<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, 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: 12,310,016 Shares of Common
Stock as of December 31, 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 DECEMBER 31, 1999 COMPARED TO THE THREE
MONTHS ENDED DECEMBER 31, 1998
Sales for the three months ended December 31, 1999 were $3,835,000
compared to $2,225,000 for the same period last year. The $1,610,000 or 72%,
increase in sales is due to a 96% increase in ACD revenue and a 65% increase in
services revenue, offset by a 24% decrease in other CTI software revenue.
Gross profit of $2,719,000 was $1,098,000, or 68%, higher than the
corresponding period of last year. This increase in gross profit is a direct
result of the increase in sales volume. Gross profit as a percentage of sales
was 71% or 2% lower than that experienced during the same period of the prior
year.
Research and development costs of $158,000 were $65,000, or 69%, higher
than the comparable prior year period. Selling, general and administrative
expenses of $1,531,000 were $353,000, or 30%, higher than the comparable prior
year period.
The Company realized income from operations of $1,030,000, or 27%, for
the three months ended December 31, 1999 compared to income from operations of
$350,000, or 16%, reported for the same period last year.
Other income was $84,000 as compared to $27,000 for the comparable
prior year period.
The income tax provision of $287,000 for the three months ended
December 31, 1999 as compared to $0 for the comparable prior year period is due
to taxable income exceeding net operating loss carryforwards available for
federal tax purposes.
2
<PAGE> 3
The Company realized Net Income of $828,000 for the three months ended
December 31, 1999 compared to Net Income of $377,000 reported for the same
period last year. Earnings Per Share, basic and diluted, were $0.07 and $0.06
respectively, versus a $0.03 Per Share, basic and diluted, reported for the
comparable prior year period.
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE SIX MONTHS
ENDED DECEMBER 31, 1998
Sales for the six months ended December 31, 1999 were $6,854,000
compared to $5,518,000 for the same period last year. The $1,336,000 or 24%,
increase in sales is due to a 28% increase in ACD revenue and a 39% increase in
services revenue, offset by an 18% decrease in other CTI software revenue.
Gross profit of $4,923,000 was $1,071,000, or 28%, higher than the
corresponding period of last year. This increase in gross profit is a direct
result of the increase in sales volume. Gross profit as a percentage of sales
was 72% or 2% higher than that experienced during the same period of the prior
year.
Research and development costs of $277,000 were $81,000, or 41%, higher
than the comparable prior year period. Selling, general and administrative
expenses of $2,780,000 were $462,000, or 20%, higher than the comparable prior
year period.
The Company realized income from operations of $1,867,000, or 27%, for
the six months ended December 31, 1999 compared to income from operations of
$1,338,000, or 24%, reported for the same period last year.
Other income was $126,000 as compared to $44,000 for the comparable
prior year period.
The income tax provision of $465,000 for the six months ended December
31, 1999 as compared to $0 for the comparable prior year period is due to
taxable income exceeding net operating loss carryforwards available for federal
tax purposes.
The Company realized Net Income of $1,528,000 for the six months ended
December 31, 1999 compared to Net Income of $1,382,000 reported for the same
period last year. Earnings Per Share, basic and diluted, were $0.12 versus a
$0.11 Per Share reported for the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital increased to $7.3 million as compared to $3.3 million
for the corresponding period of last year. The increase of $4.0 million is
primarily due to increases in cash and marketable securities of $3.5 million,
accounts receivable of $0.6 million and deferred income taxes of $0.4 million,
which were offset by increases in deferred maintenance revenue of $0.5 million
and accrued wages and compensation of $0.2 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.
3
<PAGE> 4
As of December 31, 1999, Cintech held cash and marketable securities
totaling approximately $8.1 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 not experienced and does not anticipate experiencing
any significant Year 2000 problems related to its internal operating systems.
The costs for Year 2000 problems, which was less than $20,000, was funded
through operating cash flows of prior periods. The Company believes that no
significant future costs will be incurred to address the Year 2000 issue.
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 has not
experienced and does not anticipate experiencing any significant Year 2000
problems with its products. Additional information regarding the Year 2000
readiness of the Company's products or services is available through the
Company's website: www.cintech-cti.com.
In addition, the Company has not experienced and does not anticipate
experiencing any significant Year 2000 problems related to its significant
suppliers and customers.
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: February 14, 2000
---------------------------------
Diane M. Kamionka
President and Chief Executive Officer
By: /s/ Michael E. Freese Date: February 14, 2000
----------------------------------
Michael E. Freese
Director of Finance and Administration
6
<PAGE> 7
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, 1999 and 1998
and the related condensed statements of income, 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, 1999, and the related statement of income, 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
January 28, 2000
<PAGE> 8
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999, JUNE 30, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
ASSETS 1999 June 30, 1998
(UNAUDITED) 1999 (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,317,733 $ 1,500,081 $ 1,197,730
Marketable securities (Note 2) 6,733,299 4,864,847 3,318,562
Accounts receivable, trade - (Net of
allowance of $86,086, $50,601 and
$92,468 at December 31, 1999, June 30, 1999,
and December 31, 1998, respectively) (Note 1) 1,024,001 1,022,153 461,132
Inventory (Note 1) 42,872 25,781 57,519
Prepaid expenses 30,518 30,172 20,885
Refundable income taxes (Note 6) 43,284
Deferred income taxes (Note 6) 420,829 298,960
----------- ----------- -----------
Total current assets 9,612,536 7,741,994 5,055,828
----------- ----------- -----------
FIXED ASSETS (Note 1):
Equipment 886,279 757,190 698,925
Furniture and fixtures 151,433 151,433 146,592
----------- ----------- -----------
Total 1,037,712 908,623 845,517
Less accumulated depreciation (864,988) (786,988) (752,594)
----------- ----------- -----------
Total fixed assets - net 172,724 121,635 92,923
----------- ----------- -----------
SOFTWARE DEVELOPMENT COSTS-Net (Note 1) 763,341 578,156 482,151
DEFERRED INCOME TAXES (Note 6) 274,996
----------- ----------- -----------
Total other assets 763,341 853,152 482,151
----------- ----------- -----------
TOTAL $ 10,548,601 $ 8,716,781 $ 5,630,902
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999, JUNE 30, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
LIABILITIES AND 1999 June 30, 1998
STOCKHOLDERS' EQUITY (UNAUDITED) 1999 (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 268,518 $ 270,434 $ 476,650
Accrued liabilities:
Accrued wages and compensation 580,602 755,715 362,210
Accrued income taxes 58,340
Warranty reserve 137,240 119,078 108,695
Other 164,716 182,610 192,416
Deferred maintenance revenue (Note 1) 1,116,828 728,678 567,323
---------- ---------- ----------
Total current liabilities 2,267,904 2,114,855 1,707,294
---------- ---------- ----------
DEFERRED INCOME TAXES (Note 6) 145,490
---------- ---------- ----------
STOCKHOLDERS' EQUITY (Notes 1, 4, 5):
Common stock 8,999,210 8,993,777 8,986,122
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (1,537,470) (3,065,318) (5,735,981)
---------- ---------- ----------
Total stockholders' equity 8,135,207 6,601,926 3,923,608
---------- ---------- ----------
TOTAL $ 10,548,601 $ 8,716,781 $ 5,630,902
============ =========== ===========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
-2-
<PAGE> 9
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX-MONTHS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS ENDED FOR THE SIX-MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ---------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES (Note 1) $3,834,703 $2,225,468 $6,853,651 $5,517,560
COST OF PRODUCTS SOLD (Note 1) 372,164 315,512 672,247 700,571
AMORTIZATION OF DEFERRED
SOFTWARE DEVELOPMENT
COSTS (Note 1) 60,000 36,000 106,249 72,000
LICENSING FEES (Note 1) 683,452 253,185 1,152,094 892,508
---------- ---------- ---------- ----------
GROSS PROFIT 2,719,087 1,620,771 4,923,061 3,852,481
RESEARCH AND DEVELOPMENT 157,840 93,312 276,639 195,983
SELLING, GENERAL AND
ADMINISTRATIVE (Notes 1, 3) 1,530,837 1,177,847 2,779,865 2,318,084
---------- ----------- ---------- ----------
INCOME FROM OPERATIONS 1,030,410 349,612 1,866,557 1,338,414
OTHER INCOME 83,870 27,438 126,039 43,642
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAX
PROVISION 1,114,280 377,050 1,992,596 1,382,056
INCOME TAX PROVISION (Note 6) 286,547 464,748
---------- ---------- ----------- ----------
NET INCOME $ 827,733 $ 377,050 $1,527,848 $1,382,056
========== ========== ========== ==========
BASIC EARNINGS
PER COMMON SHARE (Note 4) $ 0.07 $ 0.03 $ 0.12 $ 0.11
========== ========== ========== ==========
DILUTED EARNINGS
PER COMMON SHARE (Note 4) $ 0.06 $ 0.03 $ 0.12 $ 0.11
========== ========== ========== ==========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
-3-
<PAGE> 10
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX-MONTHS ENDED DECEMBER 31, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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
STOCK OPTIONS EXERCISED (11,312 shares) 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
=========== ========= ========= ============= ==========
BALANCE AT JUNE 30, 1999 $8,993,777 $675,757 $(2,290) $(3,065,318) $6,601,926
STOCK OPTIONS EXERCISED (8,831 shares) 5,433 5,433
NET INCOME 1,527,848 1,527,848
----------- --------- --------- ----------- ----------
BALANCE AT DECEMBER 31, 1999 $8,999,210 $675,757 $(2,290) $(1,537,470) $8,135,207
=========== ========= ========= ============= ==========
</TABLE>
See notes to condensed financial statements and independent accountants' report.
-4-
<PAGE> 11
<TABLE>
<CAPTION>
CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX-MONTHS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,527,848 $ 1,382,056
------------ -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 78,000 48,790
Amortization of software development costs 106,249 72,000
Deferred income taxes 298,617
Provision for doubtful accounts 35,485 64,071
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (37,333) 997,855
(Increase) decrease in inventory (17,091) 29,953
(Increase) decrease in other assets (43,630) 7,565
(Decrease) increase in accounts payable (1,916) 275,358
(Decrease) increase in accrued expenses (233,185) 40,015
Increase in deferred maintenance revenue 388,150 124,712
------------ -----------
Total adjustments 573,346 1,660,319
------------ -----------
Net cash provided by operating activities 2,101,194 3,042,375
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (1,868,452) (2,401,730)
Purchase of fixed assets (129,089) (30,860)
Expenditures for software development costs (291,434) (329,034)
------------ -----------
Net cash used in investing activities (2,288,975) (2,761,624)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 5,433 3,280
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (182,348) 284,031
CASH AND CASH EQUIVALENTS:
Beginning of period 1,500,081 913,699
------------ -----------
End of period $ 1,317,733 $ 1,197,730
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid $ 267,755
============
</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 DECEMBER 31, 1999 AND 1998 AND FOR THE THREE-MONTH
AND SIX-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND
SIX-MONTHS ENDED DECEMBER 31, 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-size entities, such as departments, branch
offices and workgroups, within global enterprises as well as small- to
mid-size 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
principles 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 condensed 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.
-6-
<PAGE> 13
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,
1999 1999 1998
<S> <C> <C> <C>
Literature and other documentation $ 29,175 $ 14,309 $ 18,650
Computer hardware 27,378 21,621 70,308
Allowance for obsolete inventory (13,681) (10,149) (31,439)
-------- -------- --------
Total inventory $ 42,872 $ 25,781 $ 57,519
======== ======== ========
</TABLE>
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the telephony industry. The Company had sales to major distributors, as
follows:
<TABLE>
<CAPTION>
SALES FOR THE THREE-MONTHS ENDED DEC 31, SALES FOR THE SIX-MONTHS ENDED DEC 31,
1999 1998 1999 1998
-------------------- -------------------- ------------------- --------------------
Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributor A $2,689,022 70 % $ 1,277,103 57 % $4,732,682 69 % $3,594,144 65 %
Distributor B 483,807 13 % 234,010 11 % 840,332 12 % 479,765 9 %
---------- ---- ----------- ---- ---------- ---- ---------- ----
Total $3,172,829 83 % $1,511,113 68 % $5,573,014 81 % $4,073,909 74 %
========== ==== =========== ==== ========== ==== ========== ====
</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:
PERCENT OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
December 31, 1999 2 71 %
June 30, 1999 2 83 %
December 31, 1998 2 65 %
-7-
<PAGE> 14
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,
------------------------------------------------- ---------------------------------------------------
1999 1998 1999 1998
------------------------ ----------------------- ------------------------ -------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada $ 44,083 1 % $ 16,008 1 % $ 90,273 1 % $ 31,363 1 %
Other 1,519 % % 1,519 %
-------- --- -------- --- -------- ---- -------- ----
Total $ 44,083 1 % $ 17,527 1 % $ 90,273 1 % $ 32,882 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 $164,185 and $252,691 and related amortization was
$60,000 and $36,000 for the three-months ended December 31, 1999 and 1998,
respectively. Costs capitalized were $291,434 and $329,034 and related
amortization was $106,249 and $72,000 for the six-months ended December
31, 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.
-8-
<PAGE> 15
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>
December 31, 1999 - Federal Agency Notes $ 6,733,299 $ 6,730,870 $(2,429)
=========== =========== ========
June 30, 1999 - Federal Agency Notes $ 4,864,847 $ 4,858,395 $(6,452)
=========== =========== ========
December 31, 1998 - Federal Agency Notes $ 3,318,562 $ 3,318,155 $ (407)
=========== =========== =======
</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>
<S> <C>
Period Ending December 31:
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, 1999 and 1998. Rent expense for the
leased office space was $146,553 in each of the six-month periods ended
December 31, 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>
COMMON IN
AUTHORIZED ISSUED OUTSTANDING TREASURY
<S> <C> <C> <C> <C>
Balance at December 31, 1999 15,000,000 12,312,016 12,310,016 2,000
=========== =========== =========== =====
Balance at June 30, 1999 15,000,000 12,303,185 12,301,185 2,000
=========== =========== =========== =====
Balance at December 31, 1998 15,000,000 12,293,063 12,291,063 2,000
=========== =========== =========== =====
</TABLE>
-9-
<PAGE> 16
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
DECEMBER 31, 1999 DECEMBER 31, 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 $ 827,733 12,305,712 $ 0.07 $ 377,050 12,291,063 $ 0.03
EFFECT OF DILUTIVE SECURITIES
Stock options 708,966 318,650
---------- ---------- ------- --------- ---------- ------
DILUTED EPS
Income available to
common stockholders
and assumed conversions $ 827,733 13,014,678 $ 0.06 $ 377,050 12,609,713 $ 0.03
========== =========== ======= ========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTHS ENDED SIX-MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 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 $ 1,527,848 12,304,303 $ 0.12 $ 1,382,056 12,291,063 $ 0.11
EFFECT OF DILUTIVE SECURITIES
Stock options 595,034 233,466
---------- ---------- ------- --------- ---------- ------
DILUTED EPS
Income available to
common stockholders
and assumed conversions $ 1,527,848 12,899,337 $ 0.12 $ 1,382,056 12,524,529 $ 0.11
============ =========== ======= ============ =========== ======
</TABLE>
Stock options representing 150,000 shares and 369,015 shares for the
three-months ended December 31, 1998 and the six-months ended December
31, 1998, respectively, 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. In 1999, the plan was amended and restated to
include in one document all previous amendments and other non-material
changes designed to improve the operation of the plan and to reserve an
additional 1,000,000 shares for issuance under the plan. 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
-10-
<PAGE> 17
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.
Deferred taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1999 1998
<S> <C> <C> <C>
Current deferred tax asset - Deferred revenue
and other $ 420,829 $ 298,960 $ 548,002
Less valuation allowance (548,002)
--------- ---------- ----------
Net $ 420,829 $ 298,960 $ -
========= ========== ==========
Non-current deferred tax asset - Carryforwards
and credits $ 458,436 $1,080,683 $1,731,112
Non-current deferred tax liability - Deferred
software development costs and other (388,496) (196,573) (129,931)
--------- ---------- ----------
Net non-current deferred tax asset 69,940 884,110 1,601,181
Less valuation allowance (215,430) (609,114) (1,601,181)
--------- ---------- ----------
Net $(145,490) $ 274,996 $ -
========= ========== ==========
</TABLE>
-11-
<PAGE> 18
The provision for income taxes for the three-months and six-months ended
December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS FOR THE SIX-MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------------- --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Current provision $ 130,216 $ - $ 166,131 $ -
Deferred provision 404,028 125,385 692,301 472,915
--------- -------- --------- ---------
Total 534,244 125,385 858,432 472,915
Decrease in the valuation allowance (247,697) (125,385) (393,684) (472,915)
--------- -------- --------- ---------
Income tax expense $ 286,547 $ - $ 464,748 $ -
========= ======== ========= =========
</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 December 31, 1999, the Company has state net operating loss
carryforwards, research and development credit carryforwards and
alternative minimum tax credits available to offset future income taxes.
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 December 31, 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
$23,839 and $11,417 for the periods ended December 31, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,317,733
<SECURITIES> 6,733,299
<RECEIVABLES> 1,110,087
<ALLOWANCES> 86,086
<INVENTORY> 42,872
<CURRENT-ASSETS> 9,612,536
<PP&E> 1,037,712
<DEPRECIATION> 864,988
<TOTAL-ASSETS> 10,548,601
<CURRENT-LIABILITIES> 2,267,904
<BONDS> 0
0
0
<COMMON> 8,999,210
<OTHER-SE> (864,003)
<TOTAL-LIABILITY-AND-EQUITY> 10,548,601
<SALES> 6,853,651
<TOTAL-REVENUES> 6,853,651
<CGS> 672,247
<TOTAL-COSTS> 1,930,590
<OTHER-EXPENSES> 3,056,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,992,596
<INCOME-TAX> 464,748
<INCOME-CONTINUING> 1,527,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,527,848
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
