<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, 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 December 31, 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 SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1996
Sales for the six months ended December 31, 1997 were $4,678,000 compared
to $3,128,000 for the same period last year. The $1,550,000 or 50%, increase in
sales is primarily attributable to the combined effects of a 75% increase in ACD
unit volume and a 121% increase in training, installation and maintenance
revenue which were slightly offset by a 20% decrease in sales realized from the
Tele-Series call accounting product. During September 1997, the Company released
its new MINUET ACD product which is distributed by Nortel.
Gross Margin of $3,056,000 was $971,000 or 47%, 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 65% or 2% less than that experienced during the same period of the prior
year. This difference in Gross Margin percentage is due primarily to
fluctuations in product mix.
Research and Development costs increased to $275,000 or 33%, 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 began distribution in
September. Selling, General and Administrative (S,G&A) expenses of $2,292,000
were approximately $38,000 or 2%, lower than the comparable prior year period.
2
<PAGE> 3
The Company realized Net Income of $504,000 for the six months ended
December 31,1997 compared to a $437,000 Net Loss reported for the same period
last year. Earnings Per Share were $0.04 versus a $0.04 Loss Per Share reported
for the prior year quarter.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital decreased by approximately $145,000 or 10%, to $1,357,000
when compared to the corresponding period of last year. The decrease is
primarily due to the combined effects of the approximate $800,000 retail
inventory product write-off reported for the third fiscal quarter of last year
and a $176,000 increase in deferred maintenance revenue, offset by the increases
in cash and marketable securities of $421,000 and growth in accounts receivable
of $480,000. The increases in cash, marketable securities and accounts
receivable reflect the profitability experienced by the Company thus far during
fiscal 1998.
As of December 31, 1997, Cintech held cash and marketable securities
totaling approximately $1,284,000 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.
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 13, 1998
------------------------------------------
Diane M. Kamionka, President and
Chief Executive Officer
By: /s/ James K. Keller Date: February 13, 1998
------------------------------------------
James K. Keller, Chief Financial Officer
5
<PAGE> 1
EXHIBIT NO. 19
[DELOITTE & TOUCHE LLP]
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 December 31, 1997 and 1996
and the related condensed statements of operations, stockholders' equity and
cash flows for the three months and 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 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 those 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
January 23, 1998
<PAGE> 2
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1997, JUNE 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
(Unaudited) (Unaudited)
------------ -------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 2)...... $ 674,695 $ 440,500 $ 213,934
Marketable securities (Notes 3,5)....... 609,750 363,095 649,433
Accounts receivable, trade -- (Net of
allowance of $56,401, $37,604 and
$73,226 at December 31, 1997, June 30,
1997, and December 31, 1996,
respectively)(Note 2)................. 1,266,694 973,948 787,132
Inventory (Note 2)...................... 80,688 101,415 997,906
Prepaid expenses........................ 5,865 19,783 19,013
---------- ---------- -----------
Total current assets................ 2,637,692 1,898,741 2,667,418
---------- ---------- -----------
FIXED ASSETS (Note 2):
Equipment............................... 645,446 632,489 590,895
Furniture and fixtures.................. 122,331 120,269 125,372
---------- ---------- -----------
Total............................... 767,777 752,758 716,267
Less accumulated depreciation........... (701,423) (608,423) (450,223)
---------- ---------- -----------
Total fixed assets -- net........... 66,354 144,335 266,044
---------- ---------- -----------
Software Development
Costs -- net (Note 2)................. 372,930 358,330 350,845
---------- ---------- -----------
TOTAL..................................... $3,076,976 $2,401,406 $ 3,284,307
========== ========== ===========
DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
(Unaudited) (Unaudited)
------------ -------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 526,369 $ 533,103 $ 612,610
Accrued liabilities:
Accrued salaries...................... 152,122 104,159 74,332
Accrued payroll taxes................. 10,389 3,677 19,093
Accrued vacation...................... 71,625 82,699 61,333
Other................................. 189,587 179,344 143,605
Current portion of note payable (Note 5) 30,000 100,000
Deferred maintenance revenue (Note 2)... 330,724 176,325 154,673
----------- ---------- -----------
Total current liabilities........... 1,280,816 1,109,307 1,165,646
----------- ---------- -----------
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..................... (7,860,149)(8,364,210) (7,537,386)
----------- ---------- -----------
Total stockholders' equity.......... 1,796,160) 1,292,099 2,118,661
----------- ---------- -----------
TOTAL..................................... $ 3,076,976 $2,401,406 $ 3,284,307
=========== ========== ===========
</TABLE>
See Independent Accountants' review report and notes to financial statements.
-2-
<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTH ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES (Note 2)............... $2,621,221 $1,606,690 $4,677,971 $3,127,887
COST OF PRODUCTS SOLD............ 433,427 170,246 738,882 391,313
INCREASE IN RESERVE FOR
OBSOLETE INVENTORY (Note 2).... 10,500 6,143 17,500 10,643
AMORTIZATION AND WRITE-OFF OF
DEFERRED SOFTWARE DEVELOPMENT
COSTS (Note 2)............... 36,000 34,078 72,000 45,242
LICENSING FEES (Note 2).......... 460,826 337,337 793,900 596,167
---------- ---------- ---------- ----------
GROSS PROFIT..................... 1,680,468 1,058,886 3,055,689 2,084,522
RESEARCH AND DEVELOPMENT......... 142,461 111,779 274,768 207,182
SELLING, GENERAL AND
ADMINISTRATIVE (Notes 2,4)..... 1,146,633 1,144,859 2,291,723 2,330,173
---------- ---------- ---------- ----------
INCOME/(LOSS) FROM OPERATIONS.... 391,374 (197,752) 489,198 (452,833)
OTHER INCOME..................... 6,903 7,765 14,863 15,750
---------- ---------- ---------- ----------
NET INCOME/(LOSS)................ $ 398,277 $ (189,987) $ 504,061 $ (437,083)
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE (Notes, 1,6).. $ 0.03 $(0.02) $ 0.04 $ (0.04)
========== ========== ========== ==========
</TABLE>
See Independent Accountants' review report and notes to financial statements.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
- ---------------------------------------------------------------------------------------------------------
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.......................... (437,083) (437,083)
---------- -------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1996...... $8,982,580 $675,757 $(2,290) $(7,537,386) $2,118,661
========== ======== ======= =========== =========
BALANCE AT JUNE 30, 1997.......... $8,982,842 $675,757 $(2,290) $(8,364,210) $1,292,099
NET INCOME........................ 504,061 504,061
---------- -------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1997...... $8,982,842 $675,757 $(2,290) $(7,860,149) $1,796,160
========== ======== ======= =========== ==========
</TABLE>
See Independent Accountants' review report and notes to financial statements.
-4-
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 504,061 $(437,083)
---------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation......................................... 93,000 56,039
Amortization and write-off of software development
costs.............................................. 72,000 45,242
Reserve for obsolete inventory....................... 17,500 10,643
Provision for doubtful accounts...................... 18,797 19,500
Changes in assets and liabilities:
(Increase) decrease in accounts receivable......... (311,543) 344,839
Decrease in inventory.............................. 3,227 1,411
(Increase) decrease in prepaid expenses............ 13,918 (789)
Decrease in accounts payable....................... (6,734) (36,661)
Increase in accrued expenses....................... 53,844 13,080
Increase in deferred maintenance revenue........... 154,399 14,006
---------- ---------
Total adjustments................................ 108,408 467,310
---------- ---------
Net cash provided by operating activities........ 612,469 30,227
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase of) proceeds from marketable securities...... (246,655) 120,958
Purchase of fixed assets............................... (15,019) (17,810)
Expenditures for software development costs............ (86,600) (92,882)
---------- ---------
Net cash provided by (used in) investing
activities..................................... (348,274) 10,266
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES --
Payment on notes payable............................... (30,000) (30,000)
---------- ---------
Net cash used in financing activities............ (30,000) (30,000)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 234,195 10,493
CASH AND CASH EQUIVALENTS:
Beginning of period.................................... 440,500 203,441
---------- ---------
End of period.......................................... $ 674,695 $ 213,934
========== =========
</TABLE>
See Independent Accountants' review report and notes to financial statements.
-5-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE THREE MONTH
AND SIX MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND SIX
MONTHS ENDED DECEMBER 31, 1997 AND 1996 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. 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
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<PAGE> 7
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.
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:
Equipment................................................. 5 years
Furniture and Fixtures.................................... 7 years
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>
DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Literature and other documentation.. $ 43,526 $ 39,176 $ 43,246
Computer hardware................... 950,596 958,173 999,443
Allowance for obsolete inventory.... (913,434) (895,934) (44,783)
--------- --------- ---------
Total inventory..................... $ 80,688 $ 101,415 $ 997,906
========= ========= =========
</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 DEC. 31 ENDED DEC. 31,
1997 1996 1997 1996
-------------- ------------ -------------- ---------------
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributor A..... $1,409,452 54% $927,521 58% $2,510,879 54% $1,634,340 52%
Distributor B..... 459,253 10%
---------- -- -------- -- ---------- -- ---------- --
Total............. $1,409,452 54% $927,521 58% $2,970,132 64% $1,634,340 52%
========== == ======== == ========== == ========== ==
</TABLE>
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<PAGE> 8
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>
December 31, 1997..................... 2 73%
June 30, 1997......................... 2 74%
December 31, 1996..................... 1 50%
</TABLE>
INTERNATIONAL SALES -- The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE MONTHS SALES FOR THE SIX MONTHS
ENDED DEC. 31 ENDED DEC. 31,
1997 1996 1997 1996
-------------- ------------ -------------- ---------------
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada..... $27,565 1% $10,172 1% $ 83,294 2% $65,826 2%
Other...... 14,040 1% 4,485 0% 36,143 1% 27,870 1%
------- - ------- - -------- - ------- -
Total...... $41,605 2% $14,657 1% $119,437 3% $93,696 3%
======= = ======= = ======== = ======= =
</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 $40,744 and $40,886 and related amortization was
$36,000 and $34,078 for the three months ended December 31, 1997 and 1996,
respectively. Costs capitalized were $86,600 and $92,882 and related
amortization was $72,000 and $45,242 for the six months ended December 31,
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.
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 has been reflected within the
accompanying financial statements. Earnings per share of prior periods have
been restated. See Note 6.
-8-
<PAGE> 9
CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, the
Company considers all money market instruments to be cash equivalents.
RECLASSIFICATION -- Certain fiscal year 1997 amounts have been reclassified
in order to conform to fiscal year 1998 presentation.
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>
December 31, 1997 -- U.S. Treasury
Bills/Federal Bonds................... $609,750 $616,374 $ 6,624
======== ======== =======
June 30, 1997 -- United States
Treasury Bills........................ $363,095 $372,677 $ 9,582
======== ======== =======
December 31, 1996 -- United States
Treasury Bills........................ $649,433 $663,580 $14,147
======== ======== =======
</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:
Period Ending December 31:
1998.....................................................$199,875
1999..................................................... 205,000
2000..................................................... 217,500
2001..................................................... 220,000
2002..................................................... 73,332
Rent expense for the leased office space was $73,277 in each of the three
month periods ended December 31, 1997 and 1996. Rent expense for the leased
office space was $146,553 in the six month periods ended December 31, 1997
and 1996.
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<PAGE> 10
5. NOTE PAYABLE
Note Payable consisted of the following at December 31, 1997, June 30, 1997,
and December 31, 1996, respectively:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
<S> <C> <C> <C>
Term Note Payable -- Bank......... $ 0 $30,000 $ 60,000
Term Note Payable -- Third Party.. 40,000
---- ------- --------
$ 0 $30,000 $100,000
==== ======= ========
</TABLE>
The Term Note Payable - Bank bore interest at the prime lending rate (8.25%)
and was paid in full, principal and interest, on December 19, 1997. The note
was secured by various securities on deposit with the bank.
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 December 31, 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 December 31, 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 in 1996. The weighted average
number of common shares outstanding was 12,279,751 and 12,279,371 at
December 31, 1997 and 1996, respectively.
-10-
<PAGE> 11
In accordance with FASB No. 128 "Earning Per Share," the Company's basic and
diluted earning per share were determined as follows:
<TABLE>
<CAPTION>
------------------------------------ --------------------------------------
3 MONTHS ENDED 3 MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------ --------------------------------------
INCOME SHARES PER SHARE INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (Loss) available.......... $398,277 12,279,751 $0.03 $(189,987) 12,279,371 $(0.02)
Common stockholders
EFFECT OF DILUTIVE SECURITIES
Stock options.................... 342,005
--------- ---------- ----- --------- ----------- -------
DILUTED EPS
Income (Loss) available to
common stockholders and
assumed conversions.......... $398,277 12,621,756 $0.03 $(189,987) 12,279,371 $(0.02)
======== ========== ===== ========= ========== =======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------ --------------------------------------
6 MONTHS ENDED 6 MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------ --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (Loss) available.......... $504,061 12,279,751 $0.04 $(437,083) 12,279,371 $ 0.04
Common stockholders
EFFECT OF DILUTIVE SECURITIES
Stock options.................... 298,581
--------- ---------- ----- --------- ----------- -------
DILUTED EPS
Income (Loss) available to
common stockholders and
assumed conversions.......... $504,061 12,578,332 $0.04 $(437,083) 12,279,371 $(0.04)
======== ========== ===== ========= ========== =======
</TABLE>
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
options granted became exercisable equally over a two-year period. All
options expire at the end of ten years from the date of grant. As of December
31, 1997, the Company granted an additional 350,755 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 all post 1994 options 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
-11-
<PAGE> 12
compensation cost for stock option grants made in fiscal years 1997 and 1996,
determined using the fair value method consistent with SFAS No. 123, were
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.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue.............. $ 112,446 $ 59,951 $ 52,589
Inventory reserve............. 309,996 304,617 --
Accrued compensation.......... 8,197 7,581 8,086
Reserves not currently
deductible.................. 19,176 12,785 24,897
Accrued rent.................. 26,834 23,629 19,701
----------- ---------- ------------
Total...................... 476,649 408,563 105,273
Less valuation allowance...... (476,649) (408,563) (105,273)
----------- ---------- ------------
Net............................. $ -- $ -- $ --
=========== ========== ============
Non-current deferred tax asset:
Net operating loss
carryforward............... $ 2,071,836 $ 2,312,046 $2,332,829
Research and development
credits.................... 167,825 156,725 145,625
----------- ----------- -----------
Total.................... $ 2,239,661 2,468,771 2,478,454
Non-current deferred tax
liability:
Deferred software development
costs...................... (126,796) (121,832) (119,287)
----------- ---------- ------------
Net non-current deferred
tax asset.................. 2,112,865 2,346,939 2,359,167)
Less valuation allowance..... (2,112,865) (2,346,939) (2,359,167)
----------- ----------- -----------
Net............................ $ -- $ -- $ --
=========== =========== ===========
</TABLE>
-12-
<PAGE> 13
The provision for income taxes for the three months ended September 30, 1997
and 1996 consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current provision............ $ -- $ -- $ -- $ --
Deferred credit (benefit).... (198,015) 67,579 (165,988) (169,253)
--------- ------- -------- ---------
Total.................... (198,015) 67,579 (165,988) (169,253)
Decrease (increase) in the
valuation allowance........ 198,015 67,579 (165,988) (169,253)
--------- ------- -------- ---------
Income tax expense........... $ -- $ -- $ -- $ --
========= ======= ========= =========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $6,093,600 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, 1997, for
U.S. Federal tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of approximately
$167,825 which will begin to expire in 2002.
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.
* * * * * *
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 674,695
<SECURITIES> 609,750
<RECEIVABLES> 1,323,095
<ALLOWANCES> 56,401
<INVENTORY> 80,688
<CURRENT-ASSETS> 2,637,692
<PP&E> 767,777
<DEPRECIATION> 701,423
<TOTAL-ASSETS> 3,076,976
<CURRENT-LIABILITIES> 1,280,816
<BONDS> 0
0
0
<COMMON> 8,982,842
<OTHER-SE> (7,186,682)
<TOTAL-LIABILITY-AND-EQUITY> 3,076,976
<SALES> 4,677,971
<TOTAL-REVENUES> 4,677,971
<CGS> 756,382
<TOTAL-COSTS> 1,622,282
<OTHER-EXPENSES> 2,566,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 504,061
<INCOME-TAX> 0
<INCOME-CONTINUING> 504,061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504,061
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
