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 SeptemberJune 30, 19992000 Commission File Number 0-12283
ZONIC CORPORATION
(Exact name of Registrant as specified in its charter)
Ohio 31-0791199
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(State of Incorporation) (I.R.S. Employer Identification Number)
50 West Technecenter Drive, Milford, Ohio 45150-9777
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 248-1911
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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)
Statement of Operations
For The Three MonthsMonth Periods Ended Six Months Ended
9/30/99 9/30/98 9/30/99 9/30/98June 30,
(unaudited)
Products2000 1999
----------- -----------
Product and service revenues ................................................... $ 518,659365,361 $ 623,983 $ 992,305 $ 1,066,566473,645
Cost of products and services sold ................ 214,044 215,994 409,980 388,641........................ 123,237 195,936
Selling and administrative expenses ............... 227,217 256,824 448,147 508,211....................... 245,588 220,930
Research and development expenses and software construction
and product enhancement amortization ............... 35,414 49,842 61,859 103,831................. 54,734 26,445
----------- -----------
----------- -----------
476,675 522,660 919,986 1,000,683Total Operating profits ................................. 41,984 101,323 72,319 65,883Expenses .................................. 423,559 443,311
Operating income (loss) ................................... (58,198) 30,334
Interest expense, net ............................. (1,185) (2,856) (2,902) (5,240)
----------- -----------..................................... (5,665) (1,717)
----------- -----------
Income (loss) before taxes ............................... 40,799 98,467 69,417 60,643................................ (63,863) 28,617
Provision for income taxes ........................ -- --................................ -- --
----------- -----------
Net income (loss) ......................................... (63,863) 28,617
Less: Dividend payable on Class B preferred shares ........ -- (5,723)
----------- -----------
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(loss) available to common shareholders ............... $ 32,639(63,863) $ 84,939 $ 55,534 $ 47,115
=========== ===========22,894
=========== ===========
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
Stock ..... 1,200,000 -- 1,200,000 --
Stock options ........................... 31,077Options ....................................... -- -- --
----------- -----------
----------- -----------
Adjusted weighted average of common shares outstanding ....................................... 4,275,213.... 3,044,136 4,244,136 3,044,136
=========== ===========
=========== ===========
Basic earnings (loss) per share ..................................................... $ (0.02) $ 0.01
$ 0.03 $ 0.02 $ 0.02
=========== =========== =========== ===========
Diluted earnings (loss) per share ................................................. $ 0.01(0.02) $ 0.03 $ 0.01 $ 0.02
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements .
statements.
Item 1 - Financial Statements (continued)
BALANCE SHEETS
As of September 30, 1999 & March 31, 1999
(Unaudited)
Sept.Balance Sheets
As of June 30, 2000 & March 31, 1999 19992000
(unaudited)
30-Jun 31-Mar
2000 2000
----------- -----------
ASSETS ..............................................
Current Assets
Cash ........................................................................................ $ 7,08416,067 $ 32,84834,578
Receivables
Trade ..................................... 248,029 125,786
Unbilled .................................. 33,400 115,588......................................... 154,429 101,662
Related parties ........................... 15,200 200............................... 500 27,751
----------- -----------
Total receivables .............................. 296,629 241,574............................... 154,929 129,413
Inventories
Finished products ......................... 51,786 96,164............................ 125,998 137,628
Work in process ........................... 87,047 68,128.............................. 11,065 18,561
Raw material .............................. 96,023 85,049................................. 81,521 81,229
----------- -----------
Total inventories .............................. 234,856 249,341............................... 218,584 237,418
Prepaid expenses ............................... 7,635 2,702................................ 24,649 1,896
----------- -----------
Total Current Assets ...................... 546,204 526,465......................... 414,229 403,305
Property and Equipment-at Cost
Furniture and office equipment ................. 133,284 133,284.................. 103,476 102,217
Machinery and plant equipment .................. 264,164 264,164................... 229,084 219,381
Software construction and product enhancement .. 2,247,887 2,203,070... 2,302,607 2,270,008
----------- -----------
2,645,335 2,600,5182,635,167 2,591,606
Less accumulated depreciation and amortization . 2,564,715 2,558,156.. (2,502,909) (2,494,387)
----------- -----------
80,620 42,362132,258 97,219
----------- -----------
Total Assets ....................................................... $ 626,824546,487 $ 568,827500,524
=========== ===========
LIABILITIES
Current Liabilities
Short-term notes payable and currentNotes Payable .................................... $ 150,000 $ 135,000
Current maturities of long-term debt ......................... $ 39,960 $ 20,788long term obligations ..... 5,133 5,133
Accounts payable - trade ....................... 647,129 614,230
Accounts payable - related parties ............. 535 --......................... 649,234 567,958
Deferred Income .................................. 245,127 244,098
Dividend payable ............................... 38,155 35,698
Deferred income ................................ 291,260 321,819................................. 8,575 8,575
Accrued liabilities
Salaries and wages ........................ 110,094 105,514............................ 104,393 88,693
Property and payroll taxes ................ 41,157 41,317
Commissions ............................... 99,147 75,651.................... 39,739 33,777
Other ..................................... 47,172 59,817......................................... 121,027 128,917
----------- -----------
Total Accrued Liabilities ............ 297,570 282,299........................ 265,159 251,387
----------- -----------
Total Current Liabilities ............ 1,314,609 1,274,834.................. 1,323,228 1,212,151
Long-Term Obligations, Less Current Maturities ...... 7,637 10,160
Deferred rent ....................................... --
34,7893,778 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 ............................ (8,884,977) (8,940,511).............................. (8,970,074) (8,906,211)
----------- -----------
Total Shareholders' Deficit ............... (695,422) (750,956)
----------- -----------......................... (780,519) (716,656)
-------- --------
Total Liabilities and& Shareholders' Deficit .. $ 626,824546,487 $ 568,827
=========== ===========500,524
======= =======
The accompanying notes are an integral part of these financial statements.
Item 1Part I - Financial Statements (continued)
STATEMENT OF SHAREHOLDERS' DEFICIT
For the six months ended September 30, 1999
(unaudited)
Statement of Shareholders Deficit
For The Three Months Ended June 30, 2000
(unaudited)
Additional
Common Preferred Paid - InPaid-in Accumulated
Shares Shares Capital Deficit Total
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, 19992000 ................ $ 61,674 $ 2,400,000 $ 5,727,881 $(8,884,977)$(8,906,211) $ (695,422)(716,656)
Net income (loss) for period ........... -- -- -- (63,863) (63,863)
Dividend payable on preferred shares ... -- -- -- -- --
---------- ----------- ------------ ----------- -----------
Balance, June 30, 2000 ................. $ 61,674 $ 2,400,000 $ 5,727,881 $(8,970,074) $ (780,519)
========== =========== ============ =========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
Item 1Part I - Financial Statements (continued)
STATEMENTS OF CASH FLOWS
For the six months ended September
Statements of Cash Flows
For The Three Month Periods Ended June 30,
(unaudited)
1999 1998
--------- ---------
2000 1999
-------- --------
Cash provided byused in operations:
Net income (loss) for period ....................................................................... $(63,863) $ 69,417 $ 60,64328,617
Adjustments to reconcile net income (loss)
to cash from operations:
Depreciation and amortization .............................. 5,676 10,388......................... 3,234 3,680
Amortization of software construction
and product enhancements ............................ 883 19,659.......................... 5,288 400
Provision for obsolete inventory ........................... 12,000 12,000...................... 6,000 6,000
Amortization of deferred income and deferred rent .......... (84,945) (110,920)..... (22,858) (42,860)
Increase (decrease) in cash due to changes in
Accounts receivable ........................................ (55,055) 99,845................................... (25,516) 41,722
Inventories ................................................ 2,485 (43,137)........................................... 12,834 (3,823)
Prepaid expenses ........................................... (4,933) (22,943)...................................... (22,753) (4,461)
Accounts payable ........................................... 33,434 16,732...................................... 81,276 29,639
Accrued liabilities ........................................ 3,845 (9,982)................................... 13,772 (671)
Deferred income ............................................ 19,597 (4,310)
------ ------....................................... 23,887 (18,536)
-------- --------
Net cash provided by operations ................ 2,404 27,975.................... 11,301 39,707
Cash used in investment activities:
Purchase of equipment ...................................... -- (6,014)fixed assets .............................. (10,962) 0
Increase in software construction
and product enhancements . (44,817) --
--------- ---------........................... (32,599) (32,503)
-------- --------
Net cash used in investment activities ......... (44,817) (6,014)............. (43,561) (32,503)
Cash provided (used) byused in financing activities:
Additions to debt obligations .............................. 35,000 --Proceeds from note payable ............................ 15,000 0
Payments on debtlong-term obligations ............................... (18,351) (20,951)..................... (1,251) (10,573)
------- ---------------
Net cash provided (used) by financing(used in) investment activities 16,649 (20,951)
Increase (decrease)13,749 (10,573)
Decrease in cash ........................................ (25,764) 1,010............................................ (18,511) (3,369)
Cash - beginning of period ........................................................................... 34,578 32,848
79,408
--------- ----------------- --------
Cash - end of period ....................................................................................... $ 7,08416,067 $ 80,41829,479
========= =================
Interest paid during period ......................................................................... $ 3,0745,665 $ 5,6371,717
========= =================
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 SeptemberJune 30, 19992000 and the results of operations for the three and six month
periods ended September 30, 1999 and 1998 and its cash flows for the sixthree
month periods ended SeptemberJune 30, 19992000 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. Certain reclassifications have been made to amounts shown for the prior
year to conform to current year classifications.2000.
2. New Standards
TheStandard
In 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 is 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 wouldCommencing July 1, 2000, the repriced options will be
required to record an expense (compensation costs) equalaccounted for as variable until the date the awards are exercised, are
forfeited, or expire unexercised. Compensation cost will be recognized
immediately after July 1, 2000 to the difference betweenextent that the modified exercisestock price and any subsequent increaseexceeds the
stock price on July 1, 2000. Future changes in the pricemarket value of the Company's
common stock. This accounting would be applied
fromstock will directly affect the dateamount of issuance untilcompensation expense recorded by the
exercise dateCompany. The magnitude 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 wouldwill
depend on the market value of the common stock. At September
30, 1999, the market valuestock as of the Company's common stock was less than the
exercise price of the repriced options,July 1, 2000 and
as such, there would be no
additional expense.thereafter.
3. Year 2000 IssuesShort 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 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 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, payable monthly, is computed at the prime rate plus
2%. The agreement now expires on August 1, 2000. The previous note payable with2001. All other terms of the same bank was paidagreement
remained the same.
4. Earnings Per Share
At June 30, 2000, there were 1,312,642 potential dilutive common shares
outstanding. These shares are not included in full on August 31, 1999.the diluted earnings per share
calculation as the Company had a net loss for the current year period, and their
effect is 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 Revenueservices revenue decreased by $105,324,$108,284, or 17%23% for the three months
ended SeptemberJune 30, 1999,2000, when compared to the prior year period. The decrease occurred primarilywas
due to a 71%, or $92,800 decline 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 salessale 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 primarilyother custom
designed systems which the Company no longer actively markets. Revenue from an eight-system order received during the
fourth quartersale of fiscal year 1998.
Medallion product revenueproducts was about the same and service revenues were slightly
higher for the current sixthree month period when compared to the prior year.year
period.
Order backlog amounted to $257,000$196,000 at SeptemberJune 30, 19992000 compared with $300,000$133,000 at
SeptemberJune 30, 1998. The decrease1999. There was attributable to four remaining units
from the eight system Series 7000 order receiveda significant increase in Medallion backlog primarily
for sixteen channel systems which are scheduled for delivery during the fourthsecond
quarter of this fiscal 1998 which were included in the prior year amount. The decline in Series
7000 ordersyear. This increase was substantiallypartially offset by increasesa decrease in
the backlogorders for Medallion,
new market products and extended service contracts during the current year.custom designed systems.
Costs of products and services sold were 41%34% of products and services revenues
for the three and six months ended SeptemberJune 30, 19992000 versus 35% and 36%
respectively41% for the same periods of the prior year. The
decrease was due to an increase in the sale of Medallion software products which
have significantly lower costs and higher costs related to 7000 Series and
custom designed systems sales in the prior year.
Selling and administrative expenses increased $24,658 or 11% during the current
period versus the same prior year period. This increase was due to an increase
in advertising and sales promotion costs, and higher commission expense as sales
from outside sales representatives increased when compared to the prior year
period. These increases were partially offset by a decrease in professional
services. Selling and administrative expenses were 67% versus 47% of total
revenue for the current and prior year periods, respectively. This 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%decrease in revenue 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.period.
Research and development expenses and software construction amortization was
$35,414 and $61,859, respectively,$54,734 for the three and six month periods ended
September 30, 1999current period versus $49,842 and $103,831, respectively,$26,445 for the same
periods of the prior year. These decreases wereperiod. This
increase was due to lesshigher amortization expense as a result of a decrease in capitalized
software construction and product enhancement costs during recentthe past and current
years and a declinean increase in the level of Medallion research and development costs versus the prior year.expenses. 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 periodsmonths ended SeptemberJune 30, 19992000 was $5,665 versus
$2,856 and $5,240, respectively,$1,717 for the same periodsperiod ended SeptemberJune 30, 1998.1999. This decreaseincrease was due to lessmore
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 classClass 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 fortotal unamortized software construction and product enhancement
costs for the six months ended Septemberat June 30, 1999 was $44,817. There was no2000 and March 31, 2000 were $90,430 and $63,119,
respectively. The cash outlay for software construction and product enhancement
costs during the same
period of thecurrent and prior year. Thereyear three month periods were no unamortized software construction$32,599 and
product costs at March 31, 1999.32,503, respectively.
Working Capital and Cash Flow
The Company's working capital decreased from a negative $748,369$808,846 at March 31,
19982000 to a negative $768,405$908,999 at SeptemberJune 30, 1999. The2000 resulting in a decrease in the
current ratio was .41 at
March 31, 1999 and September 30, 1999.from .33 to .31. The change in working capitaldecline was due primarilymainly to an increase in
accounts payable, accrued liabilities and short-term
borrowings that were substantially offset by an increase in accounts receivable.the note payable.
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.$11,301. Investment in
software construction and product enhancement activities was $44,817 during
the current six month period.and purchased equipment
amounted to $32,599 and $10,962, respectively. The Company has experienced some improvement in its cash flow resulting from its
operating profit duringborrowed $15,000 and
made payments on long-term debt totaling $1,251 for the current year, butthree months ended June
30, 2000.
The Company continues to experience cash flow problems as current liabilities exceed current assets.the result of its
operating loss. The Company continues to
seekis seeking additional working capital through debt
or equity financing from public or private sources to reduce current liabilities
and to sustain its operations. There can be no assurance that the Company will
be able to obtain additional financing on favorable terms, if at all, from any
source.
PART II - Other Information
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/ James B. Webb
- ---------------------
James B. Webb
President and Chief Executive Officer
By:/s/ /s/ John H. Reifschneider
- ----------------------------
John H. Reifschneider
Controller
Dated: November 5, 1999August 11, 2000