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, 1999 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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
Statement of Operations
For The Three Month Periods Ended June 30,
(unaudited)
<CAPTION>
1999 1998
<S> <C> <C>
Product and service revenues .............................. $ 473,645 $ 442,583
Cost of products and services sold ........................ 195,936 172,647
Selling and administrative expenses ....................... 220,930 251,388
Research and development expenses and software construction
and product enhancement amortization ................. 26,445 53,989
----------- -----------
Total Operating Expenses .................................. 443,311 478,024
Operating income (loss) ................................... 30,334 (35,441)
Interest expense, net ..................................... (1,717) (2,384)
----------- -----------
Income (loss) before taxes ................................ 28,617 (37,825)
Provision for income taxes ................................ -- --
----------- -----------
Net income (loss) ......................................... 28,617 (37,825)
Less: Dividend payable on Class B preferred shares ........ (5,723) --
----------- -----------
Net income (loss) available to common shareholders ........ $ 22,894 $ (37,825)
=========== ===========
Weighted average of common shares outstanding ............. 3,044,136 3,044,136
Dilutive potential common shares:
Class A convertible preferred stock ................. 1,200,000 --
Stock Options ....................................... -- --
----------- -----------
=========== ===========
Adjusted weighted average of common shares outstanding .... 4,244,136 3,044,136
=========== ===========
Basic earnings (loss) per share ........................... $ 0.01 $ (0.01)
Diluted earnings (loss) per share ......................... $ 0.01 $ (0.01)
</TABLE>
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
<TABLE>
Balance Sheets
As of June 30, 1999 & March 31, 1999
<CAPTION>
(unaudited)
<S> <C> <C>
30-Jun 31-Mar
ASSETS ........................................... 1999 1999
Current Assets
Cash .......................................... $ 29,479 $ 32,848
Receivables
Trade ...................................... 125,866 125,786
Unbilled ................................... 65,286 115,588
Related parties ............................ 8,700 200
----------- -----------
Total receivables ............................ 199,852 241,574
Inventories
Finished products ......................... 115,360 96,164
Work in process ........................... 43,527 68,128
Raw material .............................. 88,277 85,049
----------- -----------
Total inventories ............................ 247,164 249,341
Prepaid expenses ............................. 7,163 2,702
----------- -----------
Total Current Assets ...................... 483,658 526,465
Property and Equipment-at Cost
Furniture and office equipment ............... 133,284 133,284
Machinery and plant equipment ................ 264,164 264,164
Software construction and product enhancement 2,235,573 2,203,070
----------- -----------
2,633,021 2,600,518
Less accumulated depreciation and amortization (2,562,236) (2,558,156)
----------- -----------
70,785 42,362
Total Assets ........................... $ 554,443 $ 568,827
=========== ===========
LIABILITIES
Current Liabilities
Short term notes payable and current
maturities of long-term debt ............... $ 11,413 $ 20,788
Accounts payable - trade ...................... 643,869 614,230
Deferred Income ............................... 281,297 321,819
Dividend payable .............................. 34,995 35,698
Accrued liabilities
Salaries and wages ......................... 107,075 105,514
Property and payroll taxes ................. 53,994 41,317
Other ...................................... 126,985 135,468
----------- -----------
Total Accrued Liabilities ..................... 288,054 282,299
----------- -----------
Total Current Liabilities ............... 1,259,628 1,274,834
Long-Term Obligations, Less Current Maturities ... 8,962 10,160
Deferred Rent .................................... 13,915 34,789
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 ........................... (8,917,617) (8,940,511)
----------- -----------
Total Shareholders' Deficit ...................... (728,062) (750,956)
----------- -----------
Total Liabilities & Shareholders' Deficit $ 554,443 $ 568,827
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Part I - Financial Statements (continued)
<TABLE>
Statement of Shareholders Deficit
For The Three Months Ended June 30, 1999
(unaudited)
<CAPTION>
Additional
Common Preferred Paid-in Accumulated
Shares Shares Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1999 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,940,511) $ (750,956)
Net income (loss) for period - - - 28,617 28,617
Dividend payable on preferred shares - - - (5,723) (5,723)
---------- ------------- ------------- ---------------- ------------
Balance, June 30, 1999 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,917,617) $ (728,062)
========== ============= ============= ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Part I - Financial Statements (continued)
<TABLE>
Statements of Cash Flows
For The Three Month Periods Ended June 30,
(unaudited)
<CAPTION>
<S> <C> <C>
1999 1998
Cash used in operations:
Net income (loss) for period ....................... $ 28,617 $ (37,825)
Adjustments to reconcile net income (loss)
to cash from operations:
Depreciation and amortization ................... 3,680 6,416
Amortization of software construction
and product enhancements .................... 400 9,828
Provision for obsolete inventory ................ 6,000 6,000
Amortization of deferred income and deferred rent (42,860) (50,391)
Increase (decrease) in cash due to changes in
Accounts receivable ............................. 41,722 154,849
Inventories ..................................... (3,823) (103,507)
Prepaid expenses ................................ (4,461) (5,858)
Accounts payable ................................ 29,639 (37,056)
Accrued liabilities ............................. (671) (17,591)
Deferred income ................................. (18,536) 27,004
------- ---------
Net cash provided by (used in) operations .... 39,707 (48,131)
Cash used in investment activities:
Purchase of fixed assets ........................ - (2,707)
Increase in software construction
and product enhancements ..................... (32,503) --
------- ---------
Net cash used in investment activities ....... (32,503) (2,707)
Cash used in financing activities:
Payments on long-term obligations ............... (10,573) (10,466)
------- ---------
Decrease in cash ...................................... (3,369) (61,304)
Cash - beginning of period ............................ 32,848 79,408
--------- ---------
Cash - end of period .................................. $ 29,479 $ 18,104
=========
Interest paid during period ........................... $ 1,717 $ 2,781
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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 June 30, 1999 and the results of operations and cash flows for the three
month periods ended June 30, 1999 and 1998. 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,
1999. Certain reclassifications have been made to amounts shown for the prior
year to conform to current year classifications.
2. New Standards
The Financial Accounting Standards Board has proposed an interpretive release on
several issues that are not specifically addressed in APB No.25, "Accounting for
Stock Issued to Employees." The proposed guidance for accounting for the
repricing of employee stock options could result in significant accounting
changes for the Company as a result of the repricing of options which occurred
in February 1999. The Company would be required to record an expense
(compensation costs) equal to the difference between the modified exercise price
and any subsequent increase in the price of the Company's common stock. This
accounting would be applied from the date of issuance until the exercise date of
the option. The final Interpretation would be effective upon issuance (probably
in September), but will cover events that occurred after December 15, 1998. The
impact on the Company's financial statements would depend on the market value of
the common stock. At June 30, 1999, the market value of the Company's common
stock was less than the exercise price of the repriced options, and as such,
there would be no additional expense.
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, utilizes date
identification.
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. 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 website.
This review process is 95% complete at June 30, 1999 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.
<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 $31,062, or 7% for the three months
ended June 30, 1999, when compared to the prior year period. Sales increased
significantly in the targeted new markets for special systems and test
applications using Medallion products. This increase was substantially offset by
a decreases in the 7000 Series and WCA product lines. Service revenues increased
$3,104 or 8% for the current three month period when compared to the prior year
period.
Order backlog amounted to $133,000 at June 30, 1999 compared with $597,000 at
June 30, 1998. There were significant decreases in the 7000 series and Medallion
product lines. Prior year 7000 series backlog included 7 systems from an order
received during the fourth quarter of fiscal 1998 which were shipped throughout
the remainder of fiscal year 1999. The decrease in Medallion backlog was due to
a decline in new orders and the Company's ability to process and ship Medallion
orders on a more timely basis.
Costs of products and services sold were 41% of products and services revenues
for the three months ended June 30, 1999 versus 39% for the prior year. The
increase in costs was due to higher than normal costs on a 7000 series related
sale.
Selling and administrative expenses decreased $30,458 or 12% during the current
period versus the same prior year period. This decrease was due to lower
administrative salaries and lower commission expense as sales from outside sales
representatives declined. These decreases were partially offset by higher sales
commission paid to the Company's employees and an increase in advertising and
sales promotion costs. Selling and administrative expenses were 47% versus 57%
of total revenue for the current and prior year periods, respectively.
Research and development expenses and software construction amortization was
$26,445 for the current period versus $53,989 for the prior period. This
decrease was due to less amortization expense as a result of no capitalized
software construction and product enhancement costs during the past year and a
decline in Medallion research and development expenses. See Software
Construction and Product Development under Liquidity and Capital Resources.
Interest expense for the three months ended June 30, 1999 was $1,717 versus
$2,384 for the same period ended June 30, 1998. This decrease was due to less
borrowings during the current year.
Income tax expense was $9,730 for the current period and was offset by net
operating loss carryforwards. At March 31, 1999, loss carryforwards totaling
$6.7 million and tax credits of $666,000 were available to offset future income
taxes. No benefit from the Company's deferred tax assets has been provided at
this time.
Dividend payable on Class B preferred shares is equal to 20% of the Company's
current year-to-date net income.
Liquidity & Capital Resources
Software Construction and Product Development
The Company's cash outlay for software construction and product enhancement
costs at June 30, 1999 was $32,503. There was no cash outlay for software
construction and product enhancement costs during the same period of the prior
year. There were no unamortized software construction and product costs at March
31, 1999.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $748,371 at March 31,
1999 to a negative $775,970 at June 30, 1999 resulting in a decrease in the
current ratio from .41 to .38. The decline was due mainly to a reduction in
accounts receivable.
The Company's cash flows from operations amounted to $39,707. Payments on
long-term debt totaled $10,573 for the three months ended June 30, 1999.
Although the Company had an operating profit during the current three month
period, the Company continues to experience cash flow problems. The Company is
seeking 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
Item 5: Other Information
On June 29, 1999, the Company extended its current facilities lease through
August 31, 2001. The monthly rent increased from the current amount of $4,604 to
$4,685 effective September 1, 1999. All other terms and conditions remained the
same.
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
<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: August 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1999 and is qualified in its entirity by
reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-END> Jun-30-1999
<CASH> 29,479
<SECURITIES> 0
<RECEIVABLES> 224,636
<ALLOWANCES> 24,784
<INVENTORY> 247,164
<CURRENT-ASSETS> 483,658
<PP&E> 2,633,021
<DEPRECIATION> 2,562,236
<TOTAL-ASSETS> 554,443
<CURRENT-LIABILITIES> 1,259,628
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,189,736)
<TOTAL-LIABILITY-AND-EQUITY> 554,443
<SALES> 473,645
<TOTAL-REVENUES> 473,645
<CGS> 195,936
<TOTAL-COSTS> 247,375
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,717
<INCOME-PRETAX> 28,617
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,617
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
