<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 March 31, 1998
[ ] 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 March 31, 1998.
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 nine months ended March 31, 1998 compared to the nine months
ended March 31, 1997
Sales for the nine months ended March 31, 1998 were $6,745,000 compared
to $5,063,000 for the same period last year. The $1,682,000 or 33%, increase in
sales is primarily attributable to the combined effects of a 57% increase in ACD
unit volume and a 97% increase in training, installation and maintenance revenue
which were slightly offset by a 21% 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 $4,376,000 was $1,892,000 or 76%, greater than the
corresponding period of last year. Approximately $800,000 of the increase in
Gross Margin was due to the Company's decision to record a reserve for OCTuS
PCTA inventory during the third fiscal quarter of last year. Excluding the
impact of the OCTuS PCTA inventory reserve, Gross Margin increased $1,092,000 or
33% as compared to the same period last year. This increase in Gross Margin is a
direct result of the increase in sales volume. Gross Margin as a percentage of
sales was 65% or 1% less than that experienced during the same period of the
prior year excluding the OCTuS PCTA inventory reserve. This difference in Gross
Margin percentage is due primarily to fluctuations in product mix.
Research and Development costs increased to $409,000 or 34%, 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 $3,424,000
were approximately $98,000 or 3%, lower than the comparable prior year period.
2
<PAGE> 3
The Company realized Net Income of $570,000 for the nine months ended
March 31,1998 compared to a $1,321,000 Net Loss reported for the same period
last year. Earnings Per Share were $0.05 versus a $0.11 Loss Per Share reported
for the prior year quarter. Excluding the effects of the OCTuS PCTA inventory
reserve in the corresponding period of last year, the Company would have
realized a Net Loss of $521,000 and Loss Per Share of $0.04 for the comparable
prior year period.
Liquidity and Capital Resources
Working Capital increased by approximately $773,000 or 120%, to
$1,420,000 when compared to the corresponding period of last year. The increase
is primarily due to the $755,000 increase in cash and marketable securities
offset by a decrease in accounts receivable of $112,000 and an increase in
deferred maintenance revenue of $197,000. The increases in cash and marketable
securities reflect the profitability experienced by the Company thus far during
fiscal 1998.
As of March 31, 1998, Cintech held cash and marketable securities
totaling approximately $1,605,000 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: May 15, 1998
---------------------------------
Diane M. Kamionka, President and
Chief Executive Officer
By: /s/ MICHAEL E. FREESE Date: May 15, 1998
---------------------------------
Michael E. Freese, Controller
5
<PAGE> 1
Exhibit 19
DELOITTE & TOUCHE LLP
[LOGO] --------------------------------------------------
250 East Fifth Street Telephone: (513) 784-7100
P.O. Box 5340
Cincinnati, Ohio 45201-5340
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 March 31, 1998 and 1997 and
the related condensed statements of operations, stockholders' equity and cash
flows for the three months and nine 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
April 27, 1998
- -----------------
DELOITTE & TOUCHE
TOHMATSU
- -----------------
<PAGE> 2
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1998, JUNE 30, 1997 AND MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
ASSETS 1998 JUNE 30, 1997
(UNAUDITED) 1997 (UNAUDITED)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents (Note 2) $ 702,101 $ 440,500 $ 313,169
Marketable securities (Notes 3,5) 902,889 363,095 537,061
Accounts receivable, trade - (Net of
allowance of $62,748, $37,604 and
$58,030 at March 31, 1998, June 30, 1997,
and March 31, 1997, respectively) (Note 2) 872,448 973,948 984,945
Inventory (Note 2) 76,204 101,415 158,830
Prepaid expenses 13,213 19,783 25,552
---------- ---------- ----------
Total current assets 2,566,855 1,898,741 2,019,557
---------- ---------- ----------
FIXED ASSETS (Note 2):
Equipment 655,623 632,489 602,263
Furniture and fixtures 146,592 120,269 125,372
---------- ---------- ----------
Total 802,215 752,758 727,635
Less accumulated depreciation (747,923) (608,423) (480,120)
---------- ---------- ----------
Total fixed assets - net 54,292 144,335 247,515
---------- ---------- ----------
Software development costs - net (Note 2) 388,311 358,330 340,550
---------- ---------- ----------
TOTAL $3,009,458 $2,401,406 $2,607,622
========== ========== ==========
</TABLE>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1998, JUNE 30, 1997 AND MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
LIABILITIES AND 1998 JUNE 30, 1997
STOCKHOLDERS' EQUITY (UNAUDITED) 1997 (UNAUDITED)
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable $ 258,849 $ 533,103 $ 747,805
Accrued liabilities:
Accrued salaries 211,451 104,880 129,696
Accrued payroll taxes 14,325 2,956 2,239
Accrued vacation 89,907 82,699 77,728
Other 202,840 179,344 157,249
Current portion of note payable (Note 5) 30,000 85,000
Deferred maintenance revenue (Note 2) 369,953 176,325 173,363
----------- ----------- -----------
Total current liabilities 1,147,325 1,109,307 1,373,080
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Notes 1, 6, 7):
Common stock 8,982,842 8,982,842 8,982,842
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (7,794,176) (8,364,210) (8,421,767)
----------- ----------- -----------
Total stockholders' equity 1,862,133 1,292,099 1,234,542
----------- ----------- -----------
TOTAL $ 3,009,458 $ 2,401,406 $ 2,607,622
=========== =========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND NINE-MONTHS ENDED MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS ENDED FOR THE NINE-MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES (Note 2) $2,067,308 $ 1,934,725 $6,745,279 $ 5,062,611
COST OF PRODUCTS SOLD 296,564 261,796 1,035,446 663,752
INCREASE IN RESERVE FOR
OBSOLETE INVENTORY (Note 2) 10,500 824,385 28,000 824,385
AMORTIZATION AND WRITE-OFF
OF SOFTWARE DEVELOPMENT
COSTS (Note 2) 36,000 62,272 108,000 107,514
LICENSING FEES (Note 2) 403,604 386,728 1,197,504 982,895
---------- ----------- ---------- -----------
GROSS PROFIT 1,320,640 399,544 4,376,329 2,484,065
RESEARCH AND DEVELOPMENT 134,057 98,395 408,825 305,578
SELLING, GENERAL AND
ADMINISTRATIVE (Notes 2, 4) 1,132,700 1,192,714 3,424,423 3,522,885
---------- ----------- ---------- -----------
INCOME/(LOSS) FROM OPERATIONS 53,883 (891,565) 543,081 (1,344,398)
OTHER INCOME 12,090 7,184 26,953 22,934
---------- ----------- ---------- -----------
NET INCOME/(LOSS) $ 65,973 $ (884,381) $ 570,034 $(1,321,464)
========== =========== ========== ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE (Notes 1,6) $ 0.01 $ (0.07) $ 0.05 $ (0.11)
========== =========== ========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<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
SALE OF COMMON STOCK 262 262
NET LOSS (1,321,464) (1,321,464)
---------- -------- ------- ----------- -----------
BALANCE AT MARCH 31, 1997 $8,982,842 $675,757 $(2,290) $(8,421,767) $ 1,234,542
========== ======== ======= =========== ===========
BALANCE AT JUNE 30, 1997 $8,982,842 $675,757 $(2,290) $(8,364,210) $ 1,292,099
NET INCOME 570,034 570,034
---------- -------- ------- ----------- -----------
BALANCE AT MARCH 31, 1998 $8,982,842 $675,757 $(2,290) $(7,794,176) $ 1,862,133
========== ======== ======= =========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 570,034 $(1,321,464)
---------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 139,500 85,936
Amortization and write-off of software development costs 108,000 107,514
Reserve for obsolete inventory 28,000 824,385
Provision for doubtful accounts 25,144 4,304
Changes in assets and liabilities:
Decrease in accounts receivable 76,356 162,221
(Increase) decrease in inventory (2,789) 26,745
(Increase) decrease in prepaid expenses 6,570 (7,327)
Increase (decrease) in accounts payable (274,254) 98,534
Increase in accrued expenses 148,644 81,629
Increase in deferred maintenance revenue 193,628 32,696
---------- -----------
Total adjustments 448,799 1,416,637
---------- -----------
Net cash provided by operating activities 1,018,833 95,173
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase of) proceeds from marketable securities (539,794) 233,330
Purchase of fixed assets (49,457) (29,178)
Expenditures for software development costs (137,981) (144,859)
---------- -----------
Net cash provided by (used in) investing activities (727,232) 59,293
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 262
Payment on notes payable (30,000) (45,000)
---------- -----------
Net cash used in financing activities (30,000) (44,738)
---------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 261,601 109,728
CASH AND CASH EQUIVALENTS:
Beginning of period 440,500 203,441
---------- -----------
End of period $ 702,101 $ 313,169
========== ===========
</TABLE>
See notes to financial statements.
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<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1997 AND AS OF MARCH 31, 1998 AND 1997 AND FOR THE THREE-MONTH
AND NINE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND
NINE-MONTHS ENDED MARCH 31, 1998 AND 1997 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:
<TABLE>
<CAPTION>
<S> <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>
MARCH 31, JUNE 30, MARCH 31,
1998 1997 1997
<S> <C> <C> <C>
Literature and other documentation $ 43,505 $ 39,176 $ 36,792
Computer hardware 948,022 958,173 995,706
Allowance for obsolete inventory (915,323) (895,934) (873,668)
-------- --------- ---------
Total inventory $ 76,204 $ 101,415 $ 158,830
======== ========= =========
</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 MARCH 31, SALES FOR THE NINE-MONTHS ENDED MARCH 31,
1998 1997 1998 1997
-------------------- -------------------- ------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributor A $1,207,027 58 % $1,175,150 61 % $3,717,906 55 % $2,809,490 56 %
Distributor B 198,793 10 % 658,046 10 %
---------- -- ---------- -- ---------- -- ---------- --
Total $1,405,820 68 % $1,175,150 61 % $4,375,952 65 % $2,809,490 56 %
========== == ========== == ========== == ========== ==
</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>
March 31, 1998 2 73 %
June 30, 1997 2 74 %
March 31, 1997 1 66 %
</TABLE>
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE-MONTHS SALES FOR THE NINE-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------------------------------- ----------------------------------------------------
1998 1997 1998 1997
----------------------- ----------------------- ------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada $ 13,145 1 % $ 27,654 1 % $ 96,439 1 % $ 93,480 2 %
Other 4,225 40,368 1 % 27,870
-------- - -------- - --------- - --------- -
Total $ 17,370 1 % $ 27,654 1 % $ 136,807 2 % $ 121,350 2 %
======== = ======== = ========= = ========= =
</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 $51,381 and $51,977 and related amortization was
$36,000 and $35,687 for the three-months ended March 31, 1998 and 1997,
respectively. Costs capitalized were $137,981 and $144,859 and related
amortization was $108,000 and $80,929 for the nine-months ended March 31,
1998 and 1997, respectively. Write-offs of capitalized costs were $26,585
in the three months ended March 31, 1997.
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.
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<PAGE> 9
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 fiscal years 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 was adopted during 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.
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>
March 31, 1998 - U. S. Treasury Bills/Federal Bonds $ 902,889 $ 909,302 $ 6,413
========== ========== ========
June 30, 1997 - United States Treasury Bills $ 363,095 $ 372,677 $ 9,582
========== ========== ========
March 31, 1997 - United States Treasury Bills $ 537,061 $ 550,461 $13,400
========== ========== ========
</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 March 31:
1999 $ 205,000
2000 206,250
2001 220,000
2002 220,000
2003 18,333
Rent expense for the leased office space was $73,277 in each of the
three-month periods ended March 31, 1998 and 1997. Rent expense for the
leased office space was $219,829 in the nine-month periods ended March 31,
1998 and 1997.
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<PAGE> 10
5. NOTE PAYABLE
Note Payable consisted of the following at March 31, 1998, June 30, 1997,
and March 31, 1997, respectively:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, MARCH 31,
1998 1997 1997
<S> <C> <C> <C>
Term Note Payable - Bank $ $30,000 $45,000
Term Note Payable - Third Party 40,000
------- ------- -------
$ $30,000 $85,000
======= ======= =======
</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 March 31, 1998 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 March 31, 1997 15,000,000 12,281,751 12,279,751 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 in 1997 as the effect is antidilutive.
- 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>
THREE-MONTHS ENDED THREE-MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
----------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME (LOSS) SHARES PER SHARE
(NUMERATOR)(DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS
<S> <C> <C> <C> <C> <C> <C>
Income (loss) available to
common stockholders $ 65,973 12,279,751 $ 0.01 $ (884,381) 12,279,498 $ (0.07)
EFFECT OF DILUTIVE SECURITIES
Stock options 133,210
-------- ---------- ------ ---------- ---------- -------
DILUTED EPS
Income (loss) available to
common stockholders
and assumed conversions $ 65,973 12,412,961 $ 0.01 $ (884,381) 12,279,498 $ (0.07)
========= =========== ======= ============ =========== ========
</TABLE>
<TABLE>
<CAPTION>
NINE-MONTHS ENDED NINE-MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------------------------------- ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR)(DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS
<S> <C> <C> <C> <C> <C> <C>
Income (loss) available to
common stockholders $ 570,034 12,279,751 $ 0.05 $(1,321,464) 12,279,498 $ (0.11)
EFFECT OF DILUTIVE SECURITIES
Stock options 111,542
--------- ---------- ------ ----------- ---------- -------
DILUTED EPS
Income (loss) available to
common stockholders
and assumed conversions $ 570,034 12,391,293 $ 0.05 $(1,321,464) 12,279,498 $ (0.11)
========== =========== ====== ============ =========== ========
</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>
MARCH 31, JUNE 30, MARCH 31,
1998 1997 1997
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue $ 125,784 $ 59,951 $ 58,943
Inventory reserve 311,210 304,617 280,291
Accrued compensation 8,197 7,581 8,086
Reserves not currently deductible 21,334 12,785 25,283
Accrued rent 27,565 23,629 22,026
----------- ----------- -----------
Total 494,090 408,563 394,629
Less valuation allowance (494,090) (408,563) (394,629)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 2,032,271 $ 2,312,046 $ 2,347,134
Research and development credits 173,375 156,725 151,175
----------- ----------- -----------
Total 2,205,646 2,468,771 2,498,309
Non-current deferred tax liability:
Deferred software development costs (132,026) (121,832) (124,826)
----------- ----------- -----------
Net non-current deferred tax asset 2,073,620 2,346,939 2,373,483
Less valuation allowance (2,073,620) (2,346,939) (2,373,483)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
</TABLE>
- 12 -
<PAGE> 13
The provision for income taxes for the three-months and nine-months ended
March 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Current provision $ -- $ -- $ -- $ --
Deferred provision (benefit) 11,344 (303,674) 167,402 (472,925)
-------- --------- --------- ---------
Total 11,344 (303,674) 167,402 (472,925)
(Decrease) increase in
the valuation allowance (11,344) 303,674 (167,402) 472,925
-------- --------- --------- ---------
Income tax expense $ -- $ -- $ -- $ --
======== ========= ========= =========
</TABLE>
At March 31, 1998, the Company has net operating loss carryforwards of
approximately $5,977,300 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 March 31, 1998, for
U.S. Federal tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of approximately
$173,375 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 (loss) per share calculation.
* * * * * *
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 702,101
<SECURITIES> 902,889
<RECEIVABLES> 935,196
<ALLOWANCES> 62,748
<INVENTORY> 76,204
<CURRENT-ASSETS> 2,566,855
<PP&E> 802,215
<DEPRECIATION> 747,923
<TOTAL-ASSETS> 3,009,458
<CURRENT-LIABILITIES> 1,147,325
<BONDS> 0
0
0
<COMMON> 8,982,842
<OTHER-SE> (7,120,709)
<TOTAL-LIABILITY-AND-EQUITY> 3,009,458
<SALES> 6,745,279
<TOTAL-REVENUES> 6,745,279
<CGS> 1,063,446
<TOTAL-COSTS> 2,368,950
<OTHER-EXPENSES> 3,833,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 570,034
<INCOME-TAX> 0
<INCOME-CONTINUING> 570,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 570,034
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
