FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1996 Commission File Number 0-12283
ZONIC CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-0791199
(State of Incorporation) (I.R.S. Employer Identification Number)
50 West TechneCenter Drive, Milford, Ohio 45150
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 248-1911
Not Applicable
(Former name, address or fiscal year if changed since last report)
Indicate by check mark whether the registrant (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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ____X_____ No _________
The total number of shares outstanding of the issuer's common shares, without
par value, as of the date of this report, follow:
3,044,136
Part I - Financial Information
Item 1 - Financial Statements
Statement of Operations
(unaudited)
Three Months Ended Nine Months Ended
12-31-96 12-31-95 12-31-96 12-31-95
-------- -------- --------
Products and service revenues $ 950,491 $ 421,623 $3,140,765 $2,674,991
Cost of products and
services sold 434,943 204,456 1,373,635 1,378,169
Selling and administrative
expenses 320,533 381,942 1,045,801 1,249,677
Research and development
expenses and software
construction and product
enhancement amortization 618,564 155,470 1,020,855 549,682
Costs related to management
change and product 455,682 455,682
discontinuance
--------- --------- --------- ----------
1,374,040 1,197,550 3,440,291 3,633,210
Operating loss (423,549) (775,927) (299,526) (958,219)
Interest expense, net (116,198) (106,381) (347,131) (387,504)
Foreign currency gain (loss) (11,999) 23,692 26,462 134,627
Gain on sale of asset 3,020,942 - 3,020,942 1,417,027
Loss from affiliate (385,000) - (385,000) -
--------- -------- --------- ---------
Income (loss) before taxes
and extraordinary item 2,084,196 (858,616) 2,015,747 205,931
Provision for income taxes - - - -
--------- -------- --------- ---------
Income (loss) before
extraordinary item 2,084,19 (858,616) 2,015,747 205,931
Extraordinary item-
gain from debt
restructuring, net of taxes - - - 397,275
Net income (loss) $2,084,196 $(858,616) $2,015,747 $ 603,206
========== ========== ========== =========
Income (loss) before
extraordinary item $ 0.68 $ (0.28) $ 0.66 $ 0.06
Extraordinary item
gain from debt
restructuring, net of taxes - - - 0.13
---------- --------- ---------- ---------
Income (loss) per share $ 0.68 $ (0.28) $ 0.66 $ 0.19
========== ========== ========== =========
Weighted average shares
outstanding 3,044,1 3,093,580 3,044,136 3,093,951
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
Balance Sheets
As of December 31, 1996 & March 31, 1996
(unaudited)
Dec.-31 March-31
ASSETS 1996 1996
Current Assets
Cas $ 146,600 $ 28,951
Accounts Receivable
Trade 616,561 642,311
Related parties 38,873 334,781
Unbilled contracts 14,986 56,788
--------- ---------
Total accounts receivable 670,420 1,033,880
Notes receivable, shareholder 2,322,000 -
Inventories
Finished products 166,076 296,762
Work in process 276,786 102,418
Raw material 184,267 309,737
--------- ---------
Total inventories 627,129 708,917
Prepaid expenses 17,523 3,833
--------- ---------
Total Current Assets 3,783,672 1,775,581
Property and Equipment-at Cost
Furniture and office equipment 465,421 465,421
Machinery and plant equipment 1,063,346 1,046,580
Software construction and product
enhancement 4,725,507 7,260,451
--------- ---------
6,254,274 8,772,452
Less accumulated depreciation
and amortization 5,921,572 7,305,267
--------- ---------
332,702 1,467,185
--------- ---------
Total Assets $ 4,116,374 $ 3,242,766
=========== ===========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
Balance Sheets (continued)
Dec.-31 March-31
LIABILITIES 1996 1996
Current Liabilities
Short-term notes payable and
current maturities of
long-term debt $ 4,705,000 $ 806,316
Accounts payable - trade 909,965 844,685
Accounts payable - shareholder - 611,823
Deferred income 431,296 792,977
Accrued liabilities
Salaries and wages 172,140 142,813
Property and payroll taxes 111,308 86,429
Interest, commissions and other 386,182 457,012
---------- ----------
Total Accrued Liabilities 669,630 686,254
---------- ----------
Total Current Liabilities 6,715,891 3,742,055
Long-Term Obligations,
Less Current Maturities - 4,070,000
Deferred rent 246,710 292,685
SHAREHOLDERS' EQUITY (DEFICIT)
Common shares 61,674 61,674
Additional paid-in capital 5,727,881 5,727,881
--------- ---------
5,789,555 5,789,555
Accumulated deficit (8,635,782) (10,651,529)
---------- ----------
Total Shareholders' Equity (2,846,227) (4,861,974)
---------- ----------
Total Liabilities and
Shareholders' Equity $ 4,116,374 $ 3,242,766
=========== ============
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the nine months ended December 31, 1996
(unaudited)
Additional
Common Contributed Accumulated
Shares Capital Deficit Total
Balance, March 31, 1996 $ 61,674 $5,757,881 $(10,651,529) $(4,861,974)
Net income for period 2,015,747 2,015,747
-------- ---------- ------------ -----------
Balance, December 31, 1996 $ 61,674 $5,757,881 $ (8,635,782) $(2,846,227)
-------- ---------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For The Nine Month Periods Ended December 31,
(unaudited)
1996 1995
---- ----
Cash provided by (used in) operations
Net profit for period $ 2,015,747 $ 603,206
Adjustments to reconcile net income
to cash from operations
Gain from sale of rights to software (3,020,942) (1,417,027)
Gain from debt restructuring - (397,275)
Depreciation and amortization 27,010 44,066
Amortization of software construction
and product enhancements 1,020,855 537,951
Amortization of stock options - 47,358
Loss from affiliate 385,000 -
Costs related to management change and
product discontinuance - 455,682
Provision for obsolete inventory 27,000 27,000
Amortization of deferred income (220,413) (200,876)
Foreign currency gain and other (26,462) (134,627)
Increase (decrease) in cash due to
changes in Accounts receivable (10,818) 45,654
Inventories (95,212) (214,118)
Prepaid expenses (13,690) (23,130)
Accounts payable 7,625 109,057
Accrued liabilities 43,078 79,390
Accrued rent (45,975) (46,047)
Deferred income (141,268) 499,139
--------- ---------
Net cash provided by (used in)
operations (48,465) 15,403
Cash used in investment activities
Purchase of equipment (16,766) (11,777)
Increase in software construction and
product enhancements (215,804) (145,856)
--------- ---------
Net cash used in investment
activities (232,570) (157,633)
Cash used in financing activities
Additions to debt obligations 405,000 300,000
Payments on debt obligations (6,316) (15,009)
--------- --------
Net cash provided by financing
activities 398,684 284,991
Increase in cash 117,649 142,761
Cash - beginning of period 28,951 27,222
-------- -------
Cash - end of period $ 146,600 $ 169,983
========= =========
Interest paid during period,
net of capitalization $ 268,382 $ 254,111
========= =========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
Notes to Financial Statements
1. Presentation of Information
In the opinion of management, the accompanying unaudited financial statements
reflect all adjustments (including all normal recurring adjustments) necessary
to present fairly Zonic Corporation's (the "Company") financial position at
December 31, 1996 and the results of operations for the three and nine month
periods ended December 31, 1996 and 1995 and its cash flows for the nine-month
periods ended December 31, 1996 and 1995. The results of operations for the
interim periods are not necessarily indicative of results to be expected for a
full year.
The financial statements are summarized and should be read in conjunction with
the annual report to shareholders and Form 10-K for the year ended March 31,
1996.
2. Affiliate Company
The Company along with A&D Company Ltd. (A&D) formed Zonic A&D Company with
each owning 50% to market both the Company's and A&D's products. Revenue from
sales to Zonic A&D Company by the Company for the three month periods ended
December 31, 1996 and 1995 were $609,210 and $288,128 respectively. Similar
sales for the nine month periods then ended were $1,678,498 and $1,344,520.
Zonic A&D Company experienced a profit of $9,501 and $186, respectively, for
the three months ended December 31, 1996 and 1995 and a profit of $18,112 and
$36,880, respectively, for the nine month periods then ended.
The Company accounts for its portion of the earnings of Zonic A&D Company
using the equity method. The Company's recognition of its 50% interest in the
net profits and losses of this affiliate is limited to the investment in the
affiliate, including the amounts the Company has committed to fund the
operations. The Company's portion of current period and prior year profits are
not recorded as these amounts offset unrecorded losses. Zonic A&D Company
incurred substantial losses prior to 1994 and were recorded in those years to
the extent the Company was at risk to fund these losses.
In December 1996, the Company and A&D agreed to dissolve Zonic A&D Company.
The dissolution will allow the Company to simplify operations and reduce
operating costs. All daily operations, including assets and liabilities will
be assumed by the Company as of March 31, 1997. The Company has recorded a
provision of $385,000 during the current quarter for losses it expects to
incur as a result of this action.
3. Sale of Asset
In December 1996, the Company sold its Zeta Technology and software to A&D.
Principal assets sold included the core software and all the application
software and associated techniques and know-how employed within the collection
of software that the Company has developed and designed for its System 7000
and WS 7000 product lines. Under the terms of the sale, the Company has the
right to distribute Zeta Technology by paying a royalty payment to A&D equal
to 15% of Zeta Software sales made by the Company. The Company is not,
however, obligated to sell the Zeta product.
The sales price of $3,618,578 consisted of (i) two notes receivable, one in
the amount of $900,000 due on March 31, 1997 and one in the amount of
$1,500,000 due on June 30, 1997, the proceeds of which will be used to pay
down the Company's outstanding bank debt; (ii) a $530,000 reduction of
accounts payable owed to A&D by the Company; (iii) a $570,000 reduction of
loans A&D extended to the Company under a credit agreement between the
parties; and (iv) the elimination of accrued interest totaling $118,578 on
loans payable to A&D.
4. Notes Receivable
The Company has non-interest bearing notes receivable from A&D in the amounts
of $900,000 and $1,500,000 which mature on March 31, 1997 and June 30, 1997,
respectively. These notes have been discounted using interest rates similar
to those rates on current outstanding debt.
5. Subsequent Event
The Company requested and received several offers for the purchase of its
Excite Product line. On February 3, 1997, management accepted the offer from
a significant shareholder of the Company and current member of the Company's
Board of Directors. The sale price consists of cash and royalty payments
based on future sales.
This transaction is expected to be completed by the end of fiscal 1997.
Item 2 - Management's Discussion and Analysis
Results of Operations
Product and Services Revenue increased by $528,868 or 125% for the
three months ended December 31, 1996, when compared to the same period of the
prior year. Sales increased in the Company's 7000 and Machinery Monitoring
products, while WCA revenues declined. Revenue from the Medallion product
line which was introduced earlier this year was $189,200 for the current three
month period. Machinery Monitoring revenue was primarily from a large order
received last year which was completed during the current period. Revenue
from this order was recorded on the percentage of completion method in
accordance with the Company's revenue recognition policies. For the nine
months ended December 31, 1996, revenue increased by $465,774 or 17%.
Significant decreases in sales occurred in WCA and Excite products but were
substantially offset by the increase in Machinery Monitoring revenue and
revenue from Medallion products.
Order backlog amounted to $452,000 at December 31, 1996 compared with
$1,678,000 at December 31, 1995. Most of this decrease related to a large
Machinery Monitoring order received last year.
Costs of products and services sold were 46% and 44% respectively of
products and services revenues for the three and nine months ended December
31, 1996 versus 48% and 52% respectively for the prior year. The decrease in
costs is the result of higher profit margins on 7000 sales this year and low
profit margins on two large 7000 sales during the first quarter of last year.
Profit margins on extended warranty and customer service revenues improved for
the current three and nine month periods over those of the prior year. In
addition, the gross margin on current year Machinery Monitoring and Medallion
product revenues improved the current year profit margins.
Selling and administrative expenses decreased by 16% for the three and
nine month periods ended December 31, 1996 versus the same periods for the
prior year. The decline was due mainly to lower administrative salaries and
the continuing reduction of facilities costs. Expenses were 34% of products
and services revenues for the current three month period versus 90% for the
prior year period. For the nine months ended December 31, 1996, selling and
administrative expenses were 33% of products and services revenues versus 47%
the prior year.
Research and development expenses and software construction
amortization increased by $463,094 for the three months ended December 31,
1996 compared to the same period of the prior year. This increase is due
mainly to a provision of $400,000 for the write down of software construction
and product enhancement costs associated with the expected decline in future
MMS revenues. The remainder of this increase was due to higher product
development costs during the current year on current products with shorter
estimated useful. For the nine months ended December 31, 1996, expenses
increased by $471,173. See Product Development under Liquidity and Capital
Resources.
Interest expense for the three months ended December 31, 1996 increased to
$116,198 versus $106,381 for the same period of the prior year due to an
increase in borrowings during the current year. For the nine months ended
December 31, 1996, interest expense decreased to $347,131 from $387,504 for
the same period of the prior year. This decrease was due mainly to the
repayment of loans in June, 1995 resulting from the sale of the Company's
interest in the WCA Product. (See Liquidity and Capital Resources.)
There was no capitalized interest related to borrowings used to fund product
development expenditures during the current year or prior year three month
period. Capitalized interest for the nine months ended December 31,1995
amounted to $5,000.
Foreign currency losses were $11,999 for the three months ended December
31, 1996 versus a gain of $23,692 the prior year. The loss during the current
year was due to the settlement of a payable in conjunction with the sale of
the asset to A&D. Foreign currency gains for the nine months ended December
31, 1996 and 1995 were $26,462 and $134,627, respectively. These gains are
due to the increase in value of the dollar against the Japanese yen.
Gain on sale of asset- In December, the Company sold its Zeta technology
and software to A&D for $3,618,578. The gain from this sale is net of the
unamortized portion of capitalized software and product enhancement costs for
the Zeta software, a $46,584 writedown of software construction and product
enhancement costs associated with the expected decline in 7000 product
revenues, a provision of $150,000 for the write-off of excess and obsolete
7000 product inventory, and other expenses related to the sale resulting in a
gain of $3,020,942. Revenue from the sale of 7000 products including Zeta
software was $374,521 and $1,085,638, respectively, for the three and nine
months ended December 31, 1996.
Loss from affiliate - The Company has recorded a loss during the current
three month period that it expects to incur from the dissolution of Zonic A&D
Company.
Income taxes - Income tax expense of $708,627 and $685,354, respectively,
for the three and nine months ended December 31, 1996 and $70,016 for the nine
months ended December 31, 1995 is offset by net operating loss carryforwards.
At March 31, 1996 and 1995, loss carryforwards totaling $6,500,000 and
$5,970,000, respectively, were available to offset future income taxes. Also,
the Company had tax credits of $667,000 and $674,000, respectively, as of
March 31, 1996 and 1995 to offset future income taxes. No benefit from the
Company's deferred tax assets has been provided since it is not likely that
such assets would be realized at this time.
Liquidity & Capital Resources
Software Construction and Product Development
The Company's total unamortized software construction and product enhancement
costs at December 31, 1996 and March 31, 1996 were $248,829 and $1,372,016
respectively. This decrease included $318,136 related to the sale of Zeta
Technology and software and a $400,000 writedown of MMS software construction
and product enhancement costs. Cash outlays for software construction and
product enhancement projects were $215,804 for the nine months ended December
31, 1996 compared to $145,856 for the prior year period. These costs will be
amortized over the estimated useful life of each product capitalized.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $1,966,474 at March
31, 1996 to a negative $2,932,219 at December 31, 1996. The decline in
working capital was due primarily to the maturing of all previous bank and
long-term obligations within the next twelve months. However, much of this
decrease was offset by notes receivable, the reduction of accounts payable and
loans payable to A&D and the elimination of accrued interest resulting from
the sale of Zeta Technology and software to A&D. In addition, A&D has paid the
Company $300,000 to promote its new FWCA products. This amount is included in
deferred income and will be recognized in future periods as earned.
The Company's cash flows from operations amounted to a negative $48,465 for
the nine months ended December 31, 1996. Short-term borrowings from A&D
Company Ltd. less repayment of debt obligations provided $398,684 during this
period.
The Company sells certain trade receivables and pays a fee based on the period
of time the account remains unpaid by the customer. The Company retains
substantially the same credit risk as if the receivables had not been sold.
Cash proceeds from the sale of trade receivables for the current and prior
year periods were $903,370 and $482,984, respectively. At December 31, 1996,
the amount of receivables sold which remain uncollected from customers was
$90,524. The Company has received $76,964 from the sale of these receivables
and such amount has reduced the amount of receivables reported on the balance
sheet.
The Company continues to experience serious cash flow problems and has been
unable to improve on the aging of its accounts payable and certain accrued
liabilities. The Company must raise and is actively seeking additional working
capital through additional debt or equity financing from public or private
sources to reduce the delinquency of its accounts payable and accrued
liabilities, make payments on its debt obligations, and to sustain its
operations. There can be no assurance that the Company will be able to obtain
additional financing on favorable terms, if at all, from any source. During
the current nine month period, A&D made additional loans to the Company
totaling $405,000. Proceeds from the sale of Zeta Technology and software to
A&D totaling $570,000 were used to reduce outstanding loans to A&D to
$605,000. Of the remaining loans, $480,000 are payable June 30, 1997 with
payment on the remainder extended indefinitely at this time.
PART II - Other Information
Item 6: Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of earnings per common share - see Statements of
Operations
Reports on Form 8-K - A current report on Form 8-K reporting the sale of
Zeta Technology and software to A&D Co. Ltd. of Japan was filed
on January 14, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
ZONIC CORPORATION
By: /s/ James B. Webb
James B. Webb
President and Chief Executive Officer
By: /s/ John H. Reifschneider
John H. Reifschneider
Controller
Dated: February 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 146,600
<SECURITIES> 0
<RECEIVABLES> 3,055,516
<ALLOWANCES> 63,096
<INVENTORY> 627,129
<CURRENT-ASSETS> 3,783,672
<PP&E> 6,254,274
<DEPRECIATION> 5,921,572
<TOTAL-ASSETS> 4,116,394
<CURRENT-LIABILITIES> 6,715,890
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (2,907,901)
<TOTAL-LIABILITY-AND-EQUITY> 4,116,374
<SALES> 3,140,765
<TOTAL-REVENUES> 3,140,765
<CGS> 1,373,635
<TOTAL-COSTS> 3,440,291
<OTHER-EXPENSES> (2,662,404)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,131
<INCOME-PRETAX> 2,015,747
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,015,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,015,747
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<FN>
<F1>INCLUDES GAIN ON SALE OF ASSET.
</FN>
</TABLE>
