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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For the Fiscal Year Ended June 30, 1998
Commission File No. 0-24448
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1200684
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(State of Incorporation) (I.R.S. Employer Identification No.)
2100 Sherman Avenue
Cincinnati, Ohio 45212
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 513-731-6000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
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Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 _____
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B (Section 228.405 of this Chapter) is not contained
herein, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB
[ X ].
All amounts specified in this Annual Report are in U.S. Dollars, unless
otherwise specified herein. The registrant's revenues as of June 30,
1998 were $9,798,630.
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of June 30, 1998 was $2,648,596.
The outstanding voting securities of the registrant at the close of
business on June 30, 1998 were 12,281,751 shares of Common Stock without par
value.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are hereby incorporated by reference herein and
the parts of this Form 10-KSB into which the document is incorporated are shown
beside the respective documents:
Document Part
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A. Registration Statement on Parts I, II and III
Form 10-SB (Release No.
34-32231), as amended, filed
June 27, 1994
B. Proxy Statement Parts II and III
Filed on September 25, 1998
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PART I
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information, which involve risks and
uncertainties. Actual future results may differ materially. Statements
indicating that the Company "expects", "estimates", "believes", "is planning" or
"plans to" are forward-looking, as are other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors, which could cause actual results, or events
to differ materially from those anticipated by the forward-looking statements.
Such factors, include, but are not limited to, the receipt and shipment of new
orders, the timely release of enhancements to the Company's products, which
could be subject to software release delays, the growth rates of certain market
segments, the positioning of the Company's products in those market segments,
variations in the demand for customer service and technical support, pricing
pressures and the competitive environment in the software industry, and the
Company's ability to penetrate additional markets and manage operations related
to additional markets. Although the Company has sought to identify the most
significant risks to its business, the Company cannot predict whether, or to
what extent, any of such risks may be realized nor can there be any assurance
that the Company has identified all possible issues, which the Company might
face.
Item 1. DESCRIPTION OF BUSINESS
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Cintech Tele-Management Systems, Inc. (the "Company" or "Cintech") was
incorporated by means of Articles of Incorporation filed under the laws of the
State of Ohio on March 20, 1987. The Company has operated continuously since
that time and grown through internal development of an array of computer
software products. The Company has not experienced any bankruptcy or similar
proceedings, nor has it been involved in any merger, consolidation, or purchase
or sale of a significant amount of assets not in the ordinary course of
business. The Company's shares are registered on the Toronto Stock Exchange, and
are traded under the symbol CTM.
INDUSTRY BACKGROUND
COMPUTER AND TELEPHONE INTEGRATION ("CTI") INDUSTRY
The Company operates in the computer and telephone integration ("CTI")
industry. Also known as computer telephony, the industry integrates computers
with telephone systems using software to produce business applications. The
combined power of a computer and telephone systems opens numerous possibilities
for the market, many of which have not been fully developed. The Company
believes that the ability to merge voice, database, call routing, messaging,
reporting, real-time statistics and other technologies, has significant market
potential, most notably for small to mid-sized businesses and for departments
and branch offices within larger decentralized organizations.
As a competitor in the computer and telephone integration industry, the
Company is a developer and distributor of computer software that integrates
computers and telephone switching systems to produce applications that assist in
business management and operations. These applications are designed to increase
productivity and service levels of small and mid-size businesses and departments
or branches of larger businesses and to provide relevant additional information
for business decision-makers.
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CTI INDUSTRY: CALL CENTER MARKET
In the 1970's, call centers were born. They revolutionized how businesses
operated and redefined "customer service." Call centers held the promise of
increased revenues, reduced costs and higher profitability by conducting
business over the telephone instead of through costly face-to-face contact. It
was the first critical step in providing the convenience, access and information
that customers not only expect, but demand from almost every type of business
today. Because of the high costs of implementing a call center, and technology
that addressed only large, structured centers with hundreds of agents, however,
call centers remained the domain of only the largest organizations until the
early 1990s.
Expectations, trends, changing demographics, technology, and competition
have ushered in a new era of call center, and again, it is revolutionizing the
way we do business. Today, call centers are everywhere. They can be any size,
from one or two agents, up to hundreds of agents. They may be informal
environments, where the "agents" are not dedicated to handling incoming calls,
and are often knowledge-based professionals, performing multiple tasks. With the
dawn of the virtual call center - with agents located anywhere - the physical
barriers of call centers are crumbling, allowing organizations to adapt to an
increasingly mobile workforce.
Call centers are becoming a key strategic asset in every type of business,
across all industries. They are not easily categorized because the businesses
that use them span a diverse spectrum. A business operating a specialized mail
order operation out of their basement, for example, can be as compelling over
the telephone as a large business with hundreds of agents answering calls. At
the same time, larger businesses that have benefited from call centers for years
are implementing smaller call centers throughout their organizations. An
international travel agency, for example, has hundreds of local call
centers/storefronts strategically located near their corporate customers to
provide superior telephone and face-to-face customer service. Likewise, in the
competitive banking industry, most local and regional offices use smaller call
centers to offer higher levels of service.
Consider the following factors that are influencing business' adoption of
call centers:
1. Increasingly sophisticated customers demand convenience, access and
efficiency (i.e., immediate response and instant information).
Customers became accustomed to the service of larger, traditional call
centers and now expect that same high level of service and convenience
from all businesses.
2. Callers want convenient access through toll-free 800/888 numbers. It
is estimated that 11 billion 800/888 calls will be placed in 1998, a
dramatic increase over seven million calls placed in 1980. This is, in
turn, driving business towards call delivery technology and, more
importantly, information to monitor the business and for intelligent
decision making.
3. Organizational demographics have shifted dramatically. Today's
workforce is more mobile, with communications available essentially
anywhere through cellular phones, videoconferencing, and the Internet.
Telecommuting has risen in popularity. Virtual workgroups and
departments that cross geographic barriers are becoming commonplace.
Influenced by these changing demographics, a more flexible, diverse
call center with capabilities such as "at-home agents", becomes
increasingly important.
4. Call centers are technologically feasible and affordable for
workgroups and any size business. Technology and PC-based software have
advanced dramatically. Until call center applications became available
on Personal Computers in the early 1990's, smaller call centers simply
were not
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technologically feasible or affordable.
5. Businesses are recognizing that they gain a strategic competitive
advantage, based on superior service, sales, marketing and
accessibility. Products and services have become more and more
commoditized, thus making telephone service a powerful differentiator.
Companies are also looking beyond service to growing sales - at a
significantly lower price than face-to-face customer contact.
CALL CENTER TECHNOLOGY
In 1990, using a personal computer as the platform, Cintech pioneered
Automatic Call Distribution ("ACD") for smaller business entities such as
departments, branch offices, small to mid-sized businesses, and even workgroups,
greatly expanding the call center landscape. Suddenly, call centers were
feasible for any size business and the small call center market was born.
To date, the Company has focused on the development of applications for the
modular digital key telephone switching systems ("Norstar") marketed worldwide
by Northern Telecom Ltd. of Calgary, Alberta, Canada ("Nortel"). The Norstar was
the first key telephone system to offer open application interface targeted for
small and mid-size business units. The Company was the first developer to write
a successful open application interface-based application for Norstar and is now
the leader in developing business applications for Norstar. The Company began
shipping its first ACD product, CINPHONY, in April 1991 and in October 1993,
introduced a second product, PRELUDE. In September 1997, the Company introduced
its third product for the Norstar switch, MINUET.
In June 1994, the Company announced plans to market and sell the Company's
software applications with NEC America, Inc. ("NEC"). Accordingly, Cintech
developed a new ACD product, JAZZ2000, a PC-based solution for NEC's NEAX2000
IVS (Integrated Voice Server) PBX. The application performs similar functions as
the CINPHONY product on the Norstar, but on a larger PBX phone switch platform.
The JAZZ2000 was made available for general release in December 1996 and is sold
by Cintech through NEC America's sales network.
CINTECH SOLUTIONS
STRATEGIC ALLIANCES
Strategic alliances are key to the Company's corporate strategy. Through
these alliances, collective strengths of each partner combine to deliver
superior call management solutions and services. The Company is partnered with
two of the world's leading telephone manufacturers: Northern Telecom ("Nortel")
and NEC America, Inc. ("NEC") . By designing its ACDs specifically for the
business communication systems manufactured by Nortel and NEC, the Company
attains superior product integration. Extending beyond a development
relationship, the Company is also partnered with the geographically dispersed
distribution channels of Nortel and NEC to market and sell its ACD solutions
throughout North America.
Northern Telecom ("Nortel")
In April 1991, the Company began shipping its CINPHONY ACD for the modular
digital key telephone switching systems ("Norstar") sold worldwide by Northern
Telecom Ltd. of Calgary, Alberta, Canada ("Nortel"). The Norstar was the first
key telephone system to offer open application interface targeted for small and
mid-size business units. The Company was the first developer to write a
successful open application interface-based application for Norstar and is now
the leader in developing business
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applications for Norstar. In October 1993 and September 1997, the Company
introduced two additions to its Norstar portfolio, PRELUDE and MINUET,
respectively.
In March 1996, the Company's Norstar ACDs became a part of Nortel's product
portfolio and began being sold by Nortel's Norstar sales team.
NEC
Based on the Company's market share and reputation for serving the small to
mid-size call center market, the Company entered into an agreement with NEC in
September 1995, to design and develop an ACD solution for NEC's NEAX2000 IVS. In
1996, the Company introduced JAZZ2000 ACD. Recently in response to customer
demand, the Company streamlined its business relationship with NEC. The Company
is now working directly with NEC distributors to promote and sell its JAZZ2000
family of ACDs. This direct approach allows the Company to get closer to the end
user customer in an effort to provide a better level of service and value.
COMPETITIVE ADVANTAGES
The design concepts behind the Company's ACDs provide a number of
competitive advantages including.
Access to Management Information -- One of the key capabilities of any call
center is to provide easy access to management information. The Company's
portfolio of ACD solutions expands the accessibility through software such as
Status Display for Windows 95/NT (JAZZ2000) and INFOCUS (PRELUDE and CINPHONY).
INFOCUS provides LAN and remote site access to Status Display, Report View &
Print Functions and ACD Administration via a standard Internet browser.
Migration Paths -- The Company's ACDs are designed with migration in mind.
One certainty with most small to mid-sized call centers is growth and with
growth comes the need to expand in size and capabilities. A strong migration
path allows a business to start off with an entry level call center solution
such as MINUET and migrate to PRELUDE and then from PRELUDE to CINPHONY via
simple software upgrades.
Tight Integration - Unlike other ACD providers that offer products that
are designed as separate, distinct modules, the Company's ACD solutions are
designed and developed as a single, tightly integrated bundle of applications.
The Company's call processing, announcement, status display, reporting, and
administration functionality work seamlessly as a unified ACD system. This
provides users with a cohesive feature and functionality set in one solution.
In addition, the Company's ACDs are uniquely designed as integrated applications
for either the Norstar or NEAX2000 IVS business telephone systems. By writing
its applications using the OAI or Open Application Interface, The Company
achieves the tightest level of application integration possible. This is best
illustrated in how the telephone handsets are used. Agents and supervisors have
access to a wealth of features and functions directly from the handset. For
example, supervisors can record and change announcements, monitor and/or join an
agent's call, or review call center statistics (MINUET only), all from their
handset. Agents can log-in and log-out, record a call, ask a supervisor for
assistance, and enter category codes for calls, for example. All the features of
the business telephone system are available; the ACD adds new functionality.
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Advanced Call Routing and Handling - The routing and handling of customer
calls is an important, if not mission-critical application for any call center.
The Company's ACDs provide advanced call routing and handling to the small to
mid-size center--historically reserved for larger more expensive systems. With
the Company's ACDs advanced call handling capabilities, businesses can now
answer more calls, reduce abandoned calls, cut hold times, and improve customer
service.
PRODUCT PORTFOLIO
AUTOMATIC CALL DISTRIBUTION ("ACD") PRODUCTS
An ACD is a specialized software and/or hardware call management system
which answers, queues and routes incoming telephone calls. It plays
announcements to callers, encouraging them to hold until an agent (a person
qualified to take the call) is available, provides statistics about the status
of agents and callers waiting, and provides specialized management information
reports. ACDs are typically employed in order to increase employee productivity
and revenues, and to reduce costs.
ACDs were originally designed for environments such as airline reservation
services and mail order firms, which have high call volumes and generate high
revenues per call. As more companies have focused on productivity and customer
service, the ACD market has expanded to include other types of businesses. Using
open application interface technology, the Company made it feasible and cost
effective for Norstar users to bring ACD into departments, branch offices and
small companies.
The Company has developed three ACD systems for Nortel's Norstar, CINPHONY,
PRELUDE, and MINUET, and JAZZ2000 for NEC's NEAX2000 IVS switch. CINPHONY,
PRELUDE, and MINUET are generally targeted towards organizations that have less
than 50 telephone agents ("small call centers") and can be effectively utilized
by small businesses and departments or branch offices in larger organizations.
JAZZ2000 is also targeted toward the small to mid-size call center. More
detailed information on these products is as follows:
CINPHONY
CINPHONY, introduced in 1991, is targeted to a sophisticated small call
center with advanced ACD needs. CINPHONY was designed for use with a Norstar
modular system. Typically, the CINPHONY user has experience with ACD in a large
call center within the organization and wants that same level of capability in
smaller areas. Reporting, enhanced management features, and capacities often
become the critical sales elements.
CINPHONY users range from small businesses with as few as 15 employees to
Fortune 500 companies. In 1993, the Company began to focus on major accounts
that would typically have the potential for multiple installations. Today, over
50% of CINPHONY installations are in large corporations, government agencies and
institutions, many of them with multiple installations.
CINPHONY is available in two levels. Level I is designed for small call
centers staffed with up to 30 agents and 4 groups. Level II supports up to 80
agents and a maximum of 24 groups.
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PRELUDE
PRELUDE, introduced in 1993, is targeted to small call centers with
enhanced ACD needs. PRELUDE, was designed for use with a Norstar modular system.
Typically, the PRELUDE user has experience with ACD in a large call center
within the organization and wants that same level of capability in smaller
areas. Reporting often becomes the critical sales element, especially when
migrating from a MINUET.
PRELUDE supports up to 15 agents, 3 groups and 30 lines.
MINUET
MINUET, introduced in 1997, is targeted at small call centers with basic
ACD needs, such as routing and statistics. MINUET offers 2 groups and 15 lines
supporting up to 10 active agents, real-time status, voice capabilities and
reports.
The Company believes that MINUET is broadening the market for ACDs because
of its straightforward feature set and affordability for even the smallest
center. Many departments, branch offices and small businesses do not believe
they are candidates for ACD because of its reputation as a product for large
users only, its historically high cost, and a perceived overabundance of
features. Recently the Company along with its partner, Nortel, began packaging
MINUET with every Norstar Voice Mail. This is consistent with the Company's
strategy to introduce users with less sophisticated requirements to ACD
technology with MINUET and then upgrade them to PRELUDE and CINPHONY as their
needs expand.
JAZZ2000
The JAZZ2000 application performs similar functions as the CINPHONY product
on the Norstar, but on a larger PBX phone switch platform designed by NEC, the
NEAX2000 IVS. JAZZ2000 provides Cintech with an advanced ACD solution targeted
at sophisticated small to mid-size call centers, while complementing the power
and versatility of a PBX. The JAZZ2000 can handle a maximum of 80 active agents,
and 24 groups of agents as well as growth up to 512 ports. The first generation
of the JAZZ2000 began shipment in December 1996.
CALL ACCOUNTING PRODUCTS
Call accounting products provide management with various reports that show
how a company's telephone systems are being used. These products typically
generate a variety of reports which detail, on a call by call basis, the
origination and destination of the call, the cost of the call, and the duration
of each call. Call accounting packages assist managers and employees in
understanding how time is being spent on the telephone and the related costs and
can also help protect against the potential abuse of outsiders gaining access to
the telephone system.
The Company entered the call accounting market in 1987 with its personal
computer-based Tele-Series call accounting product. The technology of using a
personal computer as the call accounting platform was relatively new at the time
and allowed the Company to offer a full-featured package at low cost. This
matched the Company's strategy of bringing high-productivity software to small
and mid-sized businesses.
The Company's initial call accounting product, Tele-Series, continues to be
sold today through various US and Canadian dealers. It works with a large number
of telephone switches including those of NEC, Nortel, AT&T and Mitel.
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In February 1993, the Company expanded its distribution to include the
Norstar distribution network by introducing Tele-Series for Norstar. Tele-Series
for Norstar, in addition to basic call accounting functions, takes advantage of
features unique to Norstar. These advantages include the ability to: (i) display
the incoming caller's telephone number on the user's telephone set; (ii) prompt
users to enter account codes at the telephone set; (iii) monitor for possible
toll fraud (unauthorized individuals gaining access to and misusing the
Norstar); and (iv) track intercom calls.
MARKETING AND DISTRIBUTION
The Company has a joint marketing and distribution arrangement with Nortel.
The arrangement was implemented during April 1996 with the release of new
versions of CINPHONY and PRELUDE that were designed to perform on Nortel's newly
released Norstar Application Module platform. Under the arrangement, Cintech's
CINPHONY, PRELUDE, and now, MINUET are included in the Nortel product catalog
and marketed jointly through Nortel's distribution network which includes: the
Regional Bell Operating Companies, Canadian provincial telephone companies, the
three largest US independent operating companies: GTE, Sprint and Williams
Communications and approximately 500 smaller distributors. In the Company's
opinion this distribution stronghold represents one of its major competitive
advantages.
Based on the Company's market share and reputation for serving the small to
mid-size call center market, the Company entered into an agreement with NEC in
September 1995, to design, develop and market an ACD solution for NEC's
NEAX2000IVS. In 1996, the Company introduced JAZZ2000 ACD. Recently in response
to customer demand, the Company streamlined its business relationship with NEC.
The Company is now working directly with NEC distributors to promote and sell
its JAZZ2000 family of ACDs. This direct approach allows the Company to get
closer to the end user customer in an effort to provide a better level of
service and value.
In addition to the US and Canada, the Company's products are installed in
Central and South America as well as in the Middle East. The Company intends to
expand its sales internationally to fill the needs of global accounts. This
objective complements the Company's joint marketing and distribution strategy.
CUSTOMER SERVICE & SUPPORT
With call centers reaching mission-critical status within many companies,
the implementation, management, and maintenance of the call center is as
important, if not more important, than the technology itself. It is this
philosophy that underscores the Company's on-going commitment to ensuring
customer success. The Company makes the implementation, management, and
maintenance processes effective, thorough and problem-free through its support
services programs. These support services allow our target customers to
capitalize upon the Company's vast, in-depth knowledge of the unique business
requirements and environments of the smaller call center.
The Company's Support Services offers a host of services that expedite
implementation, management and maintenance of call centers:
Implementation Services--The key to the successful utilization of any
technology lies in the ability to implement the system right the first time.
This means that the company implementing the system not only must know the ACD
system, but also the telephone system platform supporting the ACD system.
While some customers may want to contract the installation and
implementation of the ACD system to their local dealer, the Company finds that
many customers (and many dealers) prefer and demand our
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services for implementing the ACD system. Therefore, the Company supplements our
product and distribution partner's strengths with detailed product expertise and
knowledge of practical market deployment. In support of this customer demand,
the Company offers the following services:
* On-site installation and testing of the ACD system
* Verification of Norstar configuration needed to support ACD
* ACD configuration and verification
* Training of qualified personnel on the ACD system
Implementation Services include the development of the call center
configuration and instruction on its call flow. This initial training uses
actual applications, bringing real time call handling into play. While on-site,
the Company trains supervisors and administrator on such things as application
set-up, terminology, how to record greetings, report generation and
interpretation, and problem resolution. Agents are trained on using the ACD from
the telephone set.
Training & Education--The Company is dedicated to proving the most
comprehensive technical and operational training on its ACD products. Experience
has shown that many customers look for additional training once the system is
installed and operational. This need comes from changes in personnel, expanded
application development and the desire to understand the software capabilities
more thoroughly to improve efficiencies of operation. Additional training on
report generation and analysis is also key to most organizations for use in
business decisions and for managing and growing its call center business.
Training can be held on-site at the customer's location, at the Company's
headquarters, or at scheduled regional training courses.
Customer Response Center--The Company is committed to delivering technical
support in a way that is most effective for our customers. The Company's
Customer Response Center assures that a highly responsive team of service
experts will always be available to quickly meet our customer's needs.
The Customer Response Center offers a centralized service resource to
channel partners as well as end users, accessible through a toll free
number--unlimited technical telephone support from service experts is available
Monday through Friday from 8:00 A.M. to 9:00 P.M. EST. After hours emergency
support (from 9:00 P.M. to 8:00 A.M. weekdays, official holidays, etc.) is
available through the same 800 number service.
Software Maintenance--The Company's ACD systems come with a one year
Software Maintenance Plan from date of installation; hardware is covered
separately through manufacturer's program. Software Maintenance provides:
* Unlimited access to Customer Response Center.
* Free software updates.
* The Cintech Connection, a quarterly newsletter written specifically
for end users, including call center tips, frequently asked
questions, and solution stories on how other users are
capitalizing on certain features or functions.
When the first year of Software Maintenance expires, the Company offers
additional coverage in yearly increments for up to five years through its
Extended Software Support & Maintenance Service. Extended Software Support &
Maintenance is made available at the time of system installation at a discounted
price, or at the end of the one year maintenance period at the then current rate
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PRODUCT DEVELOPMENT
From its incorporation, the Company has made substantial investments in the
development of its product lines. The Company has relied on its extensive
customer experiences and a knowledgeable development organization in the
crafting and delivering of its award-winning products. Consistent with its
strategy of expanding it's existing product offerings and introducing new
product lines for the call center software market, the Company has and continues
to build upon its development organization. The Company believes that its future
performance depends, in part, on its ability to maintain and extend its existing
product lines to meet an expanding range of customer requirements and deliver
new products that successfully gain market acceptance. At the foundation of this
belief is the Company's ability to maintain and enhance its product development
organization and strategy.
COMPETITIVE POSITION
The market for the Company's products is characterized by rapid
technological change, evolving industry standards, and involves a number of
risks, some of which are beyond the Company's control. The Company's
competitiveness depends on its ability to enhance its existing products and to
offer new products on a timely basis. The long term success of the Company's
products is based primarily on product features, performance, ease-of-use,
reliability, compatibility, brand name recognition, product reputation, levels
of advertising, pricing, merchandising and training, quality customer support,
excellence and timeliness of product upgrades, the capability of the Company to
introduce complementary new products, and, ultimately, continued market growth
and acceptance. Presently, the Company is not aware of any existing or upcoming
technologies that would render obsolete or significantly displace its products
in the near future.
The Company's long term future expansion will depend upon the continued
availability of working capital, the ability of management to implement and
successfully develop the distribution of products, and the continued and
increased demand in the market place for the products and services provided by
the Company.
DEPENDENCE ON CUSTOMERS/DISTRIBUTION
The Company derives a significant portion of its revenue from products
which are integrated with the Norstar system. Because of this product
concentration, the Company would be materially adversely affected if users of
the Norstar system determined to use another system or similar device or if the
Norstar system ceased to be competitive in the marketplace. In March 1996, in
order to further increase penetration of ACD software sales to Norstar users,
the Company entered into a joint marketing agreement with Nortel whereby,
Nortel's sales and marketing organization now has responsibility for selling the
Company's software products through common distribution channels. Consequently,
the Company's business is in part dependent upon the degree of marketing support
and effort provided by Nortel and the various distributors. Most of the
Company's sales are to large distributors in the telephony industry. For the
year ended June 30, 1998, approximately 61% of the Company's sales were made to
one such distributor.
SOURCES AND AVAILABILITY OF RAW MATERIALS/PRINCIPAL SUPPLIERS
The Company, as a supplier primarily of software products, is not dependent
upon availability of raw materials. Hardware components used for bundling with
Company products are readily available for open market purchase and the Company
can acquire such components from any number of available primary and secondary
sources.
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PROPRIETARY RIGHTS
CINPHONY and Tele-Series have been copyrighted by the Company with the
United States Copyright Office. The Company has applied for trademarks in
respect to CINPHONY, PRELUDE, Tele-Series, JAZZ2000, MINUET and INFOCUS in the
United States.
GOVERNMENT IMPACT
The Company knows of no material governmental approvals required for the
development, marketing or sale of the Company's principal products or services.
Likewise, the Company knows of no existing or probable governmental regulations,
which have or would have a material adverse effect on the operation of the
Company's business. Finally, the Company knows of no material costs or effects
of compliance with environmental laws (federal, state or local) in the operation
of its business.
RESEARCH AND DEVELOPMENT
The Company spent on research and development during each of the last two
fiscal years the following sums: $532,000 for the fiscal year ended June 30,
1998, and $444,000 for fiscal year ended June 30, 1997. The costs of such
activities are considered overhead items that are reflected only indirectly in
the pricing of the Company's products sold into the market.
EMPLOYEES
The Company presently has 51 employees, 50 of which are full time. Of these
employees, 14 are involved primarily in sales and marketing, 16 work on systems
support, 13 are involved in product development and the remaining eight are
responsible for all management and administrative functions.
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Item 2. Properties
The Company's plant and its executive offices comprising approximately
20,000 square feet are located at 2100 Sherman Avenue, Cincinnati, Ohio 45212.
The Company leases this facility. The lease extends until April 30, 2002 and
calls for escalating lease payments. Lease payments for the year ended June 30,
1998 amounted to approximately $ 306,000.
The Company owns minimum amounts of tangible personal property in the form
of equipment, furniture and fixtures, and inventory (comprised of computer
hardware and literature and other documentation). The value of these items is
modest in comparison to the value of the Company's overall assets, inclusive of
cash and cash equivalents.
All of the Company's leased premises and tangible personal property are in
good condition.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceedings which would
have a material adverse impact on the Company's financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company has nothing to report under this Item.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters
The Company's common stock is held by approximately 600 shareholders of
record as of June 30, 1998, and is traded on The Toronto Stock Exchange. The
range of price quotations in each quarter of the two years ended June 30, 1998
are shown below. These prices represent actual transactions and do not reflect
retail markup, markdowns or commissions.
FOR THE QUARTER ENDED HIGH(1) LOW(1)
- -------------------- ------- ------
September 30, 1996 1.55 0.90
December 31, 1996 1.40 0.90
March 31, 1997 0.82 0.56
June 30, 1997 0.84 0.51
September 30, 1997 1.10 0.20
December 31, 1997 0.90 0.50
March 31, 1998 0.90 0.55
June 30, 1998 1.10 0.62
(1) Based on quotations obtained from the Toronto Stock Exchange. All amounts
are in Canadian dollars.
13
<PAGE> 14
No dividends were declared or paid during the two years ended June 30, 1998
and June 30, 1997, and the Company does not anticipate paying dividends in the
foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements in this report may contain "forward looking" information
(as defined in the Private Securities Litigation Reform Act of 1995) involving
risks and uncertainties, including without limitation, projections for sales and
expenditures, and various business environment and trend projections. Actual
future results and trends may differ materially depending on a variety of
factors, including, but not limited to, the risks discussed in earlier portions
of this document (see Item 1. Description of Business). The Company assumes no
obligation to release publicly any changes to any "forward looking" statements
that may arise from the development of unanticipated events or circumstances
that occur after the date of these statements.
LIQUIDITY AND CAPITAL RESOURCES
In January 1994, the Company completed its initial public offering ("IPO")
of 2,181,820 shares of common stock (see Note 1 of Notes to the Financial
Statements). The net proceeds of this offering, after deducting applicable
issuance costs and expenses, were $7.7 million. The proceeds of the offering
were used to retire the debt of the Company incurred prior to the offering. In
addition, the proceeds are continuing to be used for sales and marketing
programs, as well as for product development.
Working Capital increased to $2.2 million in 1998 from $0.8 million in
1997. The increase of $1.4 million was mostly attributable to the increase in
cash and marketable securities investments of $1.0 million and accounts
receivable of $557,000 and a decrease in accounts payable of $332,000 offset by
an increase in deferred maintenance revenue of $266,000. The increases in cash
and marketable securities reflect the profitability experienced by the Company
in fiscal 1998.
During 1998, the Company provided cash of $1.3 million from operating
activities and invested another $190,000 and $63,000 in software development and
fixed assets, respectively. The ending cash balance increased by $473,000. The
Company purchased additional marketable securities of $546,000.
At the end of 1998, the Company held cash and marketable securities
totaling $1.8 million and had no outstanding long-term debt obligation.
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 believes that there are no significant elements of
income or loss that do not arise from the Company's continuing operations.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following selected financial information set forth below has been
derived from the financial statements of the Company. This discussion and
analysis should be read in conjunction with the financial statements and notes
thereto which follow.
RESULTS OF OPERATIONS 1998 VERSUS 1997
Sales for fiscal 1998 increased by $2,754,000 or 39% compared with 1997.
This increase by product is broken down as follows (in thousands):
INCREASE
PRODUCT CATEGORY 1998 1997 (DECREASE)
- ---------------- ---- ---- ----------
ACD Products $7,007 $4,702 $2,305
Other CTI Products 1,222 1,257 (35)
Services 1,519 1,053 466
Other 51 33 18
------ ------ ------
Total $9,799 $7,045 $2,754
The increase in the sales of the Automatic Call Distribution software
products was due to achieving a greater level of penetration through the
Company's distribution channels for the product through both Northern Telecom
and NEC. During the fourth quarter of fiscal 1998, the Company recorded a sale
to a major distributor that accounted for 10% of the Company's annual sales.
Services increased due to the Company's focused efforts on providing services,
such as, installation, training and maintenance, to the end users of the
Company's products.
Cost of products sold increased $415,000 or 44% due to the increase in
sales. As a percentage of sales, cost of products sold for 1998 increased
slightly to 14% as compared to 13% in 1997. The percentage increase of 1% is due
to the Company's establishment of warranty reserves. Reserves for obsolete
inventory decreased $848,000 due to the $800,000 reserve for OCTUS PTA inventory
that the Company made in the third quarter of fiscal 1997. Amortization of
software costs increased $188,000 due to the Company's decision to accelerate
the write-off of certain assets based on a change in the estimated economic
lives of the assets. License fees, net of fourth quarter adjustments made in
fiscal 1997, increased $613,000 or 47% due to the increase in ACD software sales
volume. Gross Profit increased $2.2 million or 56% as compared to 1997.
Research and development costs of $532,000 were $88,000 or 20% higher
than 1997. This increase is due to the Company's continuing commitment to
develop new products and new releases of existing products and the increasing
labor costs for software developers. In addition, the Company capitalized
software development costs of $190,000 during the year, a decrease of $1,000
over 1997.
15
<PAGE> 16
Selling, general, and administrative expenses decreased $364,000 or 8%
over 1997. A schedule of the selling, general, and administrative expense
categories appears below (in thousands):
INCREASE
EXPENSE CATEGORY 1998 1997 (DECREASE)
- ---------------- ---- ---- ----------
Payroll $3,011 $2,862 $ 149
Professional Services 159 192 (33)
Sales and Marketing 712 983 (271)
Occupancy 318 315 3
Other 244 456 (212)
------ ------ ------
Total $4,444 $4,808 $(364)
The increase in payroll costs reflects the Company's ability to attract
and retain quality employees in a competitive job market. The decrease in sales
and marketing expenses were the result of a successful transition of
responsibilities under the joint marketing agreement with Nortel. The decrease
in other expenses was largely due to the Company's decision in 1997 to adjust
the useful lives, for depreciation purposes, of certain types of computer
equipment and software thereby increasing the associated expense in fiscal 1997.
The Company's income from operations of $1,207,000 was $2,502,000 greater
than that experienced in 1997.
Other income of $39,000 increased by $9,000 or 28% compared to 1997 due to
the increase in the amount of funds invested in marketable securities.
The net income of $1,246,000 represents an increase of $2,510,000
compared to the loss reported in 1997. The corresponding income per share, basic
and diluted, was $0.10 in 1998 compared to a loss per share of $0.10 in 1997.
Excluding the effects of the retail product inventory adjustment, the Company
would have reported $0.03 net loss per share in 1997.
YEAR 2000 COMPLIANCE
The Company is in the process of conducting a comprehensive review of its
key internal financial, information and operational systems to identify the
systems that could be materially affected by the Year 2000 issue. The Company
will be making appropriate modifications and conducting compliance testing on
these systems. The Company believes that with modifications to, or replacement
of, existing systems, the Year 2000 issue will not pose significant operating
problems. Based upon preliminary information, the costs of addressing internal
problems are not expected to have a material adverse impact on the Company's
financial position, results of operations, or cash flows in future periods.
Accordingly, the cost for Year 2000 problems will be funded through operating
cash flows.
The Company is currently engaged in assessing the capability of its
products to handle the transition to and operate in the Year 2000.
The Company is in the process of assessing the readiness of significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company cannot guarantee that the systems of other companies will be
converted in a timely manner, or the conversion or failure to convert systems,
would not have an adverse material effect on the Company.
16
<PAGE> 17
The Company is in the process of evaluating alternative procedures to handle
Year 2000 issues in the event that there would be a delay in implementing any
changes stemming from its current review process.
Item 7. Financial Statements and Supplementary Data
The response to Item 7 is included in the response to Item 13 of this report.
Item 8. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
The Company has nothing to report under this Item.
17
<PAGE> 18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Registrant
The information required by this Item is incorporated herein by
reference to the Company's 1998 definitive proxy statement filed on September
25, 1998 with the Securities and Exchange Commission as set forth under the
captions "Voting Shares and Security Ownership of Certain Beneficial Owners and
Management" and "Compensation of Directors and Officers".
Executive Officers of the Company. The names, ages and positions of the
executive officers of the Company as of June 30,1998 are as follows:
NAME AGE POSITION
- ---- --- --------
Diane M. Kamionka 51 President and Chief Executive
Officer
Bryant A. Downey 35 Chief Technology Officer
David J. Thibodeau 49 Vice President - Customer
Support Services
Peter C. Carfagno 42 Vice President - Sales
Each of the officers has been engaged in their principal occupation
indicated above for the previous five years, except for Mr. Thibodeau who became
an Executive Officer of the Company during 1996 and Mr. Carfagno who became
Executive Officer during 1997.
Item 10. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Company's 1998 definitive proxy statement filed on September 25, 1998
with the Securities and Exchange Commission as set forth under the caption
"Compensation of Directors and Officers".
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference to the
Company's 1998 definitive proxy statement filed on September 25, 1998 with the
Securities and Exchange Commission as set forth under the caption "Voting Shares
and Security Ownership of Certain Beneficial Owners and Management".
Item 12. Certain Relationships and Related Transactions
The Company has nothing to report under this item.
18
<PAGE> 19
Item 13. Exhibits, Financial Statements and Reports on Form 8-K
- ----------------------------------------------------------------
(a)(1) AND (2). FINANCIAL STATEMENTS
The financial statements attached to the end of this annual report are
filed as part of this annual report.
(a)(3). EXHIBITS
<TABLE>
<CAPTION>
Exhibit No Description Where Provided
- --------- --------------
<S> <C> <C>
3. Charter and Bylaws ...........................................................................................*
4. Instruments Defining Rights of Security Holders ..............................................................*
4.1 Agency Agreement by and among Cintech Tele-Management Systems, Inc., Loewen, -
Ondaatje, McCutcheon Limited, and Toronto Dominion Securities, Inc. dated
January 20, 1994 ........................................................................................*
4.2 Cintech Tele-Management Systems, Inc. 1993 Stock Option Plan ............................................*
9. Voting Trust Agreements ......................................................................................*
10. Material Contracts............................................................................................*
10.1 Agency Agreement by and among Cintech Tele-Management
Systems, Inc., Loewen, Ondaatje, McCutcheon Limited, and
Toronto Dominion Securities, Inc. dated January 20, 1994 .......................................*
10.2 Escrow Agreement described in Part II, Item 1 ...................................................*
10.3 Lease between Renaissance Partners and Cintech Tele-Management Systems,
Inc. dated July 13, 1990 ........................................................................*
10.4 Cintech Tele-Management Systems, Inc. Stock Option Plan .........................................*
10.5 Lease between Cintech Tele-Management Systems, Inc. and Norwood Real
Estate Partners dated October 25, 1994 ..........................................................***
13. Portions of the Annual Report to Shareholders
14. Material Foreign Patents ...................................................................................N/A
27. Financial Data Schedule
99. Additional Exhibits .........................................................................................**
99.1 Marketing Communique ............................................................................**
99.2 StarDome Distribution Agreement (Form)...........................................................**
99.3 Press Release dated June 8, 1994 ................................................................**
99.4 Letter of Understanding between Cintech Tele-Management
Systems, Inc. and NEC America, Inc. dated May 5, 1994 ...........................................**
99.5 October 10, 1991 Letter .........................................................................***
99.6 Amendment to License Agreement dated October 10, 1991 ...........................................***
99.7 Status and Disposition Agreement ................................................................***
99.8 Loan Agreement .................................................................................***
99.9 Agreement for Purchase of Preferred Stock .......................................................***
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
99.10 Debt Exchange Agreement .........................................................................***
99.11 Agreement to Finance ............................................................................***
99.12 Supplementary Agreement to Finance ..............................................................***
99.13 Second Supplementary Agreement to Finance .......................................................***
99.14 Third Supplementary Agreement to Finance ........................................................***
99.15 Term Note Payable dated May 13, 1996 to Related Parties .........................................***
* Previously provided in original filing of Form 10-SB
** Previously provided in Amendment No. 1 to Form 10-SB
*** Previously provided in Amendment No. 2 to Form 10-SB
</TABLE>
(a)(4). REPORTS ON FORM 8-K
The Company has not made any reports on Form 8-K during the last
quarter of the period covered by this report.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
/S/ DIANE M. KAMIONKA
-----------------------------
By: Diane M. Kamionka,
President and Chief Executive Officer
September 22, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/S/ DIANE M. KAMIONKA September 22 , 1998
- ----------------------- --------------------
Diane M. Kamionka, Date
President, Chief Executive Officer and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/S/ MICHAEL E. FREESE September 22, 1998
- ----------------------- -------------------
Director of Finance and Administration Date
DIRECTORS:
/S/ DIANE M. KAMIONKA September 22, 1998
- ---------------------- -------------------
Diane M. Kamionka, Date
President, Chief Executive Officer and Director
/S/ BRYANT A. DOWNEY September 22 , 1998
- ----------------------- --------------------
Bryant A. Downey, Date
Chief Technology Officer and Director
21
<PAGE> 22
/S/ CARTER F. RANDOLPH September 24 , 1998
- ----------------------- --------------------
Carter F. Randolph Date
Director
/S/ FRANK W. TERRIZZI September 22 , 1998
- ----------------------- --------------------
Frank W. Terrizzi Date
Director
22
<PAGE> 1
[DELOITTE &
TOUCHE LLP LOGO] -----------------------------------------------
CINTECH
TELE-MANAGEMENT
SYSTEMS, INC.
Financial Statements for the Years Ended
June 30, 1998 and 1997 and Independent
Auditors' Report
- ---------------
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
- ---------------
<PAGE> 2
[DELOITTE &
TOUCHE LLP LOGO]
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Cintech Tele-Management Systems, Inc.
We have audited the accompanying balance sheets of Cintech Tele-Management
Systems, Inc. (the "Company") as of June 30, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the years then
ended (all expressed in U.S. dollars). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1998 and 1997 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
August 26, 1998
- ---------------
DELOITTE TOUCHE
TOHMATSU
- ---------------
<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
ASSETS 1998 1997 EQUITY 1998 1997
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS: CURRENT LIABILITIES:
Cash and Cash Equivalents (Note 2) $ 913,699 $ 440,500 Accounts payable $ 201,292 $ 533,103
Marketable securities (Notes 3, 5) 909,147 363,095 Accrued liabilities:
Accounts receivable, trade - (net of Accrued salaries 222,562 104,159
allowance of $28,397 and $37,604 Accrued payroll taxes 13,660 3,677
in 1998 and 1997, respectively) (Note 2) 1,530,743 973,948 Accrued vacation 86,782 82,699
Inventory (Note 2) 87,472 101,415 Other 300,302 179,344
Prepaid expenses 28,450 19,783 Notes payable (Note 5) - 30,000
---------- ----------
Total current assets 3,469,511 1,898,741 Deferred maintenance revenue (Note 2) 442,611 176,325
---------- ---------- ------------ -----------
Total current liabilities 1,267,209 1,109,307
FIXED ASSETS (Notes 2,4): ------------ -----------
Equipment 668,065 632,489 STOCKHOLDERS' EQUITY (Notes 1,6,7):
Furniture and fixtures 146,592 120,269 Common stock 8,982,842 8,982,842
---------- ---------- Contributed capital 675,757 675,757
Total 814,657 752,758 Treasury stock (2,290) (2,290)
Less accumulated depreciation (703,804) (608,423) Accumulated deficit (7,118,037) (8,364,210)
---------- ---------- ----------- -----------
Total fixed assets - net 110,853 144,335 Total stockholders' equity 2,538,272 1,292,099
---------- ----------
OTHER ASSETS:
Software development costs - net
(Note 2) 225,117 358,330
---------- ----------
Total other assets 225,117 358,330
---------- ---------- ---------- ----------
TOTAL $3,805,481 $2,401,406 TOTAL $3,805,481 $2,401,406
========== ========== ========== ==========
See notes to the financial statements.
</TABLE>
- 2 -
<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
1998 1997
NET SALES (Note 2) $9,798,630 $7,044,857
COST OF PRODUCTS SOLD (Notes 2,10) 1,359,684 944,851
PROVISION FOR OBSOLETE INVENTORY (Note 2) 13,877 861,793
AMORTIZATION AND WRITE-OFF OF DEFERRED SOFTWARE
DEVELOPMENT COSTS (Note 2) 323,599 135,540
LICENSING FEES (Note 2) 1,918,402 1,145,063
---------- -----------
GROSS PROFIT 6,183,068 3,957,610
RESEARCH AND DEVELOPMENT 531,650 443,776
SELLING, GENERAL AND ADMINISTRATIVE (Notes 2,4) 4,444,225 4,808,181
---------- -----------
INCOME (LOSS) FROM OPERATIONS 1,207,193 (1,294,347)
OTHER INCOME 38,980 30,440
---------- -----------
NET INCOME (LOSS) $1,246,173 $(1,263,907)
========== ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE (Notes 6,10) $ 0.10 $ (0.10)
========== ===========
See notes to financial statements.
-3-
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 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 (1,263,907) (1,263,907)
---------- -------- ------- ----------- -----------
BALANCE AT JUNE 30, 1997 8,982,842 675,757 (2,290) (8,364,210) 1,292,099
NET INCOME 1,246,173 1,246,173
---------- -------- ------- ----------- -----------
BALANCE AT JUNE 30, 1998 $8,982,842 $675,757 $(2,290) $(7,118,037) $ 2,538,272
========== ======== ======= =========== ============
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,246,173 $(1,263,907)
---------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 96,681 216,218
Amortization and write-off of software development costs 323,599 135,540
Provision for obsolete inventory 13,877 861,793
Provision for doubtful accounts (9,207) (16,122)
Loss on disposal of fixed assets 3,124
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (547,588) 193,645
Decrease in inventory 66 46,752
Increase in prepaid expenses (8,667) (1,559)
Decrease in accounts payable (331,811) (116,168)
Increase in accrued expenses 253,427 84,596
Increase in deferred maintenance revenue 266,286 35,658
---------- -----------
Total adjustments 56,663 1,443,477
---------- -----------
Net cash provided by operating activities 1,302,836 179,570
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale (purchase) of marketable securities (546,052) 407,296
Purchase of fixed assets (63,199) (59,404)
Expenditures for software development costs (190,386) (190,665)
---------- -----------
Net cash provided by (used in) investing activities (799,637) 157,227
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 262
Payment on notes payable (30,000) (100,000)
---------- -----------
Net cash used in financing activities (30,000) (99,738)
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 473,199 237,059
CASH AND CASH EQUIVALENTS:
Beginning of year 440,500 203,441
---------- -----------
End of year $ 913,699 $ 440,500
========== ===========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 7
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
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.
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.
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.
WARRANTY RESERVE - At the time of sale, the Company accrues for warranty
costs relating to hardware replacement or on site support to be provided
during the first 12 months following the sale. Costs associated with
supporting product under warranty are charged to the reserve instead of
current period cost. The reserve, included in other accrued liabilities in
the financial statements, is adjusted periodically based upon actual
experience.
-6-
<PAGE> 8
DEPRECIATION - Fixed assets are carried at cost. Depreciation is based on
the estimated useful lives of the assets and is computed using an
accelerated method. 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 resulting in a fourth quarter adjustment (see Note
10).
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:
1998 1997
Literature and other documentation $ 27,107 $ 39,176
Computer hardware 933,500 958,173
Allowance for obsolete inventory (873,135) (895,934)
-------- --------
Total inventory $ 87,472 $ 101,415
========= =========
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the telephony industry. The Company had sales to a major distributor, as
follows:
SALES FOR THE YEARS ENDED JUNE 30,
1998 1997
---------------- ----------------
AMOUNT % AMOUNT %
Distributor A $5,969,862 61% $3,908,169 56%
========== == ========== ==
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:
PERCENT OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
June 30, 1998 1 86%
June 30, 1997 2 74%
-7-
<PAGE> 9
INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE YEARS ENDED JUNE 30,
1998 1997
--------------- ----------------
AMOUNT % AMOUNT %
Canada $ 69,844 1% $161,952 2%
Other 40,368 -- 34,913 1%
-------- --- -------- ---
Total $110,212 1% $196,865 3%
======== === ======== ===
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 $190,386 and $190,665 and related amortization was
$323,599 and $135,540 for 1998 and 1997, respectively. The Company
periodically evaluates the capitalized cost relative to potential sales
and accelerates the write-off when appropriate. This accelerated write-off
resulted in amortization of $181,042 and $26,585, included within total
amortization expense, in fiscal 1998 and 1997, respectively.
LICENSING FEE - The Company has agreements with distributors which require
the payment of a license fee on certain 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 Financial Accounting Standards Board
(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. In 1998, the FASB issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement, which is effective for all periods beginning
after June 15, 1999, will have no impact on the Company's reported
financial position, results 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. This
statement was adopted during 1998 and has been reflected within the
accompanying financial statements. Earnings per share for 1997 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 1997 amounts have been reclassified in
order to conform to fiscal 1998 presentation.
-8-
<PAGE> 10
3. MARKETABLE SECURITIES
The Company maintains various investments in treasury bills and federal
agency notes 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:
Net
Amortized Unrealized
Description Cost Market Gain
June 30, 1998 - Federal Agency Notes $909,147 $915,957 $6,810
June 30, 1997 - United States Treasury Bills $363,095 $372,677 $9,582
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:
Year Ending June 30:
1999 $ 205,000
2000 210,000
2001 220,000
2002 183,000
Rent expense for the leased office space was $293,105 and $295,506 in 1998
and 1997, respectively.
5. NOTES PAYABLE
The Company had a Term Note Payable - Bank bearing interest at the prime
lending rate (8.25% at June 30, 1997) which was paid in full, principal
and interest, on December 19, 1997. The note was secured by various
securities on deposit with the bank.
6. CAPITAL STOCK AND INCOME (LOSS) PER SHARE
The following schedule is a summary of the Company's shares of capital
stock at June 30, 1998 and 1997.
Common Stock In
Authorized Issued Outstanding Treasury
Balance 15,000,000 12,281,751 12,279,751 2,000
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.
-9-
<PAGE> 11
In accordance with FASB No. 128 "Earnings Per Share," the Company's basic
and diluted earnings per share were determined as follows:
<TABLE>
1998 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
BASIC EPS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Income (loss) available to
common stockholders $1,246,173 12,279,751 $0.10 $(1,263,907) 12,279,751 $(0.10)
EFFECT OF DILUTIVE SECURITIES
Stock options 133,719
---------- ---------- ----- ----------- ---------- ------
DILUTED EPS
Income (loss) available to
common stockholders
and assumed conversions $1,246,173 12,413,470 $0.10 $(1,263,907) 12,279,751 $(0.10)
========== ========== ===== =========== ========== ======
</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 certain 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 become exercisable equally over a
two-year period. All options expire at the end of ten years from the date
of grant.
The Company has adopted the disclosure only provision of SFAS No. 123 and
applies APB Opinion No. 25 in accounting for its stock options. Had
compensation cost for stock option grants made in fiscal years 1998 and
1997 been determined using the fair value method consistent with SFAS No.
123, the Company's net income (loss) and net income (loss) per share would
have been effected as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
For the year ended June 30:
Net income (loss) - as reported $1,246,173 $(1,263,907)
Net income (loss) - proforma 1,135,946 (1,282,310)
Basic and diluted earnings (loss) per share - as reported 0.10 (0.10)
Basic and diluted earnings (loss) per share - proforma 0.09 (0.10)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
-10-
<PAGE> 12
'
1998 1997
Expected volatility 69% 15%
Risk-free interest rate 5.52% 6.1%
Expected term of options 5 years 5 years
Expected dividend yield 0% 0%
Information regarding the Company's stock option plan for the years ended
June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 380,112 $ 0.95 365,417 $ 0.98
Granted 650,855 0.51 57,000 0.78
Forfeited (109,318) 0.61 (41,925) 1.04
Exercised (380) 0.69
--------- --------
Outstanding at end of year 921,649 $ 0.68 380,112 $ 0.95
========= ========
Options exercisable at end of year 213,429 $ 0.92 148,119 $ 0.91
========= ========
Weighted average fair value of options
granted during year $ 0.17 $ 0.20
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
<S> <C> <C> <C> <C> <C>
Range of exercise price
.29 - .69 340,351 8.99 $0.38 51,138 $ 0.69
.71 - .80 350,600 9.74 0.72 12,500 0.80
.88 -1.14 230,698 7.22 1.05 149,791 1.01
------- -------
921,649 8.83 $0.68 213,429 $ 0.92
======= =======
</TABLE>
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.
-11-
<PAGE> 13
Deferred taxes consist of the following:
JUNE 30, JUNE 30,
1998 1997
Current deferred tax asset:
Deferred revenue $ 150,488 $ 59,951
Inventory reserve 296,866 304,617
Accrued compensation 8,197 7,581
Reserves not currently deductible 9,655 12,785
Accrued rent 26,554 23,629
--------- ---------
Total 491,760 408,563
Less valuation allowance (491,760) (408,563)
--------- ---------
Net $ -- $ --
========= =========
JUNE 30, JUNE 30,
1998 1997
Non-current deferred tax asset:
Net operating loss carryforward $ 2,027,953 $2,312,046
Research and development credits 178,925 156,725
----------- ----------
Total 2,206,878 2,468,771
Non-current deferred tax liability:
Deferred software development costs (76,540) (121,832)
----------- ----------
Net non-current deferred tax asset 2,130,338 2,346,939
Less valuation allowance (2,130,338) (2,346,939)
----------- ----------
Net $ -- $ --
=========== ==========
The provision for income taxes for the year ended June 30, 1998 and 1997
consists of the following:
1998 1997
Current provision $ -- $ --
Deferred credit (provision) (133,404) 460,315
--------- ---------
Total (133,404) 460,315
Decrease (increase) in the valuation allowance 133,404 (460,315)
--------- ---------
Income tax expense $ -- $ --
========= =========
At June 30, 1998, the Company has net operating loss carryforwards of
approximately $5,900,000 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 June 30, 1998, for U.S. Federal tax purposes,
the Company has research and development credit carryforwards available to
offset future income taxes of approximately $178,000 which will begin to expire
in 2002.
-12-
<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 years ended June 30, 1998 and 1997, 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. For the year ended June 30,
1998, the difference in methodology results in a reported US GAAP net
income in excess of Canadian GAAP of $11,768. For the year ended June 30,
1997, the difference in methodology results in a reported US GAAP net loss
in excess of Canadian GAAP of $91,015. The difference does not have a
material effect on the earnings per share calculation for either year.
10. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
The Company's fiscal 1998 and 1997 results are inclusive of significant
adjustments recorded in the fourth quarter. In 1998, the Company recorded
a change in estimate of the economic life of certain products and a change
in estimate for warranty reserves. In 1997, the Company recorded a change
in estimate associated with the service lives of computer equipment and a
change in estimate for outstanding fees due to an outside party. The
effects of the adjustments on income and related per share amounts were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
INCOME/(LOSS) PER-SHARE INCOME/(LOSS) PER-SHARE
<S> <C> <C> <C> <C>
Software Development Costs $(181,042) $ (0.01)
Warranty Reserves (98,291) (0.01)
Depreciation $ (94,696) $ (0.01)
Outstanding fees 160,611 0.01
</TABLE>
* * * * * *
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 913,699
<SECURITIES> 909,147
<RECEIVABLES> 1,559,140
<ALLOWANCES> 28,397
<INVENTORY> 87,472
<CURRENT-ASSETS> 3,469,511
<PP&E> 814,657
<DEPRECIATION> 703,804
<TOTAL-ASSETS> 3,805,481
<CURRENT-LIABILITIES> 1,267,209
<BONDS> 0
0
0
<COMMON> 8,982,842
<OTHER-SE> (6,444,570)
<TOTAL-LIABILITY-AND-EQUITY> 3,805,481
<SALES> 9,798,630
<TOTAL-REVENUES> 9,798,630
<CGS> 1,373,561
<TOTAL-COSTS> 3,615,562
<OTHER-EXPENSES> 4,975,875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,246,173
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,246,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,246,173
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
