<PAGE>
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 September 30, 1998 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
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Not Applicable
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(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
---------
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<PAGE>
Part I Financial Information
Item 1. Financial Statements
STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
Products and service revenues $623,983 $479,033 $1,066,566 $820,795
Cost of products and services sold 215,994 172,592 388,641 314,746
Selling and administrative expenses 256,824 308,893 508,211 582,595
Research and development expenses
and software construction and
product enhancement amortization 49,842 96,210 103,831 198,757
------- ------ ------- -------
522,660 577,695 1,000,683 1,096,098
------- ------- --------- ---------
Operating profits (loss) 101,323 (98,662) 65,883 (275,303)
Interest expense, net (2,856) (48,524) (5,240) (91,320)
Foreign currency loss - - - (583)
------ ------- ------- -------
Income (loss) before taxes 98,467 (147,186) 60,643 (367,206)
Provision for income taxes - - - -
------ ------- ------ -------
Net income (loss) 98,467 (147,186) 60,643 (367,206)
Less: Dividend payable on
preferred shares (13,528) - (13,528) -
------ ------- ------ -------
Net income (loss) available
to common shareholders $ 84,939 $(147,186) $47,115 $(367,206)
======== ========== ======= =========
Basic and diluted earnings (loss)
per share $ 0.03 $ (0.05) $ 0.02 $ (0.12)
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.
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<PAGE>
Item 1 - Financial Statements (continued)
BALANCE SHEETS
As of September 30, 1998 & March 31, 1998
(unaudited)
September 30 March 31
ASSETS 1998 1998
Current Assets
Cash $ 80,418 $ 79,408
Receivables
Trade 145,783 248,519
Related parties 4,599 1,708
--------- ---------
Total receivables 150,382 250,227
Inventories
Finished products 79,390 144,718
Work in process 133,807 49,111
Raw material 83,535 71,766
---------- ---------
Total inventories 296,732 265,595
Prepaid expenses 26,677 3,734
---------- ---------
Total Current Assets 554,209 598,964
Property and Equipment-at Cost
Furniture and office equipment 447,692 452,417
Machinery and plant equipment 602,232 597,022
Software construction and
product enhancement 2,203,070 2,203,070
--------- ---------
3,252,994 3,252,509
Less accumulated depreciation and
amortization 3,176,394 3,151,876
--------- ---------
76,600 100,633
--------- ---------
Total Assets $ 630,809 $ 699,597
========== ==========
LIABILITIES
Current Liabilities
Short-term notes payable and current maturities of
long-term debt $ 39,005 $ 42,365
Accounts payable - trade 721,808 728,062
Accounts payable - related parties 27,209 4,223
Dividend payable 13,528 -
Deferred income 291,776 365,258
Accrued liabilities
Salaries and wages 122,096 108,947
Property and payroll taxes 43,894 54,684
Commissions 82,336 95,066
Other 32,375 31,986
-------- --------
Total Accrued Liabilities 280,701 290,683
------- -------
Total Current Liabilities 1,374,027 1,430,591
Long-Term Obligations,
Less Current Maturities 12,595 30,186
Deferred rent 76,537 118,285
SHAREHOLDERS' DEFICIT
Preferred shares 2,400,000 2,400,000
Common shares 61,674 61,674
Additional paid-in capital 5,727,881 5,727,881
--------- ---------
8,189,555 8,189,555
Accumulated deficit (9,021,905) (9,069,020)
---------- ----------
Total Shareholders' Deficit (832,350) (879,465)
---------- ---------
Total Liabilities and
Shareholders' Deficit $ 630,809 $ 699,597
=========== ===========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Item 1 - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' DEFICIT
For the six months ended September 30, 1998
(unaudited)
Additional
Common Preferred Paid-in Accumulated
Shares Shares Capital Deficit Total
Balance,
March 31, 1998 $61,674 $2,400,000 $5,727,881 $(9,069,020) $(879,465)
Net income
for the period - - - 60,643 60,643
Dividend payable
on preferred
shares - - - (13,528) (13,528)
------- ---------- ---------- ----------- ---------
Balance,
September 30,
1998 $61,674 $2,400,000 $5,727,881 $(9,021,905) $(832,350)
======= ========== ========== ============ ==========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Item 1 - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(unaudited)
1998 1997
Cash provided (used) by operations
Net income (loss) for period $ 60,643 $ (367,206)
Adjustments to reconcile net loss to cash
from operations
Depreciation and amortization 10,388 10,875
Amortization of software construction
and product enhancements 19,659 70,000
Amortization of note receivable
from shareholder - (30,000)
Provision for obsolete inventory 12,000 18,000
Amortization of deferred income
and deferred rent (110,920) (97,652)
Foreign currency loss and other - 583
Increase (decrease) in cash due to changes in
Accounts receivable 99,845 197,524
Inventories (43,137) (36,873)
Prepaid expenses (22,943) (23,029)
Accounts payable 16,732 84,280
Accrued liabilities (9,982) (35,745)
Accrued rent - (64,079)
Deferred income (4,310) 22,283
------- -------
Net cash provided (used) by operations 27,975 (251,039)
Cash used in investment activities
Purchase of equipment (6,014) (6,225)
Increase in software construction and
product enhancements - (42,203)
-------- --------
Net cash used in investment activities (6,014) (48,428)
Cash provided (used) by financing activities
Additions to debt obligations - 75,000
Payments on debt obligations (20,951) (5,178)
-------- -------
Net cash provided (used) by
financing activities (20,951) 69,822
Increase (decrease) in cash 1,010 (229,645)
Cash - beginning of period 79,408 259,494
-------- --------
Cash - end of period $ 80,418 $ 29,849
========= ==========
Interest paid during period $ 5,637 $ 59,382
========= ==========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
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, 1998 and the results of operations for the three
and six month periods ended September 30, 1998 and 1997 and its cash flows
for the six month periods ended September 30, 1998 and 1997. 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,
1998. Certain reclassifications have been made to amounts shown for the prior
year to conform to current year classifications.
2. New Standards
The Company implemented Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" during the first quarter of the
current year. Under the provisions of this Statement, all changes in equity
that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners are
reported as comprehensive income. As required by the statement,
comprehensive income should be reported as net income and other comprehensive
income with a total amount displayed in the financial statements. Since the
Company has no items of other comprehensive income during the current year,
comprehensive income is not reported.
The Company will implement Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in the annual financial statements of the current year. This statement requires
disclosure of certain information for each operating segment of a business
enterprise. Specific criteria is included in this statement to determine
reportable segments of the business. The Company has a single reportable
segment. Revenues and the loss for this segment are reported in the
accompanying Statement of Operations. Adoption of the statement will not
impact the reported results of operations of the Company and will not require
additional disclosure.
3. Year 2000 Issues
The Company defines Year 2000 compliance as proper functionality, or
performance of a system, process, or equipment that is not adversely affected
by dates prior to, during, and after the year 2000. Due to memory
constraints, early programmers represented years by the last two digits of
the century. Thus the year 1970 is represented by the number "70" in many
older software programs. At the turn of the century, the year will become
"00" and the computer or system will interpret this as the year 1900 and not
the year 2000. Many systems have electronic components that utilize a date
to control the function it serves. Most computer software, including the
Company product offerings, utilize date identification.
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The Company has initiated a comprehensive review and evaluation of all relevant
internal and external systems, processes, and third party providers to
determine their compliance or progress toward Year 2000 compliance. This
review is to be completed by the end of 1998. If a system, process or third
party provider is deemed significant to the operations of the Company and
Year 2000 compliance is in question, the Company will develop a contingency
plan to address the issue. At this time the Company has not encountered nor
anticipates any significant Year 2000 issues requiring a contingency plan.
The Company's product offerings utilize date reference for the identification
of printed and stored data. A date reference problem will result in stored
data being tagged with an incorrect date, or printed data indicating an
incorrect date. The Company has determined that certain legacy products will
not be reviewed for Year 2000 compliance. All current products will be
Year 2000 compliant. This information has been provided to the Company's
clients and the information is available on the company's WEB site.
At this time the review process is 75% complete and the Company has discovered
no material Year 2000 compliance issues. The Company has not incurred nor
anticipates any additional significant expenses as a result of its on-going
Year 2000 work.
4. Dividend Payable on Preferred Stock
The Class B Preferred Stock of the Company includes an annual dividend equal to
20% of the Company's annual after-tax earnings excluding non-recurring earnings
as defined and charges effective with the year ended March 31, 1998. The
Company has recorded a dividend payable during the current three month period
equal to 20% of year-to-date net income as defined. No amount was recorded
during the first quarter of fiscal 1999 as the Company had a net loss for that
period. This amount will be adjusted each quarter therafter to equal 20% of
the then current year-to-date net income.
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<PAGE>
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 Operation" 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 achievement of the Company to differ
materially from the Company's expectations include, without limitation, the
following: 1) the Company is unable to improve existing products or
develop new products which satisfy needs in the Company's markets; 2) the
Company is unable to penetrate new markets; 3) the Company is unable to
retain existing personnel or hire additional personnel; 4) the industries the
Company serves experience less rapid growth than anticipated; 5) the Company is
unable to obtain supplies on a timely basis from its limited number of
suppliers; 6) new competitors enter the markets the Company serves or
existing competitors increase their marketing efforts; 7) the Company is
unable to obtain additional debt or equity financing on favorable terms, if
at all, to satisfy its cash requirements. 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 increased by $144,950, or 30% for the three months
ended September 30, 1998, when compared to the prior year period. Sales
increased in the Company's Medallion and 7000 Series product lines, but were
partially offset by decreases in the WCA and MMS product lines. The increase
in Medallion revenue was due to sales to a company under an OEM distribution
agreement and the increase in 7000 Series revenue was from sales under an
order for eight systems received during the fourth quarter of fiscal 1998.
For the six months ended September 30, 1998, revenue increased by $245,771 or
30% when compared to the same period of the prior year. Besides revenue
increases in Medallion and 7000 Series products for the six month period,
revenue also increased in WCA products as the result of sales made
during the first quarter of the current year. These increases were partially
offset by declines in consulting, extended warranty service and MMS product
revenue attributable to the continuing slow down in orders resulting from the
Company's sale of its Zeta technology and software to A&D Company, Ltd (A&D) in
fiscal 1997.
Order backlog amounted to $300,000 at September 30, 1998 compared with
$362,000 at September 30, 1997. The decrease was due to a decline in Medallion
orders during the current three month period and as a result of the Company
increasing its inventory of Medallion products throughout the current year
which reduced the amount of time to fill orders from stock. The prior year also
included several orders for manufacturing applications of Medallion-based
products. This decrease has been substantially offset by the four remaining
units from the eight system Series 7000 order received during the fourth
quarter of fiscal 1998. These remaining units will be shipped throughout
fiscal 1999.
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<PAGE>
Costs of products and services sold were 35% and 36% respectively of products
and services revenues for the three and six months ended September 30, 1998
versus 36% and 38% respectively for the same periods of the prior year. The
decrease in costs was due mainly to higher profit margins on Medallion product
sales resulting from add-on software and equipment options and reduced
production costs.
Selling and administrative expenses decreased $52,069 and $74,384 or 17% and
13% respectively during the current three and six month periods versus the same
prior year periods. This decrease was due mainly to lower rent and other
facility related costs and lower professional services expense. A decrease in
sales commission expense during the current three month period as a result of
fewer sales commissionable to sales representatives offset an increase earlier
in the current year. These decreases were partially offset by higher sales
promotion costs during the current three month period eliminating a decrease
earlier in the current year and higher travel expenses. Selling and
administrative expenses were 41% and 48% respectively of products and service
revenues for the current three and six month periods versus 64% and 71%
respectively for the same periods of the prior year.
Research and development expenses and software construction amortization was
$49,842 and $103,831, respectively, for the three and six month periods ended
September 30, 1998 versus $96,210 and $198,757, respectively, for the same
periods of the prior year. These decreases were due to less amortization
expense as a result of a decrease in capitalized software construction and
product enhancement costs during the past year and a decline in the level of
Medallion research and development costs versus the prior year. See Software
Construction and Product Development under Liquidity and Capital Resources.
Interest expense was $2,856 and $5,240, respectively, for the three and six
month periods ended September 30, 1998 versus $48,524 and $91,320,
respectively, for the same periods ended September 30, 1997. This decrease
was due to significantly less borrowings during the current year resulting
from the retirement of outstanding current and long-term debt using proceeds
from the sale of preferred stock to A&D in fiscal 1998.
Income tax expense was $33,479 and $20,619, respectively, for the three and six
months ended September 30, 1998 was offset by net operating loss carryforwards.
At March 31, 1998, loss carryforwards totaling $6.3 million and tax credits of
$646,000 were available to offset future income taxes. No benefit from the
Company's deferred tax assets has been provided at this time.
Liquidity & Capital Resources
Software Construction and Product Development
The Company's total unamortized software construction and product enhancement
costs at September 30, 1998 and March 31, 1998 were $24,724 and $44,383,
respectively. No costs were capitalized for software construction and product
enhancement projects during the current six month period compared to $42,203
for the prior year period.
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<PAGE>
Working Capital and Cash Flow
The Company's working capital improved from a negative $831,627 at March 31,
1998 to a negative $819,818 at September 30, 1998. The current ratio declined
slightly from .42 at March 31, 1998 to .40 at September 30, 1998. The change
in working capital was due primarily to a decrease in deferred income which was
substantially offset by a decline in accounts receivable.
The Company's cash flows from operations amounted to $27,975 for the six
months ended September 30, 1998. Payments on long-term debt totaled $20,951.
There was no investment in software construction and product enhancement
activities during the current period.
The Company has experienced some improvement in its cash flow resulting from
its operating profit during the current period, but continues to experience
cash flow problems as current liabilities exceed current assets. The Company
continues to seek additional working capital through debt or equity financing
from public or private sources to reduce current liabilities 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
None
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
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<PAGE>
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:_/s/ James B. Webb_______________
James B. Webb
President and Chief Executive Officer
By:_/s/ John H. Reifschneider__________
John H. Reifschneider
Controller
Dated: November 5, 1998
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 80,418
<SECURITIES> 0
<RECEIVABLES> 176,491
<ALLOWANCES> 26,109
<INVENTORY> 296,732
<CURRENT-ASSETS> 554,209
<PP&E> 3,252,994
<DEPRECIATION> 3,176,394
<TOTAL-ASSETS> 630,809
<CURRENT-LIABILITIES> 1,374,027
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,294,024)
<TOTAL-LIABILITY-AND-EQUITY> 630,809
<SALES> 1,066,566
<TOTAL-REVENUES> 1,066,566
<CGS> 388,641
<TOTAL-COSTS> 612,042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,240
<INCOME-PRETAX> 60,643
<INCOME-TAX> 0
<INCOME-CONTINUING> 60,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,643
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
