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 December 31, 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
--------------
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
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
Products and
service revenues $ 624,975 $ 699,308 $ 1,691,541 $ 1,520,103
Cost of products and
services sold 217,110 282,514 605,750 597,259
Selling and
administrative expenses 261,442 260,600 769,654 843,197
Research and development
expenses and software
construction and product
enhancement amortization 50,299 59,254 154,130 258,011
-------- ------- ------- -------
528,851 602,368 1,529,534 1,698,467
Operating profits (loss) 96,124 96,940 162,007 (178,364)
Interest expense, net (1,092) (50,849) (6,333) (142,169)
Foreign currency gain 875 612 875 -
500 - 500 29
------- -------- -------- -------
Income (loss) before taxes 96,407 46,703 157,049 (320,504)
Provision for income taxes - - - -
------- -------- -------- --------
Net income (loss) 96,407 46,703 157,049 (320,504)
Less: Dividend payable
on preferred shares (20,600) 0 (34,128) 0
------- ------- -------- --------
Net income (loss) available
to common shareholders $ 75,807 $ 46,703 $ 122,921 $ (320,504)
======== ======== ========= ==========
Basic and diluted
income (loss) per share 0.02 0.02 0.04 (0.11)
====== ====== ====== ======
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.
Item 1 - Financial Statements (continued)
BALANCE SHEETS
As of December 31, 1998 & March 31, 1998
(unaudited)
Dec. 31 Mar. 31
ASSETS 1998 1998
-------- -------
Current Assets
Cash $ 95,052 $ 79,408
Receivables
Trade 174,813 248,519
Related parties - 1,708
--------- ---------
Total receivables 174,813 250,227
Inventories
Finished products 27,337 144,718
Work in process 106,805 49,111
Raw material 88,826 71,766
--------- ---------
Total inventories 222,968 265,595
Prepaid expenses 11,193 3,734
--------- ---------
Total Current Assets 504,026 598,964
Property and Equipment-at Cost
Furniture and office equipment 447,693 452,417
Machinery and plant equipment 602,232 597,022
Software construction and
product enhancement 2,203,070 2,203,070
--------- ---------
3,252,995 3,252,509
Less accumulated depreciation
and amortization 3,189,471 3,151,876
--------- ---------
63,524 100,633
--------- ---------
Total Assets $ 567,550 $ 699,597
========= =========
LIABILITIES
Current Liabilities
Short-term notes payable
and current maturities
of long-term debt $ 29,630 $ 42,365
Accounts payable - trade 610,229 728,062
Accounts payable - related parties - 4,223
Dividend payable 34,128 -
Deferred income 273,972 365,258
Accrued liabilities
Salaries and wages 137,032 108,947
Property and payroll taxes 47,888 54,684
Commissions 91,983 95,066
Other 32,109 31,986
-------- --------
Total Accrued Liabilities 309,012 290,683
------- --------
Total Current Liabilities 1,256,971 1,430,591
Long-Term Obligations,
Less Current Maturities 11,460 30,186
Deferred rent 55,663 118,285
SHAREHOLDERS' EQUITY (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 (8,946,099) (9,069,020)
---------- -----------
Total Shareholders' Equity (756,544) (879,465)
---------- -----------
Total Liabilities and
Shareholders' Equity $ 567,550 $ 699,597
========== ==========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' DEFICIT
For the nine months ended December 31, 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 - - - 157,049 157,049
Dividends
payable on
preferred shares - - - (34,128) (34,128)
------ ----------- --------- ----------- --------
Balance,
December 31,
1998 $61,674 $2,400,000 $5,727,881 $(8,946,099) $(756,544)
======= ========== ========== =========== =========
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(unaudited)
1998 1997
------ ------
Cash provided (used) by operations
Net income (loss) for period 157,049 (320,504)
Adjustments to reconcile net
loss to cash from operations
Depreciation and amortization 13,637 15,467
Amortization of software construction
and product enhancements 29,487 103,000
Amortization of note receivable
from shareholder - (30,000)
Provision for obsolete inventory 18,000 27,000
Amortization of deferred income and
deferred rent (158,765) (159,372)
Gain on sale of assets (500) (3,624)
Foreign currency gain and other (875) (29)
Increase (decrease) in cash due to changes in
Accounts receivable 70,813 55,916
Inventories 24,627 20,873
Prepaid expenses (7,459) (11,546)
Accounts payable (116,581) 33,333
Accrued liabilities 18,329 (2,235)
Accrued rent - (64,079)
Deferred income 4,857 84,813
-------- --------
Net cash provided (used) by operations 52,619 (250,987)
Cash used in investment activities
Purchase of equipment (6,014) (6,225)
Proceeds from the sale of fixed assets 500 13,510
Increase in software construction and
product enhancements - (42,203)
------- --------
Net cash used in investment activities (5,514) (34,918)
Cash provided by financing activities
Additions to debt obligations - 75,000
Payments on debt obligations (31,461) (15,432)
------- -------
Net cash provided (used) by
financing activities (31,461) 59,568
Increase (decrease) in cash 15,644 (226,337)
Cash - beginning of period 79,408 259,494
-------- -------
Cash - end of period $ 95,052 $ 33,157
========= ========
Interest paid during period $ 3,669 $ 22,419
========= ========
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 December 31, 1998 and the results of operations for the three and nine month
periods ended December 31, 1998 and 1997 and its cash flows for the nine month
periods ended December 31, 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.
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 March 31, 1999. 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 85% 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, 1999. The Company has recorded a dividend payable during
the current three month and nine month periods equal to 20% of
year-to-date net income as defined. This amount is adjusted quarterly
to equal 20% of the then current year-to-date net income.
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 decreased by $74,333, or 11% for the three months
ended December 31, 1998, when compared to the prior year period. Sales
increased in the Company's 7000 Series product line, but were
offset by decreases in the WCA, MMS, and Medallion product lines. The increase
in 7000 Series revenue was due to sales under an order for eight systems
received during the fourth quarter of fiscal 1998 which was completed during the
current period. The decrease in Medallion revenue of approximately $103,000
was due primarily to less sales to a company under an OEM distribution
agreement. For the nine months ended December 31, 1998, revenue increased by
$171,438 or 11% when compared to the same period of the prior year. Besides
an increase in revenue from 7000 Series products for the nine month period,
revenue also increased in WCA products as the result of sales made during the
first quarter of the current year and in Medallion products due to sales made
to a company under an OEM distribution agreement earlier in the current fiscal
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 $272,000 at December 31, 1998 compared with $234,000
at December 31, 1997. There was an increase in orders for
Medallion and Medallion based products during the current three month period.
This increase was partially offset by a decrease in orders for
WCA and 35XX Series products and extended warranty service contracts.
Costs of products and services sold were 35% and 36% respectively of products
and services revenues for the three and nine months ended
December 31, 1998 versus 40% and 39% 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 increased slightly during the current three
month period versus the same prior year period, but decreased by $73,543 or 9%
during the current nine month period versus the same period
of the prior year. There was a decrease in rent and other facility
related costs, lower professional services expense, and sales commission expense
during the current three and nine month periods. The decrease in sales
commission expense was the result of fewer sales commissionable to sales
representatives. There were higher sales promotion costs during the current
three and nine month periods which offset these decreases in the current three
month period but only partially offset decreases for the current nine month
period. Selling and administrative expenses were 42%
and 46%, respectively, of product and service revenues for the current
three and nine month periods versus 37% and 55%, respectively, for the
same periods of the prior year. The increased percentage for the current three
month period was due mainly to lower revenues while the decreased percentage for
the current nine month period was the result of expense reductions and higher
revenues.
Research and development expenses and software construction amortization
was $50,299 and $154,130 respectively, for the three and nine month
periods ended December 31, 1998 versus $59,254 and $258,011, 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. See Software
Construction and Product Development under Liquidity and Capital Resources.
Interest expense was $1,092 and $6,333, respectively, for the three and
nine month periods ended December 31, 1998 versus $50,849 and $142,169,
respectively, for the same periods ended December 31, 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 $32,778 and $53,397, respectively, for the three
and nine months ended December 31, 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.
Dividend payable on preferred shares was $20,600 and $34,128,
respectively, for the three and nine months ended December 31, 1998.
See Dividend Payable on Preferred Stock under Notes to Financial
Statements.
Liquidity & Capital Resources
- ------------------------
Software Construction and Product Development
The Company's total unamortized software construction and product enhancement
costs at December 31, 1998 and March 31, 1998 were $14,896
and $44,383, respectively. No costs were capitalized for software construction
and product enhancement projects during the current nine
month period compared to $42,203 for the prior year period.
Working Capital and Cash Flow
The Company's working capital improved from a negative $831,627 at March 31,
1998 to a negative $752,945 at December 31, 1998. The current ratio
declined slightly from .42 at March 31, 1998 to .40 at December 31, 1998. The
change in working capital was due primarily to decreases in accounts payable and
deferred income which was partially offset by a decline in accounts receivable.
The Company's cash flows from operations amounted to $52,619 for the
nine months ended December 31, 1998. Payments on long-term debt totaled $31,461.
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 three and nine month periods, 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 - Current reports on Forms 8-K amd 8-K/A
reporting on the Company's dismissal of Deloitte & Touche LLP and the
selection of Clark, Schaefer and Hackett & Co. as its auditor were
filed on December 22, 1998 and December 29, 1998, respectively.
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: February 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 95,052
<SECURITIES> 0
<RECEIVABLES> 200,922
<ALLOWANCES> 26,109
<INVENTORY> 222,967
<CURRENT-ASSETS> 504,026
<PP&E> 3,252,995
<DEPRECIATION> 3,189,471
<TOTAL-ASSETS> 567,550
<CURRENT-LIABILITIES> 1,256,971
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,218,219)
<TOTAL-LIABILITY-AND-EQUITY> 567,550
<SALES> 1,691,541
<TOTAL-REVENUES> 1,691,541
<CGS> 605,750
<TOTAL-COSTS> 923,784
<OTHER-EXPENSES> (1,375)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,333
<INCOME-PRETAX> 157,049
<INCOME-TAX> 0
<INCOME-CONTINUING> 157,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,049
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>Other expenses consists of a gain on sale of asset of $500 and foreign
currency gain of $875.
</FN>
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