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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
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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, 1999
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, 1999 were $12,387,857.
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of June 30, 1999 was $5,740,332.
The outstanding voting securities of the registrant at the close of
business on June 30, 1999 were 12,303,185 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 or about September 27, 1999
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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.
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 departments, workgroups, and branch offices within
larger decentralized organizations and for small to mid-sized businesses.
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.
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These applications are designed to increase productivity and service levels of
departments, workgroups, or branches of larger businesses and small and mid-size
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, they are revolutionizing
the way business is done. 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.
The following factors are influencing business' adoption of call centers:
1. INCREASINGLY SOPHISTICATED CUSTOMERS DEMAND CONVENIENCE, ACCESS AND
EFFICIENCY (I.E., IMMEDIATE RESPONSE AND INSTANT INFORMATION).
Customers have become 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 were 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", have become
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
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center applications became available on Personal Computers in the early
1990's, smaller call centers simply were not 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 Call
Center Solutions for smaller business entities such as departments, workgroups,
branch offices, and small to mid-sized businesses, 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 call center product, CINPHONY, in April 1991 and in October
1993, introduced a second call center product, PRELUDE. In September 1997, the
Company introduced its third call center product, 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 call center 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 call center solutions
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 call
center solutions throughout North America.
NORTHERN TELECOM ("NORTEL")
In April 1991, the Company began shipping its CINPHONY call center solution
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
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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. 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 call center solutions 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 a call center solution for NEC's NEAX2000
IVS. In 1996, the Company introduced JAZZ2000 for the NEAX2000 IVS and
distributes the call center solution through NEC America's sales network.
COMPETITIVE ADVANTAGES
The design concepts behind the Company's call center solutions 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 call center 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 Administration via a standard Internet browser.
MIGRATION PATHS -- The Company's call center solutions are designed with
migration in mind. One expectation 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 call center providers that offer
products that are designed as separate, distinct modules, the Company's call
center 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 system. This provides users with a cohesive feature and functionality
set in one solution.
In addition, the Company's call center solutions 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 call center application adds new functionality.
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ADVANCED CALL ROUTING AND HANDLING - The routing and handling of customer
calls are an important, if not mission-critical, application for any call
center. The Company's call center solutions provide advanced call routing and
handling to the small to mid-size center--historically reserved for larger, more
expensive systems. With the Company's call center solutions advanced call
handling capabilities, businesses can now answer more calls, reduce abandoned
calls, cut hold times, and improve customer service.
PRODUCT PORTFOLIO
CALL CENTER PRODUCTS
A Call Center solution 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. Call center solutions are typically employed in order to
increase employee productivity and revenues, and to reduce costs.
Call center solutions 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 call center 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 call
center solutions into departments, branch offices and small companies.
The Company has developed three call center 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 follows:
CINPHONY
CINPHONY, introduced in 1991, is targeted to a sophisticated small call
center with advanced needs. CINPHONY was designed for use with a Norstar modular
system. Typically, the CINPHONY user has experience with call center
applications 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 6 groups. Level II supports up to 80
agents and a maximum of 80 groups.
PRELUDE
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PRELUDE, introduced in 1993, is targeted to small call centers with
enhanced needs. PRELUDE, was designed for use with a Norstar modular system.
Typically, the PRELUDE user has experience with call center applications 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 and 3 groups.
MINUET
MINUET, introduced in 1997, is targeted at small call centers with basic
needs, such as routing and statistics. MINUET offers 2 groups and supports up to
10 active agents, real-time status, voice capabilities and reports.
The Company believes that MINUET is broadening the market for call centers
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 call centers because of its reputation as a
product for large users only, its historically high cost, and a perceived
overabundance of features. In July 1998, 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 call center 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 call center 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 by 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.
In February 1993, the Company expanded its distribution to include the
Norstar distribution
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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 a call center solution for NEC's
NEAX 2000IVS. In 1996, the Company introduced JAZZ2000 for the NEAX2000 IVS and
distributes the call center solution through NEC America's sales network. .
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 call
center system, but also the telephone system platform supporting the call center
system.
While some customers may want to contract the installation and
implementation of the call center system to their local dealer, the Company
finds that many customers (and many dealers) prefer and demand our services for
implementing the call center system. Therefore, the
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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 call center system
- Verification of Norstar configuration needed to support the call
center system
- Application configuration and verification
- Training of qualified personnel on the call center 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 call
center application from the telephone set.
TRAINING & EDUCATION--The Company is dedicated to providing the most
comprehensive technical and operational training on its call center 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 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 customers' 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 call center 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--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 the
strategy of expanding its existing product offerings and introducing new product
lines for the call center software market, the Company has built 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 Company competes in the call center market, providing solutions for
departments, workgroups, branch offices, as well as small- to medium business
entities. 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. These market factors
represent both an opportunity and a competitive threat to the Company. The
Company competes with numerous vendors, including Lucent, Executone, Toshiba,
and Siemens. The Company expects the overall number of competitors providing
niche product solutions will increase due to the market's attractive growth.
Several of the Company's current and potential competitors have greater
financial, marketing and technical resources than the Company. In addition, the
Company leverages and relies on its product partners and extensive distribution
channel partners to deliver product to market. While, 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, the effectiveness of its product and
distribution partners, and, ultimately, continued market growth and acceptance.
Although the Company believes that its products currently compete
favorably, it is uncertain whether the Company can maintain its competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, distribution,
technical and other resources. There can be no assurance that the Company will
be able to compete successfully against current and future competitors or that
competitive pressures and market factors faced by the Company will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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
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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, 1999, approximately 71% 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.
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: $416,000 for the fiscal year ended June 30,
1999, and $532,000 for fiscal year ended June 30, 1998. 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 60 employees, 58 of which are full time. Of these
employees, 13 are involved primarily in sales, marketing and business
development, 18 work on systems support, 19 are involved in product development
and the remaining ten are responsible for all management and administrative
functions.
13
<PAGE> 14
ITEM 2. DESCRIPTION OF PROPERTY.
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,
1999 amounted to approximately $ 332,000.
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 COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is held by approximately 600 shareholders of
record as of June 30, 1999, and is traded on The Toronto Stock Exchange. The
range of price quotations in each quarter of the two years ended June 30, 1999
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, 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
September 30, 1998 1.26 0.90
December 31, 1998 2.50 0.99
March 31, 1999 3.84 1.99
June 30, 1999 2.75 1.90
(1) Based on quotations obtained from the Toronto Stock Exchange. All amounts
are in Canadian dollars.
14
<PAGE> 15
No dividends were declared or paid during the two years ended June 30, 1999
and June 30, 1998, and the Company does not anticipate paying dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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. 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 $5.6 million in 1999 from $2.2 million in
1998. The increase of $3.4 million was attributable to increases in cash and
marketable securities of $4.5 million and deferred income taxes of $299,000
offset by a decrease in accounts receivable of $501,000 and increases in accrued
salaries and payroll taxes of $418,000 and deferred maintenance revenue of
$286,000. The increases in cash and marketable securities reflect the increase
in sales volume and profitability experienced by the Company in fiscal 1999.
During 1999, the Company provided cash of $5.1 million from operating
activities and invested another $510,000 and $96,000 in software development and
fixed assets, respectively. The ending cash balance increased by $586,000. The
Company purchased additional marketable securities of $3,948,000.
At the end of 1999, the Company held cash and marketable securities
totaling $6.4 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.
15
<PAGE> 16
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 1999 VERSUS 1998
Sales for fiscal 1999 increased by $2,589,000 or 26% compared with 1998.
This increase is broken down by product as follows (in thousands):
<TABLE>
<CAPTION>
INCREASE
PRODUCT CATEGORY 1999 1998 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
ACD Products $ 9,347 $7,007 $2,340
Other CTI Products 1,103 1,222 (119)
Services 1,859 1,519 340
Other 79 51 28
------- ------ ------
Total $12,388 $9,799 $2,589
</TABLE>
Sales of Automatic Call Distribution software products increased by 33% due
to increased penetration of the Company's distribution channels for the product
through Northern Telecom while the Company continued to de-emphasize the sale of
hardware. Services increased by 22% due to the Company's continuing focus on
providing services, such as, installation, training, project management and
maintenance, to the end users of the Company's products.
Cost of products sold decreased $252,000 or 19% due to a decrease in
hardware sales. As a percentage of sales, cost of products sold for 1999
decreased to 9% as compared to 14% in 1998. Amortization of software costs, net
of fourth quarter adjustments made in fiscal 1998, increased $15,000 due to the
updates of various software products released in 1999. License fees increased
$363,000 or 19% due to the increase in ACD software sales volume. Gross profit
increased $2.6 million, or 43%, as compared to 1998. The increase in gross
profit is a direct result of the increase in sales volume and product mix.
Research and development costs of $416,000 were $116,000 or 22% lower than
1998. In addition, the Company capitalized software development costs of
$510,000 during the year, an increase of $320,000 over 1998. The decreased costs
of research and development combined with the increase in capitalized
development reflects the Company's emphasis on developing future products while
continuing to improve and maintain existing products.
16
<PAGE> 17
Selling, general, and administrative expenses increased $506,000 or 11%
over 1998. A schedule of the selling, general, and administrative expense
categories appears below (in thousands):
<TABLE>
<CAPTION>
INCREASE
EXPENSE CATEGORY 1999 1998 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Payroll $3,358 $3,011 $347
Professional Services 214 159 55
Sales and Marketing 731 712 19
Occupancy 322 318 4
Other 325 244 81
------ ------ ----
Total $4,950 $4,444 $506
</TABLE>
The increase in payroll expense is due to an 18% increase in staffing
combined with the necessity to attract and retain quality employees in a
competitive labor market. The increase in professional services was due to the
Company's outsourcing of various job functions. The increase in other expenses
was due to increasing health insurance costs associated with the increase in the
number of employees and an adjustment in bad debt expense.
The Company's income from operations of $3,464,000 was $2,257,000 greater
than that experienced in 1998.
Other income of $122,000 increased by $83,000 due to an increase in the
amount of funds invested in marketable securities.
The income tax benefit of $ 467,211 is due to a reduction in the tax
valuation allowance based upon the present and expected future profitability of
the Company.
The net income of $4,053,000 represents an increase of $2,807,000 compared
to the income reported in 1998. The corresponding earnings per share, basic and
diluted, was $0.33 and $0.32, respectively, in 1999 as compared to earnings per
share, basic and diluted, of $0.10 in 1998.
YEAR 2000 COMPLIANCE
The Company has conducted 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 has tested and
replaced systems where necessary and believes that its key internal systems are
currently Year 2000 compliant. The Company will continue to conduct compliance
testing on these systems and modify or replace systems when necessary. The
Company believes the Year 2000 issue will not pose significant operating
problems. The cost for Year 2000 problems, which has been less than $20,000, was
funded through current operating cash flows. The Company believes that any
future 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.
The Company has evaluated all of its products for Year 2000 readiness. The
evaluation included comprehensive testing of the capability of its products to
handle the transition to and operate in the Year 2000. The Company believes that
all products are Year 2000 ready or can be updated with versions currently
available to become Year 2000 ready. Information regarding the Year 2000
readiness of the Company's products or services is available through the
Company's
17
<PAGE> 18
website: www.cintech-cti.com.
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. Failure of the Company's suppliers to address their own Year 2000 issues
could result in a delay of the Company's ability to ship its products. 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.
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.
The financial statements attached to the end of this annual report are
filed as part of this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has nothing to report under this Item.
18
<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by
reference to the Company's 1999 definitive proxy statement to be filed on or
about September 27, 1999 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, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Diane M. Kamionka 52 President and Chief Executive
Officer
Bryant A. Downey 36 Chief Technology Officer
David J. Thibodeau 50 Vice President - Customer Support
Services
Charles W. Bowen 54 Sr. Vice President - Sales and
Marketing
</TABLE>
Each of the officers has been engaged in their principal occupation
indicated above for the previous five years, except for Mr. Thibodeau who prior
to becoming an Executive Officer of the Company during 1996 was Director of
Business Development for the Company, and Mr. Bowen who prior to becoming an
Executive Officer during 1998 was Director, Business Development for Sprint from
1991 thru 1994 and Vice President & General Manager for Sprint Healthcare
Systems, Inc. from 1995 thru 1998.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's 1999 definitive proxy statement to be filed on or about
September 27, 1999 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 1999 definitive proxy statement to be filed on or about September 27,
1999 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.
19
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a). EXHIBITS
<TABLE>
<CAPTION>
Exhibit No Description Where Provided
- ---------- ----------- --------------
<S> <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................................. ***
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
99.8 Loan Agreement................................................... ***
99.9 Agreement for Purchase of Preferred Stock........................ ***
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>
(b). 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.
21
<PAGE> 22
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 20, 1999
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:
<TABLE>
<S> <C>
/s/ Diane M. Kamionka September 20, 1999
- ----------------------- ------------------
Diane M. Kamionka, Date
President, Chief Executive Officer and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Michael E. Freese September 20, 1999
- ----------------------- ------------------
Michael E. Freese Date
Director of Finance and Administration
DIRECTORS:
/s/ Diane M. Kamionka September 20, 1999
- ----------------------- ------------------
Diane M. Kamionka, Date
President, Chief Executive Officer and Director
/s/ Bryant A. Downey September 20, 1999
- ----------------------- ------------------
Bryant A. Downey, Date
Chief Technology Officer and Director
/s/ Carter F. Randolph September 22, 1999
- ----------------------- ------------------
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
Carter F. Randolph Date
Director
/s/ Frank W. Terrizzi September 22,1999
- ----------------------- -----------------
Frank W. Terrizzi Date
Director
</TABLE>
23
<PAGE> 1
CINTECH
TELE-MANAGEMENT
SYSTEMS, INC.
Financial Statements for the Years Ended
June 30, 1999 and 1998 and Independent
Auditors' Report
<PAGE> 2
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, 1999 and 1998 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, 1999 and 1998 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 20, 1999
<PAGE> 3
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,500,081 $ 913,699
Marketable securities (Note 2) 4,864,847 916,832
Accounts receivable, trade - (net of
allowance of $50,601 and $28,397
in 1999 and 1998, respectively) (Note 1) 1,022,153 1,523,058
Inventory (Note 1) 25,781 87,472
Prepaid expenses 30,172 28,450
Deferred income taxes (Note 7) 298,960 --
------------ ------------
Total current assets 7,741,994 3,469,511
------------ ------------
FIXED ASSETS (Note 1):
Equipment 757,190 668,065
Furniture and fixtures 151,433 146,592
------------ ------------
Total 908,623 814,657
Less accumulated depreciation (786,988) (703,804)
------------ ------------
Total fixed assets - net 121,635 110,853
------------ ------------
OTHER ASSETS:
Deferred income taxes (Note 7) 274,996 --
Software development costs - net (Note 1) 578,156 225,117
------------ ------------
Total other assets 853,152 225,117
------------ ------------
TOTAL $ 8,716,781 $ 3,805,481
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $ 270,434 $ 201,292
Accrued liabilities:
Accrued salaries 607,408 222,562
Accrued vacation 101,507 86,782
Accrued income taxes 58,340 --
Accrued payroll taxes 46,801 13,660
Other 301,687 300,302
Deferred maintenance revenue (Note 1) 728,678 442,611
------------ ------------
Total current liabilities 2,114,855 1,267,209
------------ ------------
STOCKHOLDERS' EQUITY (Notes 1,5,6):
Common stock 8,993,777 8,982,842
Contributed capital 675,757 675,757
Treasury stock (2,290) (2,290)
Accumulated deficit (3,065,318) (7,118,037)
------------ ------------
Total stockholders' equity 6,601,926 2,538,272
------------ ------------
TOTAL $ 8,716,781 $ 3,805,481
============ ============
</TABLE>
See notes to the financial statements
-2-
<PAGE> 4
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
NET SALES (Note 1) $ 12,387,857 $ 9,798,630
COST OF PRODUCTS SOLD (Note 1) 1,120,427 1,373,561
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS (Note 1) 157,189 323,599
LICENSING FEES (Note 1) 2,281,314 1,918,402
------------ ------------
GROSS PROFIT 8,828,927 6,183,068
RESEARCH AND DEVELOPMENT 415,657 531,650
SELLING, GENERAL AND ADMINISTRATIVE (Notes 1,3) 4,949,538 4,444,225
------------ ------------
INCOME FROM OPERATIONS 3,463,732 1,207,193
OTHER INCOME 121,776 38,980
------------ ------------
INCOME BEFORE INCOME TAX BENEFIT 3,585,508 1,246,173
INCOME TAX BENEFIT (Note 7) 467,211 --
------------ ------------
NET INCOME $ 4,052,719 $ 1,246,173
============ ============
BASIC EARNINGS PER COMMON SHARE (Note 5) $ 0.33 $ 0.10
============ ============
DILUTED EARNINGS PER COMMON SHARE (Note 5) $ 0.32 $ 0.10
============ ============
</TABLE>
See notes to financial statements.
-3-
<PAGE> 5
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK CONTRIBUTED TREASURY ACCUMULATED STOCKHOLDERS'
NO PAR VALUE CAPITAL STOCK DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
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
STOCK OPTIONS EXERCISED (21,434 shares) 10,935 10,935
NET INCOME 4,052,719 4,052,719
------------ ------------ ------------ ------------ ------------
BALANCE AT JUNE 30, 1999 $ 8,993,777 $ 675,757 $ (2,290) $ (3,065,318) $ 6,601,926
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
-4-
<PAGE> 6
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,052,719 $ 1,246,173
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 85,394 96,681
Amortization of software development costs 157,189 323,599
Deferred income taxes (573,956) --
Provision for doubtful accounts 22,204 (9,207)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 478,701 (547,588)
Decrease in inventory 61,692 13,943
Increase in prepaid expenses (1,722) (8,667)
Increase (decrease) in accounts payable 69,141 (331,811)
Increase in accrued expenses 492,437 253,427
Increase in deferred maintenance revenue 286,067 266,286
------------ ------------
Total adjustments 1,077,147 56,663
------------ ------------
Net cash provided by operating activities 5,129,866 1,302,836
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (3,948,015) (546,052)
Purchase of fixed assets (96,176) (63,199)
Expenditures for software development costs (510,228) (190,386)
------------ ------------
Net cash used in investing activities (4,554,419) (799,637)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,935 --
Payment on notes payable -- (30,000)
------------ ------------
Net cash provided by (used in) financing activities 10,935 (30,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 586,382 473,199
CASH AND CASH EQUIVALENTS:
Beginning of year 913,699 440,500
------------ ------------
End of year $ 1,500,081 $ 913,699
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid $ 62,747 $ --
============ ============
</TABLE>
See notes to financial statements.
-5-
<PAGE> 7
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1. 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. These strategic product
partnerships provide the Company with extensive distribution
opportunities.
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 8.
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 periods ranging from 1-5 years
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 or software replacement or on site support to
be provided during the first twelve 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.
DEPRECIATION - Fixed assets are carried at cost. Depreciation is computed
using an accelerated method over the following useful lives:
Equipment 5 years
Furniture and fixtures 7 years
Computer equipment 3 years
-6-
<PAGE> 8
INVENTORY - Inventories are valued at the lower of cost or market, with cost
being computed using the first-in, first-out method. Inventories consist of:
1999 1998
Literature and other documentation $ 14,309 $ 27,107
Computer hardware 21,621 109,222
Allowance for obsolete inventory (10,149) (48,857)
---------- ----------
Total inventory $ 25,781 $ 87,472
========== ==========
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:
<TABLE>
<CAPTION>
SALES FOR THE YEARS ENDED JUNE 30,
1999 1998
-------------------------- ---------------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Distributor A $ 8,779,085 71 % $ 5,969,862 61 %
============ ==== ============ ====
</TABLE>
The Company had gross accounts receivable from major distributors, each of which
was in excess of 10% of the Company's total accounts receivable, as follows:
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
June 30, 1999 2 83%
June 30, 1998 1 86%
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE YEARS ENDED JUNE 30,
1999 1998
--------------------------- --------------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Canada $ 99,996 1 % $ 69,844 1 %
Other 7,089 - 40,368 -
--------- ---- --------- ----
Total $ 107,085 1 % $ 110,212 1 %
========= ==== ========= ====
</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 $510,228 and $190,386 and related amortization was
$157,189 and $323,599 for 1999 and 1998, 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
-7-
<PAGE> 9
amortization of $3,750 and $181,042, included within total amortization
expense, in fiscal 1999 and 1998, 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 1998, the Financial Accounting Standards Board
(FASB) issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, as amended, which is effective
for fiscal year 2001, will have no impact on the Company's reported
financial position, results of operations or cash flows.
The Company adopted FASB Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," during 1999. There was no impact
on the Company's financial statements. The Company also adopted FASB
Statement No. 130, "Reporting Comprehensive Income" during the quarter
ended September 30, 1998. However, as the Company had no items of
comprehensive income, there was no impact on the Company's financial
statements.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers all money market instruments to be cash equivalents.
RECLASSIFICATION - Certain fiscal 1998 amounts have been reclassified in
order to conform to fiscal 1999 presentation.
2. MARKETABLE SECURITIES
The Company maintains various investments in 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:
<TABLE>
<CAPTION>
NET
AMORTIZED UNREALIZED
DESCRIPTION COST MARKET LOSS
<S> <C> <C> <C>
June 30, 1999 - Federal Agency Notes $4,864,847 $4,858,395 $6,452
========== ========== ======
June 30, 1998 - Federal Agency Notes $ 916,832 $ 915,957 $ 875
=========== ========== ======
</TABLE>
3. 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.
-8-
<PAGE> 10
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:
2000 $ 210,000
2001 220,000
2002 183,330
Rent expense for the leased office space was $293,105 in each of the years
ended June 30, 1999 and 1998.
4. NOTES PAYABLE
The Company had a Term Note Payable - Bank bearing interest at the prime
lending rate which was paid in full, principal and interest, on December
19, 1997.
5. CAPITAL STOCK AND INCOME PER SHARE
The following schedule is a summary of the Company's shares of capital
stock.
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING TREASURY
<S> <C> <C> <C> <C>
Balance at June 30, 1999 15,000,000 12,303,185 12,301,185 2,000
========== ========== ========== =====
Balance at June 30, 1998 15,000,000 12,281,751 12,279,751 2,000
========== ========== ========== =====
</TABLE>
Income per common share was based on the weighted average number of common
shares outstanding during each period.
The Company's basic and diluted earnings per share were determined as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
BASIC EPS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Income available to
common stockholders $4,052,719 12,292,802 $ 0.33 $1,246,173 12,279,751 $ 0.10
EFFECT OF DILUTIVE SECURITIES
Stock options 339,608 133,719
---------- ---------- ------ ---------- ---------- ------
DILUTED EPS
Income available to
common stockholders
and assumed conversions $4,052,719 12,632,410 $ 0.32 $1,246,173 12,413,470 $ 0.10
========== ========== ====== ========== ========== ======
</TABLE>
Stock options representing 145,000 shares in 1999 and 647,149 shares in
1998 were not included in computing diluted earnings per share because
their effects were antidilutive.
-9-
<PAGE> 11
6. 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
period ranging from one to four years. 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 or are subject to the performance
provisions of specific grants.
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 1999 and
1998 been determined using the fair value method consistent with SFAS No.
123, the Company's net income and net income per share would have been
effected as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
For the year ended June 30:
Net income - as reported $ 4,052,719 $ 1,246,173
Net income - proforma 4,000,985 1,135,946
Basic earnings per share - as reported 0.33 0.10
Basic earnings per share - proforma 0.33 0.09
Diluted earnings per share - as reported 0.32 0.10
Diluted earnings per share - proforma 0.32 0.09
</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:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expected volatility 232 % 214 %
Risk-free interest rate 6.16 % 5.52 %
Expected term of options 5 years 5 years
Expected dividend yield 0% 0%
</TABLE>
-10-
<PAGE> 12
Information regarding the Company's stock option plan for the years ended
June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 921,649 $ 0.68 380,112 $ 0.95
Granted 207,000 1.28 650,855 0.51
Forfeited (206,592) 0.68 (109,318) 0.61
Exercised (21,434) 0.44 -
-------- --------
Outstanding at end of year 900,623 $ 0.82 921,649 $ 0.68
======== ========
Options exercisable at end of year 361,154 $ 0.80 213,429 $ 0.92
======== ========
Weighted average fair value of options
granted during year $ 0.34 $ 0.17
</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 -.69 262,709 7.98 $ 0.40 115,294 $ 0.52
.71 - .80 278,252 9.04 0.72 73,214 0.72
.88 - 1.47 359,662 7.55 1.21 172,646 1.02
------- -------
900,623 8.14 $ 0.82 361,154 $ 0.80
======= =======
</TABLE>
7. 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:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
Current deferred tax asset:
Deferred revenue $ 247,751 $ 150,488
Inventory reserve 3,451 296,866
Accrued compensation 8,044 8,197
Reserves not currently deductible 17,204 9,655
Accrued rent 22,510 26,554
------------ ------------
Total 298,960 491,760
Less valuation allowance (491,760)
------------ ------------
Net $ 298,960 $ --
============ ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
<S> <C> <C>
Non-current deferred tax asset:
Net operating loss carryforward $ 815,977 $ 2,027,953
Research and development credits 201,125 178,925
Alternative minimum tax credit 63,581
------------ ------------
Total 1,080,683 2,206,878
Non-current deferred tax liability:
Deferred software development costs (196,573) (76,540)
------------ ------------
Net non-current deferred tax asset 884,110 2,130,338
Less valuation allowance (609,114) (2,130,338)
------------ ------------
Net $ 274,996 $ --
============ ============
</TABLE>
The benefit (provision) for income taxes for the year ended June 30, 1999 and
1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current provision $ (106,745) $ --
Deferred provision (1,439,028) (133,404)
------------ ------------
Total (1,545,773) (133,404)
Decrease in the valuation allowance 2,012,984 133,404
------------ ------------
Incometax benefit $ 467,211 $ --
============ ============
</TABLE>
The primary differences between the statutory rate for federal income tax and
the effective income tax rate are the utilization of net operating losses to
offset current income and the change in the valuation allowance. At June 30,
1999, the Company has net operating loss carryforwards of approximately
$2,400,000 for U.S. Federal tax purposes. Such loss carryforwards, if unused as
offsets to future taxable income, will expire beginning in 2009 and continuing
through 2013. Also at June 30, 1999, for U.S. Federal tax purposes, the Company
has research and development credit carryforwards available to offset future
income taxes of approximately $201,000 which will begin to expire in 2000.
-12-
<PAGE> 14
In 1999, the valuation allowance was reduced to $609,114 based on the
present and expected future profitability of the Company.
8. 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, 1999 and 1998, differences between
Canadian GAAP and U.S. GAAP arose as a result of depreciation. For U.S.
GAAP purposes, furniture and fixtures, equipment, and computer equipment
are depreciated over useful lives of seven, five, and three years,
respectively, using an accelerated method. For Canadian GAAP purposes,
furniture and fixtures, equipment, and computer equipment are to be
depreciated over useful lives of five, three, and three years,
respectively, using a straight-line method. The difference in methodology
results in a reported US GAAP net income in excess of Canadian GAAP of
$4,446 and $11,768 for the periods ended June 30, 1999 and 1998,
respectively. The difference does not have a material effect on the
earnings per share calculation for either year.
9. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
The Company's fiscal 1999 results are inclusive of significant
adjustments recorded in the fourth quarter. In 1999, the Company reduced
the deferred income tax valuation allowance to $609,114 based on present
and expected future profitability of the Company (see Note 7). The
effect of the adjustment on income and related per share amount was
$510,375, or $0.04 per share.
The Company's fiscal 1998 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. The effects of the
adjustments on income and related per share amounts were $(181,042), or
$(0.01) per share, and $(98,291), or $(0.01) per share, respectively.
* * * * * *
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,500,081
<SECURITIES> 4,864,847
<RECEIVABLES> 1,072,754
<ALLOWANCES> 50,601
<INVENTORY> 25,781
<CURRENT-ASSETS> 7,741,994
<PP&E> 908,623
<DEPRECIATION> 786,988
<TOTAL-ASSETS> 8,716,781
<CURRENT-LIABILITIES> 2,114,855
<BONDS> 0
0
0
<COMMON> 8,993,777
<OTHER-SE> (2,391,851)
<TOTAL-LIABILITY-AND-EQUITY> 8,716,781
<SALES> 12,387,857
<TOTAL-REVENUES> 12,387,857
<CGS> 1,120,427
<TOTAL-COSTS> 3,558,930
<OTHER-EXPENSES> 5,365,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,585,508
<INCOME-TAX> 467,211
<INCOME-CONTINUING> 4,052,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,052,719
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.32
</TABLE>
