<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 December 31, 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
incorporation or organization) Number)
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 December 31, 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 six months ended December 31, 1996 compared to the six months ended
December 31, 1995
Sales for the six months ended December 31, 1996 were $3,128,000
compared to $3,605,000 for the corresponding period of the prior year. The
$477,000 or 13% decrease in sales reflects the initial impact of the transition
to the Nortel sales and distribution strategy announced in March 1996. Under the
terms of the joint marketing arrangement with Nortel, the Company's CINPHONY and
PRELUDE ACD software products are listed in Nortel's catalog and are sold
directly by Nortel sales representatives. In addition, the Company no longer
sells the PC-hardware platforms required to run its ACD software products as
such hardware is now supplied by Nortel. Included in the comparative prior
period sales figure is approximately $1,146,000 of PC-hardware revenue.
ACD unit volume for the current period increased by approximately 15%
over the same period last year. Unit volume is expected to continue growing to a
level which more than offsets the loss of revenues previously realized from
PC-hardware. Revenues from ACD software training, installation and maintenance
increased by approximately 41% over the same prior year period and sales of the
Tele-Series call accounting product increased by 17% over the same period. In
addition, the Company continued its efforts in repositioning the OCTuS PTA
retail product.
Gross Margin as a percentage of sales, increased to 67% compared to 58%
for the comparable prior year period. This increase in Gross Margin percentage
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. During the first six months
2
<PAGE> 3
of fiscal 1997 the Company generated Gross Profit of $2,085,000 a decrease of
$17,000 or 1% compared to the prior year.
Research and Development costs increased to $208,000 or 7% over the
same prior year period. This reflects the Company's ongoing efforts to produce
new products and new releases of existing products. Selling, General and
Administrative (S,G&A) expenses of $2,330,000 were approximately 11% higher than
the comparable prior year period due to the Company's continued implementation
of its business plan. The greatest portion of the increase in S,G&A over the
first six months of last year was due to higher payroll costs of $229,000
reflecting higher staffing levels which grew primarily during fiscal 1996.
The Company incurred a Net Loss of $437,000 for the first six months of
fiscal 1997 compared to the $194,000 Net Loss reported for the same period last
year. The $0.04 Loss per Share was $0.02 higher than that realized for the
corresponding period of 1996. As the transition of the Company's joint marketing
strategy with Nortel nears completion, it is anticipated that the sales growth
rate will exceed levels experienced in prior years and yield improved
profitability.
Liquidity and Capital Resources
Working Capital decreased to $1.5 million for the period ended December
31, 1996 compared to $2.0 million for the corresponding prior year period. This
$500,000 decrease was attributable to decreases in cash and marketable
securities ($267,000), accounts receivable ($317,000), and current liabilities
($21,000) offset by increases in inventory and prepaid expenses of $14,000 and
$19,000 respectively.
The Company's operations provided cash of $30,000 for the six months
ended December 31, 1996. As of December 31, 1996, Cintech had outstanding debt
obligations of $100,000 due to the buyout of the lease on the Company's former
office facilities in May, 1996 and held cash and marketable securities totaling
$863,000.
The Company's plan of operation is to continue distributing its
ACD-related products via joint marketing agreements with Northern Telecom and
NEC America. 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 or loss that do not arise from the Company's continuing operations,
other than interest income realized from investment in marketable securities.
3
<PAGE> 4
PART II - OTHER INFORMATION
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.
4
<PAGE> 5
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: /s/ Diane M. Kamionka Date: February 14, 1997
---------------------------------
Diane M. Kamionka, President and
Chief Executive Officer
By: /s/ James K. Keller Date: February 14, 1997
---------------------------------
James K. Keller, Chief Financial Officer
5
<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 December 31, 1996 and 1995 and the related
statements of operations for the three months and the six months then ended and
of stockholders' equity and cash flows for the six 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 & Touche LLP
January 24, 1997
<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 JUNE 30, 1996 AND DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
ASSETS 1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 213,934 $ 203,441 $ 124,878
Marketable securities (Notes 3,5) 649,433 770,391 1,005,214
Accounts receivable, trade - (Net of allowance
of $73,226, $53,726 and $67,623 at
December 31, 1996, June 30, 1996 and
December 31, 1995, respectively) (Note 2) 787,132 1,151,471 1,103,882
Inventory (Note 2) 997,906 1,009,960 983,417
Prepaid expenses 19,013 18,224
----------- ----------- -----------
Total current assets 2,667,418 3,153,487 3,217,391
----------- ----------- -----------
FIXED ASSETS (Note 2):
Equipment 590,895 574,551 515,866
Furniture and fixtures 125,372 123,906 117,756
----------- ----------- -----------
Total 716,267 698,457 633,622
Less accumulated depreciation (450,223) (394,184) (333,707)
----------- ----------- -----------
Total fixed assets - net 266,044 304,273 299,915
----------- ----------- -----------
OTHER ASSETS:
Deposits 5,062
Deferred software development
costs - net (Note 2) 350,845 303,205 232,170
----------- ----------- -----------
Total other assets 350,845 303,205 237,232
----------- ----------- -----------
TOTAL $ 3,284,307 $ 3,760,965 $ 3,754,538
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND DECEMBER 31, JUNE 30, DECEMBER 31,
STOCKHOLDERS' EQUITY 1996 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 612,610 $ 649,271 $ 776,433
Accrued liabilities:
Accrued salaries 75,902 82,228 58,018
Accrued payroll taxes 17,523 13,568 15,811
Accrued vacation 61,333 60,945 50,629
Accrued lease termination costs (Notes 4, 5) 154,335
Other 143,605 128,542 63,157
Current portion of notes payable (Note 5) 100,000 100,000
Deferred maintenance revenue (Note 2) 154,673 140,667 68,641
----------- ----------- -----------
Total current liabilities 1,165,646 1,175,221 1,187,024
----------- ----------- -----------
ACCRUED LEASE TERMINATION
COSTS (Note 4, 5) 60,665
----------- ----------- -----------
NOTES PAYABLE (Note 5) 30,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Notes 1, 6, 7):
Common stock 8,982,580 8,982,580 8,968,038
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (7,537,386) (7,100,303) (7,134,656)
----------- ----------- -----------
Total stockholders' equity 2,118,661 2,555,744 2,506,849
----------- ----------- -----------
TOTAL $ 3,284,307 $ 3,760,965 $ 3,754,538
=========== =========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES (Note 2) $ 1,606,690 $2,058,100 $ 3,127,887 $ 3,605,122
COST OF PRODUCTS SOLD 176,389 656,281 401,956 1,171,993
AMORTIZATION OF DEFERRED SOFTWARE DEVELOPMENT
COSTS (Note 2) 34,078 31,481 45,242 65,551
LICENSING FEES 337,337 140,854 596,167 265,885
----------- ---------- ----------- -----------
GROSS PROFIT 1,058,886 1,229,484 2,084,522 2,101,693
RESEARCH AND DEVELOPMENT 117,094 110,517 207,515 194,531
SELLING, GENERAL AND ADMINISTRATIVE (Notes 2, 4) 1,139,544 1,065,380 2,329,840 2,093,283
LEASE TERMINATION COSTS (Note 4, 5) 25,625 51,250
----------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (197,752) 27,962 (452,833) (237,371)
OTHER INCOME - Interest income 7,765 19,549 15,750 43,471
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ (189,987) $ 47,511 $ (437,083) $ (193,900)
=========== ========== =========== ===========
NET INCOME (LOSS) PER SHARE (Note 6) $ (0.02) $ -- $ (0.04) $ (0.02)
=========== ========== =========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 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
SALE OF COMMON STOCK 2,348 2,348
NET LOSS (193,900) (193,900)
----------- --------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1995 $ 8,968,038 $ 675,757 $(2,290) $(7,134,656) $2,506,849
=========== ========= ======= =========== ==========
BALANCE AT JUNE 30, 1996 $ 8,982,580 $ 675,757 $(2,290) $(7,100,303) $2,555,744
NET LOSS (437,083) (437,083)
----------- --------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1996 $ 8,982,580 $ 675,757 $(2,290) $(7,537,386) $2,118,661
=========== ========= ======= =========== ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(437,083) $(193,900)
--------- ---------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 56,039 47,861
Amortization of software development costs 45,242 65,551
Provision for doubtful accounts 19,500 10,550
Loss on disposal of fixed assets 613
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 344,839 (242,069)
(Increase) decrease in inventory 12,054 (483,921)
Increase in prepaid expenses (789)
Increase (decrease) in accounts payable (36,661) 196,483
Increase in accrued expenses 13,080 31,281
Decrease in accrued lease termination costs (Note 4, 5) (34,375)
Increase (decrease) in deferred maintenance revenue 14,006 (19,367)
--------- ---------
Total adjustments 467,310 (427,393)
--------- ---------
Net cash provided by (used in) operating activities 30,227 (621,293)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from marketable securities 120,958 740,449
Purchase of fixed assets (17,810) (49,975)
Expenditures for software development costs (92,882) (65,364)
--------- ---------
Net cash provided by investing activities 10,266 625,110
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 2,348
Payment on notes payable (30,000)
---------
Net cash provided by (used in) financing activities (30,000) 2,348
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 10,493 6,165
CASH AND CASH EQUIVALENTS:
Beginning of period 203,441 118,713
--------- ---------
End of period $ 213,934 $ 124,878
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 7
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE THREE-MONTH
AND SIX-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
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 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>
DECEMBER 31, JUNE 30, DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
Literature and other documentation $ 43,246 $ 70,935 $ 65,077
Computer hardware 999,443 973,166 918,340
Allowance for obsolete inventory (44,783) (34,141)
--------- ----------- --------
Total inventory $ 997,906 $ 1,009,960 $983,417
========= =========== ========
</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 SALES FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1996 1995 1996 1995
--------------------------------------- -----------------------------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributor A $927,521 58% $1,634,340 52%
Distributor B $205,169 10% $298,815 8%
-------- -- -------- -- ---------- -- -------- -
Total $927,521 58% $205,169 10% $1,634,340 52% $298,815 8%
======== == ======== == ========== == ======== =
</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>
December 31, 1996 1 50%
June 30, 1996 2 58%
December 31, 1995 2 20%
</TABLE>
-7-
<PAGE> 9
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE MONTHS ENDED DECEMBER 31, SALES FOR THE SIX MONTHS ENDED DECEMBER 31,
1996 1995 1996 1995
------------------ ----------------------- ------------------ ----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada $10,172 1% $261,154 13% $65,826 2% $420,104 12%
Other 4,485 0% 27,870 1% 1,440 0%
------- - -------- -- ------- - -------- --
Total $14,657 1% $261,154 13% $93,696 3% $421,544 12%
======= = ======== == ======= = ======== ==
</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 $40,886 and $28,196 and related amortization was
$34,078 and $31,481 for the three months ended December 31, 1996 and 1995,
respectively. Costs capitalized were $92,882 and $65,364 and related
amortization was $45,242 and $65,551 for the six months ended December 31,
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 fiscal 1996 amounts have been reclassified in
order to conform to fiscal 1997 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>
December 31, 1996 - United States Treasury Bills $ 649,433 $ 663,580 $14,147
========== ========== =======
June 30, 1996 - United States Treasury Bills $ 770,391 $ 778,146 $ 7,755
========== ========== =======
December 31, 1995 - United States Treasury Bills $1,005,214 $1,023,786 $18,572
========== ========== =======
</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 December 31:
<S> <C>
1997 $172,125
1998 199,875
1999 205,000
2000 217,500
2001 220,000
2002 73,332
</TABLE>
Rent expense for the leased office space was $73,277 and $73,277 in the
three-month periods ended December 31, 1996 and 1995, respectively. Rent
expense for the leased office space was $146,553 and $130,375 in the
six-month periods ended December 31, 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 December 31, 1996 and June 30,
1996, respectively:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
<S> <C> <C>
Term Note Payable - Bank $ 60,000 $ 90,000
Term Note Payable - Third Party 40,000 40,000
-------- --------
Total $100,000 $130,000
======== ========
</TABLE>
The Term Note Payable - Bank bears interest at the prime lending rate
(8.25% at December 31, 1996). The remaining term is 12 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 December 31, 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 December 31, 1995 15,000,000 12,268,331 12,266,331 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 12,276,696, 12,269,699 and 12,265,377 at
December 31, 1996, June 30, 1996, and December 31, 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 1996, the plan was amended to provide for
non-employee eligibility. In February 1994 the Company granted 141,500
stock options 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. 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, August and October of 1996, the Company
granted additional stock options of 35,000; 10,000; 174,015; 50,000 and
7,500, 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 December 31, 1996, June 30,
1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1996 1996 1995
<S> <C> <C> <C>
Forfeited 108,554 95,213 67,151
Exercised 20,885 20,885 7,845
Currently exercisable 90,447 90,447 43,468
Exercisable in fiscal year 1996 68,712
Exercisable in fiscal year 1997 68,975 72,405 24,108
Exercisable in fiscal year 1998 88,975 72,405 24,108
Exercisable in fiscal year 1999 81,475 72,405 24,108
Exercisable in fiscal year 2000 64,204 54,755
Exercisable in fiscal year 2001 12,500
------- ------- -------
Total options granted 536,015 478,515 259,500
======= ======= =======
</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>
DECEMBER 31, JUNE 30, DECEMBER 31,
1996 1996 1995
Current deferred tax asset:
<S> <C> <C> <C>
Deferred revenue $ 52,589 $ 47,827 $ 23,338
Accrued compensation 8,086 9,411 10,037
Reserves not currently deductible 24,897 18,267 22,992
Accrued lease termination costs 52,474
Accrued rent 19,701 14,328 8,955
----------- ----------- -----------
Total 105,273 89,833 117,796
Less valuation allowance (105,273) (89,833) (117,796)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
Non-current deferred tax asset:
Accrued lease termination costs $ -- $ -- $ 20,626
Net operating loss carryforward 2,332,829 2,173,836 2,334,735
Research and development credits 145,625 134,525 123,425
----------- ----------- -----------
Total 2,478,454 2,308,361 2,478,786
Non-current deferred tax liability:
Deferred software development costs (119,287) (103,007) (78,938)
----------- ----------- -----------
Net non-current deferred tax asset 2,359,167 2,205,354 2,399,848
Less valuation allowance (2,359,167) (2,205,354) (2,399,848)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
</TABLE>
-11-
<PAGE> 13
The provision for income taxes for the three months and six months ended
December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Current provision $ -- $ -- $ -- $ --
Deferred credit 67,579 332,641 169,253 288,635
-------- --------- --------- ---------
Total 67,579 332,641 169,253 288,635
Less increase in
the valuation allowance (67,579) (332,641) (169,253) (288,635)
-------- --------- --------- ---------
Income tax expense $ -- $ -- $ -- $ --
======== ========= ========= =========
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
$6,861,261 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 December 31, 1996, for U.S. Federal
tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of $145,625 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 and six months ended December 31, 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
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 213,934
<SECURITIES> 649,433
<RECEIVABLES> 860,358
<ALLOWANCES> 73,226
<INVENTORY> 997,906
<CURRENT-ASSETS> 2,667,418
<PP&E> 716,267
<DEPRECIATION> 450,223
<TOTAL-ASSETS> 3,284,307
<CURRENT-LIABILITIES> 1,165,646
<BONDS> 0
0
0
<COMMON> 8,982,580
<OTHER-SE> (6,863,919)
<TOTAL-LIABILITY-AND-EQUITY> 3,284,307
<SALES> 3,127,887
<TOTAL-REVENUES> 3,127,887
<CGS> 401,956
<TOTAL-COSTS> 1,043,365
<OTHER-EXPENSES> 2,537,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (437,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> (437,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (437,083)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
