<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 September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _______________to________________
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
-------------------------------------
(Exact name of small business issuer as specified in its charter)
OHIO 31-1200684
-----------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2100 Sherman Avenue, Cincinnati, Ohio 45212
-------------------------------------------
(Address of principal executive offices)
(513) 731-6000
--------------
(Issuer's telephone number)
N/A
--------------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
<PAGE> 2
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 12,303,560 SHARES OF COMMON
STOCK AS OF SEPTEMBER 30, 1999.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
The condensed financial statements attached to the end of this
quarterly report are filed as part of this quarterly report. The financial
statements include all adjustments, which in the opinion of management are
necessary in order to make the financial statements not misleading.
Item 2. Management's Discussions and Analysis or Plan of Operation.
-----------------------------------------------------------
The following selected financial information set forth below has been
derived from the unaudited condensed 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 THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
Sales for the three months ended September 30, 1999 were $3,019,000
compared to $3,292,000 for the same period last year. The $273,000 or 8%,
decrease in sales is due to a 13% decrease in ACD revenue and a 12% decrease in
revenue from other CTI products, offset by a 17% increase in services revenue.
Gross profit of $2,204,000 was $28,000, or 1%, lower than the
corresponding period of last year. This decrease in gross profit is a direct
result of the decrease in sales volume. Gross profit as a percentage of sales
was 73% or 5% greater than that experienced during the same period of the prior
year.
Research and development costs of $119,000 were $16,000, or 16%, higher
than the comparable prior year period. Selling, general and administrative
expenses of $1,249,000 were $109,000, or 10%, higher than the comparable prior
year period.
The Company realized income from operations of $836,000, or 28%, for
the three months ended September 30, 1999 compared to income from operations of
$989,000, or 30%, reported for the same period last year.
Other income was $42,000 as compared to $16,000 for the comparable
prior year period.
2
<PAGE> 3
The income tax provision of $178,000 for the three months ended
September 30, 1999 as compared to $0 for the comparable prior year period is due
to the utilization of net operating loss carryforwards, which is offset by an
additional reduction in the valuation allowance.
The Company realized Net Income of $700,000 for the three months ended
September 30, 1999 compared to Net Income of $1,005,000 reported for the same
period last year. Earnings Per Share, basic and diluted, were $0.06 versus a
$0.08 Per Share reported for the comparable prior year period.
Liquidity and Capital Resources
- -------------------------------
Working Capital increased to $6.4 million as compared to $3.2million
for the corresponding period of last year. The increase of $3.2 million is
primarily due to an increase in cash and marketable securities of $3.7 million
offset by a decrease in accounts receivable of $0.5 million and an increase in
deferred maintenance revenue of $0.3 million. The increases in cash and
marketable securities reflect the increase in sales volume and profitability
experienced by the Company in fiscal 1999 and continued profitability to date in
fiscal 2000.
As of September 30, 1999, Cintech held cash and marketable securities
totaling approximately $6.8 million and had no outstanding long-term debt
obligations.
The Company's plan of operation is to continue distributing its contact
center solutions and development of services revenue. The Company has no
material commitments for capital expenditures. The Company feels that there are
no significant elements of income or loss that does not arise from the Company's
continuing operations.
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 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
3
<PAGE> 4
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.
4
<PAGE> 5
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits are required by Item 601 of Regulation S-B:
Page
----
<S> <C>
EXHIBIT NO. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation,
or Succession..................................................................... N/A
EXHIBIT NO. 3 - (I) Articles of Incorporation, (ii) By-laws ...................................... *
EXHIBIT NO. 4 - Instruments Defining
Rights of Security Holders........................................................ N/A
EXHIBIT NO. 10 - Material Contracts................................................................ *, **
EXHIBIT NO. 11 - Statement re: Computation of Per Share Earnings .................................. N/A
EXHIBIT NO. 15 - Letter on Unaudited Interim Financial Information................................ N/A
EXHIBIT NO. 18 - Letter on Change in Accounting Principles......................................... N/A
EXHIBIT NO. 19 - Reports Furnished to Security-Holders............................................. N/A
EXHIBIT NO. 22 - Published Report Regarding Matters Submitted to Vote.............................. N/A
EXHIBIT NO. 23 - Consent of Experts and Counsel.................................................... N/A
EXHIBIT NO. 24 - Power of Attorney................................................................. N/A
EXHIBIT NO. 99 - Additional Exhibits............................................................... N/A
</TABLE>
* Previously provided in original filing on Form 10-SB.
** Previously provided in Amendment No. 2 to Form 10-SB.
5
<PAGE> 6
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: November 15, 1999
-------------------------------------
Diane M. Kamionka
President and Chief Executive Officer
By: /s/ Michael E. Freese Date: November 15, 1999
-------------------------------------
Michael E. Freese
Director of Finance and Administration
6
<PAGE> 7
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders of
Cintech Tele-Management Systems, Inc.
We have reviewed the accompanying condensed balance sheets of Cintech
Tele-Management Systems, Inc. (the "Company") as of September 30, 1999 and 1998
and the related condensed statements of income, stockholders' equity and cash
flows for the three 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, the balance sheet of the Company as of June 30,
1999, 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 20, 1999, 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, 1999 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
October 22, 1999
<PAGE> 8
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999, JUNE 30, 1999 AND SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1999 JUNE 30, 1998
(UNAUDITED) 1999 (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,069,487 $ 1,500,081 $ 1,701,860
Marketable securities (Note 2) 5,735,168 4,864,847 1,384,260
Accounts receivable, trade - (Net of
allowance of $35,748, $50,601 and
$34,211 at September 30, 1999, June 30, 1999,
and September 30, 1998, respectively) (Note 1) 1,057,688 1,022,153 1,543,144
Inventory (Note 1) 43,899 25,781 69,301
Prepaid expenses 21,756 30,172 37,949
Refundable income taxes (Note 6) 72,000
Deferred income taxes (Note 6) 328,376 298,960
----------- ----------- -----------
Total current assets 8,328,374 7,741,994 4,736,514
----------- ----------- -----------
FIXED ASSETS (Note 1):
Equipment 824,321 757,190 693,064
Furniture and fixtures 151,433 151,433 146,592
----------- ----------- -----------
Total 975,754 908,623 839,656
Less accumulated depreciation (825,988) (786,988) (729,304)
----------- ----------- -----------
Total fixed assets - net 149,766 121,635 110,352
----------- ----------- -----------
DEFERRED INCOME TAXES (Note 6) 103,294 274,996
SOFTWARE DEVELOPMENT COSTS - Net (Note 1) 659,156 578,156 265,460
----------- ----------- -----------
Total other assets 762,450 853,152 265,460
----------- ----------- -----------
TOTAL $ 9,240,590 $ 8,716,781 $ 5,112,326
=========== =========== ===========
SEPTEMBER 30, SEPTEMBER 30,
LIABILITIES AND 1999 JUNE 30, 1998
STOCKHOLDERS' EQUITY (UNAUDITED) 1999 (UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 368,998 $ 270,434 $ 400,016
Accrued liabilities:
Accrued wages and compensation 461,385 755,715 376,953
Accrued income taxes 58,340
Warranty reserve 118,756 119,078 106,106
Other 156,899 182,610 182,406
Deferred maintenance revenue (Note 1) 831,665 728,678 503,567
----------- ----------- -----------
Total current liabilities 1,937,703 2,114,855 1,569,048
----------- ----------- -----------
STOCKHOLDERS' EQUITY (Notes 1, 4, 5):
Common stock 8,994,623 8,993,777 8,982,842
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (2,365,203) (3,065,318) (6,113,031)
----------- ----------- -----------
Total stockholders' equity 7,302,887 6,601,926 3,543,278
----------- ----------- -----------
TOTAL $ 9,240,590 $ 8,716,781 $ 5,112,326
=========== =========== ===========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
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<PAGE> 9
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
NET SALES (Note 1) $3,018,948 $3,292,092
COST OF PRODUCTS SOLD (Note 1) 300,083 385,059
AMORTIZATION OF DEFERRED SOFTWARE DEVELOPMENT
COSTS (Note 1) 46,249 36,000
LICENSING FEES (Note 1) 468,642 639,323
---------- ----------
GROSS PROFIT 2,203,974 2,231,710
RESEARCH AND DEVELOPMENT 118,799 102,671
SELLING, GENERAL AND ADMINISTRATIVE (Notes 1, 3) 1,249,028 1,140,237
---------- ----------
INCOME FROM OPERATIONS 836,147 988,802
OTHER INCOME 42,169 16,204
---------- ----------
INCOME BEFORE INCOME TAX PROVISION 878,316 1,005,006
INCOME TAX PROVISION (Note 6) 178,201
---------- ----------
NET INCOME $ 700,115 $1,005,006
---------- ----------
BASIC AND DILUTED EARNINGS
PER COMMON SHARE (Note 4) $ 0.06 $ 0.08
---------- ----------
See notes to condensed financial statements and independent accountants' report.
-3-
<PAGE> 10
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON TOTAL
STOCK CONTRIBUTED TREASURY ACCUMULATED STOCKHOLDERS'
NO PAR VALUE CAPITAL STOCK DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(7,118,037) $ 2,538,272
NET INCOME 1,005,006 1,005,006
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(6,113,031) $ 3,543,278
=========== =========== =========== =========== ===========
BALANCE AT JUNE 30, 1999 $ 8,993,777 $ 675,757 $ (2,290) $(3,065,318) $ 6,601,926
STOCK OPTIONS EXERCISED (2,375 shares) 846 846
NET INCOME 700,115 700,115
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1999 $ 8,994,623 $ 675,757 $ (2,290) $(2,365,203) $ 7,302,887
=========== =========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
-4-
<PAGE> 11
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 700,115 $ 1,005,006
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 39,000 25,500
Amortization of software development costs 46,249 36,000
Deferred income taxes 142,286
Provision for doubtful accounts (14,853) 5,814
Changes in assets and liabilities:
Increase in accounts receivable (20,682) (25,900)
(Increase) decrease in inventory (18,118) 18,171
Increase in other assets (63,584) (9,499)
Increase in accounts payable 98,564 198,724
(Decrease) increase in accrued expenses (378,703) 42,159
Increase in deferred maintenance revenue 102,987 60,956
----------- -----------
Total adjustments (66,854) 351,925
----------- -----------
Net cash provided by operating activities 633,261 1,356,931
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (870,321) (467,428)
Purchase of fixed assets (67,131) (24,999)
Expenditures for software development costs (127,249) (76,343)
----------- -----------
Net cash used in investing activities (1,064,701) (568,770)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES-
Proceeds from exercise of stock options 846 -
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (430,594) 788,161
CASH AND CASH EQUIVALENTS:
Beginning of period 1,500,081 913,699
----------- -----------
End of period $ 1,069,487 $ 1,701,860
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid $ 166,255 $ -
=========== ===========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
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<PAGE> 12
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND AS OF SEPTEMBER 30, 1999 AND 1998 AND FOR THE
THREE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company develops and markets contact center
solutions for small to mid-sized entities, such as departments, branch
offices and workgroups, within global enterprises as well as small to
mid-sized businesses. In addition to the contact center solutions, the
Company also provides services, such as installation, training, project
management, consulting and maintenance support.
BASIS OF PRESENTATION - The condensed 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
priciples generally accepted in the United States of America and Canada
are described in Note 7. 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, 1999 has not changed materially unless
otherwise disclosed herein. Financial information as of June 30, 1999
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 product and service revenue when
the product is shipped and the service is provided. 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 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:
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<PAGE> 13
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:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1999 1999 1998
Literature and other documentation $ 23,479 $ 14,309 $ 22,146
Computer hardware 31,929 21,621 74,599
Allowance for obsolete inventory (11,509) (10,149) (27,444)
-------- -------- --------
Total inventory $ 43,899 $ 25,781 $ 69,301
======== ======== ========
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the telephony industry. The Company had sales to major distributors, as
follows:
SALES FOR THE THREE-MONTHS ENDED SEPT 30,
1999 1998
------------------- -------------------
AMOUNT % AMOUNT %
Distributor A $2,043,660 68 % $2,317,041 70 %
Distributor B 356,525 12 % 245,755 8 %
---------- -- ---------- --
Total $2,400,185 80 % $2,562,796 78 %
========== == ========== ==
The Company had gross accounts receivable from major distributors, each of
which was in excess of 10% of the Company's total accounts receivable, as
follows:
PERCENT OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
September 30, 1999 2 79 %
June 30, 1999 2 83 %
September 30, 1998 1 71 %
INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE THREE MONTHS
SEPTEMBER 30,
-----------------------------------------
1999 1998
------------------- -------------------
AMOUNT % AMOUNT %
Canada $ 46,190 2 % $ 15,355 0 %
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<PAGE> 14
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 $127,249 and $76,343 and related amortization was
$46,249 and $36,000 for the three-months ended September 30, 1999 and
1998, 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 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, result 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.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers all money market instruments to be cash equivalents.
RECLASSIFICATION - Certain fiscal 1999 amounts have been reclassified in
order to conform to fiscal 2000 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 GAIN (LOSS)
<S> <C> <C> <C>
September 30, 1999 - Federal Agency Notes $5,735,168 $5,730,615 $ (4,553)
========== ========== ==========
June 30, 1999 - Federal Agency Notes $4,864,847 $4,858,395 $ 6,452
========== ========== ==========
September 30, 1998 - Federal Agency Notes $1,384,260 $1,384,585 $ 325
========== ========== ==========
</TABLE>
-8-
<PAGE> 15
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:
Period Ending September 30:
2000 $213,750
2001 220,000
2002 128,331
Rent expense for the leased office space was $73,277 in each of the three
month periods ended September 30, 1999 and 1998.
4. 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 September 30, 1999 15,000,000 12,305,560 12,303,560 2,000
========== ========== ========== =====
Balance at June 30, 1999 15,000,000 12,303,185 12,301,185 2,000
========== ========== ========== =====
Balance at September 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 earning per share were determined as follows:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED THREE-MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
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 $ 700,115 12,302,893 $ 0.06 $1,005,006 12,279,751 $ 0.08
EFFECT OF DILUTIVE SECURITIES
Stock options 409,357 153,110
---------- ---------- -------- ---------- ---------- --------
DILUTED EPS
Income available to common
stockholders
and assumed conversions $ 700,115 12,712,250 $ 0.06 $1,005,006 12,432,861 $ 0.08
========== ========== ======== ========== ========== ========
</TABLE>
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<PAGE> 16
Stock options representing 267,988 shares in 1998 were not included in
computing diluted earnings per share because their effects were
antidilutive.
5. 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 became
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. Proforma
disclosure reflecting the financial impact of compensation cost for stock
option grants made in fiscal years 1999 and 1998, determined using the
fair value method consistent with SFAS No. 123, were presented in the
footnotes to the 1999 annual report.
6. 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.
-10-
<PAGE> 17
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1999 1999 1998
<S> <C> <C> <C>
Current deferred tax asset:
Deferred revenue $ 282,766 $ 247,751 $ 171,213
Inventory reserve 3,913 3,451 289,585
Accrued compensation 8,044 8,044 8,197
Reserves not currently deductible 12,154 17,204 11,632
Accrued rent 21,499 22,510 25,543
----------- ----------- -----------
Total 328,376 298,960 506,170
Less valuation allowance (506,170)
----------- ----------- -----------
Net $ 328,376 $ 298,960 $ -
=========== =========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 510,712 $ 815,977 $ 1,674,180
Research and development credits 206,675 201,125 184,425
Alternative minimum tax credit 73,147 63,581
----------- ----------- -----------
Total 790,534 1,080,683 1,858,605
Non-current deferred tax liability:
Deferred software development costs (224,113) (196,573) (90,256)
----------- ----------- -----------
Net non-current deferred tax asset 566,421 884,110 1,768,349
Less valuation allowance (463,127) (609,114) (1,768,349)
----------- ----------- -----------
Net $ 103,294 $ 274,996 $ -
=========== =========== ===========
</TABLE>
The provision for income taxes for the three-months ended September 30,
1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current provision $ 35,915 $ -
Deferred provision 288,273 347,579
--------- --------
Total 324,188 347,579
Decrease in the valuation allowance (145,987) (347,579)
--------- --------
Income tax provision $ 178,201 $ -
========= ========
</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 September 30, 1999, the Company has net operating loss carryforwards of
approximately $1,500,000 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 September 30, 1999,
for U.S. Federal tax purposes, the Company has research and development
credit carryforwards available to offset future income taxes of
approximately $207,000 which will begin to expire in 2000.
-11-
<PAGE> 18
In 2000, the valuation allowance was reduced to $463,127 based on the
present and expected future profitability of the Company.
7. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("CANADIAN GAAP AND U.S. GAAP")
These condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
During the periods ended September 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 U.S. GAAP net income in excess of Canadian GAAP of
$2,104 and $6,517 for the periods ended September 30, 1999 and 1998,
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> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,069,487
<SECURITIES> 5,735,168
<RECEIVABLES> 1,093,436
<ALLOWANCES> 35,748
<INVENTORY> 1,057,688
<CURRENT-ASSETS> 8,328,374
<PP&E> 975,754
<DEPRECIATION> 825,988
<TOTAL-ASSETS> 9,240,590
<CURRENT-LIABILITIES> 1,937,703
<BONDS> 0
0
0
<COMMON> 8,994,623
<OTHER-SE> (1,691,736)
<TOTAL-LIABILITY-AND-EQUITY> 9,240,590
<SALES> 3,018,948
<TOTAL-REVENUES> 3,018,948
<CGS> 300,083
<TOTAL-COSTS> 814,974
<OTHER-EXPENSES> 1,367,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 878,316
<INCOME-TAX> 178,201
<INCOME-CONTINUING> 700,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 700,115
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
