-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXJ0wgZAtjmWoQwHoy8OCgslt141PjaF0435JuY5E7L31QBTDCFJq706cvQuHk7Q YOBvN5SjwZ1s3hPpZgMeFg== 0000950152-97-006891.txt : 19970930 0000950152-97-006891.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950152-97-006891 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINTECH TELE MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000926038 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 311200684 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24448 FILM NUMBER: 97687145 BUSINESS ADDRESS: STREET 1: 2100 SHERMAN AVENUE CITY: CINCINNATI STATE: OH ZIP: 45212 BUSINESS PHONE: 5138612000 MAIL ADDRESS: STREET 1: 2100 SHERMAN AVEN STREET 2: 2100 SHERMAN AVEN CITY: CINCINNATI STATE: OH ZIP: 45212 10KSB40 1 CINTECH TELE-MANAGEMENT SYSTEMS, INC. 10KSB405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB --------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 -------------------- For the Fiscal Year Ended June 30, 1997 Commission File No. 0-24448 CINTECH TELE-MANAGEMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter) Ohio ------------------------ ------------------------------------ (State of Incorporation) 31-1200684 (I.R.S. Employer Identification No.) 2100 Sherman Avenue Cincinnati, Ohio 45212 - ---------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 513-731-6000 -------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value -------------------- Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ----- ----- 2 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B (Section 228.405 of this Chapter) is not contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ X ]. All amounts specified in this Annual Report are in U.S. Dollars, unless otherwise specified herein. The registrant's revenues as of June 30, 1997 were $7,098,142. The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 30, 1997 was $1,484,780. The outstanding voting securities of the registrant at the close of business on June 30, 1997 were 12,281,751 shares of Common Stock without par value. DOCUMENTS INCORPORATED BY REFERENCE The following documents are hereby incorporated by reference herein and the parts of this Form 10-KSB into which the document is incorporated are shown beside the respective documents:
Document Part -------- ---- A. Registration Statement on Parts I, II and III Form 10-SB (Release No. 34-32231), as amended, filed June 27, 1994 B. Proxy Statement Parts II and III Filed on September 25, 1997
2 3 PART I Item 1. Description of Business ORGANIZATION Cintech Tele-Management Systems, Inc. (the "Company" or "Cintech") was incorporated by means of Articles of Incorporation filed under the laws of the State of Ohio on March 20, 1987. The Company has operated continuously since that time and grown through internal development of an array of computer software products. The Company has not experienced any bankruptcy or similar proceedings, nor has it been involved in any merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business. The Company's shares are registered on the Toronto Stock Exchange, and are traded under the symbol CTM. BUSINESS OVERVIEW/MARKET The Company operates in the emerging computer and telephone integration ("CTI") industry. Also known as computer telephony, the industry integrates computers with telephone systems using software to produce business applications. The combined power of a computer and telephone systems opens numerous possibilities for the market, many of which have not been fully developed. The Company believes that the ability to merge voice, database, call routing, messaging, reporting, real-time statistics and other technologies, has significant market potential, most notably for small businesses and for departments and branch offices within larger decentralized organizations. As a competitor in the computer and telephone integration industry, the Company is a developer and distributor of computer software that integrates computers and telephone switching systems to produce applications that assist in business management and operations. These applications are designed to increase productivity and service levels of small and mid-size businesses and departments or branches of larger businesses and to provide relevant additional information for managers. To date, the Company has focused on the development of applications for the modular digital key telephone switching systems ("Norstar") sold worldwide by Northern Telecom Ltd. of Calgary, Alberta, Canada ("Nortel"). The Norstar was the first key telephone system to offer open application interface targeted for small and mid-size business units. The Company was the first developer to write a successful open application interface-based application for Norstar and is now the leader in developing business applications for Norstar. Using a standard personal computer equipped with an interface card (produced by Nortel) to the Norstar, the Company's software enables small and mid-size businesses to use applications such as ACD (Automatic Call Distribution) previously generally available only to larger users. The Company began shipping its first ACD product, CINPHONY, in April, 1991 and in October, 1993, introduced a second product, PRELUDE. In June, 1994, the Company announced plans to jointly market and sell the Company's software applications with Nippon Electric Company ("NEC"). Accordingly, Cintech developed a new ACD product, JAZZ2000, a PC-based solution for NEC's NEAX2000 IVS (Integrated Voice Server) PBX. The application performs similar functions as the CINPHONY product on the Norstar, but on a larger PBX phone switch platform. The JAZZ2000 was made available for general release in December 1996 and is sold jointly by Cintech and NEC America's sales network. Under terms of the joint arrangement, the Company's products such as the JAZZ2000 are sold under its own name by NEC America's direct sales force and distribution network in the United States. The Company believes that NEC's direct sales force and distribution network will expand its market for applications. 3 4 PRINCIPAL PRODUCTS (a) Automatic Call Distribution Products (ACD Products) An ACD is a specialized software and/or hardware call management system which answers, queues and routes incoming telephone calls. It plays announcements to callers, encouraging them to hold until an agent (a person qualified to take the call) is available, provides statistics about the status of agents and callers waiting, and provides specialized management information reports. ACDs are typically employed in order to increase employee productivity and revenues, and to reduce costs. ACDs were originally designed for environments such as airline reservation services and mail order firms which have high call volumes and generate high revenues per call. As more companies have focused on productivity and customer service, the ACD market has expanded to include other types of businesses. Using open application interface technology, the Company made it feasible and cost effective for Norstar users to bring ACD into departments, branch offices and small companies. The Company has developed two ACD systems for Nortel's Norstar, CINPHONY and PRELUDE and JAZZ2000 for NEC's NEAX2000 PBX. CINPHONY AND PRELUDE are generally targeted towards organizations that have less than 50 telephone agents ("small call centers") and can be effectively utilized by small businesses and departments or branch offices in larger organizations. JAZZ2000 is also targeted toward the small to mid-size call center. More detailed information on these products is as follows: CINPHONY CINPHONY, introduced in 1991, is targeted to a sophisticated small call center with advanced ACD needs. CINPHONY was designed for use with a Norstar modular system. Typically, the CINPHONY user has experience with ACD in a large call center within the organization and wants that same level of capability in smaller areas. Reporting often becomes the critical sales element. CINPHONY users range from small businesses with as few as 15 employees to Fortune 500 companies. In 1993, the Company began to focus on major accounts that would typically have the potential for multiple installations. Today, over 50% of CINPHONY installations are in large corporations, government agencies and institutions, many of them with multiple installations. CINPHONY is available in two levels. Level I is designed for small call centers staffed with up to 30 agents and 4 groups. Level II supports up to 80 agents and a maximum of 24 groups. PRELUDE PRELUDE, introduced in 1993, is an entry level product offering basic ACD functionality. PRELUDE also offers real-time status, voice capabilities and reports. The Company believes that PRELUDE is broadening the market for ACDs because of its straightforward feature set and affordability for even the smallest center. Many departments, branch offices and small businesses do not believe they are candidates for ACD because of its reputation as a product for large users only, its historically high cost, and a perceived overabundance of features. PRELUDE also replaces older technology, such as call sequencers. Cintech's strategy has been to introduce less sophisticated users to ACD with PRELUDE and then upgrade them to CINPHONY as their needs expand. 4 5 JAZZ2000 The JAZZ2000 application performs similar functions as the CINPHONY product on the Norstar, but on a larger PBX phone switch platform designed by NEC, the NEAX2000 IVS. JAZZ2000 provides Cintech with an advanced ACD solution targeted at sophisticated small to mid-size call centers, while complementing the power and versatility of a PBX. The JAZZ2000 can handle a maximum of 80 active agents, and 24 groups of agents as well as growth up to 512 ports. The first generation of the JAZZ2000 began shipment in December 1996. (b) Call Accounting Products Call accounting products provide management with various reports that show how a company's telephone systems are being used. These products typically generate a variety of reports which detail, on a call by call basis, the origination and destination of the call, the cost of the call, and the duration of each call. Call accounting packages assist managers and employees in understanding how time is being spent on the telephone and the related costs and can also help protect against the potential abuse of outsiders gaining access to the telephone system. The Company entered the call accounting market in 1987 with its personal computer-based Tele-Series call accounting product. The technology of using a personal computer as the call accounting platform was relatively new at the time and allowed the Company to offer a full-featured package at low cost. This matched the Company's strategy of bringing high-productivity software to small and mid-sized businesses. The Company's initial call accounting product, Tele-Series, continues to be sold today through various US and Canadian dealers. It works with a large number of telephone switches including those of NEC, Nortel, AT&T and Mitel. Tele-Series consists of a number of products and feature modules and is designed to allow the user to build its own systems. In 1992, Nortel entered into an agreement with the Company to replace the existing Norstar call accounting product with a rewritten version of Tele-Series that would take advantage of Norstar's unique technology. In February 1993, the Company introduced Tele-Series for Norstar. It replaced the previous Norstar call accounting product and is endorsed by Nortel as the official replacement product in the United States. As part of its agreement with Nortel, Cintech provides technical product support for Nortel's installed base of the previous call accounting product. The Company intends to upgrade these users to Tele-Series for Norstar. Tele-Series for Norstar, in addition to basic call accounting functions, takes advantage of features unique to Norstar. These advantages include the ability to: (i) display the incoming caller's telephone number on the user's telephone set; (ii) prompt users to enter account codes at the telephone set; (iii) monitor for possible toll fraud (unauthorized individuals gaining access to and misusing the Norstar); and (iv) track intercom calls. MARKETING AND DISTRIBUTION Cintech has joint marketing and distribution arrangements with both Nortel and NEC America. The Nortel arrangement was implemented during April 1996 with the release of new versions of CINPHONY 5 6 and PRELUDE that were designed to perform on Nortel's newly released Norstar Application Module platform. Under the arrangement, Cintech's CINPHONY and PRELUDE are now included in the Nortel product catalog and sold jointly by Cintech and Nortel's direct sales force and distributors which includes all of the Regional Bell Operating Companies, Canadian provincial telephone companies, the three largest US independent operating companies: GTE, Sprint and Wiltel and approximately 500 smaller distributors. In the Company's opinion this distribution stronghold represents one of its major competitive advantages. The Company also has a joint marketing and distribution arrangement with NEC America for its JAZZ2000 ACD solution. The JAZZ2000 product was released in December 1996 and is sold jointly by Cintech and NEC America's direct sales force and NEC distributors. The Company believes that NEC's direct sales force and distribution network will expand its market for applications as well as provide a vehicle for further international expansion. In addition to the US and Canada, the Company's products are installed in Central and South America as well as in the Middle East. The Company intends to expand its sales internationally to fill the needs of global accounts. This objective complements the Company's joint marketing and distribution strategy. RETAIL DISTRIBUTION During fiscal 1997 the Company experienced lower than expected sales of its OCTuS PTA PC-based telephone management software product. Accordingly, the Company recorded an approximate $800,000 inventory reserve during the third quarter which represented the entire book value of the inventory. Going forward, the Company intends to continue marketing the product direct to distributors and endusers by employing a significantly lower cost sales model. COMPETITIVE POSITION The market for the Company's products is characterized by rapid technological change and evolving industry standards. The Company's competitiveness depends on its ability to enhance its existing products and to offer new products on a timely basis. The long term success of the Company's products is based primarily on product features, performance, ease-of-use, reliability, compatibility, brand name recognition, product reputation, levels of advertising, pricing, merchandising and training, quality customer support, excellence and timeliness of product upgrades, and the capability of the Company to introduce complementary new products. Presently, the Company is not aware of any existing or upcoming technologies which would render obsolete or significantly displace its products in the near future. The Company's long term future expansion will depend upon the continued availability of working capital, the ability of management to implement and successfully develop the distribution of products, and the continued and increased demand in the market place for the products and services provided by the Company. 6 7 DEPENDENCE ON CUSTOMERS/DISTRIBUTION The Company derives a significant portion of its revenue from products which are integrated with the Norstar system. Because of this product concentration, the Company would be materially adversely affected if users of the Norstar system determined to use another system or similar device or if the Norstar system ceased to be competitive in the marketplace. In March 1996, in order to further increase penetration of ACD software sales to Norstar users, the Company entered into a joint marketing agreement with Nortel whereby, Nortel's sales and marketing organization now has responsibility for selling the Company's software products through common distribution channels. Consequently, the Company's business is in part dependent upon the degree of marketing support and effort provided by Nortel and the various distributors. Most of the Company's sales are to large distributors in the telephony industry. For the year ended June 30, 1997 approximately 56% of the Company's sales were made to one such distributor. SOURCES AND AVAILABILITY OF RAW MATERIALS/PRINCIPAL SUPPLIERS The Company, as a supplier primarily of software products, is not dependent upon availability of raw materials. Hardware components used for bundling with Company products are readily available for open market purchase and the Company can acquire such components from any number of available primary and secondary sources. The Company is dependent upon Nortel for the supply of Norstar components required for testing and development of Company products. PROPRIETARY RIGHTS CINPHONY and Tele-Series have been copyrighted by the Company with the United States Copyright Office. The Company has applied for trademarks in respect to CINPHONY, PRELUDE, Tele-Series and StarDome in the United States. GOVERNMENT IMPACT The Company knows of no material governmental approvals required for the development, marketing or sale of the Company's principal products or services. Likewise, the Company knows of no existing or probable governmental regulations which have or would have a material adverse effect on the operation of the Company's business. Finally, the Company knows of no material costs or effects of compliance with environmental laws (federal, state or local) in the operation of its business. RESEARCH AND DEVELOPMENT The Company spent on research and development during each of the last two fiscal years the following sums: $387,000 for the fiscal year ending June 30, 1997, and $326,000 for fiscal year ending June 30, 1996. The cost of such activities are considered overhead items which are reflected only indirectly in the pricing of the company's products sold into the market. EMPLOYEES The Company presently has 57 employees, 56 of which are full time. Of these employees, 18 are involved primarily in sales and marketing, 16 work on systems support, 14 are involved in product development and the remaining nine are responsible for all management and administrative functions. 7 8 Item 2. Properties The Company's plant and its executive offices comprising approximately 20,000 square feet are located at 2100 Sherman Avenue, Cincinnati, Ohio 45212. The Company leases this facility. The lease extends until February 28, 2002 and calls for escalating lease payments. Lease payments for the year ending June 30, 1997 amounted to approximately $296,000. The Company owns minimum amounts of tangible personal property in the form of equipment, furniture and fixtures, and inventory (comprised of computer hardware and literature and other documentation). The value of these items is modest in comparison to the value of the Company's overall assets, inclusive of cash and cash equivalents. All of the Company's leased premises and tangible personal property are in good condition. Item 3. Legal Proceedings The Company is not a party to any pending legal proceedings which would have a material adverse impact on the Company's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. The Company has nothing to report under this Item. PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters The Company's common stock is held by approximately 600 shareholders of record as of June 30, 1997, and is traded on The Toronto Stock Exchange. The range of price quotations in each quarter of the two years ended June 30, 1997 are shown below. These prices represent actual transactions and do not reflect retail markup, markdowns or commissions.
FOR THE QUARTER ENDED HIGH(1) LOW(1) - --------------------- ------- ------ June 30, 1996 $1.98 $1.40 September 30, 1996 1.55 0.90 December 31, 1996 1.40 0.90 March 31, 1997 0.82 0.56 June 30, 1997 0.84 0.51
(1) Based on quotations obtained from the Toronto Stock Exchange. All amounts are in Canadian dollars. No dividends were declared or paid during the two years ended June 30, 1997 and June 30, 1996, and the Company does not anticipate paying dividends in the foreseeable future. 8 9 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements in this report may contain "forward looking" information (as defined in the Private Securities Litigation Reform Act of 1995) involving risks and uncertainties, including without limitation, projections for sales and expenditures, and various business environment and trend projections. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to , the risks discussed in earlier portions of this document (see Item 1. Description of Business). The Company assumes no obligation to release publicly any changes to any "forward looking" statements that may arise from the development of unanticipated events or circumstances that occur after the date of these statements. LIQUIDITY AND CAPITAL RESOURCES In January 1994, the Company completed its initial public offering ("IPO") of 2,181,820 shares of common stock (see Note 1 of Notes to the Financial Statements). The net proceeds of this offering, after deducting applicable issuance costs and expenses, were $7.7 million. The proceeds of the offering were used to retire the debt of the Company incurred prior to the offering. In addition, the proceeds are continuing to be used for sales and marketing programs, as well as for product development. Working Capital decreased to $0.8 million in 1997 from $1.9 million in 1996. The decrease of $1.1 million was mostly attributable to the approximate $800,000 retail inventory product write-off along with decreases in cash and marketable securities investments of $170,000 and accounts receivable of $178,000. During 1997, the Company provided cash of $180,000 from operating activities and invested another $191,000 and $59,000 in software development and fixed assets, respectively. The ending cash balance increased by $237,000. These activities were funded primarily through sales of marketable securities of $407,000. At the end of 1997, the Company had $30,000 in outstanding debt in the form of a note payable and held cash and marketable securities totaling $804,000. 9 10 RESULTS OF OPERATIONS The following selected financial information set forth below has been derived from the financial statements of the Company. This discussion and analysis should be read in conjunction with the financial statements and notes thereto which follow. RESULTS OF OPERATIONS 1997 VERSUS 1996 Sales for fiscal 1997 decreased by $1,054,000 or 13% compared with 1996. This increase by product is broken down as follows (in thousands):
INCREASE PRODUCT CATEGORY 1997 1996 (DECREASE) - ---------------- ------- ------- ---------- ACD Software $ 4,163 $ 3,158 $ 1,005 ACD Hardware 494 2,337 (1,843) Call Accounting 759 670 89 Other 1,629 1,934 (305) ------- ------- ------- Total $ 7,045 $ 8,099 ($1,054)
The increase in the sales of the Automatic Call Distribution software products and Tele-Series, the Company's Call Accounting product, was due to achieving a greater level of penetration through the Company's distribution channels for the product. ACD hardware sales declined as the Company, under its joint marketing agreement with Nortel which was effective March 1996, no longer sells the PC-hardware platforms required to run its ACD software products. Such hardware is now supplied by Nortel. Sales of the higher margin ACD software-only products continued to grow over the course of fiscal 1997 such that the Company expects its year-over-year fiscal 1998 revenue growth to return to the levels seen in prior years. Other sales decreased primarily because the Company chose to de-emphasize selling efforts associated with the OCTuS PTA retail product line due to much slower than expected sales experience. Going forward the Company will concentrate on developing and marketing software solutions for the high-growth small call center market. Cost of products sold decreased $1,610,000 or 63% mostly due to the Company's strategy of concentrating on marketing software-only ACD products. Also, as a percentage of sales, cost of products sold for 1997 decreased to 13% from 32% experienced in 1996, due to the combination of a reduction of lower margin hardware sales attributable to the Company's joint marketing arrangement with Nortel and continued efforts to decrease component costs while maintaining product quality. License fees, net of fourth quarter adjustments, increased $479,000 or 72% due to the combined effects of the new terms of the joint marketing arrangement with Nortel and the related increase in ACD software unit sales volume. Gross Profit decreased $764,000 or 16% primarily due to the Company's decision to record an approximate $800,000 reserve for OCTuS PTA inventory during the fiscal third quarter. Research and development costs of $387,000 were $61,000 or 19% higher than 1996. This increase is largely due to more effective allocation of resources as the Company continues to develop new products and new releases of existing products. In addition, the Company capitalized software development costs of $191,000 during the year, a decrease of $2,000 over 1996. Selling, general, and administrative expenses increased $298,000 or 7% over 1996. This increase reflects the Company's continued investment in its infrastructure in order to enhance its performance in sales, 10 11 marketing and customer support services. A schedule of the selling, general, and administrative expenses categories appears below (in thousands):
INCREASE EXPENSE CATEGORY 1997 1996 (DECREASE) - ---------------- ------ ------ ---------- Payroll $2,885 $2,584 $ 301 Professional Services 203 193 10 Sales and Marketing 1,002 1,107 (105) Occupancy 315 306 9 Other 460 377 83 ------ ------ ------ Total $4,865 $4,567 $ 298
The increase in payroll costs reflects a 2% increase in staff levels and related salary and expense increases. The decrease in sales and marketing expenses largely reflects the deemphasis of the OCTuS PCTA product. The increase in other expenses was largely due to the Company's decision to adjust the useful lives, for depreciation purposes, of certain types of computer equipment and software used in product development, so that depreciation expense will more accurately reflect the cost of capital used in the business. The Company's loss from operations of $1,294,000 was $1,068,000 greater than that experienced in 1996. The majority of the loss (78%) is a direct result of the reserve for OCTuS PCTA inventory. The remainder reflects the effects of the slower than anticipated implementation of the joint marketing model with Nortel during the first half of the year. Other income of $30,000 decreased by $36,000 or 54% compared to 1996 due to a reduction in the amount of funds invested in marketable securities. The net loss of $1,264,000 represents an increase of $1,104,000 compared to the loss reported in 1996. The corresponding loss per share was $0.10 in 1997 compared to $0.01 in 1996. Excluding the effects of the retail product inventory adjustment, the Company would have reported $0.03 net loss per share. The Company's operating plans are to continue distributing its products through the current channels. While operating expenses did increase in 1997, the Company believes that increases in sales and or the liquidation of marketable securities will provide sufficient cash flow to meet these expenses in 1997. The Company has no material commitments for capital expenditures, nor is the Company subject to seasonal aspects that could be expected to have a material effect on the Company's financial condition or its results of operations. The Company believes that there are no significant elements of income or loss that do not arise from the Company's continuing operations. Item 7. Financial Statements and Supplementary Data The response to Item 7 is included in the response to Item 13 of this report. Item 8. Changes and Disagreements with Accountants on Accounting and Financial Disclosure The Company has nothing to report under this Item. 11 12 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons of the Registrant The information required by this Item is incorporated herein by reference to the Company's 1997 definitive proxy statement filed on September 25, 1997 with the Securities and Exchange Commission as set forth under the captions "Voting Shares and Security Ownership of Certain Beneficial Owners and Management" and "Compensation of Directors and Officers". Executive Officers of the Company. The names, ages and positions of the executive officers of the Company as of June 30, 1997 are as follows:
NAME AGE POSITION ---- --- -------- Diane M. Kamionka 50 President and Chief Executive Officer Bryant A. Downey 34 Chief Technology Officer David J. Thibodeau 48 Vice President - Customer Support Services Peter C. Carfagno 41 Vice President - Sales James K. Keller 41 Chief Financial Officer
Each of the officers has been engaged in their principal occupation indicated above for the previous five years, except for Mr. Thibodeau who became an Executive Officer of the Company during 1996 and Messrs. Carfagno and Keller who became Executive Officers during 1997. Item 10. Executive Compensation The information required by this Item is incorporated herein by reference to the Company's 1997 definitive proxy statement filed on September 25, 1997 with the Securities and Exchange Commission as set forth under the caption "Compensation of Directors and Officers". Item 11. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated herein by reference to the Company's 1997 definitive proxy statement filed on September 25, 1997 with the Securities and Exchange Commission as set forth under the caption "Voting Shares and Security Ownership of Certain Beneficial Owners and Management". 12 13 Item 12. Certain Relationships and Related Transactions During the last two years, the Company was a party directly or indirectly to the following transactions with its directors, executive officers, and principal shareholders (including any of their associates or affiliates): 1. During 1996, the Company was a party to a lease dated July 13, 1990 with Renaissance Partners, a partnership in which S. William Miller and Frank W. Terrizzi are partners. Messrs. Miller and Terrizzi are principal shareholders of the Company, and Mr. Terrizzi is also a director. The lease relating to the Company's former headquarters at 3006 Vernon Place, Cincinnati, Ohio, expires on December 31, 1997. On May 13, 1996, the Company negotiated a buyout of the lease. A portion of the buyout proceeds consisted of a Term Note Payable to the lessor partnership. The Term Note Payable which bore interest at 6%, was paid in full on its maturity date of May 13, 1997. With respect to each of the above transactions, the consideration was determined by means of negotiation conducted between the Company and the other party. In each case, the party entering into the transaction with the Company was the only party willing to enter into the transaction, given the Company's debt situation in the period preceding the Canadian offering. As such, management believes that no better terms could have been obtained from any third parties, and that such transactions represented "fair market value" transactions at the time they were entered into. Item 13. Exhibits, Financial Statements and Reports on Form 8-K (A)(1) AND (2). FINANCIAL STATEMENTS The financial statements attached to the end of this annual report are filed as part of this annual report. (A)(3). EXHIBITS
Exhibit No Description Where Provided - ---------- ----------- -------------- 3. Charter and Bylaws.......................................................................... * 4. Instruments Defining Rights of Security Holders * 4.1 Agency Agreement by and among Cintech Tele-Management Systems, Inc., Loewen, Ondaatje, McCutcheon Limited, and Toronto Dominion Securities, Inc. dated January 20, 1994....................................................................... * 4.2 Cintech Tele-Management Systems, Inc. 1993 Stock Option Plan........................... * 9. Voting Trust Agreements..................................................................... * 10. Material Contracts.......................................................................... * 10.1 Agency Agreement by and among Cintech Tele-Management Systems, Inc., Loewen, Ondaatje, McCutcheon Limited, and Toronto Dominion Securities, Inc. dated January 20, 1994...................... *
13 14
Exhibit No Description Where Provided - ---------- ----------- -------------- 10.2 Escrow Agreement described in Part II, Item 1.................................. * 10.3 Lease between Renaissance Partners and Cintech Tele-Management Systems, Inc. dated July 13, 1990....................................................... * 10.4 Cintech Tele-Management Systems, Inc. Stock Option Plan........................ * 10.5 Lease between Cintech Tele-Management Systems, Inc. and Norwood Real Estate Partners dated October 25, 1994......................................... *** 13. Portions of the Annual Report to Shareholders 14. Material Foreign Patents.................................................................... N/A 27. Financial Data Schedule 99. Additional Exhibits......................................................................... ** 99.1 Marketing Communique........................................................... ** 99.2 StarDome Distribution Agreement (Form)......................................... ** 99.3 Press Release dated June 8, 1994............................................... ** 99.4 Letter of Understanding between Cintech Tele-Management Systems, Inc. and NEC America, Inc. dated May 5, 1994.......................... ** 99.5 October 10, 1991 Letter........................................................ *** 99.6 Amendment to License Agreement dated October 10, 1991.......................... *** 99.7 Status and Disposition Agreement............................................... *** 99.8 Loan Agreement................................................................. *** 99.9 Agreement for Purchase of Preferred Stock...................................... *** 99.10 Debt Exchange Agreement........................................................ *** 99.11 Agreement to Finance........................................................... *** 99.12 Supplementary Agreement to Finance............................................. *** 99.13 Second Supplementary Agreement to Finance...................................... *** 99.14 Third Supplementary Agreement to Finance....................................... *** 99.15 Term Note Payable dated May 13, 1996 to Related Parties........................ ***
* Previously provided in original filing of Form 10-SB ** Previously provided in Amendment No. 1 to Form 10-SB *** Previously provided in Amendment No. 2 to Form 10-SB (A)(4). REPORTS ON FORM 8-K The Company has not made any reports on Form 8-K during the last quarter of the period covered by this report. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CINTECH TELE-MANAGEMENT SYSTEMS, INC. By: /s/ Diane M. Kamionka -------------------------------------- Diane M. Kamionka, President and Chief Executive Officer September 22, 1997 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. PRINCIPAL EXECUTIVE OFFICER: /s/ Diane M. Kamionka September 22, 1997 - ------------------------------------------------- ------------------ Diane M. Kamionka, Date President, Chief Executive Officer and Director PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ James K. Keller September 22, 1997 - ------------------------------------------------- ------------------ James K. Keller, Date Chief Financial Officer DIRECTORS: /s/ Diane M. Kamionka September 22, 1997 - ------------------------------------------------- ------------------ Diane M. Kamionka, Date President, Chief Executive Officer and Director /s/ Bryant A. Downey September 22, 1997 - ------------------------------------------------- ------------------ Bryant A. Downey, Date Chief Technology Officer and Director
15 16 /s/ Carter F. Randolph September 23, 1997 - ------------------------------------------------- ------------------ Carter F. Randolph Date Director /s/ Frank M. Terrizzi September 24, 1997 - ------------------------------------------------- ------------------ Frank M. Terrizzi Date Director
EX-13 2 EXHIBIT 13 1 EXHIBIT 13 [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Stockholders of Cintech Tele-Management Systems, Inc. We have audited the accompanying balance sheets of Cintech Tele-Management Systems, Inc. (the "Company") as of June 30, 1997 and 1996 and the related statements of operations, stockholders' equity and cash flows for the years then ended (all expressed in U.S. dollars). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 1997 and 1996 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP August 29, 1997 [DELOITTE TOUCHE TOHMATSU INTERNATIONAL LOGO] 2 CINTECH TELE-MANAGEMENT SYSTEMS, INC. BALANCE SHEETS JUNE 30, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 2) $ 440,500 $ 203,441 Marketable securities (Notes 3,5) 363,095 770,391 Accounts receivable, trade - (Net of allowance of $37,604 and $53,726 in 1997 and 1996, respectively) (Note 2) 973,948 1,151,471 Inventory (Note 2) 101,415 1,009,960 Prepaid expenses 19,783 18,224 ----------- ----------- Total current assets 1,898,741 3,153,487 ----------- ----------- FIXED ASSETS (Note 2): Equipment 632,489 574,551 Furniture and fixtures 120,269 123,906 ----------- ----------- Total 752,758 698,457 Less accumulated depreciation (608,423) (394,184) ----------- ----------- Total fixed assets - net 144,335 304,273 ----------- ----------- OTHER ASSETS: Software development costs - net (Note 2) 358,330 303,205 ----------- ----------- Total other assets 358,330 303,205 ----------- ----------- TOTAL $ 2,401,406 $ 3,760,965 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 533,103 $ 649,271 Accrued liabilities: Accrued salaries 104,880 82,228 Accrued payroll taxes 2,956 13,568 Accrued vacation 82,699 60,945 Other 179,344 128,542 Current portion of notes payable (Note 5) 30,000 100,000 Deferred maintenance revenue (Note 2) 176,325 140,667 ----------- ----------- Total current liabilities 1,109,307 1,175,221 ----------- ----------- NOTES PAYABLE (less current portion) (Note 5) 30,000 ----------- ----------- STOCKHOLDERS' EQUITY (Notes 1, 6, 7): Common stock 8,982,842 8,982,580 Contributed capital 675,757 675,757 Treasury stock (2,290) (2,290) Accumulated deficit (8,364,210) (7,100,303) ----------- ----------- Total stockholders' equity 1,292,099 2,555,744 ----------- ----------- TOTAL $ 2,401,406 $ 3,760,965 =========== ===========
See notes to financial statements. -2- 3 CINTECH TELE-MANAGEMENT SYSTEMS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ----------- ----------- NET SALES (Note 2) $ 7,044,857 $ 8,099,034 COST OF PRODUCTS SOLD (Note 10) 944,851 2,555,049 RESERVE FOR OBSOLETE INVENTORY (Note 2) 861,793 34,141 AMORTIZATION AND WRITE-OFF OF DEFERRED SOFTWARE DEVELOPMENT COSTS (Note 2) 135,540 122,494 LICENSING FEES (Note 2) 1,145,063 665,773 ----------- ----------- GROSS PROFIT 3,957,610 4,721,577 RESEARCH AND DEVELOPMENT 387,059 326,141 SELLING, GENERAL AND ADMINISTRATIVE (Notes 2, 4) 4,864,898 4,566,964 LEASE TERMINATION COSTS (Notes 4, 5) 54,675 ----------- ----------- LOSS FROM OPERATIONS (1,294,347) (226,203) OTHER INCOME 30,440 66,656 ----------- ----------- NET LOSS $(1,263,907) $ (159,547) =========== =========== NET LOSS PER COMMON SHARE (Notes 6,10) $ (0.10) $ (0.01) =========== ===========
See notes to financial statements. -3- 4 CINTECH TELE-MANAGEMENT SYSTEMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 - --------------------------------------------------------------------------------
COMMON TOTAL STOCK CONTRIBUTED TREASURY ACCUMULATED STOCKHOLDERS' NO PAR VALUE CAPITAL STOCK DEFICIT EQUITY ----------- --------- -------- ------------ ----------- BALANCE AT JUNE 30, 1995 $ 8,965,690 $ 675,757 $ (2,290) $ (6,940,756) $ 2,698,401 SALE OF COMMON STOCK 16,890 16,890 NET LOSS (159,547) (159,547) ----------- --------- -------- ------------ ----------- BALANCE AT JUNE 30, 1996 8,982,580 675,757 (2,290) (7,100,303) 2,555,744 SALE OF COMMON STOCK 262 262 NET LOSS (1,263,907) (1,263,907) ----------- --------- -------- ------------ ----------- BALANCE AT JUNE 30, 1997 $ 8,982,842 $ 675,757 $ (2,290) $ (8,364,210) $ 1,292,099 =========== ========= ======== ============ ===========
See notes to financial statements. -4- 5 CINTECH TELE-MANAGEMENT SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,263,907) $ (159,547) ----------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 216,218 108,338 Amortization and write-off of software development costs 135,540 122,494 Reserve for obsolete inventory 861,793 34,141 Provision for doubtful accounts (16,122) (3,347) Loss on disposal of fixed assets 3,124 613 Changes in assets and liabilities: (Increase) decrease in accounts receivable 193,645 (275,761) (Increase) decrease in inventory 46,752 (544,605) Increase in prepaid expenses (1,559) (18,224) Decrease in deposits 5,062 Increase (decrease) in accounts payable (116,168) 115,308 Increase in accrued expenses 84,596 86,848 Decrease in accrued lease termination costs (249,000) Increase in deferred maintenance revenue 35,658 52,659 ----------- ----------- Total adjustments 1,443,477 (565,474) ----------- ----------- Net cash provided by (used in) operating activities 179,570 (725,021) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from marketable securities 407,296 975,272 Purchase of fixed assets (59,404) (114,810) Expenditures for software development costs (190,665) (193,342) ----------- ----------- Net cash provided by investing activities 157,227 667,120 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 262 12,629 Proceeds from notes payable 140,000 Payment on notes payable (100,000) (10,000) ----------- ----------- Net cash provided by (used in) financing activities (99,738) 142,629 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 237,059 84,728 CASH AND CASH EQUIVALENTS: Beginning of year 203,441 118,713 ----------- ----------- End of year $ 440,500 $ 203,441 =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Upon exercise of common stock options for the year ended June 30, 1996, $4,261 was charged to previously accrued compensation expense. See notes to financial statements. -5- 6 CINTECH TELE-MANAGEMENT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996 1. INITIAL PUBLIC OFFERING In January 1994, Cintech Tele-Management Systems, Inc. (the "Company") completed its initial public offering of 2,181,820 shares of common stock. The Company's shares are traded on the Toronto Stock Exchange (TSE) under the symbol "CTM". 2. 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, and extensive distribution capabilities with product sold through Nortel and NEC's direct sales organizations as well as their authorized distributors throughout North America. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL STATEMENT PRESENTATION - These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in United States dollars. The differences in accounting principles generally accepted in the United States of America and Canada are described in Note 9. REVENUE - Generally, the Company records revenue from product sales when the product is shipped. Contracts with certain distributors may have terms which cause the Company to record revenue when the product is sold to third parties. Also, the Company records an estimate of potential future returns of product sold at the time of sale. DEFERRED MAINTENANCE REVENUE - The Company sells product maintenance agreements which provide for repair of hardware and no-cost upgrade of software. These agreements normally cover a one-year period with revenue being recognized on a straight-line basis over the maintenance period. DEPRECIATION - Fixed assets are carried at cost. Depreciation is based on the estimated useful lives of the assets and is computed using an accelerated method. Prior to April, 1997 depreciation was computed using the following useful lives: Equipment 5 years Furniture and Fixtures 7 years -6- 7 Effective April 1, 1997, the Company adopted a three-year amortization period for all computer equipment. The change in service life was applied on a prospective basis resulting in a fourth quarter adjustment (see Note 10). INVENTORY - Inventories are valued at the lower of cost or market, with cost being computed using the first-in, first-out method. Due to slower than expected sales, the Company decided to record a reserve of approximately $800,000 for OCTUS PCTA inventory during the fiscal third quarter. This reserve represents essentially the entire cost of the OCTUS PCTA-related retail product inventory. Inventories consist of:
1997 1996 ----------- ----------- Literature and other documentation $ 39,176 $ 70,935 Computer hardware 958,173 973,166 Allowance for obsolete inventory (895,934) (34,141) ----------- ----------- Total inventory $ 101,415 $ 1,009,960 =========== ===========
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 YEARS ENDED JUNE 30, 1997 1996 ------------------- -------------------- AMOUNT % AMOUNT % ---------- -- ---------- -- Distributor A $3,908,169 56% Distributor B $ 813,346 10% ---------- ------ Total $3,908,169 56% $ 813,346 10% ========== == ========== ==
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 ------------ ---------- June 30, 1997 2 74% June 30, 1996 2 58%
INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE YEARS ENDED JUNE 30, 1997 1996 ------------------- -------------------- AMOUNT % AMOUNT % --------- -- ---------- -- Canada $ 161,952 2% $ 925,333 11% Other 34,913 1% 14,255 0% --------- -- ---------- -- Total $ 196,865 3% $ 939,588 11% ========= == ========== ==
-7- 8 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. As the Company's products are in their early product life cycle, the capitalized costs are amortized on a straight-line basis over the estimated economic life of the product. Costs capitalized were $190,665 and $193,342 and related amortization was $135,540 and $122,494 for 1997 and 1996, respectively. Write offs of capitalized costs included within total amortization expense were $26,585 in 1997. LICENSING FEE - The Company has agreements with distributors which require the payment of a license fee on all 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. The Company's notes payable also approximate fair value based on the borrowing rates currently available to the Company for notes with similar terms and average maturities. ACCOUNTING CHANGES - In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for periods beginning after December 15, 1997, expand or modify disclosures and, accordingly, will have no impact on the Company's reported financial position, result of operations or cash flows. Additionally, in 1997, FASB issued Statement No. 128, "Earnings Per Share," which revises the manner in which earnings per share is calculated. The statement is effective for the reporting period ending June 30, 1998 and is not expected to have a significant impact on the Company's earnings per share. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the Company considers all money market instruments to be cash equivalents. RECLASSIFICATION - Certain fiscal 1996 amounts have been reclassified in order to conform to fiscal 1997 presentation. 3. MARKETABLE SECURITIES The Company maintains various investments in treasury bills 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 --------- -------- ---------- June 30, 1997 - United States Treasury Bills $363,095 $372,677 $ 9,582 ======== ======== ======== June 30, 1996 - United States Treasury Bills $770,391 $778,146 $ 7,755 ======== ======== ========
-8- 9 4. 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:
Year Ending June 30: -------------------- 1998 $ 184,500 1999 205,000 2000 210,000 2001 220,000 2002 183,330
Rent expense for the leased office space was $295,506 and $276,927 in 1997 and 1996, respectively. 5. NOTES PAYABLE Notes Payable consisted of the following at June 30, 1997 and 1996, respectively:
1997 1996 -------- -------- Term Note Payable - Bank $ 30,000 $ 90,000 Term Note Payable - Other 40,000 -------- Total $ 30,000 $130,000 ======== ========
The Term Note Payable - Bank bears interest at the prime lending rate (8.25% at June 30, 1997). The remaining term is 6 months. The note is secured by various securities on deposit with the bank. 6. CAPITAL STOCK AND LOSS PER SHARE The following schedule is a summary of the Company's shares of capital stock.
COMMON IN AUTHORIZED ISSUED OUTSTANDING TREASURY ---------- ---------- ---------- --------- Balance at June 30, 1997 15,000,000 12,281,751 12,279,751 2,000 ========== ========== ========== ===== Balance at June 30, 1996 15,000,000 12,281,371 12,279,371 2,000 ========== ========== ========== =====
Loss per common share was based on the weighted average number of common shares outstanding during each period. Exercise of stock options is not assumed as the effect is antidilutive. The weighted average number of common shares outstanding was 12,279,561 and 12,269,699 in 1997 and 1996, respectively. -9- 10 7. 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 option granted become 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. Had compensation cost for stock option grants made in fiscal years 1997 and 1996 been determined using the fair value method consistent with SFAS No. 123, the Company's net loss and net loss per share would have been effected as follows:
1997 1996 ------------- ----------- For the year ended June 30: Net loss-as reported $ 1,263,907 $ 159,547 Net loss - proforma 1,282,310 161,979 Net loss per share - as reported 0.10 0.01 Net loss per share - proforma 0.10 0.01
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1997 1996 ------- ------- Expected volatility 15% 15% Risk-free interest rate 6.1% 6.1% Expected term of options 5 years 5 years Expected dividend yield 0% 0%
-10- 11 Information regarding the Company's stock option plan for the years ended June 30, 1997 and 1996 is as follows:
1997 1996 ------------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE -------- -------- -------- ------- Outstanding at beginning of year 362,417 $ 1.06 205,649 $ 0.80 Granted 57,500 0.72 219,015 1.11 Forfeited (41,925) 1.04 (47,298) 0.73 Exercised (380) 0.69 (14,949) 0.84 ------ ----- --------- ---- Outstanding at end of year 377,612 $ 0.94 362,417 $ 1.06 ======== ======= ======== ====== Options exercisable at end of year 147,369 0.91 90,447 0.85 ======== ===== ======= ==== Weighted average fair value of option granted during year $ 0.16 $ 0.09
UTSTANDING EXERCISABLE ---------------------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE ------- ------------ -------- ------- -------- Range of exercise price .66 - .90 199,097 7.84 $ 0.77 102,740 $ 0.82 .91 - 1.14 178,515 9.00 1.14 44,629 1.14 ------- ------ ------- ------ 377,612 $ 0.94 147,369 $ 0.91 ======= ====== ======= ======
On July 14, 1997, the Company granted an additional 298,255 stock options at a price equal to the market value at the date of the grant. The options carry the same vesting and expiration terms as those defined above. The options have been excluded from the above disclosure. 8. INCOME TAXES Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. -11- 12 Deferred taxes consist of the following:
JUNE 30, JUNE 30, 1997 1996 ----------- ----------- Current deferred tax asset: Deferred revenue $ 59,951 $ 47,827 Inventory reserve 304,617 -- Accrued compensation 7,581 9,411 Reserves not currently deductible 12,785 18,267 Accrued rent 23,629 14,328 ----------- ----------- Total 408,563 89,833 Less valuation allowance (408,563) (89,833) ----------- ----------- Net $ -- $ -- =========== ===========
JUNE 30, JUNE 30, 1997 1996 ----------- ----------- Non-current deferred tax asset: Net operating loss carryforward $ 2,312,046 $ 2,173,836 Research and development credits 156,725 134,525 ----------- ----------- Total 2,468,771 2,308,361 Non-current deferred tax liability: Deferred software development costs (121,832) (103,007) ----------- ----------- Net non-current deferred tax asset 2,346,939 2,205,354 Less valuation allowance (2,346,939) (2,205,354) ----------- ----------- Net $ -- $ -- =========== ===========
The provision for income taxes for the year ended June 30, 1997 and 1996 consists of the following:
1997 1996 ----------- ----------- Current provision $ -- $ -- Deferred credit 460,315 66,178 ----------- ----------- Total 460,315 66,178 Less increase in the valuation allowance (460,315) (66,178) ----------- ----------- Income tax expense $ -- $ -- =========== ===========
At June 30, 1997, the Company has net operating loss carryforwards of approximately $6,800,135 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 June 30, 1997, for U.S. Federal tax purposes, the Company has research and development credit carryforwards available to offset future income taxes of approximately $156,725 which will begin to expire in 2002. -12- 13 9. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("CANADIAN GAAP AND U.S. GAAP") These financial statements have been prepared in accordance with accounting principles generally accepted in the United States. During the years ended June 30, 1997 and 1996, differences between Canadian GAAP and U.S. GAAP arose as a result of depreciation. For U.S. GAAP purposes, furniture and fixtures and equipment are depreciated over useful lives of seven and three years, respectively, using an accelerated method. For Canadian GAAP purposes, furniture and fixtures and equipment are to be depreciated over useful lives of five and three years, respectively, using a straight-line method. For the year ended June 30, 1997, the difference in methodology results in a reported US GAAP net loss in excess of Canadian GAAP of $91,015. The 1997 difference results primarily from the effects of the change in service life of computer equipment (see Note 2). No material difference existed during fiscal 1996. The difference does not have a material effect on the earnings per share calculation for either year. 10. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS The Company's fiscal 1997 results are inclusive of two significant adjustments recorded in the fourth quarter; the change in estimate associated with the service lives of computer equipment and a change in estimate for outstanding fees due to an outside party. The effects of the adjustments on income and related per share amounts were as follows:
INCOME (LOSS) PER-SHARE --------- --------- Depreciation $ (94,696) (0.01) Outstanding fees 160,611 0.01
* * * * * * -13- EX-27 3 EXHIBIT 27
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 440,500 363,095 1,011,552 37,604 101,415 1,898,741 752,758 608,423 2,401,406 1,109,307 0 0 0 8,982,842 (7,690,743) 2,401,406 7,044,857 7,044,857 944,851 3,087,247 5,251,957 0 0 (1,263,907) 0 (1,263,907) 0 0 0 (1,263,907) (.10) (.10)
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