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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 March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
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(Exact name of small business issuer as specified in its charter)
OHIO 31-1200684
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2100 Sherman Avenue, Cincinnati, Ohio 45212
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(Address of principal executive offices)
(513) 731-6000
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(Issuer's telephone number)
N/A
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
12,301,185 shares of common stock as of March 31, 1999.
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Transitional Small Business Disclosure Format (check one): Yes No X
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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 three months ended March 31, 1999 compared to the three months
ended March 31, 1998
Sales for the three months ended March 31, 1999 were $2,979,000
compared to $2,067,000 for the same period last year. The $912,000, or 44%,
increase in sales is due to a 63% increase in ACD software and hardware revenues
combined with a 22% decrease in revenue from other CTI products and a 26%
increase in services revenue.
Gross margin of $2,055,000 was $734,000, or 56%, 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 69%,
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 $99,000 were approximately $35,000
less than the comparable prior year period. Selling, general and administrative
(S,G&A) expenses of $1,288,000 were approximately $156,000 higher than the
comparable prior year period.
The Company realized net income of $633,000 for the three months ended
March 31,1999 compared to net income of $66,000 reported for the same period
last year. Earnings per share, basic and diluted, were $0.05 versus a $0.01 per
share reported for the comparable prior year period.
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For the nine months ended March 31, 1999 compared to the nine months
ended March 31, 1998
Sales for the nine months ended March 31, 1999 were $8,496,000 compared
to $6,745,000 for the same period last year. The $1,751,000, or 26%, increase in
sales is due to a 32% increase in ACD software and hardware revenues combined
with a 1% decrease in revenue from other CTI products and a 25% increase in
services revenue.
Gross margin of $5,908,000 was $1,532,000, or 35%, 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 $295,000 were approximately $114,000
less than the comparable prior year period. Selling, general and administrative
(S,G&A) expenses of $3,606,000 were approximately $182,000 higher than the
comparable prior year period.
The Company realized net income of $2,015,000 for the nine months ended
March 31,1999 compared to net income of $570,000 reported for the same period
last year. Earnings per share, basic and diluted, were $0.16 versus a $0.05 per
share reported for the comparable prior year period.
Liquidity and Capital Resources
Working capital increased to $4.0 million as compared to $1.4 million
for the corresponding period of last year. The increase of $2.6 million is
primarily due to the increase in cash and marketable securities of $3.4 million
offset by increases in accounts payable of $231,000, deferred maintenance
revenue of $318,000 and accrued salaries and payroll taxes of $252,000. 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 March 31, 1999, Cintech held cash and marketable securities
totaling approximately $ 5.0 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
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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 second
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, which is expected to be
less than $20,000, will be funded through operating cash flows.
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 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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are required by Item 601 of Regulation S-B:
Page
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Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation,
- ------------- or Succession..................................................................... N/A
Exhibit No. 3 - (I) Articles of Incorporation, (ii) By-laws ...................................... *
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Exhibit No. 4 - Instruments Defining
- ------------- Rights of Security Holders........................................................ N/A
Exhibit No. 10 - Material Contracts.............................................................. *, **
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Exhibit No. 11 - Statement re: Computation of Per Share Earnings .................................. N/A
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Exhibit No. 15 - Letter on Unaudited Interim Financial Information................................ N/A
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Exhibit No. 18 - Letter on Change in Accounting Principles......................................... N/A
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Exhibit No. 19 - Reports Furnished to Security-Holders............................................ 7
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Exhibit No. 22 - Published Report Regarding Matters Submitted to Vote.............................. N/A
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Exhibit No. 23 - Consent of Experts and Counsel.................................................... N/A
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Exhibit No. 24 - Power of Attorney................................................................. N/A
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Exhibit No. 99 - Additional Exhibits............................................................... N/A
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(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.
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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: May 14, 1999
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Diane M. Kamionka
President and Chief Executive Officer
By: /s/ Michael E. Freese Date: May 14, 1999
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Michael E. Freese
Director of Finance and Administration
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EXHIBIT NO. 19
REPORTS FURNISHED TO SECURITY-HOLDERS
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
Condensed Financial Statements for the Three and Nine-Months Ended
March 31, 1999 and 1998 and Independent Accountants' Report
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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 March 31, 1999 and 1998 and
the related condensed statements of operations, stockholders' equity and cash
flows for the three months and nine 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.
April 21, 1999
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
MARCH 31, 1999, JUNE 30, 1998 AND MARCH 31, 1998
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MARCH 31, MARCH 31,
ASSETS 1999 JUNE 30, 1998
(UNAUDITED) 1998 (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,602,620 $ 913,699 $ 702,101
Marketable securities (Note 2) 3,417,789 916,832 909,396
Accounts receivable, trade - (Net of
allowance of $121,705, $28,397 and
$62,748 at March 31, 1999, June 30, 1998,
and March 31, 1998, respectively) (Note 1) 936,816 1,523,058 865,941
Inventory (Note 1) 48,661 87,472 76,204
Prepaid expenses 15,548 28,450 13,213
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Total current assets 6,021,434 3,469,511 2,566,855
----------- ----------- -----------
FIXED ASSETS (Note 1):
Equipment 731,969 668,065 655,623
Furniture and fixtures 151,433 146,592 146,592
----------- ----------- -----------
Total 883,402 814,657 802,215
Less accumulated depreciation (778,094) (703,804) (747,923)
----------- ----------- -----------
Total fixed assets - net 105,308 110,853 54,292
----------- ----------- -----------
Software development costs - net (Note 1) 522,552 225,117 388,311
----------- ----------- -----------
TOTAL $ 6,649,294 $ 3,805,481 $ 3,009,458
=========== =========== ===========
MARCH 31, MARCH 31,
LIABILITIES AND 1999 JUNE 30, 1998
STOCKHOLDERS' EQUITY (UNAUDITED) 1998 (UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 490,178 $ 201,292 $ 258,849
Accrued liabilities:
Accrued salaries 444,705 222,562 211,451
Accrued payroll taxes 33,031 13,660 14,325
Accrued vacation 93,603 86,782 89,907
Other 335,619 300,302 202,840
Deferred maintenance revenue (Note 1) 688,055 442,611 369,953
----------- ----------- -----------
Total current liabilities 2,085,191 1,267,209 1,147,325
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STOCKHOLDERS' EQUITY (Notes 1, 5, 6):
Common stock 8,993,777 8,982,842 8,982,842
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (5,103,141) (7,118,037) (7,794,176)
----------- ----------- -----------
Total stockholders' equity 4,564,103 2,538,272 1,862,133
----------- ----------- -----------
TOTAL $ 6,649,294 $ 3,805,481 $ 3,009,458
=========== =========== ===========
See notes to financial statements.
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS AND NINE-MONTHS ENDED MARCH 31, 1999 AND 1998
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FOR THE THREE-MONTHS ENDED For the Nine-Months Ended
MARCH 31, March 31,
-------------------------- -------------------------
1999 1998 1999 1998
NET SALES (Note 1) $2,978,853 $2,067,308 $8,496,413 $6,745,279
COST OF PRODUCTS SOLD (Note 1) 292,394 296,564 983,965 1,035,446
PROVISION FOR OBSOLETE
INVENTORY (Note 1) 4,500 10,500 13,500 28,000
AMORTIZATION OF DEFERRED
SOFTWARE DEVELOPMENT
COSTS (Note 1) 37,891 36,000 109,891 108,000
LICENSING FEES (Note 1) 588,653 403,604 1,481,161 1,197,504
---------- ---------- ---------- ----------
GROSS PROFIT 2,055,415 1,320,640 5,907,896 4,376,329
RESEARCH AND DEVELOPMENT 98,983 134,057 294,966 408,825
SELLING, GENERAL AND
ADMINISTRATIVE (Notes 1, 3) 1,288,255 1,132,700 3,606,339 3,424,423
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 668,177 53,883 2,006,591 543,081
OTHER INCOME 33,818 12,090 77,460 26,953
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX
PROVISION 701,995 65,973 2,084,051 570,034
INCOME TAX PROVISION (Note 7) 69,155 69,155
---------- ---------- ---------- ----------
NET INCOME $ 632,840 $ 65,973 $2,014,896 $ 570,034
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS
PER COMMON SHARE (Note 5) $ 0.05 $ 0.01 $ 0.16 $ 0.05
========== ========== ========== ==========
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 1999 AND 1998
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COMMON TOTAL
STOCK CONTRIBUTED TREASURY ACCUMULATED STOCKHOLDERS'
NO PAR VALUE CAPITAL STOCK DEFICIT EQUITY
BALANCE AT JUNE 30, 1997 $ 8,982,842 $ 675,757 $ (2,290) $(8,364,210) $ 1,292,099
NET INCOME 570,034 570,034
----------- -------- -------- ----------- -----------
BALANCE AT MARCH 31, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(7,794,176) $ 1,862,133
=========== ========= ======== =========== ===========
BALANCE AT JUNE 30, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(7,118,037) $ 2,538,272
STOCK OPTIONS EXERCISED 10,935 10,935
NET INCOME 2,014,896 2,014,896
----------- -------- -------- ----------- -----------
BALANCE AT MARCH 31, 1999 $ 8,993,777 $ 675,757 $ (2,290) $(5,103,141) $ 4,564,103
=========== ========= ======== =========== ===========
See notes to financial statements.
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 1999 AND 1998
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1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,014,896 $ 570,034
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 76,500 139,500
Amortization of software development costs 109,891 108,000
Provision for obsolete inventory 13,500 28,000
Provision for doubtful accounts 93,308 25,144
Changes in assets and liabilities:
Decrease in accounts receivable 492,934 82,863
Decrease (increase) in inventory 25,311 (2,789)
Decrease in prepaid expenses 12,902 6,570
Increase (decrease) in accounts payable 288,886 (274,254)
Increase in accrued expenses 283,652 148,644
Increase in deferred maintenance revenue 245,444 193,628
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Total adjustments 1,642,328 455,306
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Net cash provided by operating activities 3,657,224 1,025,340
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (2,500,957) (546,301)
Purchase of fixed assets (70,955) (49,457)
Expenditures for software development costs (407,326) (137,981)
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Net cash used in investing activities (2,979,238) (733,739)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 10,935
Payment on notes payable (30,000)
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Net cash provided by (used in) financing activities 10,935 (30,000)
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NET INCREASE IN CASH AND CASH
EQUIVALENTS 688,921 261,601
CASH AND CASH EQUIVALENTS:
Beginning of period 913,699 440,500
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End of period $ 1,602,620 $ 702,101
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SUPPLEMENTAL CASH FLOW INFORMATION - TAXES PAID $ 52,000
===========
See notes to financial statements.
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CINTECH TELE-MANAGEMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE-MONTH
AND NINE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND
NINE-MONTHS ENDED MARCH 31, 1999 AND 1998 IS UNAUDITED)
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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 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 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
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cost. The reserve, included in other accrued liabilities in the financial
statements, is adjusted periodically based upon actual experience.
DEPRECIATION - Fixed assets are carried at cost. Depreciation is computed
using an accelerated method over the following useful lives:
Equipment 5 years
Furniture and Fixtures 7 years
Computer Equipment 3 years
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:
MARCH 31, JUNE 30, MARCH 31,
1999 1998 1998
Literature and other documentation $ 26,576 $ 27,107 $ 43,505
Computer hardware 882,302 933,500 948,022
Allowance for obsolete inventory (860,217) (873,135) (915,323)
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Total inventory $ 48,661 $ 87,472 $ 76,204
========= ========= =========
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 MARCH 31, SALES FOR THE NINE-MONTHS ENDED MARCH 31,
1999 1998 1999 1998
------------------ ------------------ -------------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
Distributor A $ 2,220,043 75% $1,207,027 58% $ 5,814,187 68% $3,717,906 55%
Distributor B 226,583 8 198,793 10% 706,346 8 658,046 10%
----------- --- ---------- --- ----------- -- ---------- ---
Total $ 2,446,626 83% $1,405,820 68% $ 6,520,533 76% $4,375,952 65%
=========== === ========== === =========== === ========== ===
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
March 31, 1999 2 78 %
June 30, 1998 1 86 %
March 31, 1998 2 73 %
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INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE THREE-MONTHS SALES FOR THE NINE-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1999 1998
------------------------ ---------------------- ------------------------ -------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
Canada $ 47,727 2% $ 13,145 1% $ 79,090 1% $ 96,439 1%
Other 2,000 4,225 3,519 40,368 1%
-------- -- -------- -- -------- -- -------- --
Total $ 49,727 2% $ 17,370 1% $ 82,609 1% $136,807 2%
======== == ======== == ======== == ======== ==
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 $78,292 and $51,381 and related amortization was
$37,891 and $36,000 for the three-months ended March 31, 1999 and 1998,
respectively. Costs capitalized were $407,326 and $137,981 and related
amortization was $109,891 and $108,000 for the nine-months ended March 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 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, results 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.
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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:
NET
AMORTIZED UNREALIZED
Description COST MARKET GAIN (LOSS)
March 31, 1999 - Federal Agency Notes $3,417,789 $ 3,416,287 $ (1,502)
========== =========== ========
June 30, 1998 - Federal Agency Notes $ 916,832 $ 915,957 $ (875)
========== ====-====== ========
March 31, 1998 - US Treasury Bills/Federal
Agency Notes $ 909,396 $ 909,302 $ (94)
========== =========== ========
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 March 31:
2000 $ 206,250
2001 220,000
2002 220,000
2003 18,333
Rent expense for the leased office space was $73,277 in each of the
three-month periods ended March 31, 1999 and 1998. Rent expense for the
leased office space was $219,829 in each of the nine-month periods ended
March 31, 1999 and 1998.
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.
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5. CAPITAL STOCK AND INCOME PER SHARE
The following schedule is a summary of the Company's shares of capital
stock.
COMMON IN
AUTHORIZED ISSUED OUTSTANDING TREASURY
Balance at March 31, 1999 15,000,000 12,303,185 12,301,185 2,000
========== =========== =========== =====
Balance at June 30, 1998 15,000,000 12,281,751 12,279,751 2,000
========== =========== =========== =====
Balance at March 31, 1998 15,000,000 12,281,751 12,279,751 2,000
========== =========== =========== =====
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:
THREE-MONTHS ENDED THREE-MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS
Income available to
common stockholders $ 632,840 12,299,207 $ 0.05 $ 65,973 12,279,751 $ 0.01
EFFECT OF DILUTIVE SECURITIES
Stock options 491,425 133,210
--------- --------- ----- -------- ---------- ------
DILUTED EPS
Income available to
common stockholders
and assumed conversions $ 632,840 12,790,632 $ 0.05 $ 65,973 12,412,961 $ 0.01
========= ========== ====== ======== ========== ======
NINE-MONTHS ENDED NINE-MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------------------- --------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS
Income available to
common stockholders $ 2,014,896 12,290,007 $ 0.16 $ 570,034 12,279,751 $ 0.05
EFFECT OF DILUTIVE SECURITIES
Stock options 327,166 111,542
------------ ---------- ------ --------- ---------- ------
DILUTED EPS
Income available to
common stockholders
and assumed conversions $ 2,014,896 12,617,173 $ 0.16 $ 570,034 12,391,293 $ 0.05
=========== ========== ====== ========= ========== ======
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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:
MARCH 31, JUNE 30, MARCH 31,
1999 1998 1998
Current deferred tax asset:
Deferred revenue $ 233,939 $ 150,488 $ 125,784
Inventory reserve 292,474 296,866 311,210
Accrued compensation 8,044 8,197 8,197
Reserves not currently deductible 41,380 9,655 21,334
Accrued rent 23,521 26,554 27,565
----------- ----------- -----------
Total 599,358 491,760 494,090
Less valuation allowance (599,358) (491,760) (494,090)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
Non-current deferred tax asset:
Net operating loss carryforward $ 1,296,223 $ 2,027,953 $ 2,032,271
Research and development credits 195,575 178,925 173,375
----------- ----------- -----------
Total 1,491,798 2,206,878 2,205,646
Non-current deferred tax liability:
Deferred software development costs (177,668) (76,540) (132,026)
----------- ----------- -----------
Net non-current deferred tax asset 1,314,130 2,130,338 2,073,620
Less valuation allowance (1,314,130) (2,130,338) (2,073,620)
----------- ----------- -----------
Net $ -- $ -- $ --
=========== =========== ===========
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20
The provision for income taxes for the three-months and nine-months ended
March 31, 1999 and 1998 consists of the following:
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------------- -------------------------------
1999 1998 1999 1998
Current provision $ 69,155 $ -- $ 69,155 $ --
Deferred provision 201,695 11,344 708,610 167,402
--------- --------- --------- ---------
Total 270,850 11,344 777,765 167,402
Decrease in the
valuation allowance (201,695) (11,344) (708,610) (167,402)
--------- --------- --------- ---------
Income tax expense $ 69,155 $ -- $ 69,155 $ --
========= ========= ========= =========
At March 31, 1999, the Company has net operating loss carryforwards of
approximately $3,800,000 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 March 31, 1999, for
U.S. Federal tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of approximately
$195,000 which will begin to expire in 2002.
Although the Company has net operating loss carryforwards, the Company has
provided for federal taxes based upon the requirements of the alternative
minimum tax.
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 U.S. GAAP net
income in excess of Canadian GAAP of $12,281 and $11,020 for the
nine-month periods ended March 31, 1999 and 1998, respectively. The
difference does not have a material effect on the earnings per share
calculation for either period.
* * * * * *
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