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, 1999September 30, 2000 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____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 NineSix Months Ended
12/31/9/30/00 9/30/99 12/31/98 12/31/9/30/00 9/30/99
12/31/98
----------- ----------- ----------- ----------------------- ------------ ------------
Products and service revenues .................... $ 517,926527,198 $ 624,975518,659 $ 1,510,231892,559 $ 1,691,541992,305
Cost of products and services sold ............... 209,897 217,110 619,877 605,750186,160 214,044 309,397 409,980
Selling and administrative expenses .............. 248,243 261,442 696,391 769,654229,833 227,217 475,421 448,147
Research and development expenses
and software construction and
product enhancement amortization .............. 38,564 50,299 100,423 154,13052,785 35,414 107,519 61,859
----------- ----------- ----------- -----------
496,704 528,851 1,416,691 1,529,534------------ ------------ ------------
468,778 476,675 892,337 919,986
Operating profits ................................ 21,222 96,124 93,540 162,007income 58,420 41,984 222 72,319
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
----------- ----------- ----------- -----------(6,830) (1,185) (12,495) (2,902)
Income before taxes .............................. 18,214 96,407 87,629 157,04951,590 40,799 (12,273) 69,417
Provision for income taxes ....................... -- -- -- --- - - -
----------- ----------- ----------- ----------------------- ------------ ------------
Net income ....................................... 18,214 96,407 87,629 157,049(loss) 51,590 40,799 (12,273) 69,417
Less: Dividend payable on preferred shares ....... (3,644) (20,600) (17,527) (34,128)0 (8,160) 0 (13,883)
----------- ----------- ----------- ----------------------- ------------ ------------
Net income (loss) available to
common shareholders ...... $ 14,57051,590 $ 75,80732,639 $ 70,102(12,273) $ 122,92155,534
=========== =========== =========== ======================= ============ ============
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 ...........Stock 1,200,000 -- 1,200,000 --- 1,200,000
Stock Options ................................. -- -- -- --options 60,625 31,077 - -
----------- ----------- ----------- -----------
=========== =========== =========== ===========------------ ------------ ------------
Adjusted weighted average of common shares
....... 4,244,136outstanding 4,304,761 4,275,213 3,044,136 4,244,136
3,044,136
=========== =========== =========== ======================= ============ ============
Basic earnings per share ......................... $ 0.00 $ 0.02 $ 0.02 $ 0.04$0.02 $0.01 $0.00 $0.02
=========== =========== =========== ===========
=========== =========== =========== ======================= ============ ============
Diluted earnings per share ....................... $ 0.00 $ 0.02 $ 0.02 $ 0.04$0.01 $0.01 $0.00 $0.01
=========== =========== =========== ======================= ============ ============
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
BALANCE SHEETS
As of September 30, 2000 & March 31, 2000
BALANCE SHEETS
As of December 31, 1999 & March 31, 1999
(unaudited)(Unaudited)
Sept. 30 March-31
2000 2000
---------- ----------
Dec. 31 Mar. 31
ASSETS ................................................ 1999 1999
Current Assets
Cash ............................................. $ 19,5328,200 $ 32,84834,578
Receivables
Trade ....................................... 216,820 125,786
Unbilled .................................... 41,275 115,588212,649 101,662
Related parties ............................. 21,152 200
----------- -----------500 27,751
------------- -------------
Total receivables ................................ 279,247 241,574213,149 129,413
Inventories
Finished products ........................... 96,219 96,16425,237 137,628
Work in process ............................. 14,555 68,12899,013 18,561
Raw material ................................ 106,135 85,049
----------- -----------95,853 81,229
------------- -------------
Total inventories ................................ 216,909 249,341220,103 237,418
Prepaid expenses ................................. 4,089 2,702
----------- -----------25,513 1,896
------------- -------------
Total Current Assets ........................ 519,777 526,465466,965 403,305
Property and Equipment-at Cost
Furniture and office equipment ................... 133,284 133,284104,504 102,217
Machinery and plant equipment .................... 269,831 264,164229,084 219,381
Software construction and product enhancement .... 2,267,834 2,203,070
----------- -----------
2,670,949 2,600,5182,350,283 2,270,008
------------- -------------
2,683,871 2,591,606
Less accumulated depreciation and amortization ... 2,569,360 2,558,156
----------- -----------
101,589 42,362
----------- -----------2,518,241 2,494,387
------------- -------------
165,630 97,219
------------- -------------
Total Assets ........................... $ 621,366632,595 $ 568,827
=========== ===========500,524
============= =============
LIABILITIES
Current Liabilities
Short-term notes payable and currentNote Payable $150,000 $135,000
Current maturities of long-term debt ........................... $ 90,046 $ 20,788long term obligations 5,313 5,133
Accounts payable - trade ......................... 584,990 614,230679,365 567,958
Dividend payable ................................. 31,799 35,6988,575 8,575
Deferred income .................................. 288,033 321,819247,818 244,098
Accrued liabilities
Salaries and wages .......................... 115,060 105,51495,887 88,693
Property and payroll taxes .................. 48,582 41,31731,468 33,777
Commissions ................................. 84,666 75,651100,202 72,043
Other ....................................... 52,699 59,817
----------- -----------40,570 56,874
------------- -------------
Total Accrued Liabilities .............. 301,007 282,299
----------- -----------268,127 251,387
------------- -------------
Total Current Liabilities .............. 1,295,875 1,274,8341,359,198 1,212,151
Long-Term Obligations, Less Current Maturities ........ 6,345 10,160
Deferred rent ......................................... -- 34,7892,326 5,029
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)
----------- -----------(8,918,484) (8,906,211)
------------- -------------
Total Shareholders' Equity .................. (680,854) (750,956)
----------- -----------Deficit (728,929) (716,656)
------------- -------------
Total Liabilities and Shareholders' Equity ..Deficit $ 621,366632,595 $ 568,827
=========== ===========500,524
============= =============
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' DEFICIT
For the ninesix months ended December 31, 1999September 30, 2000
(unaudited)
Additional
Common Preferred Paid - In Accumulated
Shares Shares Capital Deficit Total
Balance, March 31, 19992000 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,940,511)(8,906,211) $ (750,956)(716,656)
Net incomeloss for the period - - - 87,629 87,629(12,273) (12,273)
Dividends payable on preferred shares - - - (17,527) (17,527)- -
---------- ------------- ------------- ------------- -----------
------------- -------------- -------------- ------------
Balance, December 31, 1999September 30, 2000 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,870,409)(8,918,484) $ (680,854)(728,929)
========== ============= ============= ============= =========== ============= ============== ============== ============
The accompanying notes are an integral part of these financial statements.
Item 1 - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(unaudited)
STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(unaudited)2000 1999
---------- ------------
1999 1998
--------- ---------
Cash provided (used) by operations
Net income (loss) for period .......................................... $ 87,629(12,273) $ 157,04969,417
Adjustments to reconcile net incomeloss to cash from operations
Depreciation ............................................... 8,342 13,637and amortization 7,318 5,676
Amortization of software construction
and product enhancements ............................ 2,862 29,48716,536 883
Provision for obsolete inventory ........................... 18,000 18,00012,000 12,000
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)(49,419) (84,945)
Increase (decrease) in cash due to changes in
Accounts receivable ........................................ (38,221) 70,813(83,736) (55,055)
Inventories ................................................ 14,432 24,6275,315 2,485
Prepaid expenses ........................................... (1,387) (7,459)(23,617) (4,933)
Accounts payable ........................................... (28,704) (116,581)111,407 33,434
Accrued liabilities ........................................ (2,718) 18,32916,740 3,845
Deferred income ............................................ 44,697 4,857
--------- ---------53,139 19,597
---------- ------------
Net cash provided (used) by operations ......... (8,328) 52,61953,410 2,404
Cash used in investment activities
Purchase of equipment ...................................... (5,667) (6,014)
Proceeds from the sale of fixed assets ..................... -- 500(11,990) -
Increase in software construction and product enhancements . (64,764) --
--------- ---------(80,275) (44,817)
---------- ------------
Net cash used in investment activities ......... (70,431) (5,514)(92,265) (44,817)
Cash provided (used) by financing activities
Additions to debt obligations .............................. 85,000 --15,000 35,000
Payments on debt obligations ............................... (19,557) (31,461)
--------- ---------(2,523) (18,351)
---------- ------------
Net cash provided (used) by financing activities 65,443 (31,461)
Increase (decrease)12,477 16,649
Decrease in cash ........................................ (13,316) 15,644(26,378) (25,764)
Cash - beginning of period .........................................34,578 32,848
79,408
--------- ------------------- ------------
Cash - end of period ............................................... $ 19,5328,200 $ 95,052
========= =========7,084
========== ============
Interest paid during period ........................................$12,495 $ 5,899 $ 3,669
========= =========3,074
========== ============
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, 1999September 30, 2000 and the results of operations for the three and ninesix month
periods ended December 31,September 30, 2000 and 1999 and 1998 and its cash flows for the ninesix month
periods ended December 31, 1999September 30, 2000 and 1998.1999. 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,
1999.2000. Certain reclassifications have been made to amounts shown for the prior
year to conform to current year classifications.
2. New Standards
TheIn March 2000, the Financial Accounting Standards Board has proposed an interpretive release on several
issues that are not specifically addressed in APB No.25,issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
IssuedCompensation - an interpretation of APB Option No. 25." This Interpretation
clarifies the application of Opinion 25 for only certain issues, including the
accounting consequence of various modifications to Employees." The proposed guidance for accounting for the repricingterms of employeea previously
fixed stock options could result in significant accounting changes foroption or award. This Interpretation was effective July 1, 2000, but
covers specific events that occurred after December 15, 1998. This
Interpretation affects 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) equalCommencing July 1, 2000, the repriced options are
accounted for as variable until the date the awards are exercised, are
forfeited, or expire unexercised. Compensation cost is recognized immediately
after July 1, 2000 to the difference betweenextent that the modified exercisestock price and any subsequent increase
inexceeds the stock price on
July 1, 2000. As 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,September 30, 2000, the market value of the Company's common
stock was less than the exercise
price of the repriced options,did not increase in value from July 1, 2000 and as such, there would be no additional
expense.
3. Year 2000 Issuescompensation
expense related to the repricing of options which occurred in February 1999 has
been recorded.
2. Short Term Note Payable
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 ofextended 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 now expires on August 1, 2000. The amount borrowed at
December 31, 19992001. All other terms of the agreement
remained the same.
3. Earnings Per Share
For the six months ending September 30, 2000, there were 1,286,633 potential
dilutive common shares outstanding. These shares were not included in the
diluted earnings per share calculation for the six months ended September 30,
2000 as the Company had a net loss, and their effect was $85,000. The previous note payable with the same bank was
paid in full on August 31, 1999.
.anti-dilutive
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 decreasedincreased by $107,049$8,539, or 17%2% for the three months
ended December 31, 1999,September 30, 2000, when compared to the prior year period. A decrease
occurredSales
increased 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 increaseproducts during the period. Medallion product revenue was about
the same for the current three month period when compared to the prior year
while revenue from 7000 Series sales increased but was offset by declines in
custom designed systems and services revenues. For the six months ended
September 30, 2000, revenue decreased by $99,746 or 10% when compared to the
same period of the prior year. The decrease was due to a significant declinesdecline in
revenue from custom designed systems which the Company no longer actively
markets but was partially offset by increases in revenue from 7000 Series and
WCAMedallion 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$151,000 at December 31, 1999September 30, 2000 compared with $272,000$257,000
at December 31, 1998.September 30, 1999. The decrease wasoccurred in the backlog for Medallion and other analysis
products and special systems using Medallion products. This decrease was partially offset by
an increase in extended warranty service contracts during the current period.contracts.
Costs of products and services sold was 41%were 35% of products and services revenues
for the three and ninesix months ended December 31, 1999September 30, 2000 versus 35%41% for the same
periods of the prior year. The decrease resulted from increased sales of
Medallion software products which had significantly lower costs during the
current year and 36%higher costs related 7000 Series and custom designed system
sales in the prior year.
Selling and administrative expenses increased $2,616 or 1% and $27,274 or 6%
during the current three and six month periods versus the same prior year
periods. There was a significant decrease in professional services expenses
during the current three month period versus the prior year which was mostly
offset by higher costs for promotional mailings for the Company" targeted new
markets and higher communication expenses. The increase during the current six
month period versus the prior year was due to higher commissions expense from
increased sales by outside sales representatives and higher advertising, product
collateral and sales promotional expenses. These were partially offset a
significant decrease in professional services expense. Selling and
administrative expenses were 44% and 53% respectively of products and service
revenues for the current three and six month periods versus 44% and 45%
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 ninesix month periods versus 42% and 46%, respectively, for the same periods of the
prior year. The increased percentageperiod was due to lower revenues forthe decline in revenue which occurred during
the first three month period of the current three and nine month periods.fiscal year.
Research and development expenses and software construction amortization was
$38,564$52,875 and $100,423$107,519, respectively, for the three and ninesix month periods ended
December 31, 1999September 30, 2000 versus $50,299$35,414 and $154,130,$61,859, respectively, for the same
periods of the prior year. These decreasesincreases were due to lesshigher amortization
expense as a result of a decreasean increase in capitalized software construction and
product enhancement costs during the recentcurrent and prior years and a declinean increase 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$6,830 and $5,899$12,495, respectively, for the three and ninesix
month periods ended December 31, 1999September 30, 2000 versus $1,092$1,185 and $6,333$2,902, respectively,
for the same periods ended December 31, 1998. TheSeptember 30, 1999. This increase during the current three
month period was due to higher
bank borrowings and discounts given to customers
for early payment of invoices.during the current year.
Income tax expense was $6,193 and $29,794 respectivelyof $17,541 for the three and nine
months ended December 31, 1999 andSeptember 30, 2000 was
offset by net operating loss carryforwards. At March 31, 1999,2000, loss
carryforwards totaling $6.7$6.8 million and tax credits of $666,000$663,000 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 total unamortized software construction and product enhancement
costs at December 31, 1999 was $61,900. There was no unamortized software
constructionSeptember 30, 2000 and product development costs at March 31, 1999.2000 were $126,858 and $63,119,
respectively . The Company's cash outlay for software construction and product enhancement
costs during the nine
months ended December 31, 1999 was $64,764. No costscurrent and prior year six month periods were capitalized during the
prior year.$80,275 and
$44,817, respectively.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $748,369$808,846 at March 31,
19992000 to a negative $776,098$892,223 at December 31, 1999.September 30, 2000. The current ratio declined
slightly from .41was .33 and
.34 at March 31, 1999 to .40 at December 31, 1999.2000 and September 30, 2000, respectively. The decreasechange in
working capital was due primarily to increases in short termaccounts payable, accrued
commissions and short-term borrowings whichand was partially offset by a declinean increase in
accounts payable, deferred income and
accrued liabilities.receivable.
The Company's cash flows from operations generated a negative $8,328amounted to $53,410 for the ninesix months
ended December 31, 1999.September 30, 2000. Investment in software construction and product
enhancement activities and purchased equipment amounted to $80,275 and $11,990,
respectively. The Company borrowed $85,000$15,000 and made payments on other long-term
debt totaling $19,557.$2,523 for the six months ended September 30, 2000.
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
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/_/s/ James B. Webb
-----------------Webb_______________
James B. Webb
President and Chief Executive Officer
By: /s/_/s/ John H. Reifschneider
-------------------------Reifschneider__________
John H. Reifschneider
Controller
Dated: February 4,November 3, 2000