UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 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 Six Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
======= ======= ======= =======
Products and services
revenues $ 479,033 $1,445,262 $ 820,795 $ 2,190,274
Cost of products and
services sold 172,592 591,964 314,746 938,692
Selling and administrative
expenses 308,893 416,697 582,595 725,267
Research and development
expenses and software
construction and product
enhancement amortization 96,210 205,647 198,757 402,291
-------- ---------- --------- ----------
577,695 1,214,308 1,096,098 2,066,250
Operating profits (loss) (98,662) 230,954 (275,303) 124,024
Interest expense, net (48,524) (129,188) (91,320) (230,933)
Foreign currency gain (loss) - 21,776 (583) 38,461
--------- -------- ---------- ----------
Income (loss) before taxes (147,186) 123,542 (367,206) (68,448)
Provision for income taxes - - - -
--------- -------- ---------- ----------
Net income (loss) $(147,186) $123,542 $(367,206) $ (68,448)
========== ======== ========== =========
Net income (loss) per share (0.05) 0.04 (0.12) (0.02)
========== ======== ========== =========
Weighted average
shares outstanding $3,044,136 $3,044,136 $3,044,136 $3,044,136
The accompanying notes are an integral part of these financial statements.
BALANCE SHEETS
As of September 30, 1997 & March 31, 1997
(unaudited)
Sept. 30 March 31
ASSETS 1997 1997
=========== ===========
Current Assets
Cash $ 29,849 $ 259,494
Receivables
Trade 36,032 266,538
Related parties 57,418 38,873
Unbilled contracts 14,986 14,986
----------- -----------
Total receivables 108,436 320,397
Notes Receivable, shareholder 1,470,000
Inventories
Finished products 305,567 278,412
Work in process 52,451 68,582
Raw material 80,722 72,872
----------- -----------
Total inventories 438,740 419,866
Prepaid expenses 27,267 4,238
----------- -----------
Total Current Assets 604,292 2,473,995
Property and Equipment-at Cost
Furniture and office equipment 432,121 430,297
Machinery and plant equipment 787,538 783,137
Software construction and product enhancement 4,844,725 4,802,522
----------- -----------
6,064,384 6,015,956
Less accumulated depreciation and amortization 5,883,342 5,802,467
----------- -----------
181,042 213,489
----------- -----------
Total Assets $ 785,334 $ 2,687,484
=========== ===========
The accompanying notes are an integral part of these financial statements.
BALANCE SHEETS
As of September 30, 1997 & March 31, 1997
(unaudited)
LIABILITIES Sept. 30 March 31
1997 1997
=========== ===========
Current Liabilities
Short-term notes payable and current maturities
of long-term debt $ 1,510,822 $ 2,841,176
Accounts payable - trade 785,064 718,775
Accounts payable - related parties 7,876 3,738
Deferred income 285,161 353,572
Accrued liabilities
Salaries and wages 134,319 126,007
Commissions 121,547 108,363
Property and payroll taxes 82,391 78,196
Interest 48,110 76,536
Provision for closing of affiliated company 52,808 84,150
Other 40,669 42,337
----------- -----------
Total Accrued Liabilities 479,844 515,589
----------- -----------
Total Current Liabilities 3,068,767 4,432,850
Long-Term Obligations, Less Current Maturities 887,601 987,425
Deferred rent 160,033 231,070
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 (9,120,622) (8,753,416)
----------- -----------
Total Shareholders' Deficit (3,331,067) (2,963,861)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 785,334 $ 2,687,484
=========== ===========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements
(continued)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the six months ended September 30, 1997
(unaudited)
Additional
Common Contributed Accumulated
Shares Capital Deficit Total
====== ========== ============= ===========
Balance, March 31, 1997 $61,674 $5,727,881 $(8,753,416) $(2,963,861)
Net loss for period - - (367,206) (367,206)
------- ---------- ------------ ------------
Balance, September 30, 1997 $61,674 $5,727,881 $(9,120,622) $(3,331,067)
======= ========== ============ ============
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements
(continued)
STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(unaudited)
1997 1996
=========== =========
Cash used by operations
Net loss for period $ (367,206) $ (68,448)
Adjustments to reconcile net loss
to cash from operations
Depreciation and amortization 10,875 21,338
Amortization of software construction
and product enhancements 70,000 402,291
Amortization of note receivable from shareholder (30,000) -
Provision for obsolete inventory 18,000 18,000
Amortization of deferred income (90,694) (148,751)
Foreign currency loss (gain) and other 583 (38,490)
Increase (decrease) in cash due to changes in
Accounts receivable 197,524 275,680
Inventories (36,873) (156,001)
Prepaid expenses (23,029) (24,668)
Accounts payable 84,280 32,687
Accrued liabilities (35,745) 51,120
Deferred rent (71,037) (30,650)
Deferred income 22,283 (454,026)
--------- ---------
Net cash used by operations (251,039) (119,918)
Cash used in investment activities
Purchase of equipment (6,225) (16,766)
Increase in software construction and
product enhancements (42,203) (148,498)
--------- ---------
Net cash used in investment activities (48,428) (165,264)
Cash provided by financing activities
Additions to debt obligations 75,000 350,000
Payments on debt obligations (5,178) (6,316)
--------- ---------
Net cash provided by financing activities 69,822 343,684
Increase (decrease) in cash (229,645) 58,502
Cash - beginning of period 259,494 28,951
----------- ---------
Cash - end of period $ 29,849 $ 87,453
========== =========
Interest paid during period, net of capitalization $ 59,382 $ 168,618
========== =========
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 (consisting of only normal recurring
adjustments) necessary to present fairly Zonic Corporation's (the "Company")
financial position at September 30, 1997 and the results of operations for
the three and six month periods ended September 30, 1997 and 1996 and its
cash flows for the six-month periods ended September 30, 1997 and 1996. 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, 1997. Certain reclassifications have been made to amounts shown
for the prior year to conform to current year classifications.
Expenses totaling $69,547 related to research and product development which
were reported as selling and administrative expenses have been reclassified
as research and development expenses for the three month period ended June
30, 1997. This reclassification has no effect on the statement of
operations for the three month period ended September 30, 1997, but the
effect is included on the statement of operations for the six month period
ended September 30, 1997. No prior year reclassifications were necessary to
conform to current year presentations. This reclassification had no effect
on operating profits or net income for any period.
2. Affiliate Company
The Company along with A&D Company Ltd. (A&D) has formed Zonic A&D Company
with each owning 50% to market its products. During 1997, the Company and
A&D agreed to dissolve Zonic A&D Company to simplify operations and reduce
operating costs. All daily operations were merged with the Company on April
1, 1997. The dissolution which includes the distribution of assets and
liabilities will occur during 1998. The Company recorded an expense of
$385,000 during 1997 for the losses it expected to incur as a result of the
dissolution. Revenue from sales to Zonic A&D Company by the Company for the
three month periods ended September 30, 1996 was $770,501. Similar sales
for the six month periods then ended were $1,069,288. Zonic A&D Company
recorded a profit of $26,081 for the three months ended September 30, 1996
and a profit of $8,611 for the six month period then ended.
The Company accounted 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
Zonic A&D Company, including the amounts the Company has committed to fund
the operations. The prior period profits were not recorded as Zonic A&D
Company incurred substantial losses prior to 1994 and losses were recorded
in those years to the extent the Company was at risk to fund these losses.
3. Earnings Per Share
The Company is required to implement Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which was issued on February
1997, in the third quarter of fiscal 1998. The effect of implementing this
new accounting standard on reported earnings is not expected to be material.
4. New Standards
In June 1997, the Financial Accounting Standard Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Zonic will be required
to adopt these standards in 1998. Adoption of these standards will not
impact the reported results of operation or financial position of Zonic, but
may require additional disclosures.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
- --------------------------------------------------------------
Certain of the matters discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may
constitute forward-looking statements for purposes of the Securities Act of
1933 and the Securities Exchange Act of 1934, as amended, and as such may
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Important factors
that could cause the actual results, performance or achievements of the
Company to differ materially from the Company's limitation, the impact of
competitive products and pricing, product demand and market acceptance, and
fluctuations in operating results. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by such factors.
Results of Operations
- ---------------------
Product and Services Revenue decreased by $966,229 or 67% for the three
months ended September 30, 1997, when compared to the same period of the
prior year. For the six months ended September 30, 1997, revenue decreased
by $1,369,479, or 63% when compared to the same prior year period. Sales
decreased across all product lines with significant declines in the
Company's 7000 Series and Machinery Monitoring System (MMS) products lines.
The prior year included revenue from work completed on a large MMS order
received in fiscal year 1996. Revenue from this project was recorded on the
percentage of completion method in accordance with the Company's revenue
recognition policies and was completed in December, 1996. The decrease in
7000 Series revenue was attributable to significantly less orders resulting
from the Company's sale of its Zeta technology and software to A&D and its
focus on manufacturing applications of Company products primarily in the
areas of machine condition monitoring and product process monitoring.
Revenue from the Medallion product line increased $246,282 and $334,052,
respectively, for the three and six months ended September 30, 1997 when
compared to the same periods of the prior year.
Order backlog amounted to $362,000 at September 30, 1997 compared with
$711,000 at September 30, 1996. This decrease was due mainly to the large
MMS order received last year and the decline in 7000 Series orders.
Costs of products and services sold were 36% and 38% respectively of
products and services revenues for the three and six months ended September
30, 1997 versus 41% and 43% respectively for the prior year. The decrease
in costs is the result of higher profit margins on the sale of Medallion
products.
Selling and administrative expenses decreased by 26% and 20%
respectively for the three and six month periods ended September 30, 1997
versus the same periods for the prior year. The decline was due mainly to
lower administrative salaries and the continuing reduction of facilities
costs. However, selling and administrative expenses were 64% and 71%,
respectively, of products and services revenues for the current three and
six month periods versus 29% and 33%, respectively, for the same periods of
the prior year. The increased percentage was due mainly to substantially
lower revenues and higher advertising and sales promotion costs.
Research and development expenses and software construction and product
enhancement amortization was $96,210 and $198,757, respectively, for the
three and six months ended September 30, 1997 versus $205,647 and $402,291,
respectively, for the same periods of the prior year. This decrease was
due to less amortization expense as a result of the sale of the Company's
Zeta technology and software and writedown of software construction and
product enhancement costs in December, 1996. This reduction has been
partially offset by an increase in amortization expense related to Medallion
products, and research and development expenses of $59,210 and $128,757 for
the three and six months ended September 30, 1997, respectively. There was
no research and development expense for the three and six month periods for
the prior year. See Software Construction and Product Development under
Liquidity and Capital Resources.
Interest expense for the three months ended September 30, 1997 decreased
to $48,524 versus $129,188 for the same period of the prior year. For the
six months ended September 30, 1997 interest expense decreased to $91,320
from $230,933 for the same period of the prior year. This decrease was due
primarily to reduced borrowing levels during the current year resulting from
the use of proceeds from the sale of Zeta Technology and software in fiscal
1997, versus the levels of borrowing during the same period of the prior
year. (See Liquidity and Capital Resources).
Foreign currency loss was $583 for the six months ended September 30,
1997 versus currency gains of $21,776 and $38,461, respectively, for the
three and six month periods of the prior year. There was no foreign
currency gain or loss during the current three month period. Currency gain
and loss is due to the increase and decrease, respectively, in the value of
the dollar against the Japanese yen.
Liquidity & Capital Resources
- -----------------------------
Software Construction and Product Development
The Company's total unamortized software construction and product
enhancement costs at September 30, 1997 and March 31, 1997 were $108,568 and
$136,364 respectively. Cash outlays for software construction and product
enhancement projects were $42,203 for the six months ended September 30,
1997 compared to $148,498 for the prior year period. These costs will be
amortized over the estimated useful life of each product capitalized.
Research and development costs are expensed as incurred.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $1,958,855 at March
31, 1997 to a negative $2,464,475 at September 30, 1997 resulting in a
decrease in the current ratio from .56 to .20. The decline was due to
significant reductions in cash and accounts receivable.
The Company's cash flows from operations amounted to a negative $251,039 for
the six months ended September 30, 1997. Investments in software
construction and product enhancement activities used cash of $42,203.
During the current year, A&D paid a note receivable of $1,500,000 to retire
a Company bank loan guaranteed by A&D. On September 15, 1997, the Company
borrowed $600,000 from a bank to make payment on a $600,000 short-term note
payable to another bank. This note requires monthly interest payments
computed at the prime rate less 1% with the principal payable in a lump sum
on August 31, 1998 and is guaranteed by A&D. Proceeds from this loan and
the payment on the note receivable were made directly to the respective
banks. These transactions are considered non-cash transactions for the
Statement of Cash Flows.
On August 15,1997, the Company reached an agreement with its landlord to
terminate its then existing lease agreement and satisfy all outstanding past
due rental obligations with a payment of $100,000 to the landlord and by
signing of a new lease for less space in the same building. The new lease
agreement commenced September 1, 1997 for a period of two years with monthly
payments of $4,604 versus $16,112 under the prior lease. As a result of the
$100,000 payment, deferred rent was reduced by approximately $39,000 and
accounts payable was reduced by $61,000. The remaining balance of deferred
rent will be amortized into income over the term of the new lease agreement.
The main source of funds for the payment to the landlord was a $75,000 loan
from a bank. The remaining funds were from the sale of rights to receive
royalty payments to a related party. This loan which matures on August 30,
1999 is secured by the assets of the Company and requires a monthly
principal payment of $3,150 and interest computed at the prime rate plus 2%.
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 is 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. Subsequent to September 30,
1997, A&D has made additional loans to the Company totaling $57,382 to pay
current maturities of long-term debt. No repayment date for these loans
have been set at this time.
Part II - Other Information
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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: November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRITY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 29,849
<SECURITIES> 0
<RECEIVABLES> 149,532
<ALLOWANCES> 41,096
<INVENTORY> 438,740
<CURRENT-ASSETS> 604,292
<PP&E> 6,064,384
<DEPRECIATION> 5,883,342
<TOTAL-ASSETS> 785,334
<CURRENT-LIABILITIES> 3,068,767
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (3,392,742)
<TOTAL-LIABILITY-AND-EQUITY> 785,334
<SALES> 820,795
<TOTAL-REVENUES> 820,795
<CGS> 314,746
<TOTAL-COSTS> 781,352
<OTHER-EXPENSES> 583<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,320
<INCOME-PRETAX> (367,206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (367,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (367,206)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
<FN>
<F1>FOREIGN CURRENCY LOSS
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