 46,307
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of property and equipment (36,231) (88,937)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line-of-credit (LOC) 313,311 -
Payments on LOC (92,500) -
Proceeds from long-term debt - 36,169
Principal payments on long-term debt (6,527) (5,045)
Acquisition and retirement of common stock (12,429) (136)
-------- --------
Net cash provided by financing activities 201,855 30,988
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,370) (11,642)
CASH AND CASH EQUIVALENTS, beginning of year 169,891 181,533
-------- --------
CASH AND CASH EQUIVALENTS, end of year $145,521 $169,891
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,431 $ 2,403
======== ========
Cash paid for income taxes $ 5,786 $ -
======== ========
</TABLE>
See accompanying notes to these financial statements.
F-6
<PAGE>
ZEON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT 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 Estimates- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities 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 Instruments and Credit Risk Concentration - Financial instruments
which potentially subject the Company to concentrations of credit risk
consist primarily of cash, temporary cash investments and trade receivables.
The Company invests temporary cash in demand deposits and interest bearing
money market accounts with 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, 1999, six customers made up 63% of accounts receivable. Revenue derived
from franchisees for the years ended December 31, 1999 and 1998 was as
follows:
Customer 1999 1998
-------- ---- ----
A 9% 14%
B 14% 4%
C 6% 11%
D 6% 5%
E 20% 16%
--- ---
55% 50%
=== ===
Sales to customer A is made directly to an independently owned and operated
franchise while sales to customers B through E are made to franchisors.
In 1999, the Company began purchasing parts from an overseas supplier. These
parts were used to fill orders obtained from new customers. Of the total
revenue for the year ended December 31, 1999, approximately 10% was from
customers for which overseas parts were supplied. The Company expects this
percentage to increase substantially in 2000. Any disruption in the Company's
relationship with the supplier could have an adverse impact on the Company's
future operating results. Management believes an alternative supplier of the
Company's products could be procured, but there could be significant delays
in procuring products to fulfill sales commitments.
F-7
<PAGE>
ZEON CORPORATION
NOTES TO FINANCIAL STATEMENTS
Cash and Cash Equivalents - The Company considers cash and all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined at a standard cost, which approximates the same value as
determined under the first-in, first-out method.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed over the estimated useful lives of the assets using
the straight-line method generally over a 5-year period. Leasehold
improvements are amortized on the straight-line method over the lesser of the
lease term or the useful life. Expenditures for ordinary maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the account
and any gain or loss is reflected in the statement of operations. For income
tax purposes, depreciation is calculated using accelerated methods.
Long-Lived Assets - The Company applies SFAS No. 121, Accounting for the
Impairment 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.
Revenue Recognition - Sales are generally recorded in the periods in which
products are shipped.
Taxes on Income - The Company follows the provisions of Statement of
Financial 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.
Stock-Based Compensation - As permitted under the SFAS No. 123, Accounting
for Stock-Based Compensation, the Company accounts for its stock-based
compensation in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such,
compensation expense for issuances of equity instruments to employees is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Certain pro forma net income
and EPS disclosures for employee stock option grants are also included in the
notes to the financial statements as if the fair value method as defined in
SFAS No. 123 had been applied. Transactions in equity instruments with
non-employees for goods or services are accounted for by the fair value
method. The Company estimates the fair value of each stock option of the
grant date by using the Black-Scholes option-pricing model.
Income Per Share - The Company applies SFAS No. 128, Earnings Per Share. SFAS
No. 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. Diluted income per share
reflects the potential dilution of securities that could share in the
earnings of an entity. At December 31, 1999 and 1998, 18,000 and 27,000
outstanding options were not included in diluted income per share because the
exercise contingency had not been met. See Note 5 for further discussion.
F-8
<PAGE>
ZEON CORPORATION
NOTES TO FINANCIAL STATEMENTS
Comprehensive Income - Comprehensive income is defined as all changes in
stockholders' equity, exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income, changes in certain
assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and certain
changes in minimum pension liabilities. The Company's comprehensive income
was equal to its net income for all periods presented in these financial
statements.
Accounting Pronouncements - The SFAS Board 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.
2. INVENTORIES:
-----------
Inventories are summarized as follows:
December 31,
1999
------------
Finished goods $204,411
Work-in-process 40,925
Raw materials 184,512
--------
$429,848
========
3. LONG-TERM DEBT AND REVOLVING LINE-OF-CREDIT:
-------------------------------------------
Long-term debt consisted of the following:
December 31,
1999
------------
8.25% note payable to a bank, monthly payments of $741,
including interest through February 2003, secured by a
vehicle. $24,597
Less current maturities (6,528)
-------
$18,069
=======
F-9
<PAGE>
ZEON CORPORATION
NOTES TO FINANCIAL STATEMENTS
Future maturities of long-term debt are: 2000 - $6,528; 2001 - $7,697; 2002 -
$8,354; and 2003 - $2,018.
The Company has a line-of-credit from its bank for borrowings of up to
$500,000, with interest on any borrowing at 1% above the banks reference
rate, to be paid monthly. The line-of-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. The balance on this line as
of December 31, 1999 was $220,811. The line-of-credit expires on November 18,
2000. Management has received tentative verbal approval to increase the
line-of-credit to $750,000.
4. COMMITMENTS AND RELATED PARTY TRANSACTIONS:
------------------------------------------
The Company leases its primary manufacturing and office facilities through
January 2003 from an entity in which the Company's president is a 50%
partner. The lease requires monthly payments of approximately $8,200. The
Company is responsible for maintenance and operating costs.
Approximately April 2000, the Company will expand into an additional facility
adjacent to the existing manufacturing and office facilities. These
facilities will also be leased from an entity in which the Company's
president is a 50% partner. The existing lease has been superseded by a new
lease for current and additional space, which requires monthly payments of
approximately $16,000 and expires February 2010 with an option for one
five-year period. The Company is responsible for maintenance and operating
costs.
The Company has an operating lease agreement with an unrelated party which
requires monthly payments of approximately $6,200 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 $10,700, increasing at 5% per year.
Rent expense for operating leases, less related sublease income, was as
follows:
For the Years Ended
December 31,
-------------------------
1999 1998
----------- ---------
Related party lease $ 100,366 $ 102,295
Unrelated party lease 74,662 72,589
Less sublease rentals (122,226) (116,406)
-------- --------
$ 52,802 $ 58,478
======== ========
F-10
<PAGE>
ZEON CORPORATION
NOTES TO FINANCIAL STATEMENTS
Future lease commitments, net of approximately $128,000 of sublease income in
2000 and including the new lease signed subsequent to December 31, 1999, are:
2000 - $119,722; 2001 - $198,658; 2002 - $205,611; 2003 - $212,807; 2004 -
$220,256, and thereafter - $1,267,580.
5. STOCK OPTION AND AWARD PLANS:
----------------------------
Stock Option Plan - 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 non-statutory 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 10
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. As of February 2000, 18,000 of these
options had expired because certain predetermined financial targets were not
met.
SFAS No. 123, requires the Company to provide pro forma information regarding
net income and net earnings 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 estimated 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.
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, 1999, no shares have been issued under this plan.
6. TAXES ON INCOME:
---------------
A reconciliation of income taxes at the Federal statutory rate to the
effective tax rate is as follows:
1999 1998
-------- ---------
Income taxes computed at the
Federal statutory rate (34%) $(18,700) $(41,000)
Expiration of unused tax credits - (45,000)
Change in valuation allowance 37,000 97,000
Other 9,600 (17,200)
-------- --------
Income tax benefit (expense) $ 27,900 $ (6,200)
======== ========
F-11
<PAGE>
The types of temporary differences between the tax basis of assets and
liabilities that give rise to a significant portion of the deferred tax
assets and their approximate tax effects are as follows:
1999 1998
---------- ---------
Property and equipment - non-current $ 3,300 $ 15,000
Current:
Deferred revenue 7,700 10,000
Allowance for bad debts 9,500 -
Other 10,500 12,000
------- --------
31,000 37,000
Valuation allowance - (37,000)
------- --------
$31,000 -
======= ========
The deferred tax assets are included as part of other current and long-term
assets.
F-12
<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
31,1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000796513
<NAME> Zeon Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 145,521
<SECURITIES> 0
<RECEIVABLES> 492,965
<ALLOWANCES> 25,645
<INVENTORY> 429,848
<CURRENT-ASSETS> 1,212,943
<PP&E> 407,665
<DEPRECIATION> 251,471
<TOTAL-ASSETS> 1,397,499
<CURRENT-LIABILITIES> 478,424
<BONDS> 0
0
0
<COMMON> 34,471
<OTHER-SE> 866,535
<TOTAL-LIABILITY-AND-EQUITY> 1,397,499
<SALES> 3,014,879
<TOTAL-REVENUES> 3,014,879
<CGS> 2,065,531
<TOTAL-COSTS> 927,580
<OTHER-EXPENSES> (35,632)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,524
<INCOME-PRETAX> 54,876
<INCOME-TAX> (27,900)
<INCOME-CONTINUING> 82,776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,776
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
