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 Quarter Ended June 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 45150-9777
- ----------------------------------------- ----------
(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
For The Three Month Periods Ended June 30,
(unaudited)
1997 1996
---- ----
Product and service revenues $ 341,761 $ 745,012
Cost of products and services sold 142,154 346,728
Selling and administrative expenses 343,247 308,804
Research and development expenses and
software construction and product
enhancement amortization 33,000 196,644
-------- --------
Total Operating Expenses 518,401 852,176
Operating loss (176,640) (107,164)
Interest expense, net (42,797) (101,745)
Foreign currency gains (losses) (583) 16,685
-------- --------
Loss before taxes (220,020) (192,224)
Provision for income taxes - -
--------- ---------
Net loss $ (220,020) $ (192,224)
========= =========
Net loss per share $ (0.07) $ (0.06)
======== ========
Weighted average shares outstanding 3,044,136 3,044,136
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
Balance Sheets
As of June 30, 1997 & March 31, 1997
(unaudited)
June 30 March 31
ASSETS 1997 1997
------- --------
Current Assets
Cash $ 8,164 $ 259,494
Receivables
Trade 89,458 266,538
Related parties 57,418 38,873
Unbilled contracts 14,986 14,986
------- -------
Total receivables 161,862 320,397
Notes receivable, shareholder - 1,470,000
Inventories
Finished products 200,312 278,412
Work in process 186,947 68,582
Raw material 74,023 72,872
------- -------
Total inventories 461,282 419,866
Prepaid expenses 50,089 4,238
------- ---------
Total Current Assets 681,397 2,473,995
Property and Equipment-at Cost
Furniture and office equipment 432,471 430,297
Machinery and plant equipment 783,137 783,137
Software construction and
product enhancement 4,828,104 4,802,522
--------- ---------
6,043,712 6,015,956
Less accumulated depreciation
and amortization 5,841,287 5,802,467
--------- ---------
202,425 213,489
Total Assets $ 883,822 $ 2,687,484
======== =========
The accompanying notes are an integral part of these financial statements.
BALANCE SHEETS
As of June 30, 1997 & March 31, 1997
(unaudited)
June 30 March 31
LIABILITIES 1997 1997
------- --------
Current Liabilities
Short term notes payable and current
maturities of long-term debt $ 1,407,248 $ 2,841,176
Accounts payable - trade 761,144 718,775
Accounts payable - related parties 0 3,738
Deferred Income 294,822 353,572
Accrued liabilities
Salaries and wages 133,349 126,007
Property and payroll taxes 80,078 78,196
Interest 64,672 76,536
Commissions 96,263 108,363
Provision for closing of affiliated company 49,287 84,150
Other 44,242 42,337
-------- --------
Total Accrued Liabilities 467,891 515,589
--------- ---------
Total Current Liabilities 2,931,105 4,432,850
Long-Term Obligations, Less Current Maturities 920,688 987,425
Deferred Rent 215,910 231,070
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 (8,973,436) (8,753,416)
---------- ----------
Total Shareholders' Deficit (3,183,881) (2,963,861)
---------- ----------
Total Liabilities &
Shareholders' Deficit $ 883,822 $ 2,687,484
========= ===========
The accompanying notes are an integral part of these financial statements.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For The Three Months Ended June 30, 1997
(unaudited)
Additional
Common Paid-In Accumulated
Shares Capital Deficit Total
Balance, March 31, 1997 $ 61,674 $5,727,881 $(8,753,416) $(2,963,861)
Net loss for period (220,020) (220,020)
-------- ---------- ----------- ----------
Balance, June 30, 1997 $ 61,674 $5,727,881 $(8,973,436) $(3,183,881)
======== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CASH FLOWS
For The Three Month Periods Ended June 30,
(unaudited)
1997 1996
---- ----
Cash used in operations
Net loss for period $ (220,020) $ (192,224)
Adjustments to reconcile net loss
to cash from operations:
Depreciation and amortization 5,820 10,525
Amortization of software construction
and product enhancements 33,000 196,643
Amortization of note receivable
from shareholder (30,000) 0
Provision for obsolete inventory 9,000 9,000
Amortization of deferred income (51,447) (74,909)
Foreign currency loss and other 583 (16,685)
Increase (decrease) in cash due to changes in
Accounts receivable 144,096 522,752
Inventories (50,416) (186,717)
Prepaid expenses (45,851) (41,057)
Accounts payable 52,486 (7,278)
Accrued liabilities (47,698) (9,982)
Accrued rent (15,159) (15,408)
Deferred income (7,303) (304,563)
-------- --------
Net cash used in operations (222,909) (109,903)
Cash used in investment activities
Purchase of fixed assets (2,174) 0
Increase in software construction
and product enhancements (25,582) (102,421)
------- --------
Net cash used in investment activities (27,756) (102,421)
Cash provided by (used in) financing activities:
Additions to long-term obligations 0 200,000
Payments on long-term obligations (665) (3,735)
----- -------
Net cash provided by (used in)
financing activities (665) 196,265
Decrease in cash (251,330) (16,059)
Cash - beginning of period 259,494 28,951
-------- -------
Cash - end of period 8,164 12,892
======== =======
Interest paid during period,
net of capitalization $ 84,211 $ 78,171
======== ========
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 June 30, 1997 and the results of operations and cash
flows for the three month period ended June 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.
2. Affiliate Company
The Company along with A&D Company Ltd. (A&D) formed Zonic A&D Company in
October, 1988 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 period ended June 30, 1996 was $298,787. Zonic A&D Company
experienced a loss of $17,000 for the three months ended June 30, 1996.
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 was limited to the investment in
Zonic A&D Company, including the amounts the Company has committed to fund the
operations. The prior period loss was 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 per share 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
Results of Operations
Product and Services Revenue decreased by $403,251, or 54% for the three
months ended June 30, 1997, when compared to the prior year period.
Sales decreased across all product lines with significant decreases
occurring in the Machinery Monitoring System (MMS) and 7000 Series product
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 is attributable to the slow down in 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 production process monitoring.
Revenue from the Medallion product line was $195,000 for the current period.
There was no revenue from Medallion products during the prior year period.
Order backlog amounted to $226,000 at June 30, 1997 compared with $1,315,000
at June 30, 1996. This decrease was due primarily to the large MMS order
received last year and a decline in 7000 Series orders.
Costs of products and services sold were 42% of products and services
revenues for the three months ended June 30, 1997 versus 47% for the prior
year. The decrease in costs was due mainly to higher profit margins on the
sale of Medallion products and lower warranty and repair costs.
Selling and administrative expenses increased $34,443 or 11% during the
current period versus the same prior year period. This increase was due to
higher advertising and sales promotion costs for the Medallion product line.
Selling and administrative expenses were 100% versus 41% of total revenue
for the current and prior year periods, respectively, as the result of
substantially lower sales and higher advertising and sales promotion costs.
Research and development expenses and software construction amortization
was $33,000 for the current period versus $196,644 for the prior period.
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. See Software Construction and Product
Development under Liquidity and Capital Resources.
Interest expense for the three months ended June 30, 1997 was $42,797
versus $101,745 for the same period ended June 30, 1996. 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.
Foreign currency loss was $583 for the three months ended June 30, 1997
compared to a gain of $16,685 for the same period of the prior year. The
current year loss is due to the decrease in 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 June 30, 1997 and March 31, 1997 were $128,946 and $136,364,
respectively. Cash outlays for software construction and product enhancement
projects were $25,582 for the three months ended June 30, 1997 compared to
$102,421 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 $1,958,855 at March
31, 1997 to a negative $2,249,708 at June 30, 1997 resulting in a decrease
in the current ratio from .56 to .23. The decline was due to significant
reductions in cash and accounts receivable.
The Company's cash flows from operations amounted to a negative $222,909 for
the three months ended June 30, 1997. Investments in software construction
and product enhancement activities used cash of $25,582.
During the current year period, A&D paid a note receivable of $1,500,000,
which payment was made directly to a bank to retire a Company bank loan
guaranteed by A&D. This transaction is considered a non-cash transaction on
the Statement of Cash Flows.
The Company continues to experience serious cash flow problems. A $600,000
short-term note payable to a bank which is guaranteed by A&D is due on
September 15, 1997. The Company is actively seeking a source of funds to
make payment on this note, but to date none has been found. The Company is
also 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, to make payments on its other 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.
PART II - Other Information
Item 5: Other Information
On August 4, 1997, the Company received a Notice of Default for non-payment
of rent. On August 15, 1997, the Company reached an agreement with the
Landlord to terminate the existing lease and satisfy all outstanding rental
obligations with a payment of $100,000 and by signing a new lease for less
space in the same building. The new lease agreement commences September 1,
1997 for a period of two years with monthly payments of $4,604 versus the
current payment of $16,112. The impact of this transaction is not reflected
in these financial statements.
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 - None
SIGNATURES
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: --------------------------------------------
James B. Webb
President and Chief Executive Officer
By: --------------------------------------------
John H. Reifschneider
Controller
Dated: August 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRITY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,164
<SECURITIES> 0
<RECEIVABLES> 202,958
<ALLOWANCES> 41,096
<INVENTORY> 461,281
<CURRENT-ASSETS> 681,396
<PP&E> 6,043,712
<DEPRECIATION> 5,841,287
<TOTAL-ASSETS> 883,822
<CURRENT-LIABILITIES> 2,931,105
<BONDS> 0
0
0
<COMMON> 61,674
<OTHER-SE> (3,245,555)
<TOTAL-LIABILITY-AND-EQUITY> 883,822
<SALES> 341,761
<TOTAL-REVENUES> 341,761
<CGS> 142,154
<TOTAL-COSTS> 376,247
<OTHER-EXPENSES> 583<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,797
<INCOME-PRETAX> (220,020)
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<EPS-PRIMARY> (.07)
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<F1>FOREIGN CURRENCY LOSS
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