UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1999 Commission File Number 0-12283 ZONIC CORPORATION (Exact name of Registrant as specified in its charter) Ohio 31-0791199 ---------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification Number) 50 West Technecenter Drive, Milford, Ohio 45150-9777 ----------------------------------------- ---------- (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 248-1911 -------------- Not Applicable (Former name, address or fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ____X_____ No _________ The total number of shares outstanding of the issuer's common shares, without par value, as of the date of this report, follow: 3,044,136 --------- Part I Financial Information Item 1. Financial Statements STATEMENT OF OPERATIONS (unaudited) Three Months Ended Six Months Ended 9/30/99 9/30/98 9/30/99 9/30/98 Products and service revenues ..................... $ 518,659 $ 623,983 $ 992,305 $ 1,066,566 Cost of products and services sold ................ 214,044 215,994 409,980 388,641 Selling and administrative expenses ............... 227,217 256,824 448,147 508,211 Research and development expenses and software construction and product enhancement amortization ............... 35,414 49,842 61,859 103,831 ----------- ----------- ----------- ----------- 476,675 522,660 919,986 1,000,683 Operating profits ................................. 41,984 101,323 72,319 65,883 Interest expense, net ............................. (1,185) (2,856) (2,902) (5,240) ----------- ----------- ----------- ----------- Income before taxes ............................... 40,799 98,467 69,417 60,643 Provision for income taxes ........................ -- -- -- -- ----------- ----------- ----------- ----------- Net income ........................................ 40,799 98,467 69,417 60,643 Less: Dividend payable on preferred shares ........ (8,160) (13,528) (13,883) (13,528) ----------- ----------- ----------- ----------- Net income available to common shareholders ....... $ 32,639 $ 84,939 $ 55,534 $ 47,115 =========== =========== =========== =========== Weighted average of common shares outstanding ..... 3,044,136 3,044,136 3,044,136 3,044,136 Dilutive potential common shares: Class A convertible preferred Stock ..... 1,200,000 -- 1,200,000 -- Stock options ........................... 31,077 -- -- -- ----------- ----------- ----------- ----------- Adjusted weighted average of common shares outstanding ....................................... 4,275,213 3,044,136 4,244,136 3,044,136 =========== =========== =========== =========== Basic earnings per share .......................... $ 0.01 $ 0.03 $ 0.02 $ 0.02 =========== =========== =========== =========== Diluted earnings per share ........................ $ 0.01 $ 0.03 $ 0.01 $ 0.02 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements . Item 1 - Financial Statements (continued) BALANCE SHEETS As of September 30, 1999 & March 31, 1999 (Unaudited) Sept. 30 March 31 1999 1999 ASSETS .............................................. Current Assets Cash ........................................... $ 7,084 $ 32,848 Receivables Trade ..................................... 248,029 125,786 Unbilled .................................. 33,400 115,588 Related parties ........................... 15,200 200 ----------- ----------- Total receivables .............................. 296,629 241,574 Inventories Finished products ......................... 51,786 96,164 Work in process ........................... 87,047 68,128 Raw material .............................. 96,023 85,049 ----------- ----------- Total inventories .............................. 234,856 249,341 Prepaid expenses ............................... 7,635 2,702 ----------- ----------- Total Current Assets ...................... 546,204 526,465 Property and Equipment-at Cost Furniture and office equipment ................. 133,284 133,284 Machinery and plant equipment .................. 264,164 264,164 Software construction and product enhancement .. 2,247,887 2,203,070 ----------- ----------- 2,645,335 2,600,518 Less accumulated depreciation and amortization . 2,564,715 2,558,156 ----------- ----------- 80,620 42,362 ----------- ----------- Total Assets ......................... $ 626,824 $ 568,827 =========== =========== LIABILITIES Current Liabilities Short-term notes payable and current maturities of long-term debt ......................... $ 39,960 $ 20,788 Accounts payable - trade ....................... 647,129 614,230 Accounts payable - related parties ............. 535 -- Dividend payable ............................... 38,155 35,698 Deferred income ................................ 291,260 321,819 Accrued liabilities Salaries and wages ........................ 110,094 105,514 Property and payroll taxes ................ 41,157 41,317 Commissions ............................... 99,147 75,651 Other ..................................... 47,172 59,817 ----------- ----------- Total Accrued Liabilities ............ 297,570 282,299 ----------- ----------- Total Current Liabilities ............ 1,314,609 1,274,834 Long-Term Obligations, Less Current Maturities ...... 7,637 10,160 Deferred rent ....................................... -- 34,789 SHAREHOLDERS' DEFICIT Preferred shares ............................... 2,400,000 2,400,000 Common shares .................................. 61,674 61,674 Additional paid-in capital ..................... 5,727,881 5,727,881 ----------- ----------- 8,189,555 8,189,555 Accumulated deficit ............................ (8,884,977) (8,940,511) ----------- ----------- Total Shareholders' Deficit ............... (695,422) (750,956) ----------- ----------- Total Liabilities and Shareholders' Deficit $ 626,824 $ 568,827 =========== =========== The accompanying notes are an integral part of these financial statements. Item 1 - Financial Statements (continued) STATEMENT OF SHAREHOLDERS' DEFICIT For the six months ended September 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 for the period .................. -- -- -- 69,417 69,417 Dividends payable on preferred shares ...... -- -- -- (13,883) (13,883) ----------- ----------- ----------- ------------ ---------- Balance, September 30, 1999 ................ $ 61,674 $ 2,400,000 $ 5,727,881 $(8,884,977) $ (695,422) =========== =========== =========== ============ =========== 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) 1999 1998 --------- --------- Cash provided by operations: Net income for period .......................................... $ 69,417 $ 60,643 Adjustments to reconcile net income to cash from operations: Depreciation and amortization .............................. 5,676 10,388 Amortization of software construction and product enhancements ............................ 883 19,659 Provision for obsolete inventory ........................... 12,000 12,000 Amortization of deferred income and deferred rent .......... (84,945) (110,920) Increase (decrease) in cash due to changes in Accounts receivable ........................................ (55,055) 99,845 Inventories ................................................ 2,485 (43,137) Prepaid expenses ........................................... (4,933) (22,943) Accounts payable ........................................... 33,434 16,732 Accrued liabilities ........................................ 3,845 (9,982) Deferred income ............................................ 19,597 (4,310) ------ ------ Net cash provided by operations ................ 2,404 27,975 Cash used in investment activities: Purchase of equipment ...................................... -- (6,014) Increase in software construction and product enhancements . (44,817) -- --------- --------- Net cash used in investment activities ......... (44,817) (6,014) Cash provided (used) by financing activities: Additions to debt obligations .............................. 35,000 -- Payments on debt obligations ............................... (18,351) (20,951) ------- ------- Net cash provided (used) by financing activities 16,649 (20,951) Increase (decrease) in cash ........................................ (25,764) 1,010 Cash - beginning of period ......................................... 32,848 79,408 --------- --------- Cash - end of period ............................................... $ 7,084 $ 80,418 ========= ========= Interest paid during period ........................................ $ 3,074 $ 5,637 ========= ========= 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 September 30, 1999 and the results of operations for the three and six month periods ended September 30, 1999 and 1998 and its cash flows for the six month periods ended September 30, 1999 and 1998. The results of operations for the interim periods are not necessarily indicative of results to be expected for a full year. The financial statements are summarized and should be read in conjunction with the annual report to shareholders and Form 10-K for the year ended March 31, 1999. Certain reclassifications have been made to amounts shown for the prior year to conform to current year classifications. 2. New Standards The Financial Standards Board has proposed an interpretive release on several issues that are not specifically addressed in APB No.25, "Accounting for Stock Issued to Employees." The proposed guidance for accounting for the repricing of employee stock options could result in significant accounting changes for the Company as a result of the repricing of options which occurred in February 1999. The Company would be required to record an expense (compensation costs) equal to the difference between the modified exercise price and any subsequent increase in the price of the Company's common stock. This accounting would be applied from the date of issuance until the exercise date of the option. The final Interpretation would be effective upon issuance, but will cover events that occurred after December 15, 1998. The impact on the Company's financial statements would depend on the market value of the common stock. At September 30, 1999, the market value of the Company's common stock was less than the exercise price of the repriced options, and as such, there would be no additional expense. 3. Year 2000 Issues The Company defines Year 2000 compliance as proper functionality, or performance of a system, process, or equipment that is not adversely affected by dates prior to, during, and after the year 2000. Due to memory constraints, early programmers represented years by the last two digits of the century. Thus the year 1970 is represented by the number "70" in many older software programs. At the turn of the century, the year will become "00" and the computer or system will interpret this as the year 1900 and not the year 2000. Many systems have electronic components that utilize a date to control the function it serves. Most computer software, including the Company product offerings, utilizes date identification. The Company has initiated a comprehensive review and evaluation of all relevant internal and external systems, processes, and third party providers to determine their compliance or progress toward Year 2000 compliance. If a system, process or third party provider is deemed significant to the operations of the Company and Year 2000 compliance is in question, the Company will develop a contingency plan to address the issue. At this time the Company has not encountered nor anticipates any significant Year 2000 issues requiring a contingency plan. The Company's product offerings utilize date reference for the identification of printed and stored data. A date reference problem will result in stored data being tagged with an incorrect date, or printed data indicating an incorrect date. The Company has determined that certain legacy products will not be reviewed for Year 2000 compliance. All current products will be Year 2000 compliant. This information has been provided to the Company's clients and the information is available on the company's website. The review process is complete and the Company has discovered no material Year 2000 compliance issues. The Company has not incurred nor anticipates any additional significant expenses as a result of its Year 2000 work. 4. Short-Term Note Payable On August 29, 1999, the Company signed a revolving line of credit agreement with its local bank. The maximum amount is $150,000 and is secured by all the assets of the Company. Interest, payable monthly, is computed at the prime rate plus 2%. The agreement expires on August 1, 2000. The previous note payable with the same bank was paid in full on August 31, 1999. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Special Cautionary Notice Regarding Forward-Looking Statements Certain of the matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation" may constitute forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause the actual results, performance or achievement of the Company to differ materially from the Company's expectations include, without limitation, the following: 1) the Company is unable to improve existing products or develop new products which satisfy needs in the Company's markets; 2) the Company is unable to penetrate new markets; 3) the Company is unable to retain existing personnel or hire additional personnel; 4) the industries the Company serves experience less rapid growth than anticipated; 5) the Company is unable to obtain supplies on a timely basis from its limited number of suppliers; 6) new competitors enter the markets the Company serves or existing competitors increase their marketing efforts; 7) the Company is unable to obtain additional debt or equity financing on favorable terms, if at all, to satisfy its cash requirements. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by such factors. Results of Operations Product and Services Revenue decreased by $105,324, or 17% for the three months ended September 30, 1999, when compared to the prior year period. The decrease occurred primarily in the Company's 7000 Series product line. Medallion revenues for the period were approximately the same as last year although sales to end user customers increased 89% or $161,000. Last year included sales of $163,000 to a company under an OEM distribution agreement. For the six months ended September 30, 1999, revenue decreased by $74,261 or 7% when compared to the same period of the prior year. Sales increased significantly in the targeted new markets for special systems and test applications using Medallion products during the period, but were offset by significant declines in revenue from 7000 Series and WCA products. The prior year's 7000 Series revenue was primarily from an eight-system order received during the fourth quarter of fiscal year 1998. Medallion product revenue was about the same for the current six month period when compared to the prior year. Order backlog amounted to $257,000 at September 30, 1999 compared with $300,000 at September 30, 1998. The decrease was attributable to four remaining units from the eight system Series 7000 order received during the fourth quarter of fiscal 1998 which were included in the prior year amount. The decline in Series 7000 orders was substantially offset by increases in the backlog for Medallion, new market products and extended service contracts during the current year. Costs of products and services sold were 41% of products and services revenues for the three and six months ended September 30, 1999 versus 35% and 36% respectively for the same periods of the prior year. The increase was due primarily to higher than normal costs on several 7000 Series sales and the sale of a custom designed product. Selling and administrative expenses decreased $29,607 and $60,064 or 12% during the current three and six month periods ended September 30, 1999 versus the same prior year periods. The decrease during the current three month period was due mainly to less sales promotion expenses versus an unusually high amount last year and lower professional services and communications expenses. A significant decrease in sales commission expense during the current six month period resulting from fewer sales upon which commissions were due to sales representatives was partially offset by higher costs during the current three month period as commissionable transactions to sales representatives increased. Selling and administrative expenses were 44% and 45% respectively of products and service revenues for the current three and six month periods versus 41% and 48% respectively for the same periods of the prior year. The increase for the current three month period was due to the decline in revenue. Research and development expenses and software construction amortization was $35,414 and $61,859, respectively, for the three and six month periods ended September 30, 1999 versus $49,842 and $103,831, respectively, for the same periods of the prior year. These decreases were due to less amortization expense as a result of a decrease in capitalized software construction and product enhancement costs during recent years and a decline in the level of Medallion research and development costs versus the prior year. See Software Construction and Product Development under Liquidity and Capital Resources. Interest expense was $1,185 and $2,902, respectively, for the three and six month periods ended September 30, 1999 versus $2,856 and $5,240, respectively, for the same periods ended September 30, 1998. This decrease was due to less borrowings during the current year. Income tax expense was $13,872 and $23,602, respectively, for the three and six months ended September 30, 1999 and was offset by net operating loss carryforwards. At March 31, 1999, loss carryforwards totaling $6.7 million and tax credits of $666,000 were available to offset future income taxes. No benefit from the Company's deferred tax assets has been provided at this time. Dividend payable on class B preferred shares is equal to 20% of the Company's current year-to-date net income. Liquidity & Capital Resources Software Construction and Product Development The Company's cash outlay for software construction and product enhancement costs for the six months ended September 30, 1999 was $44,817. There was no cash outlay for software construction and product enhancement costs during the same period of the prior year. There were no unamortized software construction and product costs at March 31, 1999. Working Capital and Cash Flow The Company's working capital decreased from a negative $748,369 at March 31, 1998 to a negative $768,405 at September 30, 1999. The current ratio was .41 at March 31, 1999 and September 30, 1999. The change in working capital was due primarily to an increase in accounts payable, accrued liabilities and short-term borrowings that were substantially offset by an increase in accounts receivable. The Company's cash flows from operations amounted to $2,404 for the six months ended September 30, 1999. The Company borrowed $35,000 during September, 1999 and made payments on other existing long-term debt totaling $18,351. Investment in software construction and product enhancement activities was $44,817 during the current six month period. The Company has experienced some improvement in its cash flow resulting from its operating profit during the current year, but continues to experience cash flow problems as current liabilities exceed current assets. The Company continues to seek additional working capital through debt or equity financing from public or private sources to reduce current liabilities and to sustain its operations. There can be no assurance that the Company will be able to obtain additional financing on favorable terms, if at all, from any source. PART II - Other Information None Item 6: Exhibits and Reports on Form 8-K Exhibit 11 - Computation of earnings per common share - see Statements of Operations Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ZONIC CORPORATION By: /s/ James B. Webb - --------------------- James B. Webb President and Chief Executive Officer By:/s/ John H. Reifschneider - ---------------------------- John H. Reifschneider Controller Dated: November 5, 1999