<PAGE> 1
FORM 10-QSB
[As last amended in Release No. 34-32231, April 28, 1993, 58 F.R. 26509]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from __________________ to
_____________________
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 31-1200684
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2100 Sherman Avenue, Cincinnati, Ohio 45212
-------------------------------------------
(Address of principal executive offices)
(513) 731-6000
--------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
1
<PAGE> 2
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 12,291,063 shares of common
stock as of December 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
The unaudited condensed financial statements attached to the end of
this quarterly report are filed as part of this quarterly report. The unaudited
condensed financial statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
Item 2. Management's Discussions and Analysis or Plan of Operation.
----------------------------------------------------------
The following selected financial information set forth below has been
derived from the unaudited financial statements of the Company. This discussion
and analysis should be read in conjunction with such financial statements. All
amounts are in US dollars.
Results of Operations
- ---------------------
For the six months ended December 31, 1998 compared to the six months
---------------------------------------------------------------------
ended December 31, 1997
- -----------------------
Sales for the six months ended December 31, 1998 were $5,518,000
compared to $4,678,000 for the same period last year. The $840,000, or 18%,
increase in sales is due to an 18% increase in ACD software and hardware
revenues combined with a 9% increase in revenue from other CTI products and a
24% increase in services revenue.
Gross margin of $3,852,000 was $797,000, or 26%, greater than the
corresponding period of last year. This increase in gross margin is a direct
result of the increase in sales volume and product mix. Gross margin was 70%,
which as a percentage of sales was 5% greater than that experienced during the
same period of the prior year.
Research and development costs of $196,000 were approximately $79,000
less than the comparable prior year period. Selling, general and administrative
(S,G&A) expenses of $2,318,000 were approximately $26,000 higher than the
comparable prior year period.
The Company realized net income of $1,382,000 for the six months ended
December 31,1998 compared to net income of $504,000 reported for the same period
last year. Earnings per share, basic and diluted, were $0.11 versus a $0.04 per
share reported for the comparable prior year period.
2
<PAGE> 3
Liquidity and Capital Resources
- -------------------------------
Working capital increased to $3.3 million as compared to $1.4 million
for the corresponding period of last year. The increase of $1.9 million is
primarily due to the increase in cash and marketable securities of $3.2 million
offset by a decrease in accounts receivable of $800,000 and increases in
deferred maintenance revenue of $237,000 and accrued salaries and taxes of
$130,000. The increases in cash and marketable securities reflect the increase
in sales volume and profitability experienced by the Company thus far during
fiscal 1999.
As of December 31, 1998, Cintech held cash and marketable securities
totaling approximately $4.5 million and had no outstanding long-term debt
obligations.
The Company's plan of operation is to continue distributing its
ACD-related products via strategic alliances with Northern Telecom and NEC. The
Company has no material commitments for capital expenditures. The Company feels
that there are no significant elements of income or loss that do not arise from
the Company's continuing operations.
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. The Company believes that its key internal systems will be Year 2000
compliant before June 30, 1999. The Company began replacing non-compliant
versions of internal software during the recent fiscal quarter. 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. Information
regarding the Year 2000 readiness of the Company's products or services is
available through the Company's 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. 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.
3
<PAGE> 4
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
(a) The following Exhibits are required by Item 601 of Regulation S-B:
Page
----
<S> <C> <C>
Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation,
- ------------- or Succession..................................................................... N/A
Exhibit No. 3 - (I) Articles of Incorporation, (ii) By-laws ...................................... *
- ------------- ------
Exhibit No. 4 - Instruments Defining
- ------------- Rights of Security Holders........................................................ N/A
------
Exhibit No. 10 - Material Contracts................................................................ *,**
- -------------- ------
Exhibit No. 11 - Statement re: Computation of Per Share Earnings .................................. N/A
- -------------- ------
Exhibit No. 15 - Letter on Unaudited Interim Financial Information................................. N/A
- -------------- ------
Exhibit No. 18 - Letter on Change in Accounting Principles......................................... N/A
- -------------- ------
Exhibit No. 19 - Reports Furnished to Security-Holders............................................. 7
- -------------- ------
Exhibit No. 22 - Published Report Regarding Matters Submitted to Vote.............................. N/A
- -------------- ------
Exhibit No. 23 - Consent of Experts and Counsel.................................................... N/A
- -------------- ------
Exhibit No. 24 - Power of Attorney................................................................. N/A
- -------------- ------
Exhibit No. 99 - Additional Exhibits............................................................... N/A
- -------------- ------
</TABLE>
(b) On September 15, 1995, the Company changed its fiscal year end to
June 30 commencing June 30, 1995. The Company filed a Form 8-K regarding this
change in fiscal year on September 26, 1995. This form is incorporated in this
report by reference.
* Previously provided in original filing on Form 10-SB.
** Previously provided in Amendment No. 2 to Form 10-SB.
4
<PAGE> 5
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, Cintech Tele-Management Systems, Inc., as Registrant, has caused this
Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto
duly authorized.
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
By: /s/ DIANE M. KAMIONKA Date: February 12, 1999
--------------------------------------
Diane M. Kamionka
President and Chief Executive Officer
By: /s/ MICHAEL E. FREESE Date: February 12, 1999
--------------------------------------
Michael E. Freese
Director of Finance and Administration
5
<PAGE> 1
EXHIBIT NO. 19
REPORTS FURNISHED TO SECURITY-HOLDERS
<PAGE> 2
- ------------------------------------------------
CINTECH TELE-
MANAGEMENT
SYSTEMS, INC.
Condensed Financial Statements for the Three and
Six-Months Ended December 31, 1998 and 1997
and Independent Accountants' Report
<PAGE> 3
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors of
Cintech Tele-Management Systems, Inc.
We have reviewed the accompanying condensed balance sheets of Cintech
Tele-Management Systems, Inc. (the "Company") as of December 31, 1998 and 1997
and the related condensed statements of operations, stockholders' equity and
cash flows for the three months and six months then ended (all expressed in U.S.
dollars). These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytic procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of the Company as of
June 30, 1998, and the related statement of operations, stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated August 26, 1998, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of June 30, 1998 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
January 22, 1999
<PAGE> 4
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998, JUNE 30, 1997 AND DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1998 1997
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $1,197,730 $ 913,699 $ 674,695
Marketable securities (Note 2) 3,318,562 916,832 614,310
Accounts receivable, trade - (Net of
allowance of $92,468, $28,397 and
$56,401 at December 31, 1998, June 30, 1998,
and December 31, 1997, respectively) (Note 1) 461,132 1,523,058 1,262,134
Inventory (Note 1) 57,519 87,472 80,688
Prepaid expenses 20,885 28,450 5,865
---------- ---------- ----------
Total current assets 5,055,828 3,469,511 2,637,692
---------- ---------- ----------
FIXED ASSETS (Note 1):
Equipment 698,925 668,065 645,446
Furniture and fixtures 146,592 146,592 122,331
---------- ---------- ----------
Total 845,517 814,657 767,777
Less accumulated depreciation (752,594) (703,804) (701,423)
---------- ---------- ----------
Total fixed assets - net 92,923 110,853 66,354
---------- ---------- ----------
Software development costs - net (Note 1) 482,151 225,117 372,930
---------- ---------- ----------
TOTAL $5,630,902 $3,805,481 $3,076,976
========== ========== ==========
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1998 1997
LIABILITIES AND
STOCKHOLDERS' EQUITY (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 476,650 $ 201,292 $ 526,369
Accrued liabilities:
Accrued salaries 266,250 222,562 152,122
Accrued payroll taxes 25,976 13,660 10,389
Accrued vacation 70,712 86,782 71,625
Other 300,383 300,302 189,587
Deferred maintenance revenue (Note 1) 567,323 442,611 330,724
----------- ----------- -----------
Total current liabilities 1,707,294 1,267,209 1,280,816
----------- ----------- -----------
STOCKHOLDER'S EQUITY (Notes 1, 5, 6):
Common stock 8,986,122 8,982,842 8,982,842
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (5,735,981) (7,118,037) (7,860,149)
----------- ----------- -----------
Total stockholders' equity 3,923,608 2,538,272 1,796,160
TOTAL $ 5,630,902 $ 3,805,481 $ 3,076,976
=========== =========== ===========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE> 5
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND SIX-MONTHS ENDED DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS ENDED FOR THE SIX-MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES (Note 1) $2,225,468 $2,621,221 $5,517,560 $4,677,971
COST OF PRODUCTS SOLD (Note 1) 311,012 433,427 691,571 738,882
PROVISION FOR OBSOLETE
INVENTORY (Note 1) 4,500 10,500 9,000 17,500
AMORTIZATION OF DEFERRED
SOFTWARE DEVELOPMENT
COSTS (Note 1) 36,000 36,000 72,000 72,000
LICENSING FEES (Note 1) 253,185 460,826 892,508 793,900
---------- ---------- ---------- ----------
GROSS PROFIT 1,620,771 1,680,468 3,852,481 3,055,689
RESEARCH AND DEVELOPMENT 93,312 142,461 195,983 274,768
SELLING, GENERAL AND
ADMINISTRATIVE (Notes 1, 3) 1,177,847 1,146,711 2,318,084 2,291,801
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 349,612 391,296 1,338,414 489,120
OTHER INCOME 27,438 6,981 43,642 14,941
---------- ---------- ---------- ----------
NET INCOME $ 377,050 $ 398,277 $1,382,056 $ 504,061
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS
PER COMMON SHARE (Note 5) $ 0.03 $ 0.03 $ 0.11 $ 0.04
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE> 6
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX-MONTHS ENDED DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------
COMMON TOTAL
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 504,061 504,061
---------- -------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1997 $8,982,842 $675,757 $(2,290) $(7,860,149) $1,796,160
========== ======== ======= =========== ==========
BALANCE AT JUNE 30, 1998 $8,982,842 $675,757 $(2,290) $(7,118,037) $2,538,272
STOCK OPTIONS EXERCISED 3,280 3,280
NET INCOME 1,382,056 1,382,056
---------- -------- ------- ----------- ----------
BALANCE AT DECEMBER 31, 1998 $8,986,122 $675,757 $(2,290) $(5,735,981) $3,923,608
========== ======== ======= =========== ==========
</TABLE>
See notes to financial statements.
- 4 -
<PAGE> 7
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX-MONTHS ENDED DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,382,056 $ 504,061
----------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 48,790 93,000
Amortization of software development costs 72,000 72,000
Provision for obsolete inventory 9,000 17,500
Provision for doubtful accounts 64,071 18,797
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 997,855 (306,983)
Decrease in inventory 20,953 3,227
Decrease in prepaid expenses 7,565 13,918
Increase (decrease) in accounts payable 275,358 (6,734)
Increase in accrued expenses 40,015 53,844
Increase in deferred maintenance revenue 124,712 154,399
----------- ---------
Total adjustments 1,660,319 112,968
----------- ---------
Net cash provided by operating activities 3,042,375 617,029
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (2,401,730) (251,215)
Purchase of fixed assets (30,860) (15,019)
Expenditures for software development costs (329,034) (86,600)
----------- ---------
Net cash used in investing activities (2,761,624) (352,834)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,280
Payment on notes payable (30,000)
----------- ---------
Net cash provided by (used in) financing activities 3,280 (30,000)
----------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 284,031 234,195
CASH AND CASH EQUIVALENTS:
Beginning of period 913,699 440,500
----------- ---------
End of period $ 1,197,730 $ 674,695
=========== =========
</TABLE>
See notes to financial statements
- 5 -
<PAGE> 8
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND AS OF DECEMBER 31, 1998 AND 1997 AND FOR THE THREE-MONTH
AND SIX-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND
SIX-MONTHS ENDED DECEMBER 31, 1998 AND 1997 IS UNAUDITED)
- --------------------------------------------------------------------------------
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.
BASIS OF PRESENTATION - The financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X 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. The information disclosed in the notes to the
financial statements included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1998 has not changed materially unless
otherwise disclosed herein. Financial information as of June 30, 1998
included in these financial statements has been derived from the audited
financial statements included in that report. In management's opinion all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the interim periods have been made.
Results of operations are not necessarily indicative of the results that
may be expected for future interim periods or for the full year.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 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.
- 6 -
<PAGE> 9
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
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:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1998 1997
<S> <C> <C> <C>
Literature and other documentation $ 18,650 $ 27,107 $ 43,526
Computer hardware 894,586 933,500 950,596
Allowance for obsolete inventory (855,717) (873,135) (913,434)
-------- -------- --------
Total inventory $ 57,519 $ 87,472 $ 80,688
======== ======== ========
</TABLE>
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the telephone industry. The Company had sales to major distributors, as
follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE-MONTHS SALES FOR THE SIX-MONTHS
ENDED DEC 31, ENDED DEC 31,
1998 1997 1998 1997
---------------- ---------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributor A $1,277,103 57% $1,409,452 54% $3,594,144 65% $2,510,879 54%
Distributor B 234,010 11% 479,765 9% 459,253 10%
---------- -- ---------- -- ---------- -- ---------- --
Total $1,511,113 68% $1,409,452 54% $4,073,909 74% $2,970,132 64%
========== == ========== == ========== == ========== ==
</TABLE>
The Company had gross accounts receivable from major distributors, each of
which was in excess of 10% of the Company's total accounts receivable, as
follows:
<TABLE>
<CAPTION>
PERCENT OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
<S> <C> <C>
December 31, 1998 2 65%
June 30, 1998 1 86%
December 31, 1997 2 73%
</TABLE>
- 7 -
<PAGE> 10
INTERNATIONAL SALES - The Company had international sales as follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE-MONTHS SALES FOR THE SIX-MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
---------------- ---------------- -------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada $16,008 1% $27,565 1% $31,363 1% $ 83,294 2%
Other 1,519 14,040 1% 1,519 36,143 1%
------- -- ------- -- ------- -- -------- --
Total $17,527 1% $41,605 2% $32,882 1% $119,437 3%
======= == ======= == ======= == ======== ==
</TABLE>
SOFTWARE DEVELOPMENT COSTS - Costs incurred internally for creation of the
computer software product are charged to research and development expense
when incurred until technological feasibility has been established for the
product. Thereafter, until general release, all software production costs
are capitalized and subsequently reported at the lower of amortized cost
or net realizable value. The capitalized costs are amortized on a
straight-line basis over the estimated economic life of the product.
Costs capitalized were $252,691 and $40,744 and related amortization was
$36,000 for the three-months ended December 31, 1998 and 1997,
respectively. Costs capitalized were $329,034 and $86,600 and related
amortization was $72,000 for the six-months ended December 31, 1998 and
1997, respectively. The Company periodically evaluates the capitalized
cost relative to potential sales and accelerates the write-off when
appropriate.
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. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement, which is effective
for the 1999 fiscal year, expands or modifies 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.
The Company adopted FASB Statement No. 128, "Earnings Per Share," during
the quarter ended December 31, 1997. Earnings per share of prior periods
have been restated (see Note 5). 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.
- 8 -
<PAGE> 11
RECLASSIFICATION - Certain fiscal year 1998 amounts have been reclassified
in order to conform to fiscal year 1999 presentation.
2. 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:
<TABLE>
<CAPTION>
NET
AMORTIZED UNREALIZED
DESCRIPTION COST MARKET GAIN (LOSS)
<S> <C> <C> <C>
December 31, 1998 - Federal Agency Notes $3,318,562 $3,318,155 $ (407)
========== ========== ======
June 30, 1998 - Federal Agency Notes $ 916,832 $ 915,957 $ (875)
========== ========== ======
December 31, 1997 - US Treasury Bills/Federal Notes $ 614,310 $ 616,374 $2,064
========== ========== ======
</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.
The annual minimum rent to be paid under the operating lease agreement for
the facility in Norwood, Ohio is as follows:
<TABLE>
<CAPTION>
Period Ending December 31:
<S> <C>
1999 $205,000
2000 217,500
2001 220,000
2002 73,332
</TABLE>
Rent expense for the leased office space was $73,277 in each of the
three-month periods ended December 31, 1998 and 1997. Rent expense for the
leased office space was $146,553 in each of the six-month periods ended
December 31, 1998 and 1997.
4. NOTE PAYABLE
The Company had a Term Note Payable - Bank bearing interest at the prime
lending rate (8.25%) which was paid in full, principal and interest, on
December 19, 1997.
- 9 -
<PAGE> 12
5. CAPITAL STOCK AND INCOME PER SHARE
The following schedule is a summary of the Company's shares of capital
stock.
<TABLE>
<CAPTION>
COMMON IN
AUTHORIZED ISSUED OUTSTANDING TREASURY
<S> <C> <C> <C> <C>
Balance at December 31, 1998 15,000,000 12,293,063 12,291,063 2,000
========== ========== ========== =====
Balance at June 30, 1998 15,000,000 12,281,751 12,279,751 2,000
========== ========== ========== =====
Balance at December 31, 1997 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.
In accordance with FASB No. 128 "Earning Per Share," the Company's basic and
diluted earning per share were determined as follows:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED THREE-MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 377,050 12,291,063 $0.03 $398,277 12,279,751 $0.03
EFFECT OF DILUTIVE
SECURITIES
Stock options 318,650 342,005
---------- ---------- ----- -------- ---------- -----
DILUTED EPS
Income available to
common stockholders
and assumed conversions $ 377,050 12,609,713 $0.03 $398,277 12,621,756 $0.03
========== ========== ===== ======== ========== =====
<CAPTION>
SIX-MONTHS ENDED SIX-MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------ -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $1,382,056 12,291,063 $0.11 $504,061 12,279,751 $0.04
EFFECT OF DILUTIVE
SECURITIES
Stock options 233,466 298,581
---------- ---------- ----- -------- ---------- -----
DILUTED EPS
Income available to
common stockholders
and assumed conversions $1,382,056 12,524,529 $0.11 $504,061 12,578,332 $0.04
========== ========== ===== ======== ========== =====
</TABLE>
- 10 -
<PAGE> 13
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
four-year period. The February 1994 options were granted at a price below
fair market value at the date of grant and were subsequently adjusted to
market. The 1994 options granted became exercisable equally over a
two-year period. All options expire at the end of ten years from the date
of grant.
The Company has adopted the disclosure only provision of SFAS No. 123 and
applies APB Opinion No. 25 in accounting for its stock options. Proforma
disclosure reflecting the financial impact of compensation cost for stock
option grants made in fiscal years 1998 and 1997, determined using the
fair value method consistent with SFAS No. 123, were presented in the
footnotes to the 1998 annual report.
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.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1998 1998 1997
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue $ 192,890 $ 150,488 $ 112,446
Inventory reserve 290,944 296,866 309,996
Accrued compensation 8,197 8,197 8,197
Reserves not currently deductible 31,439 9,655 19,176
Accrued rent 24,532 26,554 26,834
----------- ----------- -----------
Total 548,002 491,760 476,649
Less valuation allowance (548,002) (491,760) (476,649)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 1,541,087 $ 2,027,953 $ 2,071,836
Research and development credits 190,025 178,925 167,825
----------- ----------- -----------
Total 1,731,112 2,206,878 2,239,661
Non-current deferred tax liability:
Deferred software development costs (129,931) (76,540) (126,796)
----------- ----------- -----------
Net non-current deferred tax asset 1,601,181 2,130,338 2,112,865
Less valuation allowance (1,601,181) (2,130,338) (2,112,865)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
</TABLE>
- 11 -
<PAGE> 14
The provision for income taxes for the three-months and six-months ended
December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS FOR THE SIX-MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Current provision $ -- $ -- $ -- $ --
Deferred provision (benefit) 125,385 (198,015) 472,915 (165,988)
--------- --------- --------- ---------
Total 125,385 (198,015) 472,915 (165,988)
(Decrease) increase in
the valuation allowance (125,385) 198,015 (472,915) 165,988
--------- --------- --------- ---------
Income tax expense $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $4,500,000 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 December 31, 1998,
for U.S. Federal tax purposes, the Company has research and development
credit carryforwards available to offset future income taxes of
approximately $190,000 which will begin to expire in 2002.
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 periods presented, 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 $11,417 and $10,306 for the six-month
periods ended December 31, 1998 and 1997, respectively. The difference
does not have a material effect on the earnings per share calculation for
either period.
* * * * * *
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,197,730
<SECURITIES> 3,318,562
<RECEIVABLES> 553,600
<ALLOWANCES> 92,468
<INVENTORY> 57,519
<CURRENT-ASSETS> 5,055,828
<PP&E> 845,517
<DEPRECIATION> 752,594
<TOTAL-ASSETS> 5,630,902
<CURRENT-LIABILITIES> 1,707,294
<BONDS> 0
0
0
<COMMON> 8,986,122
<OTHER-SE> (5,062,514)
<TOTAL-LIABILITY-AND-EQUITY> 5,630,902
<SALES> 5,517,560
<TOTAL-REVENUES> 5,517,560
<CGS> 700,571
<TOTAL-COSTS> 1,665,079
<OTHER-EXPENSES> 2,514,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,382,056
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,382,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,382,056
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
