<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to____________
Commission File Number 0-16335
OZO DIVERSIFIED AUTOMATION, INC.
(Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0922701
(State or other juris- (IRS Employer
diction of incorpora- Identification No.)
tion or organization)
7450 East Jewell Avenue
Suite A
Denver, Colorado 80231
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (303) 368-0401
Securities registered under Section 12(g) of the Exchange Act:
$0.10 Par Value Common Stock
(Title of Class)
Indicate by check mark 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 preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days. YES / X / NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. / /
Revenues for fiscal year ended December 31, 1997 were $2,715,991.
The aggregate market value of the Registrant's voting stock held as of March
2, 1998 by nonaffiliates of the Registrant was $402,081.
As of March 2, 1998, Registrant had 478,164 shares of its $0.10 par value
common stock outstanding.
Total Pages
Exhibit Index at Page
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) Business Development. OZO Diversified Automation, Inc. ("OZO"
or the "Company") was incorporated as a Colorado Corporation on October
13, 1983. Since its formation, the Company has been engaged in the design
and manufacture of robotic workstations for the electronics industry. The
initial products offered by OZO included small scale CNC (Computer
Numerically Controlled) drilling machines used in the fabrication of
prototype printed circuit boards. As of the late 1980's, the Company
diversified its product line to include routing and depaneling workstations,
which continues to be the primary focus of the Company today. OZO
workstations are found in various segments of the electronics industry,
including electronics assembly companies (i.e., medium and large OEMs),
printed circuit board fabricators (i.e., Contract Manufacturers), product
design and prototype shops, and test fixture fabricators. For the fiscal
year ended December 31, 1997, the Company had net sales of $2,715,991,
compared to $2,166,763 for the fiscal year ended December 31, 1996.
As noted throughout this report, the future performance of the Company and
its business is dependent upon numerous factors, and there can be no
assurance that the Company will be able to conduct its operations as
contemplated herein. Except for historical information contained in the
report, the statements made herein are forward-looking statements that are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known
and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from forecasted results.
These risks and uncertainties include, among other things, product demand and
acceptance, market competition, limited access to working capital, and
numerous risks inherent in the Company's international operations. Many of
these risks are described herein, and it is important that each person
reviewing this report understand the significant risks attendant to the
operations of the Company and its related industry.
(b) Business of Issuer. OZO manufactures and markets robotic
workstations that are used by the electronics industry for the depaneling,
routing, and drilling of printed circuit boards. In addition to furnishing
the base workstations, the Company also provides sophisticated motion control
software that is used to operate the machines for specific applications. In
terms of its primary business, OZO's hardware and software products enable
electronics assembly companies to rout or depanel printed circuit boards from
panels that are produced on surface mount assembly lines. Although the
depaneling market niche accounted for most of the Company's revenues in
1997, OZO continues to experience demand for its small scale drilling
machines. The demand for small scale drilling equipment is based on OZO's
strong reputation among product designers and circuit board prototypers, as
well as among the bare board shops and test fixture houses that are prevalent
in the industry today.
(1) Products The Company's products are defined by a two-tier offering
of equipment and accessories. The upper tier (or premium line), which
represents OZO's core business, is comprised of the Company's high-end
servomotor systems. These include the Model 18HS standalone router, and
the Model 16SI fully automated inline system. The lower tier offering is
comprised of the Company's stepper motor systems, which include the Model
18 and Model 24 multipurpose machines. On a limited basis, the Company
also supplies a dual-spindle drilling platform (Model 2-24), as well as a
large format multiuse machine (Model 32), both of which are dedicated to a
very narrow market segment. The Model 2-24 and Model 32 machines are
available only on a special order basis.
<PAGE>
For marketing purposes, the Company's lower tier products, namely the
Model 18 and Model 24 workstations, are distributed under the
PanelMASTER, FixtureMASTER, EtchMASTER, and LabMASTER
product designations. The premium depaneling systems, specifically the
Model 18HS and Model 16SI, are marketed under the trade names
PanelMASTER 18HS and PanelROUTER 16SI, respectively. The
Company's products are packaged with various accessories which customize
the equipment for specific market applications. In all cases, OZO's
workstations include (as a minimum) the base machine, a custom fixture
assembly, the associated spindles, a computer controller, and the system
software. Other accessories, such as machine vision, electrostatic discharge
control systems, bar code readers, and spare parts, are sold separately
(either with the machine or on an aftermarket basis).
Currently the majority of the Company's revenue comes from the sale of its
premium line of depaneling equipment. The PanelMASTER 18HS represents
a self-contained standalone depaneling router that has gained acceptance in
the OEM market, as well as within the Contract Manufacturing sector. The
PanelROUTER 16SI represents a customized solution to automated inline
depaneling, and is used extensively by large OEMs for the post assembly
routing of printed circuit boards. The Company's lower tier machines, the
Models 18 and 24, are also sold for depaneling applications. These systems
are typically sold to price sensitive customers, where precision is required
but speed and throughput are not important factors.
One of the Company's core competencies is its ability to design, build, and
service its own high precision spindle assemblies. OZO produces router
spindles for its own line of depaneling systems, as well as drilling spindles
and mechanical etch heads. The Company also offers spindles for sale on a
relabel basis. Demand for the Company's spindle products has increased
dramatically over the past twenty-four (24) months.
Manufacturing and Assembly of Products
The Company continues to fabricate most of its custom components at
its in-house machine shop. In addition, the Company contracts with sheet
metal suppliers, paint and anodize specialists, independent machine shops,
and electronic manufacturers for various parts and services. In terms of
mainstream materials, off-the-shelf components are purchased from various
industrial suppliers. Final assembly, testing and inspection of the finished
systems are done by the Company's employees at its production facility in
Denver, Colorado. During the course of 1997, the Company initiated an
aggressive plan aimed at enhancing the overall functionality of its
Manufacturing Group, which is comprised of its Purchasing, Engineering,
and Production Departments. The effort resulted in substantial improvements
being made in several key areas. Those improvements include: more
efficient order handling, reduced lead times on purchased materials,
dramatically reduced lead times on saleable products (new systems, as well as
parts), more favorable terms with suppliers and service providers, and a
dramatic increase in spare parts inventory (to support the growing worldwide
demand for spare parts). The improvements within the manufacturing group
made a significant contribution to the Company's ability to produce and ship
quality products on time in 1997. Additionally, the Company has
successfully managed its supplier base to ensure that it is not dependent on
one or a few major suppliers for any critical components.
(2) Distribution. The Company utilizes in-house sales engineers for
direct sales in the United States, Canada, and Mexico, as well as numerous
manufacturer representatives throughout North America. Internationally, the
Company continues to expand its market presence, and currently has strong
distributor relationships in Australia, Brazil, Egypt, Hong Kong and the
Peoples Republic of China, India, Israel, Malaysia, New Zealand, Pakistan,
the Philippines, Singapore, South Korea, Taiwan, Turkey, the United Arab
Emirates, and the United Kingdom. The Company has a policy of supporting
its international distributor base, providing regular service, training
visits, individualized sales literature, and support for trade shows held
within their respective territories.
<PAGE>
(3) Status of Product. In 1997 the Company continued the
expansion of its premium line of routing equipment, namely the
PanelROUTER 16SI and the PanelMASTER 18HS. During the year, both
machines continued to gain acceptance in the marketplace, with sales of
the PanelMASTER 18HS increasing substantially over 1996 levels.
While sales of the PanelRouter 16SI were slightly below
plan for 1997, the Company anticipates that the projected growth of the
electronics industry will sustain a strong demand for these products through
1998 and beyond. Management is confident that the depaneling technology
represented by these machines will remain an important aspect of the
manufacture of printed circuit boards and related electronic subsystems. The
depaneling market niche continued to be the Company's most important
United States business segment in 1997, and in 1998 it will remain a
significant part of the Company's overall sales strategy.
While the Company remains focused on sales of its premium depaneling
equipment to facilitate its strategic growth initiatives, the demand
for its traditional drilling and routing machines also remains strong. The
Company continues to sell its lower tier systems to test fixture fabricators
and small printed circuit board facilities in the United States.
Internationally, test fixture fabricators, small printed circuit board
facilities, and prototype operations are a consistent market for the Company's
Company's Model 18, Model 24, and Model 2-24 products. In terms of the Model
18 and Model 24 machines in particular, the Company has also enjoyed a
healthy retrofit and rebuild market for pre-owned systems. Many of the
Company's earlier generation machines have returned to the factory for
electronics upgrades and other miscellaneous refurbishment projects.
The Company's proprietary software is in full compliance with
the Year 2000 transition requirements. Management believes that all of the
Company's proprietary software currently in release will be unaffected by the
millenium date change.
(4) Competition. Within the electronics industry the Company
competes in four distinct segments of the capital equipment market. The four
areas are: depaneling equipment, low-to-medium volume bare board drilling
and routing equipment, test fixture drilling and routing equipment, and
prototyping equipment. The Company has identified two primary U.S.
competitors, and numerous second tier competitors, who manufacture
depaneling equipment. Internationally, there are at least three foreign
competitors whose primary business is the manufacture of depaneling
routers. In many cases, the competitors identified are operating divisions of
companies larger than OZO and produce revenues from various products.
The Company believes that it competes favorably in the depaneling
equipment market. The Company believes that its ability to continue to
compete will depend upon how well it can produce competitively priced full
featured equipment for the standalone depaneling equipment market and upon
its ability to produce customized solutions for the in-line depaneling
equipment market. The Company estimates that there are at least twenty
competitors worldwide who manufacture drilling equipment for the
electronics industry. The Company believes that it competes favorably only
in the low-to-medium volume drilling equipment market, and in the test
fixture drilling application market. The Company's drilling equipment
customers are predominantly small businesses, who prefer the Company's
products over more expensive alternatives. The Company has identified one
U.S. competitor and two foreign competitors who manufacture printed circuit
board prototyping equipment. The Company believes that it competes
favorably in this market for customers seeking full function equipment, but
cannot compete with single function lower cost prototyping equipment.
<PAGE>
While other competitors supplying products necessary for the
development, production, and depaneling of printed circuit boards exist or
may enter the market, the Company anticipates that its broad range of
products will continue to find acceptance. Presently, however, the
Company's relatively small size may give competitors with established
reputations, and greater marketing capability and financial resources, an
advantage in the marketplace.
(5) Raw Materials. The Company procures parts and raw materials
from a broad base of suppliers, and does not rely on one or a few major
vendors for critical components. Most materials purchased by the Company
are off-the-shelf items.
(6) Customer Dependence. The Company is not dependent on one
or a few major customers.
(7) Patents, Trademarks and Licenses. The Company has not
sought patent protection for the hardware it has developed and presently
considers certain aspects thereof to be proprietary to the Company protected
by its trade secrets. The Company has made only a limited search of existing
patents to determine the extent to which such proprietary protection may have
been available or whether the Company's products infringe on patents held
by others. A claim against the Company for possible infringement of a patent
was made in 1994, and the Company has executed a License Agreement with
the unaffiliated claimant. Royalties were paid in 1997 under this License
Agreement. The Company is unaware of any other claims or proprietary
rights of others on which the Company's products may be deemed to infringe.
As additional developments of the Company's products and proprietary
information occur, the Company intends to pursue the appropriate protection.
Should products of the Company be deemed to infringe on patents held by
others, the Company would be subject to the risk of litigation, expense of
licensing rights to use such proprietary technology, or other adverse results.
Copyright protection for the Company's proprietary software,
which is a key component of the operation of the Company's workstation
systems, has been acquired by the Company. Specifically, copyright
protection for the Company's proprietary stepper motor software was
acquired on May 26, 1988. Copyright protection for the Company's
servomotor software was acquired by the Company on October 27, 1994.
(8) Government Approval. The Company is not subject to any
government approval for its products.
(9) Government Regulation. The Company has no knowledge of
impending government regulation on its business.
(10) Research and Development. Research and development
expenses for the fiscal years ending December 31, 1997, and December 31,
1996, were approximately $154,414 and $159,570 respectively. Ongoing
projects in 1998 include automation enhancements for the PanelMASTER
18HS and PanelROUTER 16SI, aesthetic and ergonomic improvements to
the PanelROUTER 16SI, software upgrades for all products, continued
spindle optimization and redesign programs, and miscellaneous development
of new products, accessories, and services. The Company does not receive
funding from other parties to conduct research and development, except in
specific cases where U.S. government NSF or ARPA grants may be awarded.
The Company received no grants in 1996 or 1997.
(11) Environmental Regulation. Since its inception, the Company
has not made any material capital expenditures for environmental control
facilities and the Company does not expect to make any such expenditures
during the current or forthcoming fiscal year. The Company believes that it
is in full compliance with all federal, state, and local environmental
regulations.
(12) Employees. As of December 31, 1997, the Company had 18 full-
time employees and one part-time employee.
<PAGE>
ITEM 2. PROPERTIES
Effective March 1, 1997, the Company expanded its corporate
headquarters in Denver, Colorado by acquiring 3,400 square feet of
additional manufacturing space. The expansion was made as part of the
Company's overall re-engineering effort, which included a redesign of the
production area to improve efficiencies and allow for multiple machines to be
assembled concurrently. At the same time, the Company exited
approximately 400 square feet of non-contiguous storage space. As of
March 1, 1997, the Company's combined office and production space totaled
approximately 9,040 square feet. The monthly lease obligation increased
from $3,050 per month prior to the expansion, to $4,168 per month as of
March 1, 1997. As of this date, the Company's lease obligation on all space
was extended for three years, through February 28, 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a
party or of which any of its property is the subject as of the date of this
report and there were no such proceedings during the fiscal year ended
December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
1997 to a vote of the Company's security holders.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The Company's common stock is quoted on the OTC (Over-The-
Counter) Bulletin Board. The following table shows the range of high and
low closing bid quotations of the common stock as traded in the OTC market
during the last two fiscal years.
Common Stock
High Low
Fiscal Period Bid ($'s) Bid ($'s)
1996
First Quarter 1.00 1.00
Second Quarter 1.50 1.00
Third Quarter 1.25 0.75
Fourth Quarter 0.75 0.50
1997
First Quarter 0.50 0.50
Second Quarter 0.75 0.50
Third Quarter 0.75 0.75
Fourth Quarter 0.75 0.75
The above quotations were reported by market makers in the stock and
by the National Quotation Bureau, LLC. The quotations represent prices
between dealers and do not include retail markups, markdowns, or
commissions, and do not necessarily represent prices at which actual
transactions were or could have been effected.
(b) Holders.
As of December 31, 1997, the Company had approximately 700
holders of record of its $0.10 par value common stock.
(c) Dividends.
The Company has not declared cash dividends on its common stock
since its inception, and the Company does not anticipate paying any dividends
in the foreseeable future. There are no contractual restrictions on the
Company's ability to pay dividends.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Results of Operations
For the fiscal year ended December 31, 1997, sales of the Company's
products increased to $2,715,991, a 25.3% gain over sales of $2,166,763
recorded in 1996. The increase in revenues was primarily a result of growing
demand for the Company's premium depaneling equipment, the
PanelMASTER 18HS and PanelROUTER 16SI workstations, as well as
continued demand for the Company's lower tier multipurpose workstations.
Introduced in 1995, and 1994 respectively, the PanelMASTER 18HS and
PanelROUTER 16SI have gained broad acceptance in the electronics
industry, where the demand for custom depaneling equipment continues to
grow. Over the past eighteen months the Company has
noted a favorable shift in its product mix toward the larger, faster
servomotor-based depaneling systems.
While sales for fiscal year 1997 increased 25.3% over the prior period, the
cost of goods sold increased only 13.4% to $1,490,352, from $1,314,209 in
1996. Management attributes the favorable trend in cost of goods sold to
numerous cost containment and scrap reduction initiatives which were
introduced early in 1997. As a result, the gross profit margin increased
to 45.1% of total revenues in 1997, compared to 39.3% of total
revenues in 1996.
In terms of the foreign and domestic breakdown of sales, the Company
experienced growth within North America during 1997, but a reduction in
revenues abroad. Domestic sales as of December 31, 1997, were
approximately $1,901,000, a 108% increase compared to $914,725 for the
same period in 1996. International revenues decreased by 57.5% in 1997,
accounting for only $401,688 in sales versus $945,000 in 1996. Parts and
service revenue accounted for the remaining sales of approximately
$413,000, or 15.2% of total revenues in 1997. Parts and service recorded
sales of $305,167 in 1996, or 14.1% of total revenues. Although
international sales are an integral part of the Company's strategic sales
objective, the Company has become more selective on the type and amount of
foreign business it accepts. This change in policy is deemed appropriate by
Management, especially in light of the dramatic downturn in the Asian and
Pacific Rim markets which occurred in the second half of 1997. For the year
ended December 31, 1997, the Company recorded an increase in its
allowance for bad debt in the amount of $61,605, to reserve for the recovery
of delinquent accounts primarily in South Korea and Taiwan. Management
is actively pursuing the collection of these accounts. International sales
on new equipment accounted for only 14.8% of revenues in 1997, compared to
49.2% in 1996.
As in past years, there are many factors that impair the Company's ability to
reasonably predict the future sales potential of foreign markets. Exchange
rate variations, policies of local governments regarding import duties or trade
restrictions on U.S. produced equipment, and fluctuations of local economies,
may affect the Company's ability to sustain revenues internationally.
Similarly, these same uncertainties limit the predictability of sales
projections in foreign markets. Nevertheless, the Company remains dependent
upon both the Domestic and International sectors for maintaining its revenue
base from year-to-year.
<PAGE>
Results of operations improved dramatically with the Company recording net
income of $122,854 for the fiscal year ended December 31, 1997, compared
to a net loss of $80,832 in fiscal 1996. The improvement in earnings may be
attributed to a number of factors including: an industry-wide acceptance of
routing as a viable and cost effective means for depaneling printed circuit
boards, an increased market recognition of OZO resulting from an aggressive
marketing campaign which promoted the Company and its products, effective
cost controls and productivity enhancements initiated by the Company in
fourth quarter of 1996 (and continuing throughout 1997), and the realization
of numerous re-engineering benefits within OZO's administrative groups.
In the area of operating expenses, general and administrative costs increased
to $255,964 in 1997, compared to $231,127 for the same period in
1996. As a percentage of sales, however, the general and administrative
costs decreased from 10.7% of total revenues in 1996, to 9.4% in 1997. The
Company continues to focus on expense control as a requisite to sustaining
profitability in 1998.
Marketing and sales costs also increased during the reporting period, up
13.0% to $562,020 in 1997 versus $497,575 as recorded in 1996. On a
percentage basis, marketing and sales costs declined to 20.7% of total sales
in 1997, compared to 23.0% of total sales in 1996. The slight improvement can
be attributed to the mix of commission payments associated with products
being sold by geographical region (i.e., commission rates for international
distributors are different than those for manufacturer's representatives who
sell, but do not service, equipment in the United States). The Company
believes it will always be subject to higher selling costs (as a percentage of
revenue) because of its practice of going to market through distributors and
manufacturer's representatives.
Research and Development costs decreased slightly in 1997 to $154,414,
down 3.2% from $159,570 in 1996. The research and development activities
in 1997 focused primarily on redesigning the PanelMASTER 18HS, as well
as various performance enhancements on inline fixturing and automation
related to the PanelROUTER 16SI. Other R&D projects included software
improvements to the Company's premium line of depaneling routers,
electronics upgrades on all machines, and design enhancements to OZO's
proprietary line of router spindles.
In summary, the improvement in expense control in 1997 occurred in all three
major operating expense categories: general and administrative expense,
marketing expense, and research and development expense. Table 1 below
illustrates the breakdown of the major expense categories as a percentage of
net sales.
<TABLE>
<CAPTION>
Table 1
1997 % 1996 %
<S> <C> <C> <C> <C>
Net Sales $2,715,991 100.0 $2,166,763 100.0
Cost of Sales 1,490,352 54.9 1,314,209 60.7
---------- ----- --------- -----
Gross Profit $1,225,639 45.1 $ 852,554 39.3
---------- ----- ---------- -----
G & A Expense $ 255,964 9.4 $ 231,127 10.7
Marketing 562,020 20.7 497,575 23.0
R & D Expense 154,414 5.7 159,570 7.3
---------- ----- ---------- -----
Total $ 972,398 35.8 $ 888,272 41.0
---------- ------ ---------- -----
Provision for Bad Debt $ 79,109 2.9 0 0
Loss on Disposition
of Assets $ 6,336 0.2 0 0
---------- ----- ---------- -----
Earnings before Interest $ 167,796 6.2 $ (35,718) (1.7)
---------- ----- ---------- -----
Interest Expense $ 44,942 1.7 $ 45,114 (2.0)
---------- ----- ---------- -----
Net Income (Loss) $ 122,854 4.5 $ (80,832) (3.7)
</TABLE>
In 1998 the Company will continue to expand sales of its premium line of
depaneling routers, while still supporting its original line of small scale
multipurpose machines. The Company will focus on growth opportunities in
the U.S. and North America, as well as in selected markets overseas. In first
quarter 1998, the Company secured CE Compliance for its PanelMASTER
18HS standalone router, allowing the product to be reintroduced into the
European market. The first CE compliant machine shipped to a customer in
Dublin, Ireland in late February 1998. Responding to specific needs in the
marketplace, as well as the requests of many of its customers, the Company
will introduce new products and accessories aimed at addressing a multitude
of new applications. In the opinion of Management, the strength of the
electronics market, combined with the internal improvements OZO has made
during 1997, will enable the Company to meet its objectives for sales and
profitability in 1998.
<PAGE>
Liquidity and Capital Resources
For short term cash and credit requirements, the Company continues to use
the credit revolver established in July 1995 through its local bank. The
revolving line of credit has a maximum available limit of $30,000, and
matures on July 13, 2000. As of January 1998, the Company had reached a
tentative agreement with its local bank to expand the credit revolver to
approximately $50,000. The agreement was contingent on a review by the
bank of the Company's 10-KSB report for 1997, and the Company's
continued profitability through the first quarter of 1998.
Also, as disclosed in Item 12 of Form 10-KSB, throughout 1997 the
President and Chief Executive Officer made a series of loans to the Company
to provide short term working capital for projects and to stabilize cash flow.
The outstanding loan balance at the end of 1997 was zero, and the loans had
been repaid in full. Refer to Note 12 of the Financial Statements (Related
Party Transactions), and Item 12 herein, for additional details of this loan.
Prior to 1997, the Company had completed the retirement of three significant
debt obligations (all in the fourth quarter of 1996). In addition to retiring
a $100,000 loan from an investment group, the Company also retired a
$50,000 short term loan from its local bank, as well as a $45,000 loan from a
customer. As of December 31, 1997, the Company's primary debt obligation
was a $240,000 note due December 30, 1998 (see Note 5 of the Financial
Statements). The Company will continue its efforts to remediate, consolidate,
and retire its debt obligations throughout 1998 and into the next fiscal year.
Total Current Assets decreased slightly by 2.1%, or $13,627 in 1997. The
accounts receivable balance remained almost unchanged at $255,414 as of
December 31, 1997, compared to $257,775 as of December 31, 1996. This is
despite the Company's decision to increase its allowance for doubtful
accounts by $61,605 to reflect the uncertainty of overdue payments from
customers, primarily in South Korea and Taiwan. As stated above,
Management continues to pursue payment on these and other delinquent
accounts.
Inventories decreased by $29,927 to $358,498 as of December 31, 1997, a
decrease of 7.7% from December 31, 1996. The change in inventory is
primarily a result of the year-end shop floor production schedule and the
timing of sales orders. Management does not believe the inventory
comparison necessarily reflects any material change in the operating
performance of the Company.
Total Current Liabilities increased $91,826 or 14.9% in 1997 to $709,138.
The increase in current liabilities is due primarily as a result of the
the maturity schedule of the Company's $240,000 in
long-term debt which became current as of December 31, 1997.
Repayment of the entire $240,000 is due on December 30, 1998.
Total current debt as of December 31, 1997 (including the
aforementioned current portion of long-term debt and the current portion of
capitalized lease obligations), was $280,036, an increase of $245,429 from
$34,607 as of December 31, 1996. Management is in the process of securing
a refinancing package for the Company's debt, and expects to have the issue
resolved well in advance of the December 30, 1998 due date. As an
alternative, Management is also contemplating repaying a portion of the
$240,000 debt from cash from operations it expects to generate in 1998.
Excluding the current portion of long-term debt, $240,000, Total Current
Liabilities would have decreased $148,174 during 1997. This reduction was
due in part because of Management's commitment to reducing current
liabilities, specifically the elimination of the note payable to an officer
($84,500 as of December 31, 1996). Other current liabilities, including
Accounts Payable were virtually unchanged between December 31, 1996, and
December 31, 1997, despite an increase in sales of 25.3%.
<PAGE>
The Company made significant progress in 1997 with the expanded sales and
marketing of its premium products, the PanelMASTER 18HS and the
PanelROUTER 16SI. Management believes that the market acceptance phase
for these products has progressed satisfactorily, and the prospects for
receiving additional orders for the premium depaneling equipment is
favorable at this time. In addition to this positive forecast, Management
also believes that various re-engineering activities undertaken by the Company
throughout 1997 have resulted in dramatic improvements in the Company's
competitiveness. These re-engineering activities include: reductions in
cycle times for equipment fabrication, substantial equipment upgrades within
the Manufacturing Group; new rapid response procurement and inventory
procedures; enhanced quality defect reduction programs; improved
performance enhancement projects for mechanical assemblies, electronics,
and software; and cost containment and waste reduction projects throughout
all levels of production. In addition, significant re-engineering projects
have also been implemented within the administrative functions. As a result
of these tactical and strategic initiatives, the favorable forecast for 1998,
and a strong backlog through the second quarter of 1998, Management believes
that the Company can continue as a going concern.
Looking forward, the Company intends to fund its current operations from a
combination of cash generated from operations, existing lines of credit,
potential new lines of credit, equity financing, and refinancing of existing
debt. These sources of capital are expected to fund the Company's current
operations through December 31, 1998 and beyond. Unless the Company
continues to be profitable, or develops additional equity or debt sources of
financing, there would be a materially adverse effect on the financial
condition, operations and business prospects of the Company. The Company
has no arrangements in place for such equity or debt financing and no
assurance can be given that such financing will be available at all or on
terms acceptable to the Company. Any additional equity or debt financing may
involve substantial dilution to the interests of the Company's shareholders as
well as warrantholders. If the Company is unable to obtain sufficient funds
to satisfy its cash requirements, it will be forced to curtail operations,
dispose of assets or seek extended payment terms from its vendors. There can
be no assurances that the Company would be able to continue to reduce expenses
or successfully complete other steps necessary to continue as a going concern.
Such events would materially and adversely affect the value of the
Company's equity securities.
Backlog
As of March 27, 1998, the Company's backlog of orders was approximately
$307,000, compared to $693,000 as of March 28, 1997. Throughout the
second half of 1997, the Company's backlog at any given time was typically
lower than in previous reporting periods, primarily due to the reduction in
cycle times for producing and shipping finished materials.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements on pages F-1 through F-18.
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) Identification of Directors and Executive Officers
Name and Position
in the Company Age Director Since
Alvin L. Katz 68 October 1996
(Chairman of the Board
since October 1996, Director)
David J. Wolenski 36 September 1996
(President since
September 1996, Director)
David W. Orthman 47 February 1992
(Secretary-Treasurer,
Director)
Scott E. Salpeter 39 October 1996
(Director)
Brantley J. Halstead 40 Officer since February 1998
(Chief Financial Officer)
The present term of office of each director will expire at the next
annual meeting of shareholders. The executive officers of the Company are
elected annually at the first meeting of the Company's Board of Directors
held after each Annual Meeting of Shareholders. Each executive officer
holds office until his successor is duly elected and qualified or until his
resignation or until he shall be removed in the manner provided by the
Company's Bylaws.
See Item 12 for a description of understandings pursuant to which
individuals were selected as a director of the Company.
<PAGE>
Business Experience. The following is a brief account of the business
experience during the past five years of each director and executive officer:
<TABLE>
<CAPTION>
<S> <C>
Name of Director Principal Occupation During the Last Five Years
Alvin L. Katz Chairman of the Board since October 1996;
Currently serving on the Board of Directors of Amtech Systems, Inc., a public company
engaged in the manufacture of capital equipment in the computer chip
manufacturing business; Blimpie International, a publicly held fast food
franchise; Nastech Pharmaceutical Company, Inc., a public company engaged
in the development of pharmaceuticals; BCT, a public company engaged in the
franchising of printing plants; and Mikron Instruments, Inc., a public company
engaged in the manufacture of infrared parts and equipment. Also, from 1991 until the
company sold in September 1992, Chief Executive Officer of Odessa Engineering
Corp., a company engaged in the manufacture of pollution monitoring
equipment; and, since 1981, an adjunct professor of business management at
Florida Atlantic University.
David J. Wolenski President and Chief Executive Officer since September 1996; Previously with Johns
Manville Corporation, a public company engaged in the manufacture of fiberglass
insulations and related building materials, from July 1983 through July 1996;
Manufacturing manager at Johns Manville's Corona, California facility, September 1994
through July 1996; Manager of Quality Assurance for Johns Manville's Performance
Materials Division, March 1991 through September 1994.
David W. Orthman Director of Research and Development since April 1, 1992;
Director of Special Projects from June 6, 1990 to March 31, 1992;
Vice President of the Company from January 1989 to June 1990;
Chairman of the Board of Directors of the Company from March
1988 to December 1988; President of the Company from October 1983 to March
1988; Mr. Orthman developed the Model 18 and related products and technology, as well
as the Models 24, 2-20 and 2-24; also developed the PanelMASTER 18HS and
PanelROUTER 16SI high speed depaneling systems and related products and
technology.
Scott E. Salpeter Senior Associate of Catalyst Financial, an affiliate of Barber and Bronson
Incorporated, since September 1996; From 1993 until August 1996, Chief Financial
Officer, Treasurer,Vice President, and a Director of ECOS Group, Inc. (formerly
Evans Environmental Corp.), a public company engaged in environmental
consulting and laboratory services; From 1988 through 1992, Chief Financial Officer
of Alco International Group, Inc., a public company engaged in marine transportation.
Mr. Salpeter was an officer of Nova Distributing Co., Inc., a private company
within two years of Nova's June 1992 petition filing for relief under federal
bankruptcy laws. Such proceeding was converted to a liquidation proceeding under
Chapter 7 of the Bankruptcy Code in March 1993.
Brantley J. Halstead Chief Financial Officer since February 1998; Corporate Controller from September
1997 through January 1998; independent Management Consultant from May 1993 to
May 1995, and April 1996 through August 1997; Senior Manager with Price Bednar
Consulting LLC from June 1995 through March 1996; Management Consultant with
Deloitte & Touche from May 1988 through May 1993. The focus of Mr. Halstead's
management consulting efforts included the use of information technology to facilitate
business process re-engineering.
</TABLE>
Directorships
Except as described above, no director of the Company is a director of any
other Company with a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended, or subject to the
requirements of Section 15(d) of such Act, or any company registered as an
investment company under the Investment Company Act of 1940, as
amended.
(b) Identification of Certain Significant Employees
N/A
(c) Family Relationships
As of December 31, 1997, there were no family relationships
between any director, executive officer, or person nominated or chosen by the
Company to become a director or executive officer.
(d) Involvement in Legal Proceedings
N/A
(e) Compliance with Section 16(a) of the Exchange Act
Based solely on its review of the copies of the reports it received from
persons required to file, the Company believes that during the 1997 fiscal
year and subsequently, all filing requirements applicable to its officers,
directors, and greater than ten-percent shareholders were in compliance, with
one exception involving late filings of Form 3's. Specifically the Form 3's
for directors David J. Wolenski and Alvin L. Katz, who joined the Board in
September 1996 and October 1996, respectively, were filed in March 1998.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table.
The following table shows information regarding compensation paid to
the chief executive officers of the Registrant for the three years ending
December 31, 1997.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Name and Principal Other Annual Restricted Stock
Position Year Salary($) Bonus Compensation Awards($) Other
<S> <C> <C> <C> <C> <C> <C>
David J. Wolenski
CEO 1997 48,000 0 0 18,750 None
CEO(1) 1996 26,300 0 0 None None
CEO(2) 1996 13,000 0 0 5,000 None
Marjorie
Zimdars-Orthman
CEO 1995 39,500 0 0 None None
</TABLE>
Note 1: Marjorie Zimdars-Orthman was CEO through September 22, 1996;
the salary is prorated accordingly.
Note 2: David J. Wolenski became CEO on September 23, 1996; the salary
shown is for the balance of the year.
Other Plans.
There are no other bonus, profit sharing, pension, retirement, stock option,
stock purchase, or other remuneration or incentive plans in effect.
Long Term Incentive Plan.
The Company has no long term incentive plans.
Compensation of Directors.
As of December 31, 1997, and for the year then ended, cash compensation
was not being paid to members of the Board of Directors for their services as
directors, except for their salaries as reported above under executive officer
compensation. On June 24, 1997, the Board granted stock options to its
directors in lieu of cash compensation, as described in Note 6 of the
Financial Statements. In summary, the Board granted 25,000 options each to
Alvin L. Katz and Scott E. Salpeter, and 35,000 options each to David W.
Orthman and David J. Wolenski. All of the aforementioned options are
immediatedly vested as of the date of grant, and will expire in five years on
June 24, 2002. The exercise price is $1.125 per share for the duration of
the five-year option term.
Employment Contracts and Termination of Employment and Change-in-
Control Arrangements.
As of December 31, 1997, the Company had no formalized employment
contracts with any executive officer. The Company has no compensation
plan or arrangement with respect to any executive officer which plan or
arrangement results or will result from the resignation, retirement or any
other termination of such individual's employment with the Company. The
Company has no plan or arrangement with respect to any such persons which
will result from a change in control of the Company or a change in the
individual's responsibilities following a change in control. The Company
does have an agreement with the President and CEO whereby 20,000 shares
of common stock were awarded in December 1997 as non-cash
compensation. The stock award was based on performance, and approved by
the compensation committee of the Board of Directors.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Management.
The following table sets forth, as of December 31, 1997, the number of
shares of the Company's Common Stock beneficially owned by owner's of
more than five percent of the Company's outstanding Common Stock who are
known to the Company and the Directors of the Company, individually, and
the Officers and Directors of the Company as a group, and the percentage of
ownership of the outstanding Common Stock represented by such shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Name of Beneficial Owner Position With Company Ownership of Class
<S> <C> <C> <C>
David W. Orthman Director, Director of 129,710 (1) 25.3%
7450 E. Jewell Ave., #A Research & Development
Denver, Colorado 80231
David J. Wolenski Director, President, 60,000 (2) 11.7%
7450 E. Jewell Ave., #A Chief Executive Officer
Denver, Colorado 80231
Scott E. Salpeter Director 25,000 (3) 5.0%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131
Alvin L. Katz Director, Chairman 61,250 (4) 7.4%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131
All Officers and Directors
as a Group (4 Persons)
275,960 44.0%
- -------------
Steven N. Bronson None 111,650 (5) 22.0%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131
James S. Cassel None 28,750 (6) 5.7%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131
</TABLE>
Note (1): Of the 129,710 shares beneficially owned by David W. Orthman,
79,090 shares are jointly held with his wife Marjorie A. Zimdars-Orthman,
another 10,000 shares are held by Marjorie A. Zimdars-Orthman, and 5,620
shares are held by David W. Orthman; also, 35,000 shares are in the form of
options, in the name of David W. Orthman, exercisable at $1.125 per share
through June 24, 2002.
Note (2): Of the 60,000 shares beneficially owned by David J. Wolenski,
25,000 shares are in the form of common stock obtained as part of executive
compensation, and 35,000 shares are in the form of options, exercisable at
$1.125 per share through June 24, 2002.
Note (3): Of the 25,000 shares beneficially owned by Scott E. Salpeter, all
are in the form of options exercisable at $1.125 per share through June 24,
2002.
Note (4): Of the 61,250 shares beneficially owned by Alvin L. Katz, 5,000
shares are in the name of his wife, Lenore Katz; 2,500 shares are held in
general partnership (the partnership consists of 5,000 shares of common
stock, with Alvin L. Katz maintaining a 1% ownership interest and Lenore
Katz maintaining a 49% ownership interest in said partnership); 25,000
shares are in the form of warrants, in the name of Lenore Katz, exercisable at
$1.00 per share through April 1, 2001; 3,750 shares are in the form of
warrants, also in the name of Lenore Katz, exercisable at $0.75 per share
through October 10, 2001; and 25,000 shares are in the form of options, in
the name of Alvin L. Katz, exercisable at $1.125 per share through June 24,
2002. Not included in this calculation are 8,772 shares due upon conversion
of debentures, December 30, 1998.
Note (5): Of the 111,650 shares beneficially owned by Steven N. Bronson,
82,900 are in the form of common stock obtained through various
transactions and previous exercise of warrants; 25,000 shares are in the form
of warrants, exercisable at $1.00 per share through April 1, 2001, and 3,750
shares are in the form of warrants, exercisable at $0.75 per share through
October 10, 2001. Not included in this calculation are 8,772 shares due upon
conversion of debentures, December 30, 1998.
Note (6): All of the 28,750 shares beneficially owned by James S. Cassel are
in the form of warrants, 25,000 of which are exercisable at $1.00 per share
through April 1, 2001, and 3,750 of which are exercisable at $0.75 per share
through October 10, 2001.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With Management and Others and Certain Business
Relationships.
Throughout the course of 1997, the President and Chief Executive Officer
made a series of loans to the Company in an effort to provide short term
working capital for projects and to stabilize cash flow. The secured loans
were made to the Company at a financing rate that was comparable to that
which could have been obtained through outside sources. This action was
undertaken with the approval and concurrence of the Board of Directors. As
a result of these transactions, a total of $304,000 was loaned to the Company
during the fiscal year 1997. As of December 31, 1997, the outstanding loan
balance was paid down to zero.
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements:
Independent Auditors' Report
Balance Sheet--As of December 31, 1997
Statements of Operations--Years Ended December 31, 1997, and 1996
Statements of Stockholders' Equity--Years Ended December 31, 1996,
and 1997
Statements of Cash Flows for the Years Ended December 31, 1997,
and 1996
Notes to Financial Statements
(b) 8-K Reports:
No 8-K reports were filed in the fourth quarter of 1997.
(c) Exhibits:
3.1 Articles of Incorporation incorporated by reference to
Registration Statement No. 33-13074-D as Exhibit 3.1.
3.2 Amended Bylaws adopted June 1, 1987, incorporated by
reference to Annual Report on Form 10-K for the fiscal year ended
December 31, 1987 as Exhibit 3.2.
3.4 Articles of Amendment to Restated Articles of Incorporation
dated March 7, 1991. Incorporated by reference to Annual Report on Form
10-K for fiscal year ended December 31, 1990 as Exhibit 3.4.
10.1 OEM Purchase Agreement dated January 15, 1990, between the
Company and Ariel Electronics, Inc. incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended December 31, 1989 as
Exhibit 10.16.
10.2 Form of Convertible Promissory Note, 12/30/93 Private
Placement incorporated by reference to Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993 as Exhibit 10.2.
10.3 Form of Non-Convertible Promissory Note, 12/30/93 Private
Placement incorporated by reference to Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993 as Exhibit 10.3.
10.4 Form of Note Purchaser Warrant Agreement and Warrant,
12/30/93 Private Placement incorporated by reference to Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1993 as Exhibit 10.4.
10.5 Form of Promissory Note, 4/1/96, incorporated by reference
to Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 as Exhibit 10.5.
10.6 Form of Security Agreement, 4/1/96, incorporated by
reference to Annual Report on Form 10-KSB for the fiscal year ended
December 31,1996 as Exhibit 10.6.
10.7 Form of Common Stock Purchase Warrant, 4/1/96, incorporated
by reference to Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 as Exhibit 10.7.
10.8 Form of Promissory Note, 7/1/96, incorporated by reference
to Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 as Exhibit 10.8.
10.9 Form of 4/1/96 Promissory Note Extension, 10/17/96,
incorporated by reference on Form 10-KSB for the fiscal year ended
December 31, 1996 as Exhibit 10.9.
10.10 Form of Common Stock Purchase Warrant, 10/10/96,
incorporated by reference on Form 10-KSB for the fiscal year ended
December 31, 1996 as Exhibit 10.10.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 30, 1998
OZO DIVERSIFIED AUTOMATION, INC.,
a Colorado corporation
By: David J. Wolenski
David J. Wolenski
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date Name and Title Signature
March 30, 1998 David J. Wolenski David J. Wolenski
Principal Executive Officer
Principal Financial Officer
Director
March 30, 1998 David W. Orthman David W. Orthman
Secretary-Treasurer
Director
March 30, 1998 Alvin L. Katz Alvin L. Katz
Chairman of the Board
Director
March 30, 1998 Scott E. Salpeter Scott E. Salpeter
Director
March 30, 1998 Brantley J. Halstead Brantley J. Halstead
Principal Accounting Officer
Chief Financial Officer
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report F - 2
Balance Sheet
December 31, 1997 F - 3 -- F - 4
Statements of Operations
Years Ended December 31, 1997 and 1996 F - 5
Statements of Stockholders' Equity
Years Ended December 31, 1996 and 1997 F - 6
Statements of Cash Flows
Years Ended December 31, 1997 and 1996 F - 7 -- F - 8
Notes to Financial Statements F - 9 -- F - 18
F - 1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
OZO DIVERSIFIED AUTOMATION, INC.
We have audited the accompanying balance sheet of OZO Diversified
Automation, Inc. as of December 31, 1997 and the related statements of
operations, stockholders' equity, and cash flows for each of the two years
in the period ended December 31, 1997. 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 OZO Diversified
Automation, Inc. as of December 31, 1997 and the results of its
operations and its cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note
2, the Company is experiencing difficulty in generating sufficient cash
flow to meet its debt obligations and sustain its operations. These factors
raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Wheeler Wasoff, P.C.
Denver, Colorado
March 18, 1998
F - 2
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash $ 7,526
Accounts receivable, (net of allowance for doubtful
accounts of $68,105) 255,414
Inventories (Note 3) 358,498
Prepaid expenses 25,631
---------
Total Current Assets 647,069
---------
PROPERTY AND EQUIPMENT, at cost (Note 5)
Manufacturing 149,703
Furniture and fixtures 169,747
Assets under capitalized leases 204,814
Vehicle 10,820
Leasehold improvements 5,010
---------
540,094
Less accumulated depreciation and amortization 362,271
---------
177,823
---------
OTHER ASSETS
Deferred financing costs, net 8,126
Other 2,859
---------
10,985
---------
$ 835,877
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 3
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
BALANCE SHEET (CONTINUED)
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDER' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Note payable - bank $ 27,415
Accounts payable (Note 1) 244,139
Commissions payable 60,345
Due to shareholder 20,750
Accrued expenses 76,453
Current portion of long term debt and
capitalized lease obligations (Note 5) 280,036
---------
Total Current Liabilities 709,138
---------
LONG TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS (Note 5) 126,731
---------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Note 6)
Preferred stock - $.10 par value
Authorized - 1,000,000 shares
Issued - none -
Common stock - $.10 par value
Authorized - 5,000,000 shares
Issued and outstanding - 478,164 shares 47,816
Capital in excess of par value 1,193,004
Accumulated deficit (1,240,812)
----------
8
----------
$ 835,877
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 4
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET SALES $2,715,991 $2,166,763
COST OF SALES 1,490,352 1,314,209
---------- ----------
GROSS PROFIT 1,225,639 852,554
---------- ----------
OPERATING EXPENSES
General and administrative 255,964 231,127
Marketing and sales 562,020 497,575
Research and development 154,414 159,570
---------- ----------
972,398 888,272
---------- ----------
OTHER (EXPENSE) ITEMS
Interest expense (44,942) (45,114)
Provision for bad debts (79,109) -
Loss on disposition of assets (6,336) -
---------- ----------
(130,387) (45,114)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX 122,854 (80,832)
INCOME TAX EXPENSE (70,000) -
TAX BENEFIT OF NET OPERATING
LOSS CARRY FORWARD 70,000 -
---------- ----------
NET INCOME (LOSS) $ 122,854 (80,832)
---------- ----------
---------- ----------
INCOME (LOSS) PER COMMON SHARE $ .27 $ (.18)
---------- ----------
---------- ----------
INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION (Note 10) $ .18 $ (.18)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 5
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Capital in Total
Excess of Accumulated Stockholders'
Shares Amount Par Value Deficit Equity
<S> <C> <C> <C> <C>
Balance, January 1, 1996 452,664 $45,266 $1,169,804 $(1,282,834) $(67,764)
Issuance of common stock 5,500 550 6,450 - 7,000
to officer and employee
Net (Loss) - - - (80,832) (80,832)
-------- ------- ---------- ----------- ---------
Balance, December 31, 1996 458,164 45,816 1,176,254 (1,363,666) (141,596)
Issuance of common stock to officer 20,000 2,000 16,750 - 18,750
Net Income - - - 122,854 122,854
-------- ------- ---------- ------------ --------
Balance, December 31, 1997 478,164 $47,816 $1,193,004 $(1,240,812) $ 8
-------- ------- ---------- ----------- --------
-------- ------- ---------- ----------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 6
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $122,854 $ (80,832)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities
Depreciation and amortization 54,734 38,863
Stock issuance for services (Note 6) 18,750 7,000
Provision for bad debts 61,605 -
Loss on disposition of assets 6,336 -
Other (2,859) (4,522)
Changes in assets and liabilities
(Increase) in accounts receivable (59,244) (72,293)
Decrease in inventories 29,927 117,972
(Increase) decrease in prepaids (14,246) 3,759
(Decrease) increase in accounts payable and
accrued expenses (23,517) 60,542
(Decrease) in deferred income and
and customer deposits (45,000) (113,118)
-------- --------
Net cash provided (used) by operating
activities 149,340 (42,629)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (20,425) (12,485)
-------- --------
Net cash (used) by investing activities (20,425) (12,485)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt and capital
lease obligations (39,415) (29,937)
Proceeds from short-term borrowings 210,000 375,500
Payment of short-term borrowings (210,585) (375,000)
Proceeds from officer loan 304,000 168,800
Payment of officer loan (388,500) (84,300)
-------- --------
Net cash (used) provided by financing
activities (124,500) 55,063
-------- --------
NET INCREASE (DECREASE) IN CASH 4,415 (51)
CASH, BEGINNING OF YEAR 3,111 3,162
-------- ---------
CASH, END OF YEAR $ 7,526 $ 3,111
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 7
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid cash for interest on long-term debt of $44,382 and $41,568
during the years ended December 31, 1997 and 1996, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1997 and 1996, the Company acquired equipment by entering into lease
obligations of $24,188 and $180,626, respectively.
In 1997 the Company issued 20,000 shares of common stock, valued at $18,750,
to an officer and in 1996 issued 5,500 shares of common stock, valued at
$7,000, to an officer and employee of the Company. See Note 6 for additional
details.
The accompanying notes are an integral part of the financial statements.
F - 8
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
OZO Diversified Automation, Inc. (the Company) was
incorporated under the laws of the State of Colorado on
October 13, 1983. The Company is engaged in the design,
manufacture, and marketing of computer controlled
manufacturing and machining equipment predominately to
entities in North America and the Pacific Rim.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
WARRANTY COSTS
The Company provides a warranty on products sold for a
period of one year from the date of sale. Estimated warranty
costs are charged to cost of sales at the time of sale.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and
amortization of assets under capital lease is provided by use
of the straight-line method over the estimated useful lives of
the related assets of three to five years.
Expenditures for replacements, renewals and betterments are
capitalized. Maintenance and repairs are charged to
operations as incurred.
Depreciation expense and amortization of assets under capital
lease was $46,606 and $30,737 for the years ended December 31, 1997
and 1996, respectively.
REASERCH AND DEVELOPMENT
Expenditures for the research and development of new
products are charged to operations as they are incurred.
DEFERRED FINANCING COSTS
Deferred financing costs include fees and costs incurred in
conjunction with the Company's sale of 9% convertible notes
(Note 5). These fees and costs are being amortized over the
term of the respective loans on a basis which approximates
the interest method. Accumulated amortization of deferred
financing costs was $32,508 at December 31, 1997.
Unamortized deferred financing fees are written-off when debt
is retired before the maturity date.
F - 9
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires
recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been
included in the financial statements or tax returns. Under
this method, the deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
INCOME (LOSS) PER SHARE
For 1996, loss per common share is computed based on the
weighted average number of common shares outstanding of
454,497 shares. Common stock equivalents, consisting of
warrants and convertible debt, are not considered in the
calculation of net loss per share as their inclusion would be
antidilutive.
In February 1997 SFAS No. 128, "Earnings Per Share",
was issued effective for periods ending after December 15,
1997. There is no impact on the Company's 1996 financial
statements from adoption of SFAS No. 128. The Company
has adopted the provisions of SFAS No. 128 effective for the
year ending December 31, 1997, (See Note 10). The
weighted average number of common shares outstanding at
December 31, 1997 was 458,218 shares.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company
considers as cash equivalents all highly liquid investments
with a maturity of three months or less at the time of
purchase. At December 31, 1997 there were no cash
equivalents.
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 reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
ACCOUNTS PAYABLE
Accounts payable at December 31, 1997 include a bank
overdraft of $71,193.
F - 10
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHARE BASED COMPENSATION
In October 1995 SFAS No. 123, "Accounting for Stock-
Based Compensation" was issued. This new standard
defines a fair value based method of accounting for an
employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method
or to continue to measure compensation using the intrinsic
value approach under Accounting Principles Board (APB)
Opinion No. 25. The Company has elected to utilize APB
No. 25 for measurement; and will, pursuant to SFAS No.
123, disclose supplementally the pro forma effects on net
income and earnings per share of using the new measurement
criteria.
NEW TECHNICAL PRONOUNCEMENTS
In February 1997 SFAS No. 129, "Disclosure of
Information about Capital Structure" was issued effective
for periods ending after December 15, 1997. The Company
has adopted the disclosure provisions of SFAS No. 129
effective with the fiscal year ended December 31, 1997.
In June 1997 SFAS No. 130, "Reporting Comprehensive
Income" was issued effective for fiscal years beginning after
December 31, 1997, with earlier application permitted. The
Company has elected to adopt SFAS No. 130 effective with
the fiscal year ended December 31, 1998. Adoption of
SFAS No. 130 is not expected to have a material impact on
the Company's financial statements.
In June 1997 SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" was issued effective
for fiscal years beginning after December 31, 1997, with
earlier application permitted. The Company has elected to
adopt SFAS No. 131 effective with the fiscal year ended
December 31, 1998. Adoption of SFAS No. 131 is not
expected to have a material impact on the Company's
financial statements.
NOTE 2 - BASIS OF ACCOUNTING
The accompanying financial statements have been prepared
on the basis of accounting principles applicable to a going
concern which contemplates the realization of assets and
extinguishment of liabilities in the normal course of business.
As shown in the accompanying financial statements, the
Company has accumulated a deficit of $1,240,812 through
December 31, 1997, as compared to $1,363,666 through
December 31, 1996, and at December 31, 1997 current
liabilities exceeded current assets by $62,069. Included in
current liabilities at December 31, 1997 are $240,000 of
notes the Company is obligated to retire by December 30,
1998 (See Note 5). These factors indicate that the Company
may be unable to continue in existence. The Company's
financial statements do not include any adjustments related
to the carrying value of assets or the amount and
classification of liabilities that might be necessary should the
Company be unable to continue in existence. The
Company's ability to establish itself as a going concern is
dependent on its ability to meet its financing and cash
requirements to retire debt and to continue achieving
profitable operations.
F - 11
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - BASIS OF ACCOUNTING (CONTINUED)
Management is continuing its programs of cost control and
containment; installing new production and budgetary
controls in all aspects of operations; expanding its marketing
efforts, especially on new products, and pursuing additional
financing from outside sources to retire existing debt and
sustain operations. In addition, management is attempting to
continue to generate cash from operations. Management
believes that these actions presently being taken to revise the
Company's operating and financial requirements provide the
opportunity to continue as a going concern.
NOTE 3 - INVENTORIES
Inventories at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $358,498
Work in process and components -
Finished goods -
--------
$358,498
--------
--------
</TABLE>
NOTE 4 - NOTE PAYABLE - BANK
Note payable - bank consists of the balance due on a
revolving line of credit from a commercial bank. The note
matures in July 2000, and is repayable monthly at the rate of
a 2% principal reduction and interest thereon. Interest on the
note is 2% above the prime interest rate. The note is secured
by substantially all assets of the Company including
receivables, inventory and equipment and is personally
guaranteed by certain present and/or former
officers/directors of the Company. At December 31, 1997,
the Company has $2,585 available to be drawn upon under
the line of credit.
NOTE 5 - LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long term debt and capitalized lease obligations consist of
the following at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
9% unsecured convertible notes, due December 30, 1998,
interest payable quarterly $120,000
9% unsecured non-convertible notes, due December 30,
1998, interest payable quarterly 120,000
Capitalized lease obligations with interest at 10.1% to
18.29%, repayable in monthly installments of an
aggregate $4,723;
collateralized by the underlying equipment 166,767
-------
406,767
Less current portion 280,036
-------
$126,731
--------
--------
</TABLE>
F - 12
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
As of December 31, 1997, the scheduled maturities of notes
payable and capitalized lease obligations are as follows:
1998 $280,036
1999 44,895
2000 48,627
2001 33,209
--------
$406,767
--------
--------
Future minimum payments on capitalized leases are as
follows:
Year ending December 31,
1998 $ 56,669
1999 56,669
2000 54,919
2001 34,623
--------
202,880
Less amount representing interest 36,113
--------
Present value of net minimum lease
payments including current maturity $166,767
--------
The 9% notes represent gross proceeds from a private
placement of $240,000 of units completed in December
1993. In conjunction with the offering, warrants to purchase
110,000 shares of common stock at $2.00 per share were
issued. In 1994, warrants were exercised at a reduced price
of $1.00 per share for 100,000 shares. At December 31,
1997 10,000 warrants, exercisable at $2.00 per share
through December 30, 1998, are outstanding. The
convertible notes are convertible into shares of the
Company's common stock at $1.14 per share through
December 30, 1998.
NOTE 6 - STOCKHOLDERS' EQUITY
COMMON STOCK
In December 1997 the Board of Directors authorized the
issuance of 20,000 shares of common stock to an officer,
valued at $18,750 ($.9375 per share). In 1996 the Company
issued 5,000 shares of its common stock to its President,
valued at $6,250 ($1.25 per share); and 500 shares to an
employee, valued at $750 ($1.50 per share).
F - 13
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
At December 31, 1997 the Company had warrants
outstanding to purchase shares of the Company's common
stock as follows:
- 10,000 shares at $2.00 per share expiring December 30, 1998;
issued in conjunction with 9% notes.
- 100,000 shares at $1.00 per share, expiring April 1, 2001;
issued in 1996 in conjunction with short-term borrowings.
- 15,000 shares at $.75 per share, expiring October 1, 2001;
issued in conjunction with granting an extension on the due date
of short-term borrowings.
The weighted average exercise price of warrants outstanding
at December 31, 1997 was $1.05 per share.
OPTIONS
The status of outstanding options granted by the Company is
as follows:
<TABLE>
<CAPTION>
Number Weighted Weighted
of Average Average
Shares Excercise Price Fair Value
<S> <C> <C> <C>
Options Outstanding - January 1, 1997 - - -
Granted in 1997 120,000 $1.13 $.51
------- ----- ----
----- ----
Options Outstanding - December 31, 1997 120,000 $1.13
------- -----
------- -----
</TABLE>
The Company has adopted the disclosure-only provisions of
SFAS No. 123. Had compensation cost for stock options
issued been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the
Company's net income and income per share for 1997 would
have been decreased to the pro forma amounts indicated
below:
Net income applicable to common stockholders - as reported $122,854
--------
Net income applicable to common stockholders - pro forma $ 61,285
--------
Income per share - as reported $ .27
--------
Income per share - pro forma $ .13
--------
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants:
dividend yield of 0%; expected volatility of 43%; discount
rate of 5.50%; and expected lives of 5 years. No options
were exercised or forfeited during 1997.
F - 14
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1997 the number of options exercisable
was 120,000, the weighted average exercise price of these
options was $1.13, the weighted average contractual life of
the options was 5 years and the exercise price was $1.13 per
share.
In February 1998 the Board of Directors granted to an
officer options to purchase 25,000 shares of the Company's
common stock at an exercise price of $1.25 per share for a
period of 5 years.
NOTE 7 - COMMITMENTS
The Company has entered into a non-cancelable lease for
office and production facilities. Minimum payments due
under this lease are as follows:
Year ending December 31,
1998 $50,618
1999 51,457
2000 8,600
Rent expense was $46,234 and $38,340 for the years ended
December 31, 1997 and 1996, respectively.
NOTE 8 - SEGMENT INFORMATION
Foreign sales represent export sales, and were approximately
18% and 47% of net sales revenue for the years ended
December 31, 1997 and 1996, respectively.
Export sales of systems, by geographic region, are as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pacific Rim $240,271 $535,000
Asia 161,417 140,000
South America - 155,000
Europe - 115,000
-------- --------
$401,688 $945,000
-------- --------
-------- --------
</TABLE>
Sales by two distributors in the Pacific Rim represented 13%
and 8% of total Company sales for 1996.
F - 15
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
At December 31, 1997, the Company has net operating loss
carryforwards totaling approximately $962,000 that may be
offset against future taxable income through 2011 and
research and development credits of approximately $60,000
through 2012.
The Company has fully reserved the tax benefits of these
operating losses and credits because the likelihood of
realization of the tax benefits cannot be determined. These
carryforwards and credits are subject to review by the
Internal Revenue Service. The $245,000 tax benefit of
the loss carryforward and tax credits has been offset by a
valuation allowance of the same amount. The tax benefit of
the loss carry forward was reduced by $70,000 in 1997.
Temporary differences between the time of reporting certain
items for financial and tax reporting purposes, primarily
from using different methods of reporting depreciation costs
and warranty and vacation accruals, are not considered
significant by management of the Company.
There is no current or deferred tax expense for the years
ended December 31, 1997 and 1996. The Company, in
1997, utilized net operating loss carryforwards to offset
taxable income, and, in 1996 had no taxable income. The
benefits of timing differences have not previously been
recorded.
A reconciliation between the statutory federal income tax
rate (34%) and the effective rate of income tax expense for
1997 is as follows:
Statutory federal income tax rate 31%
Increase (decrease) in taxes resulting from:
State tax, net of federal benefit 3
Utilization of net operating loss carryforwards (34)
Effective Rate -%
----
----
F - 16
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1997
has been computed as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Earnings per share
Income available to common stockholders $122,854 458,218 $.27
----
Effect of Dilutive Securities
Warrants - 115,000
Options - 120,000
-------- -------
Earnings per share assuming dilution
Income available to common stockholders
and assumed conversions $122,854 693,218 $.18
-------- ------- ----
-------- ------- ----
</TABLE>
Warrants to purchase 100,000 shares of common stock at
$2.00 per share and notes convertible to 105,263 shares of
common stock at $1.14 per share were outstanding during
1997, but were not included in the calculation of diluted
earnings per share as the exercise prices were greater than
the average market price of common shares.
NOTE 11 - CONCENTRATIONS AND OTHER RISKS
FAIR VALUE
The carrying amount reported in the balance sheets for cash,
accounts receivable, accounts payable and accrued liabilities
approximates fair value because of the immediate or short-
term maturity of these financial instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of trade
accounts receivable. Credit risk with respect to these
receivables is generally diversified due to the number of
entities comprising the Company's customer base and their
dispersion across many different industries and geographical
locations.
F - 17
<PAGE>
OZO DIVERSIFIED AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - CONCENTRATIONS AND OTHER RISKS (CONTINUED)
NATURE OF BUSINESS
The Company's business has been comprised of domestic
and foreign export sales. In 1997 foreign export sales
accounted for 18% of the Company's total sales, as
compared to 47% for 1996. This decrease in foreign export
sales has largely been due to the changing economic
conditions in the Pacific Rim and Asia. At December 31,
1997 the Company has accounts receivable due from its
distributors in Taiwan and Korea of an aggregate $63,475,
which has been 100% reserved for collectibility as of that
date.
NOTE 12 - RELATED PARTY TRANSACTIONS
During 1996 the President of the Company loaned the
Company an aggregate $168,800 under a line of credit note,
secured by inventory and trade accounts receivable, due
November 16, 1996 with interest at prime plus 2.5%. At
December 31, 1996, $84,500 was outstanding under the loan
agreement. In 1997 the President made additional advances
to the Company of an aggregate $304,000 and was repaid
$388,500 and interest of $4,611.
At December 31, 1997 and 1996 the former President of the
Company had accrued wages and advances due of $20,750
and $54,545, respectively.
F - 18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,526
<SECURITIES> 0
<RECEIVABLES> 323,519
<ALLOWANCES> 68,105
<INVENTORY> 358,498
<CURRENT-ASSETS> 647,069
<PP&E> 540,094
<DEPRECIATION> 362,271
<TOTAL-ASSETS> 835,877
<CURRENT-LIABILITIES> 709,138
<BONDS> 240,000
0
0
<COMMON> 47,816
<OTHER-SE> (47,808)
<TOTAL-LIABILITY-AND-EQUITY> 835,877
<SALES> 2,715,991
<TOTAL-REVENUES> 2,715,991
<CGS> 1,490,352
<TOTAL-COSTS> 1,490,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 79,109
<INTEREST-EXPENSE> 44,942
<INCOME-PRETAX> 122,854
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> 122,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 122,854
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.18
<FN>
<F1>Although the Company's tax liability in 1997 was $70,000, this amount was
offset in its entirety by loss carryforwards from previous years. The
Company's net tax liability for 1997 is zero.
</FN>
</TABLE>