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 June 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 Part I. Financial Information Item 1. Financial Statements Statement of Operations For The Three Month Periods Ended June 30, (unaudited) 1999 1998 Product and service revenues .............................. $ 473,645 $ 442,583 Cost of products and services sold ........................ 195,936 172,647 Selling and administrative expenses ....................... 220,930 251,388 Research and development expenses and software construction and product enhancement amortization ................. 26,445 53,989 ----------- ----------- Total Operating Expenses .................................. 443,311 478,024 Operating income (loss) ................................... 30,334 (35,441) Interest expense, net ..................................... (1,717) (2,384) ----------- ----------- Income (loss) before taxes ................................ 28,617 (37,825) Provision for income taxes ................................ -- -- ----------- ----------- Net income (loss) ......................................... 28,617 (37,825) Less: Dividend payable on Class B preferred shares ........ (5,723) -- ----------- ----------- Net income (loss) available to common shareholders ........ $ 22,894 $ (37,825) =========== =========== Weighted average of common shares outstanding ............. 3,044,136 3,044,136 Dilutive potential common shares: Class A convertible preferred stock ................. 1,200,000 -- Stock Options ....................................... -- -- ----------- ----------- =========== =========== Adjusted weighted average of common shares outstanding .... 4,244,136 3,044,136 =========== =========== Basic earnings (loss) per share ........................... $ 0.01 $ (0.01) Diluted earnings (loss) per share ......................... $ 0.01 $ (0.01) The accompanying notes are an integral part of these financial statements. Item 1 - Financial Statements (continued) Balance Sheets As of June 30, 1999 & March 31, 1999 (unaudited) 30-Jun 31-Mar ASSETS ........................................... 1999 1999 Current Assets Cash .......................................... $ 29,479 $ 32,848 Receivables Trade ...................................... 125,866 125,786 Unbilled ................................... 65,286 115,588 Related parties ............................ 8,700 200 ----------- ----------- Total receivables ............................ 199,852 241,574 Inventories Finished products ......................... 115,360 96,164 Work in process ........................... 43,527 68,128 Raw material .............................. 88,277 85,049 ----------- ----------- Total inventories ............................ 247,164 249,341 Prepaid expenses ............................. 7,163 2,702 ----------- ----------- Total Current Assets ...................... 483,658 526,465 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 2,235,573 2,203,070 ----------- ----------- 2,633,021 2,600,518 Less accumulated depreciation and amortization (2,562,236) (2,558,156) ----------- ----------- 70,785 42,362 Total Assets ........................... $ 554,443 $ 568,827 =========== =========== LIABILITIES Current Liabilities Short term notes payable and current maturities of long-term debt ............... $ 11,413 $ 20,788 Accounts payable - trade ...................... 643,869 614,230 Deferred Income ............................... 281,297 321,819 Dividend payable .............................. 34,995 35,698 Accrued liabilities Salaries and wages ......................... 107,075 105,514 Property and payroll taxes ................. 53,994 41,317 Other ...................................... 126,985 135,468 ----------- ----------- Total Accrued Liabilities ..................... 288,054 282,299 ----------- ----------- Total Current Liabilities ............... 1,259,628 1,274,834 Long-Term Obligations, Less Current Maturities ... 8,962 10,160 Deferred Rent .................................... 13,915 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 ........................... (8,917,617) (8,940,511) ----------- ----------- Total Shareholders' Deficit ...................... (728,062) (750,956) ----------- ----------- Total Liabilities & Shareholders' Deficit $ 554,443 $ 568,827 =========== =========== The accompanying notes are an integral part of these financial statements. Part I - Financial Statements (continued) Statement of Shareholders Deficit For The Three Months Ended June 30, 1999 (unaudited) Additional Common Preferred Paid-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 (loss) for period - - - 28,617 28,617 Dividend payable on preferred shares - - - (5,723) (5,723) ---------- ------------- ------------- ---------------- ------------ Balance, June 30, 1999 $ 61,674 $ 2,400,000 $ 5,727,881 $ (8,917,617) $ (728,062) ========== ============= ============= ============== ============ The accompanying notes are an integral part of these financial statements. Part I - Financial Statements (continued) Statements of Cash Flows For The Three Month Periods Ended June 30, (unaudited) 1999 1998 Cash used in operations: Net income (loss) for period ....................... $ 28,617 $ (37,825) Adjustments to reconcile net income (loss) to cash from operations: Depreciation and amortization ................... 3,680 6,416 Amortization of software construction and product enhancements .................... 400 9,828 Provision for obsolete inventory ................ 6,000 6,000 Amortization of deferred income and deferred rent (42,860) (50,391) Increase (decrease) in cash due to changes in Accounts receivable ............................. 41,722 154,849 Inventories ..................................... (3,823) (103,507) Prepaid expenses ................................ (4,461) (5,858) Accounts payable ................................ 29,639 (37,056) Accrued liabilities ............................. (671) (17,591) Deferred income ................................. (18,536) 27,004 ------- --------- Net cash provided by (used in) operations .... 39,707 (48,131) Cash used in investment activities: Purchase of fixed assets ........................ - (2,707) Increase in software construction and product enhancements ..................... (32,503) -- ------- --------- Net cash used in investment activities ....... (32,503) (2,707) Cash used in financing activities: Payments on long-term obligations ............... (10,573) (10,466) ------- --------- Decrease in cash ...................................... (3,369) (61,304) Cash - beginning of period ............................ 32,848 79,408 --------- --------- Cash - end of period .................................. $ 29,479 $ 18,104 ========= Interest paid during period ........................... $ 1,717 $ 2,781 ========= ========= 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 June 30, 1999 and the results of operations and cash flows for the three month periods ended June 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 Accounting 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 (probably in September), 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 June 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. This review process is 95% complete at June 30, 1999 and the Company has discovered no material Year 2000 compliance issues. The Company has not incurred nor anticipates any additional significant expenses as a result of its on-going Year 2000 work. 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 increased by $31,062, or 7% for the three months ended June 30, 1999, when compared to the prior year period. Sales increased significantly in the targeted new markets for special systems and test applications using Medallion products. This increase was substantially offset by a decreases in the 7000 Series and WCA product lines. Service revenues increased $3,104 or 8% for the current three month period when compared to the prior year period. Order backlog amounted to $133,000 at June 30, 1999 compared with $597,000 at June 30, 1998. There were significant decreases in the 7000 series and Medallion product lines. Prior year 7000 series backlog included 7 systems from an order received during the fourth quarter of fiscal 1998 which were shipped throughout the remainder of fiscal year 1999. The decrease in Medallion backlog was due to a decline in new orders and the Company's ability to process and ship Medallion orders on a more timely basis. Costs of products and services sold were 41% of products and services revenues for the three months ended June 30, 1999 versus 39% for the prior year. The increase in costs was due to higher than normal costs on a 7000 series related sale. Selling and administrative expenses decreased $30,458 or 12% during the current period versus the same prior year period. This decrease was due to lower administrative salaries and lower commission expense as sales from outside sales representatives declined. These decreases were partially offset by higher sales commission paid to the Company's employees and an increase in advertising and sales promotion costs. Selling and administrative expenses were 47% versus 57% of total revenue for the current and prior year periods, respectively. Research and development expenses and software construction amortization was $26,445 for the current period versus $53,989 for the prior period. This decrease was due to less amortization expense as a result of no capitalized software construction and product enhancement costs during the past year and a decline in Medallion research and development expenses. See Software Construction and Product Development under Liquidity and Capital Resources. Interest expense for the three months ended June 30, 1999 was $1,717 versus $2,384 for the same period ended June 30, 1998. This decrease was due to less borrowings during the current year. Income tax expense was $9,730 for the current period 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 at June 30, 1999 was $32,503. 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 $748,371 at March 31, 1999 to a negative $775,970 at June 30, 1999 resulting in a decrease in the current ratio from .41 to .38. The decline was due mainly to a reduction in accounts receivable. The Company's cash flows from operations amounted to $39,707. Payments on long-term debt totaled $10,573 for the three months ended June 30, 1999. Although the Company had an operating profit during the current three month period, the Company continues to experience cash flow problems. The Company is 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 Item 5: Other Information On June 29, 1999, the Company extended its current facilities lease through August 31, 2001. The monthly rent increased from the current amount of $4,604 to $4,685 effective September 1, 1999. All other terms and conditions remained the same. 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/ John H. Reifschneider__________ John H. Reifschneider Controller Dated: August 6, 1999