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, 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
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
9/30/99 9/30/98 9/30/99 9/30/98
<S> <C> <C> <C> <C>
Products and service revenues ..................... $ 518,659 $ 623,983 $ 992,305 $ 1,066,566
Cost of products and services sold ................ 214,044 215,994 409,980 388,641
Selling and administrative expenses ............... 227,217 256,824 448,147 508,211
Research and development expenses
and software construction and
product enhancement amortization ............... 35,414 49,842 61,859 103,831
----------- ----------- ----------- -----------
476,675 522,660 919,986 1,000,683
Operating profits ................................. 41,984 101,323 72,319 65,883
Interest expense, net ............................. (1,185) (2,856) (2,902) (5,240)
----------- ----------- ----------- -----------
Income before taxes ............................... 40,799 98,467 69,417 60,643
Provision for income taxes ........................ -- -- -- --
----------- ----------- ----------- -----------
Net income ........................................ 40,799 98,467 69,417 60,643
Less: Dividend payable on preferred shares ........ (8,160) (13,528) (13,883) (13,528)
----------- ----------- ----------- -----------
Net income available to common shareholders ....... $ 32,639 $ 84,939 $ 55,534 $ 47,115
=========== =========== =========== ===========
Weighted average of common shares outstanding ..... 3,044,136 3,044,136 3,044,136 3,044,136
Dilutive potential common shares:
Class A convertible preferred Stock ..... 1,200,000 -- 1,200,000 --
Stock options ........................... 31,077 -- -- --
----------- ----------- ----------- -----------
Adjusted weighted average of common shares
outstanding ....................................... 4,275,213 3,044,136 4,244,136 3,044,136
=========== =========== =========== ===========
Basic earnings per share .......................... $ 0.01 $ 0.03 $ 0.02 $ 0.02
=========== =========== =========== ===========
Diluted earnings per share ........................ $ 0.01 $ 0.03 $ 0.01 $ 0.02
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements .
<PAGE>
Item 1 - Financial Statements (continued)
BALANCE SHEETS
As of September 30, 1999 & March 31, 1999
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30 March 31
1999 1999
<S> <C> <C>
ASSETS ..............................................
Current Assets
Cash ........................................... $ 7,084 $ 32,848
Receivables
Trade ..................................... 248,029 125,786
Unbilled .................................. 33,400 115,588
Related parties ........................... 15,200 200
----------- -----------
Total receivables .............................. 296,629 241,574
Inventories
Finished products ......................... 51,786 96,164
Work in process ........................... 87,047 68,128
Raw material .............................. 96,023 85,049
----------- -----------
Total inventories .............................. 234,856 249,341
Prepaid expenses ............................... 7,635 2,702
----------- -----------
Total Current Assets ...................... 546,204 526,465
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 .. 2,247,887 2,203,070
----------- -----------
2,645,335 2,600,518
Less accumulated depreciation and amortization . 2,564,715 2,558,156
----------- -----------
80,620 42,362
----------- -----------
Total Assets ......................... $ 626,824 $ 568,827
=========== ===========
LIABILITIES
Current Liabilities
Short-term notes payable and current maturities
of long-term debt ......................... $ 39,960 $ 20,788
Accounts payable - trade ....................... 647,129 614,230
Accounts payable - related parties ............. 535 --
Dividend payable ............................... 38,155 35,698
Deferred income ................................ 291,260 321,819
Accrued liabilities
Salaries and wages ........................ 110,094 105,514
Property and payroll taxes ................ 41,157 41,317
Commissions ............................... 99,147 75,651
Other ..................................... 47,172 59,817
----------- -----------
Total Accrued Liabilities ............ 297,570 282,299
----------- -----------
Total Current Liabilities ............ 1,314,609 1,274,834
Long-Term Obligations, Less Current Maturities ...... 7,637 10,160
Deferred rent ....................................... --
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 ............................ (8,884,977) (8,940,511)
----------- -----------
Total Shareholders' Deficit ............... (695,422) (750,956)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 626,824 $ 568,827
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 1 - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' DEFICIT
For the six months ended September 30, 1999
(unaudited)
<TABLE>
<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 for the period .................. -- -- -- 69,417 69,417
Dividends payable on preferred shares ...... -- -- -- (13,883) (13,883)
----------- ----------- ----------- ------------ ----------
Balance, September 30, 1999 ................ $ 61,674 $ 2,400,000 $ 5,727,881 $(8,884,977) $ (695,422)
=========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 1 - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash provided by operations:
Net income for period .......................................... $ 69,417 $ 60,643
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization .............................. 5,676 10,388
Amortization of software construction
and product enhancements ............................ 883 19,659
Provision for obsolete inventory ........................... 12,000 12,000
Amortization of deferred income and deferred rent .......... (84,945) (110,920)
Increase (decrease) in cash due to changes in
Accounts receivable ........................................ (55,055) 99,845
Inventories ................................................ 2,485 (43,137)
Prepaid expenses ........................................... (4,933) (22,943)
Accounts payable ........................................... 33,434 16,732
Accrued liabilities ........................................ 3,845 (9,982)
Deferred income ............................................ 19,597 (4,310)
------ ------
Net cash provided by operations ................ 2,404 27,975
Cash used in investment activities:
Purchase of equipment ...................................... -- (6,014)
Increase in software construction and product enhancements . (44,817) --
--------- ---------
Net cash used in investment activities ......... (44,817) (6,014)
Cash provided (used) by financing activities:
Additions to debt obligations .............................. 35,000 --
Payments on debt obligations ............................... (18,351) (20,951)
------- -------
Net cash provided (used) by financing activities 16,649 (20,951)
Increase (decrease) in cash ........................................ (25,764) 1,010
Cash - beginning of period ......................................... 32,848 79,408
--------- ---------
Cash - end of period ............................................... $ 7,084 $ 80,418
========= =========
Interest paid during period ........................................ $ 3,074 $ 5,637
========= =========
</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 September 30, 1999 and the results of operations for the three and six month
periods ended September 30, 1999 and 1998 and its cash flows for the six month
periods ended September 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 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, 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 September
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.
The review process is 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 Year 2000 work.
<PAGE>
4. Short-Term Note Payable
On August 29, 1999, the Company signed a revolving line of credit agreement with
its local bank. The maximum amount is $150,000 and is secured by all the assets
of the Company. Interest, payable monthly, is computed at the prime rate plus
2%. The agreement expires on August 1, 2000. The previous note payable with the
same bank was paid in full on August 31, 1999.
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 $105,324, or 17% for the three months
ended September 30, 1999, when compared to the prior year period. The decrease
occurred primarily in the Company's 7000 Series product line. Medallion revenues
for the period were approximately the same as last year although sales to end
user customers increased 89% or $161,000. Last year included sales of $163,000
to a company under an OEM distribution agreement. For the six months ended
September 30, 1999, revenue decreased by $74,261 or 7% when compared to the same
period of the prior year. Sales increased significantly in the targeted new
markets for special systems and test applications using Medallion products
during the period, but were offset by significant declines in revenue from 7000
Series and WCA products. The prior year's 7000 Series revenue was primarily from
an eight-system order received during the fourth quarter of fiscal year 1998.
Medallion product revenue was about the same for the current six month period
when compared to the prior year.
Order backlog amounted to $257,000 at September 30, 1999 compared with $300,000
at September 30, 1998. The decrease was attributable to four remaining units
from the eight system Series 7000 order received during the fourth quarter of
fiscal 1998 which were included in the prior year amount. The decline in Series
7000 orders was substantially offset by increases in the backlog for Medallion,
new market products and extended service contracts during the current year.
Costs of products and services sold were 41% of products and services revenues
for the three and six months ended September 30, 1999 versus 35% and 36%
respectively for the same periods of the prior year. The increase was due
primarily to higher than normal costs on several 7000 Series sales and the sale
of a custom designed product.
Selling and administrative expenses decreased $29,607 and $60,064 or 12% during
the current three and six month periods ended September 30, 1999 versus the same
prior year periods. The decrease during the current three month period was due
mainly to less sales promotion expenses versus an unusually high amount last
year and lower professional services and communications expenses. A significant
decrease in sales commission expense during the current six month period
resulting from fewer sales upon which commissions were due to sales
representatives was partially offset by higher costs during the current three
month period as commissionable transactions to sales representatives increased.
Selling and administrative expenses were 44% and 45% respectively of products
and service revenues for the current three and six month periods versus 41% and
48% respectively for the same periods of the prior year. The increase for the
current three month period was due to the decline in revenue.
Research and development expenses and software construction amortization was
$35,414 and $61,859, respectively, for the three and six month periods ended
September 30, 1999 versus $49,842 and $103,831, 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 recent years 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 $1,185 and $2,902, respectively, for the three and six
month periods ended September 30, 1999 versus $2,856 and $5,240, respectively,
for the same periods ended September 30, 1998. This decrease was due to less
borrowings during the current year.
Income tax expense was $13,872 and $23,602, respectively, for the three and six
months ended September 30, 1999 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 for the six months ended September 30, 1999 was $44,817. 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 $748,369 at March 31,
1998 to a negative $768,405 at September 30, 1999. The current ratio was .41 at
March 31, 1999 and September 30, 1999. The change in working capital was due
primarily to an increase in accounts payable, accrued liabilities and short-term
borrowings that were substantially offset by an increase in accounts receivable.
The Company's cash flows from operations amounted to $2,404 for the six months
ended September 30, 1999. The Company borrowed $35,000 during September, 1999
and made payments on other existing long-term debt totaling $18,351. Investment
in software construction and product enhancement activities was $44,817 during
the current six month period.
The Company has experienced some improvement in its cash flow resulting from its
operating profit during the current year, 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
<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, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Form 10-Q for the quarter ended September 30, 1999 and is qualified
in its entirity by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-END> Sep-30-1999
<CASH> 7,084
<SECURITIES> 0
<RECEIVABLES> 321,413
<ALLOWANCES> 24,784
<INVENTORY> 234,856
<CURRENT-ASSETS> 546,204
<PP&E> 2,645,335
<DEPRECIATION> 2,564,715
<TOTAL-ASSETS> 626,824
<CURRENT-LIABILITIES> 1,314,609
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,157,096)
<TOTAL-LIABILITY-AND-EQUITY> 626,824
<SALES> 992,305
<TOTAL-REVENUES> 992,305
<CGS> 409,980
<TOTAL-COSTS> 510,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,902
<INCOME-PRETAX> 69,417
<INCOME-TAX> 0
<INCOME-CONTINUING> 69,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,417
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.01
</TABLE>
