<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, 1997
[ ] 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: 12,279,751 shares of common
stock as of September 30, 1997.
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, 1997 compared to the three months ended
September 30, 1996
Sales for the three months ended September 30, 1997 were $2,057,000
compared to $1,521,000 for the same period last year. The $536,000 or 35%,
increase in sales is primarily attributable to the combined effects of a 50%
increase in ACD unit volume and a 108% increase in training, installation and
maintenance revenue which were slightly offset by a 19% decrease in sales
realized from the Tele-Series call accounting product.
Gross Margin of $1,375,000 was $350,000 or 34%, greater than the
corresponding period of last year. The increase in Gross Margin is a direct
result of the increase in sales volume. Gross Margin as a percentage of sales
was 67% or unchanged from that experienced during the same period of the prior
year.
Research and Development costs increased to $132,000 or 39%, over the
same prior year period. This reflects the Company's continued efforts to produce
new products such as the MINUET ACD for Nortel which was released at the end of
September. Selling, General and Administrative (S,G&A) expenses of $1,145,000
were approximately $40,000 or 3.4%, lower than the comparable prior year period.
The Company realized Net Income of $106,000 for the three months ended
September 30,1997 compared to a $247,000 Net Loss reported for the same period
last year. Earnings Per Share were $0.01 versus a $0.02 Loss Per Share reported
for the prior year quarter.
2
<PAGE> 3
Liquidity and Capital Resources
Working Capital decreased by approximately $761,000 or 45%, to $927,000
when compared to the corresponding period of last year. The decrease is
primarily due to the approximate $800,000 retail inventory product write-off
reported for the third fiscal quarter of last year.
The Company's operations provided cash of $235,000 for the three months
ended September 30, 1997. As of September 30, 1997, Cintech held cash and
marketable securities totaling approximately $974,000 and had no outstanding
long-term debt obligations.
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 these
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.
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 30, 1997 (the "Annual Meeting"). The vote of holders
of record of 12,281,751 shares (inclusive of 2,000 shares held
as treasury stock) of the Company's common stock outstanding
at the close of business on September 10, 1997 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 10,348,950 0 6,900
Bryant A. Downey 10,348,950 0 6,900
Frank W. Terrizzi 10,348,950 0 6,900
John G. Slater 10,348,950 0 6,900
Carter F. Randolph 10,348,950 0 6,900
</TABLE>
3
<PAGE> 4
(c) At the Annual Meeting, stockholders approved the following
matter by the vote indicated:
<TABLE>
<CAPTION>
VOTE
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Ratification of Selection 9,209,593 3,300 1,142,957
of Deloitte Touche as
Independent Auditors
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are required by Item 601 of Regulation
S-B: Page
<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>
4
<PAGE> 5
(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: /s/ Diane M. Kamionka Date: November 14, 1997
---------------------------------
Diane M. Kamionka, President and
Chief Executive Officer
By: /s/ James K. Keller Date: November 14, 1997
---------------------------------
James K. Keller, Chief Financial Officer
6
<PAGE> 1
EXHIBIT NO. 19
REPORTS FURNISHED TO SECURITY-HOLDERS
<PAGE> 2
CINTECH TELE-MANAGEMENT SYSTEMS,
INC.
CONDENSED FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AND INDEPENDENT ACCOUNTANTS' REPORT
<PAGE> 3
[DELOITTE & TOUCHE, LLP LETTERHEAD]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors of
Cintech Tele-Management Systems, Inc.
We have reviewed the accompanying condensed balance sheets of Cintech
Tele-Management Systems, Inc. (the "Company") as of September 30, 1997 and 1996
and the related condensed 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 condensed 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, 1997, and the related
statement of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated August 29, 1997, we
expressed an unqualified opinion on the financial statements. In our opinion,
the information set forth in the accompanying condensed balance sheet as of June
30, 1997 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
October 24, 1997
<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
ASSETS 1997 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 378,167 $ 440,500 $ 296,341
Marketable securities (Notes 3,5) 595,381 363,095 770,391
Accounts receivable, trade - (Net of allowance
of $60,431, $37,604 and $51,543 at
September 30, 1997, June 30, 1997, and
September 30, 1996, respectively) (Note 2) 1,065,419 973,948 791,096
Inventory (Note 2) 98,701 101,415 1,021,935
Prepaid expenses 11,782 19,783 17,594
----------- ----------- -----------
Total current assets 2,149,450 1,898,741 2,897,357
----------- ----------- -----------
FIXED ASSETS (Note 2):
Equipment 636,985 632,489 587,879
Furniture and fixtures 120,269 120,269 125,372
----------- ----------- -----------
Total 757,254 752,758 713,251
Less accumulated depreciation (654,923) (608,423) (422,052)
----------- ----------- -----------
Total fixed assets - net 102,331 144,335 291,199
----------- ----------- -----------
Software Development
Costs - net (Note 2) 368,186 358,330 344,037
----------- ----------- -----------
TOTAL $ 2,619,967 $ 2,401,406 $ 3,532,593
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
STOCKHOLDERS' EQUITY 1997 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 484,845 $ 533,103 $ 607,916
Accrued liabilities:
Accrued salaries 142,348 104,159 148,158
Accrued payroll taxes 6,706 3,677 13,930
Accrued vacation 89,349 82,699 66,563
Other 172,334 179,344 133,135
Current portion of note payable (Note 5) 15,000 30,000 100,000
Deferred maintenance revenue (Note 2) 311,502 176,325 139,243
----------- ----------- -----------
Total current liabilities 1,222,084 1,109,307 1,208,945
----------- ----------- -----------
NOTE PAYABLE (less current portion) (Note 5) 15,000
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Notes 1, 6, 7):
Common stock 8,982,842 8,982,842 8,982,580
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (8,258,426) (8,364,210) (7,347,399)
----------- ----------- -----------
Total stockholders' equity 1,397,883 1,292,099 2,308,648
----------- ----------- -----------
TOTAL $ 2,619,967 $ 2,401,406 $ 3,532,593
=========== =========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
NET SALES (Note 2) $2,056,750 $ 1,521,197
COST OF PRODUCTS SOLD 305,455 221,067
INCREASE IN RESERVE FOR OBSOLETE INVENTORY (Note 2) 7,000 4,500
AMORTIZATION AND WRITE-OFF OF DEFERRED SOFTWARE
DEVELOPMENT COSTS (Note 2) 36,000 11,164
LICENSING FEES (Note 2) 333,074 258,830
---------- -----------
GROSS PROFIT 1,375,221 1,025,636
RESEARCH AND DEVELOPMENT 132,307 95,403
SELLING, GENERAL AND ADMINISTRATIVE (Notes 2, 4) 1,145,090 1,185,314
---------- -----------
INCOME/(LOSS) FROM OPERATIONS 97,824 (255,081)
OTHER INCOME 7,960 7,985
---------- -----------
NET INCOME/(LOSS) $ 105,784 $ (247,096)
========== ===========
NET INCOME/(LOSS) PER COMMON SHARE (Note 6) $ 0.01 $ (0.02)
========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<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, 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
========== ======== ======== ============ ==========
BALANCE AT JUNE 30, 1997 $8,982,842 $675,757 $(2,290) $(8,364,210) $1,292,099
NET INCOME 105,784 105,784
---------- -------- ------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1997 $8,982,842 $675,757 $(2,290) $(8,258,426) $1,397,883
========== ======== ======== ============ ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 7
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 105,784 $(247,096)
--------- ---------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 46,500 27,868
Amortization and write-off of software development costs 36,000 11,164
Reserve for obsolete inventory 7,000 4,500
Provision for doubtful accounts 22,827 (2,183)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (114,297) 362,558
Increase in inventory (4,286) (16,475)
Decrease in prepaid expenses 8,001 630
Decrease in accounts payable (48,258) (107,342)
Increase in accrued expenses 40,858 142,490
Increase (decrease) in deferred maintenance revenue 135,177 (1,424)
--------- ---------
Total adjustments 129,522 421,786
--------- ---------
Net cash provided by operating activities 235,306 174,690
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (232,287)
Purchase of fixed assets (4,496) (14,794)
Expenditures for software development costs (45,856) (51,996)
--------- ---------
Net cash used in investing activities (282,639) (66,790)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payment on notes payable (15,000) (15,000)
--------- ---------
Net cash used in financing activities (15,000) (15,000)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (62,333) 92,900
CASH AND CASH EQUIVALENTS:
Beginning of period 440,500 203,441
--------- ---------
End of period $ 378,167 $ 296,341
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 8
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 (AUDITED) AND AS OF SEPTEMBER 30, 1997 AND 1996 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 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. Cintech has key strategic
product partnerships with Nortel and NEC America, and extensive
distribution capabilities with product sold through Nortel and NEC's
direct sales organizations as well as their authorized distributors
throughout North America.
BASIS OF PRESENTATION - The financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule
10-01 of Regulation S-X. The information disclosed in the notes to the
financial statements included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1997 has not changed materially unless
otherwise disclosed herein. Financial information as of June 30, 1997
included in these financial statements has been derived from the audited
financial statements included in that report. In management's opinion all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the interim periods have been made.
Results of operations are not necessarily indicative of the results that
may be expected for future interim periods or for the full year.
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.
-6-
<PAGE> 9
DEFERRED MAINTENANCE REVENUE - 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.
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. Prior to April, 1997 depreciation was computed using
the following useful lives:
<TABLE>
<CAPTION>
<S> <C> <C>
Equipment 5 years
Furniture and Fixtures 7 years
</TABLE>
Effective April 1, 1997, the Company adopted a three-year amortization
period for all computer equipment. The change in service life was applied
on a prospective basis.
INVENTORY - Inventories are valued at the lower of cost or market, with
cost being computed using the first-in, first-out method. In Fiscal 1997,
due to slower than expected sales, the Company decided to record a reserve
for OCTUS PCTA inventory. This reserve represents essentially the entire
cost of the OCTUS PCTA-related retail product inventory. Inventories
consist of:
<TABLE>
<CAPTION>
SEPT 30, JUNE 30, SEPT 30,
1997 1997 1996
<S> <C> <C> <C>
Literature and other documentation $ 39,985 $ 39,176 $ 53,802
Computer hardware 961,449 958,173 1,006,773
Allowance for obsolete inventory (902,733) (895,934) (38,640)
--------- --------- -----------
Total inventory $ 98,701 $ 101,415 $ 1,021,935
========= ========= ===========
</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 SEPT 30,
1997 1996
--------------------- -------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Distributor A $1,101,427 54% $706,819 46%
Distributor B 258,793 13%
---------- --- -------- --
Total $1,360,220 67% $706,819 46%
========== == ======== ==
</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>
PERCENT
OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
<S> <C> <C>
September 30, 1997 2 66%
June 30, 1997 2 74%
September 30, 1996 1 61%
</TABLE>
-7-
<PAGE> 10
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE MONTHS ENDED SEPT 30,
1997 1996
---------------- ----------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Canada $55,729 3% $55,654 4%
Other 22,103 1% 23,385 2%
------ -- ------ --
Total $77,832 4% $79,039 6%
======= == ======= ==
</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. The capitalized costs are amortized on a
straight-line basis over the estimated economic life of the product.
Costs capitalized were $45,856 and $51,996 and related amortization was
$36,000 and $11,164 for the three months ended September 30, 1997 and
1996, respectively.
LICENSING FEE - The Company has agreements with distributors which require
the payment of a license fee on all software sales made by the
distributors. This license fee is for the distribution of the Company's
products.
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.
ACCOUNTING CHANGES - In 1997, the FASB issued Statement No. 130,
"Reporting Comprehensive Income," and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." These
statements, which are effective for periods beginning after December 15,
1997, expand or modify disclosures and, accordingly, will have no impact
on the Company's reported financial position, result of operations or cash
flows. Additionally, in 1997, FASB issued Statement No. 128, "Earnings Per
Share," which revises the manner in which earnings per share is
calculated. The statement is effective for the quarter ending December 31,
1997 and is not expected to have a significant impact on the Company's
earnings per share.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers all money market instruments to be cash equivalents.
RECLASSIFICATION - Certain 1996 amounts have been reclassified in order to
conform to 1997 presentation.
- 8 -
<PAGE> 11
3. MARKETABLE SECURITIES
The Company maintains various investments in treasury bills and bonds
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, 1997 - U. S. Treasury Bills/Federal Bonds $595,381 $602,503 $7,122
======== ======== ======
June 30, 1997 - United States Treasury Bills $363,095 $372,677 $9,582
======== ======== ======
September 30, 1996 - United States Treasury Bills $770,391 $789,848 $19,457
======== ======== =======
</TABLE>
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 April
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>
Period Ending September 30:
<S> <C> <C>
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 $73,276 in the
three month periods ended September 30, 1997 and 1996, respectively.
5. NOTE PAYABLE
Note Payable consisted of the following at September 30, 1997 and June 30,
1997, respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1997 1997 1996
<S> <C> <C> <C>
Term Note Payable - Bank $15,000 $30,000 $ 75,000
Term Note Payable - Third Party 40,000
------- ------- --------
$15,000 $30,000 $115,000
======= ======= ========
</TABLE>
The Term Note Payable - Bank bears interest at the prime lending rate
(8.25% at September 30, 1997). The remaining term is 3 months. The note is
secured by various securities on deposit with the bank.
-9-
<PAGE> 12
The Term Note Payable - Third Party bore interest at 6% and was paid in
full, principal and interest, on May 13, 1997.
6. CAPITAL STOCK AND INCOME (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, 1997 15,000,000 12,281,751 12,279,751 2,000
========== ========== ========== =====
Balance at June 30, 1997 15,000,000 12,281,751 12,279,751 2,000
========== ========== ========== =====
Balance at September 30, 1996 15,000,000 12,281,371 12,279,371 2,000
========== ========== ========== =====
</TABLE>
Income (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 12,279,751 and 12,279,371 at September 30,
1997 and 1996, 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. Excluding the options granted in February 1994,
all options have been granted at an exercise price equal to the fair
market value at the date of grant and become exercisable equally over a
four - year period. The February 1994 options were granted at a price
below fair market value at the date of grant and were subsequently
adjusted to market. The 1994 option granted become exercisable equally
over a two-year period. All options expire at the end of ten years from
the date of grant. On July 14, 1997, the Company granted an additional
298,255 stock options at a price equal to the market value at the date of
the grant. The options carry the same vesting and expiration terms as
those defined above.
The Company has adopted the disclosure only provision of SFAS No. 123 and
applies APB Opinion No. 25 in accounting for its stock options. Proforma
disclosure reflecting the financial impact of compensation cost for stock
option grants made in fiscal years 1997 and 1996, determined using the
fair value method consistent with SFAS No. 123, was presented in the
footnotes to the 1997 annual report.
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.
-10-
<PAGE> 13
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1997 1997 1996
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue $ 105,911 $ 59,951 $ 47,343
Inventory reserve 306,929 304,617 --
Accrued compensation 7,581 7,581 8,086
Reserves not currently deductible 20,546 12,785 17,525
Accrued rent 25,231 23,629 17,014
----------- ----------- -----------
Total 466,198 408,563 89,968
Less valuation allowance (466,198) (408,563) (89,968)
----------- ----------- -----------
Net $ - $ - $ -
=========== =========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 2,276,079 $ 2,312,046 $ 2,283,791
Research and development credits 162,225 156,725 140,075
----------- ----------- -----------
Total 2,438,304 2,468,771 2,423,866
Non-current deferred tax liability:
Deferred software development costs (116,973) (121,832) (116,973)
----------- ----------- -----------
Net non-current deferred tax asset 2,321,331 2,346,939 2,306,893
Less valuation allowance (2,321,331) (2,346,939) (2,306,893)
----------- ----------- -----------
Net $ - $ - $ -
=========== =========== ===========
</TABLE>
The provision for income taxes for the three months ended September 30,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current provision $ - $ -
Deferred credit 32,028 101,674
------- --------
Total 32,028 101,674
Less increase in
the valuation allowance (32,028) (101,674)
------- --------
Income tax expense $ - $ -
======= ========
</TABLE>
At September 30, 1997, the Company has net operating loss carryforwards of
approximately $6,525,064 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, 1997,
for U.S. Federal tax purposes, the Company has research and development
credit carryforwards available to offset future income taxes of
approximately $162,225 which will begin to expire in 2002.
-11-
<PAGE> 14
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 periods presented, 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
three 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 the reported
income (loss) nor the earnings per share calculation.
* * * * * *
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 378,167
<SECURITIES> 595,381
<RECEIVABLES> 1,125,850
<ALLOWANCES> 60,431
<INVENTORY> 98,701
<CURRENT-ASSETS> 2,149,450
<PP&E> 757,254
<DEPRECIATION> 654,923
<TOTAL-ASSETS> 2,619,967
<CURRENT-LIABILITIES> 1,222,084
<BONDS> 0
0
0
<COMMON> 8,982,842
<OTHER-SE> (7,584,959)
<TOTAL-LIABILITY-AND-EQUITY> 2,619,967
<SALES> 2,056,750
<TOTAL-REVENUES> 2,056,750
<CGS> 312,455
<TOTAL-COSTS> 681,529
<OTHER-EXPENSES> 1,277,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 105,784
<INCOME-TAX> 0
<INCOME-CONTINUING> 105,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,784
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
