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, 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>
<CAPTION>
STATEMENT OF OPERATIONS
(unaudited)
<S> <C> <C>
Three Months Ended Nine Months Ended
<S> <C> <C> <C> <C>
12/31/99 12/31/98 12/31/99 12/31/98
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Products and service revenues .................... $ 517,926 $ 624,975 $ 1,510,231 $ 1,691,541
Cost of products and services sold ............... 209,897 217,110 619,877 605,750
Selling and administrative expenses .............. 248,243 261,442 696,391 769,654
Research and development expenses
and software construction and
product enhancement amortization .............. 38,564 50,299 100,423 154,130
----------- ----------- ----------- -----------
496,704 528,851 1,416,691 1,529,534
Operating profits ................................ 21,222 96,124 93,540 162,007
Interest expense, net ............................ (2,996) (1,092) (5,899) (6,333)
Foreign currency gain (loss) ..................... (12) 875 (12) 875
Gain on sale of assets ........................... -- 500 -- 500
----------- ----------- ----------- -----------
Income before taxes .............................. 18,214 96,407 87,629 157,049
Provision for income taxes ....................... -- -- -- --
----------- ----------- ----------- -----------
Net income ....................................... 18,214 96,407 87,629 157,049
Less: Dividend payable on preferred shares ....... (3,644) (20,600) (17,527) (34,128)
----------- ----------- ----------- -----------
Net income available to common shareholders ...... $ 14,570 $ 75,807 $ 70,102 $ 122,921
=========== =========== =========== ===========
Weighted average 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 ................................. -- -- -- --
----------- ----------- ----------- -----------
=========== =========== =========== ===========
Adjusted weighted average of common shares ....... 4,244,136 3,044,136 4,244,136 3,044,136
=========== =========== =========== ===========
Basic earnings per share ......................... $ 0.00 $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
=========== =========== =========== ===========
Diluted earnings per share ....................... $ 0.00 $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 1 - Financial Statements (continued)
<TABLE>
<CAPTION>
BALANCE SHEETS
As of December 31, 1999 & March 31, 1999
(unaudited)
<S> <C> <C>
Dec. 31 Mar. 31
ASSETS ................................................ 1999 1999
Current Assets
Cash ............................................. $ 19,532 $ 32,848
Receivables
Trade ....................................... 216,820 125,786
Unbilled .................................... 41,275 115,588
Related parties ............................. 21,152 200
----------- -----------
Total receivables ................................ 279,247 241,574
Inventories
Finished products ........................... 96,219 96,164
Work in process ............................. 14,555 68,128
Raw material ................................ 106,135 85,049
----------- -----------
Total inventories ................................ 216,909 249,341
Prepaid expenses ................................. 4,089 2,702
----------- -----------
Total Current Assets ........................ 519,777 526,465
Property and Equipment-at Cost
Furniture and office equipment ................... 133,284 133,284
Machinery and plant equipment .................... 269,831 264,164
Software construction and product enhancement .... 2,267,834 2,203,070
----------- -----------
2,670,949 2,600,518
Less accumulated depreciation and amortization ... 2,569,360 2,558,156
----------- -----------
101,589 42,362
----------- -----------
Total Assets ........................... $ 621,366 $ 568,827
=========== ===========
LIABILITIES
Current Liabilities
Short-term notes payable and current maturities
of long-term debt ........................... $ 90,046 $ 20,788
Accounts payable - trade ......................... 584,990 614,230
Dividend payable ................................. 31,799 35,698
Deferred income .................................. 288,033 321,819
Accrued liabilities
Salaries and wages .......................... 115,060 105,514
Property and payroll taxes .................. 48,582 41,317
Commissions ................................. 84,666 75,651
Other ....................................... 52,699 59,817
----------- -----------
Total Accrued Liabilities .............. 301,007 282,299
----------- -----------
Total Current Liabilities .............. 1,295,875 1,274,834
Long-Term Obligations, Less Current Maturities ........ 6,345 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 .............................. (8,870,409) (8,940,511)
----------- -----------
Total Shareholders' Equity .................. (680,854) (750,956)
----------- -----------
Total Liabilities and Shareholders' Equity .. $ 621,366 $ 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 nine months ended December 31, 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 - - - 87,629 87,629
Dividends payable on preferred shares - - - (17,527) (17,527)
----------- ------------- -------------- -------------- ------------
Balance, December 31, 1999 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,870,409) $ (680,854)
=========== ============= ============== ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 1 - Financial Statements (continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(unaudited)
<S> <C> <C>
1999 1998
--------- ---------
Cash provided (used) by operations
Net income for period .......................................... $ 87,629 $ 157,049
Adjustments to reconcile net income to cash from operations
Depreciation ............................................... 8,342 13,637
Amortization of software construction
and product enhancements ............................ 2,862 29,487
Provision for obsolete inventory ........................... 18,000 18,000
Amortization of deferred income and deferred rent .......... (113,272) (158,765)
Gain on sale of assets ..................................... -- (500)
Foreign currency (gain) loss and other ..................... 12 (875)
Increase (decrease) in cash due to changes in
Accounts receivable ........................................ (38,221) 70,813
Inventories ................................................ 14,432 24,627
Prepaid expenses ........................................... (1,387) (7,459)
Accounts payable ........................................... (28,704) (116,581)
Accrued liabilities ........................................ (2,718) 18,329
Deferred income ............................................ 44,697 4,857
--------- ---------
Net cash provided (used) by operations ......... (8,328) 52,619
Cash used in investment activities
Purchase of equipment ...................................... (5,667) (6,014)
Proceeds from the sale of fixed assets ..................... -- 500
Increase in software construction and product enhancements . (64,764) --
--------- ---------
Net cash used in investment activities ......... (70,431) (5,514)
Cash provided (used) by financing activities
Additions to debt obligations .............................. 85,000 --
Payments on debt obligations ............................... (19,557) (31,461)
--------- ---------
Net cash provided (used) by financing activities 65,443 (31,461)
Increase (decrease) in cash ........................................ (13,316) 15,644
Cash - beginning of period ......................................... 32,848 79,408
--------- ---------
Cash - end of period ............................................... $ 19,532 $ 95,052
========= =========
Interest paid during period ........................................ $ 5,899 $ 3,669
========= =========
</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 December 31, 1999 and the results of operations for the three and nine month
periods ended December 31, 1999 and 1998 and its cash flows for the nine month
periods ended December 31, 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 December 31,
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 became "00" and the computer or system could
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 completed 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. At this time the
Company has not encountered nor anticipates any future significant Year 2000
issues.
The Company's product offerings utilize date reference for the identification of
printed and stored data. A date reference problem could result in stored data
being tagged with an incorrect date, or printed data indicating an incorrect
date. Certain legacy products were not reviewed for Year 2000 compliance. All
current products were determined to 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.
The Company has not incurred nor anticipates any additional significant
expenses as a result of its Year 2000 work.
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 is computed at the prime rate plus 2% and payable
monthly. The agreement expires on August 1, 2000. The amount borrowed at
December 31, 1999 was $85,000. 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
<PAGE>
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 $107,049 or 17% for the three months
ended December 31, 1999, when compared to the prior year period. A decrease
occurred in the Company's 7000 Series and WCA product lines, but was partially
offset by a $69,024 or 20% increase in Medallion sales. For the nine months
ended December 31, 1999, revenue decreased by $181,310 or 11% when compared to
the same period of the prior year. Medallion sales increased $90,166, or 9% with
a significant increase in revenue from targeted new markets for special systems
and test applications using Medallion products. This increase was 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.
Order backlog amounted to $105,000 at December 31, 1999 compared with $272,000
at December 31, 1998. The decrease was in the backlog for Medallion products and
special systems using Medallion products. This decrease was partially offset by
an increase in extended warranty service contracts during the current period.
Costs of products and services sold was 41% of products and services revenues
for the three and nine months ended December 31, 1999 versus 35% and 36%
respectively for the same periods of the prior year. The increase was due
primarily to higher costs on the sale of certain Medallion based custom designed
systems.
Selling and administrative expenses decreased $13,199 or 5% and $73,263 or 10%
during the current three and nine month periods, respectively, versus the same
prior year periods. These decreases were due primarily to less sales commission
expense as a result of more sales made by the Company's employees versus outside
sales representatives during the current periods and lower professional service
and advertising expenses. Selling and administrative expenses were 48% and 46%,
respectively, of product and service revenues for the current three and nine
month periods versus 42% and 46%, respectively, for the same periods of the
prior year. The increased percentage was due to lower revenues for the current
three and nine month periods.
Research and development expenses and software construction amortization was
$38,564 and $100,423 respectively, for the three and nine month periods ended
December 31, 1999 versus $50,299 and $154,130, 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 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 $2,996 and $5,899 respectively for the three and nine month
periods ended December 31, 1999 versus $1,092 and $6,333 respectively for the
same periods ended December 31, 1998. The increase during the current three
month period was due to higher bank borrowings and discounts given to customers
for early payment of invoices.
Income tax expense was $6,193 and $29,794 respectively for the three and nine
months ended December 31, 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.
<PAGE>
Liquidity & Capital Resources
Software Construction and Product Development
The Company's total unamortized software construction and product enhancement
costs at December 31, 1999 was $61,900. There was no unamortized software
construction and product development costs at March 31, 1999. The Company's cash
outlay for software construction and product enhancement costs during the nine
months ended December 31, 1999 was $64,764. No costs were capitalized during the
prior year.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $748,369 at March 31,
1999 to a negative $776,098 at December 31, 1999. The current ratio declined
slightly from .41 at March 31, 1999 to .40 at December 31, 1999. The decrease in
working capital was due primarily to increases in short term borrowings which
was partially offset by a decline in accounts payable, deferred income and
accrued liabilities.
The Company's cash flows from operations generated a negative $8,328 for the
nine months ended December 31, 1999. The Company borrowed $85,000 and made
payments on long-term debt totaling $19,557.
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: February 4, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial inforamtion extracted from Form 10-Q
for the quarter ended December 31, 1999 and is qualified in its entirity by
reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-END> Dec-31-1999
<CASH> 19,532
<SECURITIES> 0
<RECEIVABLES> 304,031
<ALLOWANCES> 24,784
<INVENTORY> 216,909
<CURRENT-ASSETS> 519,777
<PP&E> 2,670,949
<DEPRECIATION> 2,569,360
<TOTAL-ASSETS> 621,366
<CURRENT-LIABILITIES> 1,295,875
<BONDS> 0
0
2,400,000
<COMMON> 61,674
<OTHER-SE> (3,142,528)
<TOTAL-LIABILITY-AND-EQUITY> 621,366
<SALES> 1,510,231
<TOTAL-REVENUES> 1,510,231
<CGS> 619,877
<TOTAL-COSTS> 796,814
<OTHER-EXPENSES> 12
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,899
<INCOME-PRETAX> 87,629
<INCOME-TAX> 0
<INCOME-CONTINUING> 87,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,629
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
