<PAGE> 1
FORM 10-QSB
[As last amended in Release No. 34-32231, April 28, 1993, 58 F.R. 26509]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from __________________ to
_____________________
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 31-1200684
-------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2100 Sherman Avenue, Cincinnati, Ohio 45212
-------------------------------------------
(Address of principal executive offices)
(513) 731-6000
---------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
<PAGE> 2
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 12,279,371 SHARES OF COMMON
STOCK AS OF SEPTEMBER 30, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
The financial statements attached to the end of this quarterly report
are filed as part of this quarterly report. The financial statements include all
adjustments which in the opinion of management are necessary in order to make
the financial statements not misleading.
Item 2. Management's Discussions and Analysis or Plan of Operation.
-----------------------------------------------------------
The following selected financial information set forth below has been
derived from the unaudited financial statements of the Company. This discussion
and analysis should be read in conjunction with such financial statements. All
amounts are in US dollars.
Results of Operations
- ---------------------
For the three months ended September 30, 1996 compared to the three months ended
- --------------------------------------------------------------------------------
September 30, 1995
- ------------------
Sales for the three months ended September 30, 1996 were $1,521,000
compared to $1,547,000 for the corresponding period of the prior year. ACD unit
volume for the current period increased by approximately 15% over the same
period last year. Revenues from ACD software training, installation and
maintenance increased by approximately 42% over the prior year quarter and sales
of the Tele-Series call accounting product increased by 24% over the same
period. Sales of the Company's retail product, OCTus PTA, were negatively
impacted due to higher than expected returns of inventory overstock by one of
its distributors. Cintech is currently repositioning this product to generate
higher unit sales.
Gross Margin as a percentage of sales, increased to 67% compared to 56%
for the comparable prior year period. This increase in Gross Margin is
attributable to the Company's strategy of concentrating on higher margin ACD
software unit sales while de-emphasizing distribution of the lower margin
PC-hardware products. This change in strategy, combined with sales of high
margin, non-ACD products such as Tele-Series, Dial-by-Name, maintenance,
installation, etc., allowed the Company to generate Gross Profit of $1,026,000,
an increase of $153,000 or 18% compared to the same period of last year.
The first quarter represents the first full quarter whereby Cintech's
ACD products were promoted and sold under the joint marketing agreement entered
into with Nortel in March 1996. Under this partnership arrangement, Cintech's
PRELUDE and CINPHONY ACD are listed in the Nortel catalog and are sold by Nortel
through Authorized Norstar Distributors. Cintech receives revenue on software
only instead of software and hardware as in the past. Nortel now is
2
<PAGE> 3
responsible for supplying the PC hardware components. On a per unit basis then,
Cintech realizes less revenue, countered by a higher gross margin. Unit volume
is expected to continue to increase, brought about by the marketing and sales
leverage of Nortel. (Nortel has approximately 120 salespeople versus Cintech's
10.) For comparative purposes, had Cintech continued to provide PC-hardware
components during the current quarter, sales would have increased approximately
34% over the prior year's first quarter to about $2,075,000.
Research and Development costs increased to $90,000 or 7% over the same
prior year period. This reflects the Company's ongoing efforts in product
development including the most recent software solution - JAZZ2000 ACD for NEC's
NEAX 2000 IVS. Selling, General and Administrative (S,G&A) expenses of
$1,190,000 were approximately 16% higher than the comparable quarter due to the
implementation of the Company's joint marketing strategy. The greatest portion
of the increase in S,G&A over the first quarter of last year was due to higher
payroll costs of $139,000 reflecting higher staffing levels. The organizational
growth occurred mainly in fiscal 1996 with staffing levels maintained from the
fourth quarter of fiscal 1996 to the first quarter of 1997.
Other Income decreased to $8,000 for the first three months of fiscal
1997 compared with $24,000 for the prior year quarter due to lower levels of
interest income generated from corresponding lower levels of funds invested in
marketable securities.
The Company incurred a Net Loss of $247,000 for the first three months
of fiscal 1997 compared to the $241,000 Net Loss reported for the same period
last year. The $0.02 Loss per Share was equal to that realized for the first
quarter of 1996.
Liquidity and Capital Resources
- -------------------------------
Working Capital decreased to $1.7 million for the current quarter
compared to $2.0 million for the corresponding prior year. This $300,000
decrease was attributable to decreases in cash and marketable securities
($538,000), accounts receivable ($83,000), and current liabilities ($26,000)
offset by increases in inventory and prepaid expenses of $277,000 and $18,000
respectively.
The Company's operations provided cash of $175,000 during the first
fiscal quarter ended September 30, 1996. The cash provided was partially offset
by net cash used by investing activities of $67,000.
As of September 30, 1996, Cintech had outstanding debt obligations of
$115,000 due to the buyout of the lease on the Company's former office
facilities in May, 1996 and held cash and marketable securities totaling $1.07
million.
The Company is continuing to execute its joint marketing strategy with
Nortel and NEC America that provides higher margin unit sales and a much larger
sales and marketing effort from the partnering companies. While operating
expenses did increase during the periods covered, the Company believes that
increases in sales and/or the liquidation of marketable securities will provide
sufficient cash flow to meet expenses in future periods. The Company has no
material commitments for capital expenditures, nor is the Company subject to
seasonal aspects that could be expected to have a material effect on the
Company's financial condition or its results of operations. The Company feels
that there are no significant elements of income
3
<PAGE> 4
or loss that do not arise from the Company's continuing operations, other than
interest income realized from investment in marketable securities.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders of the Company was held on
October 8, 1996 (the "Annual Meeting"). The vote of holders of
record of 12,281,371 shares of the Company's common stock
outstanding at the close of business on September 2, 1996 was
solicited by proxy pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
(b) All of the Board of Directors nominees submitted for approval
by shareholders were elected. The results of the shareholder
voting were as follows:
<TABLE>
<CAPTION>
VOTE
----
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Diane M. Kamionka 10,374,714 0 1,000
Bryant A. Downey 10,375,714 0 0
Frank W. Terrizzi 10,375,714 0 0
Robert I. Westheimer 10,375,714 0 0
John G. Slater 10,375,714 0 0
Carter F. Randolph 10,375,714 0 0
</TABLE>
(c) At the Annual Meeting, stockholders approved the following
matters by the vote indicated:
<TABLE>
<CAPTION>
VOTE
----
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Ratification of Selection 10,371,214 4,000 500
of Deloitte Touche as
Independent Auditors
<CAPTION>
VOTE
----
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Amendment of Stock 10,366,714 7,000 2,000
Option Plan to Provide
for Nonemployee Eligibility
</TABLE>
4
<PAGE> 5
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following Exhibits are required by Item 601 of Regulation
S-B:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation,
- ------------- or Succession..................................................................... N/A
-----
Exhibit No. 3 - (I) Articles of Incorporation, (ii) By-laws ...................................... *
- ------------- -----
Exhibit No. 4 - Instruments Defining
- ------------- Rights of Security Holders........................................................ N/A
-----
Exhibit No. 10 - Material Contracts................................................................*, **
- -------------- -----
Exhibit No. 11 - Statement re: Computation of Per Share Earnings .................................. N/A
- -------------- -----
Exhibit No. 15 - Letter on Unaudited Interim Financial Information................................ N/A
- -------------- -----
Exhibit No. 18 - Letter on Change in Accounting Principles......................................... N/A
- -------------- -----
Exhibit No. 19 - Reports Furnished to Security-Holders............................................. N/A
- -------------- -----
Exhibit No. 22 - Published Report Regarding Matters Submitted to Vote.............................. N/A
- -------------- -----
Exhibit No. 23 - Consent of Experts and Counsel.................................................... N/A
- -------------- -----
Exhibit No. 24 - Power of Attorney................................................................. N/A
- -------------- -----
Exhibit No. 99 - Additional Exhibits............................................................... N/A
- -------------- -----
</TABLE>
(b) On September 15, 1995, the Company changed its fiscal year end to
June 30 commencing June 30, 1995. The Company filed a Form 8-K regarding this
change in fiscal year on September 26, 1995. This form is incorporated in this
report by reference.
* Previously provided in original filing on Form 10-SB.
** Previously provided in Amendment No. 2 to Form 10-SB.
5
<PAGE> 6
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, Cintech Tele-Management Systems, Inc., as Registrant, has caused this
Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto
duly authorized.
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
By: _________________________________ Date: November 14, 1996
Diane M. Kamionka, President and
Chief Executive Officer
By: _________________________________ Date: November 14, 1996
James K. Keller, Chief Financial Officer
6
<PAGE> 1
EXHIBIT NO. 19
REPORTS FURNISHED TO SECURITY-HOLDERS
<PAGE> 2
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors of
Cintech Tele-Management Systems, Inc.
We have reviewed the accompanying balance sheets of Cintech Tele-Management
Systems, Inc. (the "Company") as of September 30, 1996 and 1995 and the related
statements of operations, stockholders' equity and cash flows for the three
months then ended (all expressed in U.S. dollars). These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytic procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of the Company as of June 30, 1996, and in our
report dated August 23, 1996, we expressed an unqualified opinion on that
balance sheet.
/s/ Deloitte & Touch LLP
October 25, 1996
<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 JUNE 30, 1996, AND SEPTEMBER 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPT 30, JUNE 30, SEPT 30,
ASSETS 1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 296,341 $ 203,441 $ 217,608
Marketable securities (Notes 3,5) 770,391 770,391 1,386,790
Accounts receivable, trade - (Net of allowance
of $51,543, $53,726 and $59,701 at Sept 30, 1996,
June 30, 1996, and Sept 30, 1995 respectively) (Note 2) 791,096 1,151,471 874,141
Inventory (Note 2) 1,021,935 1,009,960 744,565
Prepaid expenses 17,594 18,224
----------- ----------- -----------
Total current assets 2,897,357 3,153,487 3,223,104
----------- ----------- -----------
FIXED ASSETS (Note 2):
Equipment 587,879 574,551 495,211
Furniture and fixtures 125,372 123,906 112,652
----------- ----------- -----------
Total 713,251 698,457 607,863
Less accumulated depreciation 422,052 394,184 307,023
----------- ----------- -----------
Total fixed assets - net 291,199 304,273 300,840
----------- ----------- -----------
OTHER ASSETS:
Deposits 5,062
Deferred software development
costs - net (Note 2) 344,037 303,205 235,455
----------- ----------- -----------
Total other assets 344,037 303,205 240,517
----------- ----------- -----------
TOTAL $ 3,532,593 $ 3,760,965 $ 3,764,461
=========== =========== ===========
<CAPTION>
LIABILITIES AND SEPT 30, JUNE 30, SEPT 30,
STOCKHOLDERS' EQUITY 1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 607,916 $ 715,258 $ 804,780
Accrued liabilities:
Accrued salaries 152,075 82,228 93,634
Accrued payroll taxes 10,013 13,568 7,792
Accrued vacation 66,563 60,945 57,171
Accrued lease termination costs (Notes 4, 5) 159,571
Other 133,135 62,555 36,583
Current portion of notes payable (Note 5) 100,000 100,000
Deferred maintenance revenue (Note 2) 139,243 140,667 75,511
----------- ----------- -----------
Total current liabilities 1,208,945 1,175,221 1,235,042
----------- ----------- -----------
ACCRUED LEASE TERMINATION
COSTS (Note 4, 5) 72,429
----------- ----------- -----------
NOTES PAYABLE (Note 5) 15,000 30,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Notes 1, 6, 7):
Common stock 8,982,580 8,982,580 8,965,690
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (7,347,399) (7,100,303) (7,182,167)
----------- ----------- -----------
Total stockholders' equity 2,308,648 2,555,744 2,456,990
----------- ----------- -----------
TOTAL $ 3,532,593 $ 3,760,965 $ 3,764,461
=========== =========== ===========
</TABLE>
-2-
<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET SALES (Note 2) $ 1,521,197 $ 1,547,022
COST OF PRODUCTS SOLD 225,567 515,712
AMORTIZATION OF DEFERRED SOFTWARE DEVELOPMENT
COSTS (Note 2) 11,164 34,070
LICENSING FEES 258,830 125,031
----------- -----------
GROSS PROFIT 1,025,636 872,209
RESEARCH AND DEVELOPMENT 90,421 84,014
SELLING, GENERAL AND ADMINISTRATIVE (Notes 2, 4) 1,190,296 1,027,903
LEASE TERMINATION COSTS (Note 4, 5) 0 25,625
----------- -----------
LOSS FROM OPERATIONS (255,081) (265,333)
OTHER INCOME - Interest income 7,985 23,922
----------- -----------
NET LOSS $ (247,096) $ (241,411)
=========== ===========
NET LOSS PER SHARE (Note 6) $ (0.02) $ (0.02)
=========== ===========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK CONTRIBUTED TREASURY ACCUMULATED STOCKHOLDERS'
NO PAR VALUE CAPITAL STOCK DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 $8,965,690 $675,757 $(2,290) $(6,940,756) $ 2,698,401
NET LOSS (241,411) (241,411)
---------- -------- ------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1995 $8,965,690 $675,757 $(2,290) $(7,182,167) $ 2,456,990
========== ======== ======= =========== ===========
BALANCE AT JUNE 30, 1996 $8,982,580 $675,757 $(2,290) $(7,100,303) $ 2,555,744
NET LOSS (247,096) (247,096)
---------- -------- ------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 $8,982,580 $675,757 $(2,290) $(7,347,399) $ 2,308,648
========== ======== ======= =========== ===========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss $(247,096) $(241,411)
--------- ---------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 27,868 21,178
Amortization of software development costs 11,164 34,070
Provision for doubtful accounts (2,183) 2,628
Loss on disposal of fixed assets 613
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 362,558 (4,406)
Increase in inventory (11,975) (245,069)
Decrease in prepaid expenses 630
Increase (decrease) in accounts payable (107,342) 204,830
Increase in accrued expenses 142,490 58,471
Decrease in accrued lease termination costs (Note 4, 5) (17,000)
Decrease in deferred maintenance revenue (1,424) (12,497)
--------- ---------
Total adjustments 421,786 42,818
--------- ---------
Net cash provided by (used in) operating activities 174,690 (198,593)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from marketable securities 358,873
Purchase of fixed assets (14,794) (24,217)
Expenditures for software development costs (51,996) (37,168)
--------- ---------
Net cash provided by (used in) investing activities (66,790) 297,488
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable (15,000)
--------- ---------
Net cash used in financing activities (15,000)
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 92,900 98,895
CASH AND CASH EQUIVALENTS:
Beginning of period 203,441 118,713
--------- ---------
End of period $ 296,341 $ 217,608
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 7
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 (AUDITED) AND AS OF SEPTEMBER 30, 1996 AND 1995 AND FOR THE
TWO THREE MONTH PERIODS THEN ENDED
- --------------------------------------------------------------------------------
1. INITIAL PUBLIC OFFERING
In January 1994, Cintech Tele-Management Systems, Inc. (the "Company")
completed its initial public offering of 2,181,820 shares of common stock
(the "Offering"). The Company's shares are traded on the Toronto Stock
Exchange (TSE) under the symbol "CTM".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company develops and markets computer software in
the emerging Computer-to-Telephone Integration (CTI) industry which
integrates the voice functions of the telephone with the data functions of
the computer to provide various business applications. This provides the
means for small to mid-sized offices to take advantage of the rapid
advances and emerging capabilities of CTI. This is accomplished through
StarDome, the Company's marketing and distribution organization that
offers Business and Personal Computer Telephony Applications to this
market. StarDome applications may be developed by the Company or by
selected development companies. These products are offered through the
Company's extensive distribution network with all the major telephone
companies in North America.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FINANCIAL STATEMENT PRESENTATION - These financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America and are expressed in United States dollars.
The differences in accounting principles generally accepted in the United
States of America and Canada are described in Note 9.
REVENUE - Generally, the Company records revenue from product sales when
the product is shipped. Contracts with certain distributors may have terms
which cause the Company to record revenue when the product is sold to
third parties. Also, the Company records an estimate of potential future
returns of product sold at the time of sale.
The Company sells product maintenance agreements which provide for repair
of hardware and no-cost upgrade of software. These agreements normally
cover a one-year period with revenue being recognized on a straight-line
basis over the maintenance period.
-6-
<PAGE> 8
DEPRECIATION - Fixed assets are carried at cost. Depreciation is based on
the estimated useful lives of the assets and is computed using an
accelerated method. Depreciation is computed using the following useful
lives:
<TABLE>
<S> <C>
Equipment 5 years
Furniture and Fixtures 7 years
</TABLE>
INVENTORY - Inventories are valued at the lower of cost or market, with
cost being computed using the first-in, first-out method. Inventories
consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1996 1996 1995
<S> <C> <C> <C>
Literature and other documentation $ 53,802 $ 70,935 61,357
Computer hardware 1,006,773 973,166 683,208
Allowance for obsolete inventory (38,640) (34,141)
----------- ----------- --------
Total inventory $ 1,021,935 $ 1,009,960 $744,565
=========== =========== ========
</TABLE>
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the telephony industry.
The Company had sales to major distributors, as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
---------------------- --------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Distributor A $706,819 46%
Distributor B $162,089 10%
Distributor C 163,004 11%
Distributor D 147,407 10%
-------- -- -------- --
Total $706,819 46% $472,500 31%
======== == ======== ==
</TABLE>
The Company had gross accounts receivable from major distributors, each of
which was in excess of 10% of the Company's total accounts receivable, as
follows:
<TABLE>
<CAPTION>
DISTRIBUTORS PERCENT OF
GROSS
ACCOUNTS
RECEIVABLE
<S> <C> <C>
September 30, 1996 1 61%
June 30, 1996 2 58%
September 30, 1995 1 13%
</TABLE>
-7-
<PAGE> 9
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
---------------------- --------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Canada $55,654 4% $158,950 10%
Other 23,385 2% 1,440 0%
-------- -- -------- --
Total $79,039 6% $160,390 10%
======== == ======== ==
</TABLE>
SOFTWARE DEVELOPMENT COSTS - Costs incurred internally for creation of the
computer software product are charged to research and development expense
when incurred until technological feasibility has been established for the
product. Thereafter, until general release, all software production costs
are capitalized and subsequently reported at the lower of amortized cost
or net realizable value. As the Company's products are in their early
product life cycle, the capitalized costs are amortized on a straight-line
basis over the estimated economic life of the product.
Costs capitalized were $51,996 and $37,168 and related amortization was
$11,164 and $34,070 for the three months ended September 30, 1996 and
1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of certain of the
Company's financial instruments, such as cash, trade accounts receivable
and trade accounts payable, approximate their fair values. The Company's
notes payable also approximate fair value based on the borrowing rates
currently available to the Company for notes with similar terms and
average maturities.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers all money market instruments to be cash equivalents.
RECLASSIFICATION - Certain 1995 amounts have been reclassified in order to
conform to 1996 presentation.
3. MARKETABLE SECURITIES
The Company maintains various investments in treasury bills which are
classified as held to maturity and are reported at amortized cost in
accordance with FASB Statement No. 115 "Accounting for Certain Investments
in Debt and Equity Securities". All items mature within one year. The cost
and market value of the investments are summarized below:
<TABLE>
<CAPTION>
NET
AMORTIZED UNREALIZED
DESCRIPTION COST MARKET GAIN
<S> <C> <C> <C>
September 30, 1996 - United States Treasury Bills $ 770,391 $ 789,848 $19,457
========== ========== =======
June 30, 1996 - United States Treasury Bills $ 770,391 $ 778,146 $ 7,755
========== ========== =======
September 30, 1995 - United States Treasury Bills $1,386,790 $1,405,771 $18,981
========== ========== =======
</TABLE>
-8-
<PAGE> 10
4. OPERATING LEASES
OPERATING LEASES - The Company leases its office facility in Norwood,
Ohio. This operating lease, which began in March 1995 and expires in March
2002, calls for escalating lease payments over the term of the lease. The
Company records lease expense on a straight-line basis over the life of
the lease.
The annual minimum rent to be paid under the operating lease agreement for
the facility in Norwood, Ohio is as follows:
<TABLE>
<CAPTION>
Year Ending September 30:
<S> <C>
1997 $ 168,938
1998 192,188
1999 205,000
2000 213,750
2001 220,000
2002 128,331
</TABLE>
Rent expense for the leased office space was $73,276 and $57,098 in the
three month periods ended September 30, 1996 and 1995, respectively.
During 1996 and 1995, the Company remained obligated for the lease on its
former office facility in Cincinnati, Ohio leased from a partnership in
which two of the Company's stockholders, one of whom is also a director,
are partners. As a result of the duplicate office facility the Company
accrued as lease termination cost the remaining lease payments on the
Cincinnati facility, less projected sublease income and expenses. In May
1996, this obligation was removed through a buyout of the lease as
discussed in Note 5.
5. NOTES PAYABLE
Notes Payable consisted of the following at September 30, 1996 and June
30, 1996 respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1996 1996
<S> <C> <C>
Term Note Payable - Bank $ 75,000 $ 90,000
Term Note Payable - Third Party 40,000 40,000
-------- --------
Total $115,000 $130,000
======== ========
</TABLE>
The Term Note Payable - Bank bears interest at the prime lending rate
(8.25% at September 30, 1996). The remaining term is 15 months. The note
is secured by various securities on deposit with the bank.
The Term Note Payable - Third Party bears interest at 6%. The term of the
note is for 12 months with principal and interest due in full on May 13,
1997. The note is with a partnership in which two of the company's
stockholders, one of whom is also a director, are partners.
The notes are a result of the buyout of the lease on the Company's former
office facility in Cincinnati, Ohio. As a result of the lease buyout, the
Company has eliminated the liability for accrued lease termination costs.
-9-
<PAGE> 11
6. CAPITAL STOCK AND LOSS PER SHARE
The following schedule is a summary of the Company's shares of capital
stock.
<TABLE>
<CAPTION>
COMMON IN
AUTHORIZED ISSUED OUTSTANDING TREASURY
<S> <C> <C> <C> <C>
Balance at September 30, 1996 15,000,000 12,281,371 12,279,371 2,000
========== ========== =========== =====
Balance at June 30, 1996 15,000,000 12,281,371 12,279,371 2,000
========== ========== =========== =====
Balance at September 30, 1995 15,000,000 12,266,422 12,264,422 2,000
========== ========== =========== =====
</TABLE>
Loss per common share was based on the weighted average number of common
shares outstanding during each period. Exercise of stock options is not
assumed as the effect is antidilutive. The weighted average number of
common shares outstanding was 12,279,371, 12,269,699 and 12,264,422 at
September 30, 1996, June 30, 1996, and September 30, 1995, respectively.
7. STOCK OPTION PLAN
During 1994, the Board of Directors approved a plan providing for the
granting, to employees, options for the purchase of a maximum of 1,500,000
shares of common stock. In February 1994 the Company granted 141,500 stock
options to its employees to purchase common stock at prices which reflect
a discount from the market value at the date of grant. The related
compensation expense is recognized over the period earned. Options granted
become exercisable over a two-year period and expire at the end of ten
years from the date of grant. In November 1994, the Company adjusted the
exercise price on the options to $.88. In March 1995, the Company granted
an additional 118,000 stock options to its employees. These options were
granted at prices equal to the market value at the date of grant and
become exercisable over a four-year period and expire at the end of ten
years from the date of grant. In January, March, June and August of 1996,
the Company granted additional stock options to its employees of 35,000,
10,000, 174,015 and 50,000, respectively. These options were all granted
at prices equal to market value at the date of the grant and become
exercisable over a four year period and expire at the end of ten years
from the date of grant. The status of stock options granted at September
30, 1996, June 30, 1996 and September 30, 1995 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1996 1996 1995
<S> <C> <C> <C>
Forfeited 95,213 95,213 47,915
Exercised 20,885 20,885 5,936
Currently exercisable 90,447 90,447 47,042
Exercisable in fiscal year 1996 75,786
Exercisable in fiscal year 1997 72,405 72,405 27,607
Exercisable in fiscal year 1998 84,906 72,405 27,607
Exercisable in fiscal year 1999 84,905 72,405 27,607
Exercisable in fiscal year 2000 67,254 54,755
Exercisable in fiscal year 2001 12,500
------- ------- -------
Total options granted 528,515 478,515 259,500
======= ======= =======
</TABLE>
-10-
<PAGE> 12
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which is effective for the Company beginning
July 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue
to apply APB Opinion No. 25, which recognizes compensation cost based on
the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation
awards to employees.
8. INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1996 1996 1995
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue $ 47,343 $ 47,827 $ 25,674
Accrued compensation 8,086 9,411 9,074
Reserves not currently deductible 17,525 18,267 20,298
Accrued lease termination costs 54,254
Accrued rent 17,014 14,328 6,268
----------- ----------- -----------
Total 89,968 89,833 115,568
Less valuation allowance (89,968) (89,833) (115,568)
----------- ----------- -----------
Net $ $ $
=========== =========== ===========
Non-current deferred tax asset:
Accrued lease termination costs $ 24,626
Net operating loss carryforward $ 2,283,791 $ 2,173,836 2,136,056
Research and development credits 140,075 134,525 117,875
----------- ----------- -----------
Total 2,423,866 2,308,361 2,278,557
Non-current deferred tax liability:
Deferred software development costs (116,973) (103,007) (80,055)
----------- ----------- -----------
Net non-current deferred tax asset 2,306,893 2,205,354 2,198,502
Less valuation allowance (2,306,893) (2,205,354) (2,198,502)
----------- ----------- -----------
Net $ $ $
=========== =========== ===========
</TABLE>
-11-
<PAGE> 13
The provision for income taxes for the three months ended September 30,
1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current provision $ $
Deferred credit 101,674 85,061
-------- -------
Total 101,674 85,061
Less increase in the valuation allowance (101,674) (85,061)
-------- -------
Income tax expense $ $
======== =======
</TABLE>
At September 30, 1996, the Company has net operating loss carryforwards of
$6,717,031 for U.S. Federal tax purposes. Such loss carryforwards, if
unused as offsets to future taxable income, will expire beginning in 2002
and continuing through 2011. Also at September 30, 1996, for U.S. Federal
tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of $140,075 which
will begin to expire in 2003.
9. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("CANADIAN GAAP AND U.S. GAAP")
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
During the three months ended September 30, 1996 and 1995, differences
between Canadian GAAP and U.S. GAAP arose as a result of depreciation. For
U.S. GAAP purposes, furniture and fixtures and equipment are depreciated
over useful lives of seven and five years, respectively, using an
accelerated method. For Canadian GAAP purposes, furniture and fixtures and
equipment are to be depreciated over useful lives of five and three years,
respectively, using a straight-line method. The difference does not have a
material effect on income nor on the earnings per share calculation.
* * * * * *
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 296,341
<SECURITIES> 770,391
<RECEIVABLES> 842,639
<ALLOWANCES> 51,543
<INVENTORY> 1,021,935
<CURRENT-ASSETS> 2,897,357
<PP&E> 713,251
<DEPRECIATION> 422,052
<TOTAL-ASSETS> 3,532,593
<CURRENT-LIABILITIES> 1,208,945
<BONDS> 15,000
<COMMON> 8,982,580
0
0
<OTHER-SE> (6,673,932)
<TOTAL-LIABILITY-AND-EQUITY> 3,532,593
<SALES> 1,521,197
<TOTAL-REVENUES> 1,521,197
<CGS> 225,567
<TOTAL-COSTS> 495,561
<OTHER-EXPENSES> 1,280,717
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (247,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (247,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (247,096)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
