-----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, NelZpVXub56r5RWxOhNfMYcSvpF6Jshddbxtu3PmKz0aJmAYktQgJuy/DCQm/bjF DkliRnyc7AyQhSLrIQce6g== 0000950152-98-008797.txt : 19981113 0000950152-98-008797.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950152-98-008797 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-24448 FILM NUMBER: 98745018 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 10QSB 1 CINTECH TELE-MANAGEMENT SYSTEMS, INC. FORM 10QSB 1 FORM 10-QSB [As last amended in Release No. 34-32231, April 28, 1993, 58 F.R. 26509] U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from __________________ to _____________________ CINTECH TELE-MANAGEMENT SYSTEMS, INC. --------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) OHIO 31-1200684 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2100 Sherman Avenue, Cincinnati, Ohio 45212 ------------------------------------------- (Address of principal executive offices) (513) 731-6000 --------------------------- (Issuer's telephone number) N/A ------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- --- APPLICABLE ONLY TO CORPORATE ISSUERS 2 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 12,279,751 shares of common stock as of September 30, 1998. --------------------------- - ------------------------------- Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS. The financial statements attached to the end of this quarterly report are filed as part of this quarterly report. The financial statements include all adjustments which in the opinion of management are necessary in order to make the financial statements not misleading. Item 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION. The following selected financial information set forth below has been derived from the unaudited financial statements of the Company. This discussion and analysis should be read in conjunction with such financial statements. All amounts are in US dollars. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 Sales for the three months ended September 30, 1998 were $3,292,000 compared to $2,057,000 for the same period last year. The $1,235,000 or 60%, increase in sales is due to a 69% increase in ACD unit volume combined with a 16% increase in revenue from other CTI products and a 32% increase in services revenue. Gross Margin of $2,232,000 was $856,000 or 62%, greater than the corresponding period of last year. This increase in Gross Margin is a direct result of the increase in sales volume. Gross Margin as a percentage of sales was 68% or 1% greater than that experienced during the same period of the prior year. Research and Development costs of $103,000 were approximately $30,000 less than the comparable prior year period. Selling, General and Administrative (S,G&A) expenses of $1,140,000 were approximately $5,000 less than the comparable prior year period. The Company realized Net Income of $1,005,000 for the three months ended September 30,1998 compared to a $106,000 Net Income reported for the same period last year. Earnings Per Share, basic and diluted, were $0.08 versus a $0.01 Per Share reported for the comparable prior year period. 2 3 LIQUIDITY AND CAPITAL RESOURCES Working Capital increased to $3.2 million as compared to $0.9 million for the corresponding period of last year. The increase of $2.3 million is primarily due to the increases in cash and marketable securities of $2.1 million and accounts receivable of $0.5 million offset by an increase in deferred maintenance revenue of $192,000 and accrued salaries and taxes of $155,000. 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 September 30, 1998, Cintech held cash and marketable securities totaling approximately $ 3.1 million and had no outstanding long-term debt obligations. The Company's plan of operation is to continue distributing its ACD-related products via strategic alliances with Northern Telecom and NEC. The Company has no material commitments for capital expenditures. The Company feels that there are no significant elements of income or loss that do not arise from the Company's continuing operations. YEAR 2000 COMPLIANCE The Company is in the process of conducting a comprehensive review of its key internal financial, information and operational systems to identify the systems that could be materially affected by the Year 2000 issue. The Company will be making appropriate modifications and conducting compliance testing on these systems. The Company believes that with modifications to, or replacement of, existing systems, the Year 2000 issue will not pose significant operating problems. Based upon preliminary information, the costs of addressing internal problems are not expected to have a material adverse impact on the Company's financial position, results of operations, or cash flows in future periods. Accordingly, the cost for Year 2000 problems will be funded through operating cash flows. The Company is currently engaged in assessing the capability of its products to handle the transition to and operate in the Year 2000. The Company is in the process of assessing the readiness of significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company cannot guarantee that the systems of other companies will be converted in a timely manner, or the conversion or failure to convert systems, would not have an adverse material effect on the Company. The Company is in the process of evaluating alternative procedures to handle Year 2000 issues in the event that there would be a delay in implementing any changes stemming from its current review process. 3 4 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 ---- Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession..................................................................... N/A Exhibit No. 3 - (I) Articles of Incorporation, (ii) By-laws ...................................... * Exhibit No. 4 - Instruments Defining Rights of Security Holders........................................................ N/A Exhibit No. 10 - Material Contracts................................................................ *, ** Exhibit No. 11 - Statement re: Computation of Per Share Earnings .................................. N/A Exhibit No. 15 - Letter on Unaudited Interim Financial Information................................. N/A Exhibit No. 18 - Letter on Change in Accounting Principles......................................... N/A Exhibit No. 19 - Reports Furnished to Security-Holders............................................. N/A Exhibit No. 22 - Published Report Regarding Matters Submitted to Vote.............................. N/A Exhibit No. 23 - Consent of Experts and Counsel.................................................... N/A Exhibit No. 24 - Power of Attorney................................................................. N/A Exhibit No. 99 - Additional Exhibits............................................................... N/A
(b)......On September 15, 1995, the Company changed its fiscal year end to June 30 commencing June 30, 1995. The Company filed a Form 8-K regarding this change in fiscal year on September 26, 1995. This form is incorporated in this report by reference. * Previously provided in original filing on Form 10-SB. ** Previously provided in Amendment No. 2 to Form 10-SB. 4 5 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, Cintech Tele-Management Systems, Inc., as Registrant, has caused this Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized. CINTECH TELE-MANAGEMENT SYSTEMS, INC. By: /s/ Diane M. Kamionka Date: November 13, 1998 --------------------------------- Diane M. Kamionka President and Chief Executive Officer By: /s/ Michael E. Freese Date: November 13, 1998 ---------------------------------- Michael E. Freese Director of Finance and Administration 5 EX-19 2 EXHIBIT 19 1 EXHIBIT NO. 19 REPORTS FURNISHED TO SECURITY-HOLDERS 2 [LOGO - DELOITTE & TOUCHE] ----------------------------------------------- DELOITTE & TOUCHE LLP Telephone: (513) 784-7100 250 East Fifth Street P.O. Box 5340 Cincinnati, Ohio 45201-5340 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 September 30, 1998 and 1997 and the related condensed statements of operations, stockholders' equity and cash flows for the three months then ended (all expressed in U.S. dollars). These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical 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 generally accepted auditing standards, the balance sheet of the Company as of June 30, 1998, and the related statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 26, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of June 30, 1998 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Deloitte & Touche LLP October 26, 1998 - ----------------- DELOITTE TOUCHE TOHMATSU - ----------------- 3 CINTECH TELE-MANAGEMENT SYSTEMS, INC. CONDENSED BALANCE SHEETS SEPTEMBER 30, 1998, JUNE 30, 1998 AND SEPTEMBER 30, 1997 - -------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, ASSETS 1998 JUNE 30, 1997 (UNAUDITED) 1998 (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 1,701,860 $ 913,699 $ 378,167 Marketable securities (Note 2) 1,384,260 916,832 602,048 Accounts receivable, trade - (Net of allowance of $34,211, $28,397 and $60,431 at September 30, 1998, June 30, 1998, and September 30, 1997, respectively) (Note 1) 1,543,144 1,523,058 1,058,752 Inventory (Note 1) 69,301 87,472 98,701 Prepaid expenses 37,949 28,450 11,782 ----------- --------- --------- Total current assets 4,736,514 3,469,511 2,149,450 ----------- --------- --------- FIXED ASSETS (Note 1): Equipment 693,064 668,065 636,985 Furniture and fixtures 146,592 146,592 120,269 ----------- --------- --------- Total 839,656 814,657 757,254 Less accumulated depreciation (729,304) (703,804) (654,923) ----------- --------- --------- Total fixed assets - net 110,352 110,853 102,331 ----------- --------- --------- Software development costs - net (Note 1) 265,460 225,117 368,186 ----------- --------- --------- TOTAL $ 5,112,326 $ 3,805,481 $ 2,619,967 =========== =========== ===========
See notes to financial statements. - -------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, LIABILITIES AND 1998 JUNE 30, 1997 STOCKHOLDERS' EQUITY (UNAUDITED) 1998 (UNAUDITED) CURRENT LIABILITIES: Accounts payable $ 400,016 $ 201,292 $ 484,845 Accrued liabilities: Accrued salaries 278,222 222,562 137,495 Accrued payroll taxes 25,544 13,660 11,559 Accrued vacation 73,187 86,782 89,349 Other 288,512 300,302 172,334 Current portion of note payable (Note 4) 15,000 Deferred maintenance revenue (Note 1) 503,567 442,611 311,502 --------- --------- --------- Total current liabilities 1,569,048 1,267,209 1,222,084 --------- --------- --------- STOCKHOLDERS' EQUITY (Notes 1, 5, 6): Common stock 8,982,842 8,982,842 8,982,842 Contributed capital 675,757 675,757 675,757 Treasury stock (2,290) (2,290) (2,290) Accumulated deficit (6,113,031) (7,118,037) (8,258,426) --------- --------- --------- Total stockholders' equity 3,543,278 2,538,272 1,397,883 --------- --------- --------- TOTAL $ 5,112,326 $ 3,805,481 $ 2,619,967 =========== =========== ===========
-2- 4 CINTECH TELE-MANAGEMENT SYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - -------------------------------------------------------------------------------
1998 1997 NET SALES (Note 1) $3,292,092 $2,056,750 COST OF PRODUCTS SOLD (Note 1) 380,559 305,455 PROVISION FOR OBSOLETE INVENTORY (Note 1) 4,500 7,000 AMORTIZATION OF DEFERRED SOFTWARE DEVELOPMENT COSTS (Note 1) 36,000 36,000 LICENSING FEES (Note 1) 639,323 333,074 ---------- ---------- GROSS PROFIT 2,231,710 1,375,221 RESEARCH AND DEVELOPMENT 102,671 132,307 SELLING, GENERAL AND ADMINISTRATIVE (Notes 1, 3) 1,140,237 1,145,090 ---------- ---------- INCOME FROM OPERATIONS 988,802 97,824 OTHER INCOME 16,204 7,960 ---------- ---------- NET INCOME $1,005,006 $ 105,784 ========== ========== BASIC AND DILUTED EARNINGS PER COMMON SHARE (Note 5) $ 0.08 $ 0.01 ========== ==========
See notes to financial statements -3- 5 CINTECH TELE-MANAGEMENT SYSTEMS, INC. CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - ------------------------------------------------------------------------------
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 105,784 105,784 ----------- ----------- ----------- ----------- ----------- BALANCE AT SEPTEMBER 30, 1997 $ 8,982,842 $ 675,757 $ (2,290) $(8,258,426) $ 1,397,883 =========== =========== =========== =========== =========== BALANCE AT JUNE 30, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(7,118,037) $ 2,538,272 NET INCOME 1,005,006 1,005,006 ----------- ----------- ----------- ----------- ----------- BALANCE AT SEPTEMBER 30, 1998 $ 8,982,842 $ 675,757 $ (2,290) $(6,113,031) $ 3,543,278 =========== =========== =========== =========== ===========
See notes to financial statements -4- 6 CINTECH TELE-MANAGEMENT SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 - -------------------------------------------------------------------------------
1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,005,006 $ 105,784 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 25,500 46,500 Amortization of software development costs 36,000 36,000 Provision for obsolete inventory 4,500 7,000 Provision for doubtful accounts 5,814 22,827 Changes in assets and liabilities: Increase in accounts receivable (25,900) (114,297) Decrease (increase) in inventory 13,671 (4,286) (Increase) decrease in prepaid expenses (9,499) 8,001 Increase (decrease) in accounts payable 198,724 (48,258) Increase in accrued expenses 42,159 40,858 Increase in deferred maintenance revenue 60,956 135,177 ----------- ----------- Total adjustments 351,925 129,522 ----------- ----------- Net cash provided by operating activities 1,356,931 235,306 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (467,428) (232,287) Purchase of fixed assets (24,999) (4,496) Expenditures for software development costs (76,343) (45,856) ----------- ----------- Net cash used in investing activities (568,770) (282,639) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on notes payable (15,000) ----------- ----------- Net cash used in financing activities (15,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 788,161 (62,333) CASH AND CASH EQUIVALENTS: Beginning of period 913,699 440,500 ----------- ----------- End of period $ 1,701,860 $ 378,167 =========== ===========
See notes to financial statements. -5- 7 CINTECH TELE-MANAGEMENT SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND AS OF SEPTEMBER 30, 1998 AND 1997 AND FOR THE THREE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED) - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - The Company develops and markets computer software in the emerging Computer-to-Telephone Integration (CTI) industry which integrates the voice functions of the telephone with the data functions of the computer to provide various business applications. This provides the means for small to mid-sized offices to take advantage of the rapid advances and emerging capabilities of CTI. Cintech has key strategic product partnerships with Nortel and NEC America. These strategic product partnerships provide the Company with extensive distribution opportunities. BASIS OF PRESENTATION - The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X and are expressed in United States dollars. The differences in accounting principles generally accepted in the United States of America and Canada are described in Note 8. The information disclosed in the notes to the financial statements included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 1998 has not changed materially unless otherwise disclosed herein. Financial information as of June 30, 1998 included in these financial statements has been derived from the audited financial statements included in that report. In management's opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE - Generally, the Company records revenue from product sales when the product is shipped. Contracts with certain distributors may have terms which cause the Company to record revenue when the product is sold to third parties. Also, the Company records an estimate of potential future returns of product sold at the time of sale. DEFERRED MAINTENANCE REVENUE - The Company sells product maintenance agreements which provide for repair of hardware and no-cost upgrade of software. These agreements normally cover a one-year period with revenue being recognized on a straight-line basis over the maintenance period. WARRANTY RESERVE - At the time of sale, the Company accrues for warranty costs relating to hardware replacement or on site support to be provided during the first twelve months following the sale. Costs associated with supporting product under warranty are charged to the reserve instead of current period -6- 8 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:
September 30, June 30, September 30, 1998 1998 1997 Literature and other documentation $ 22,146 $ 27,107 $ 39,985 Computer hardware 898,877 933,500 961,449 Allowance for obsolete inventory (851,722) (873,135) (902,733) -------- -------- -------- Total inventory $ 69,301 $ 87,472 $ 98,701 ======== ======== ========
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in the telephony industry. The Company had sales to major distributors, as follows:
Sales for the Three Months Ended Sept 30, 1998 1997 ----------------------- --------------------------- Amount % Amount % Distributor A $ 2,317,041 70 % $ 1,101,427 54 % Distributor B 258,793 13 % ----------- ---- ----------- ---- Total $ 2,317,041 70 % $ 1,360,220 67 % =========== ==== =========== ====
The Company had gross accounts receivable from major distributors, each of which was in excess of 10% of the Company's total accounts receivable, as follows:
PERCENT OF GROSS ACCOUNTS DISTRIBUTORS RECEIVABLE September 30, 1998 1 71 % June 30, 1998 1 86 % September 30, 1997 2 66 %
-7- 9 INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE THREE MONTHS SEPTEMBER 30, ------------------------------------------------- 1998 1997 ----------------------- ----------------------- Amount % Amount % Canada $ 15,355 0 % $ 55,729 3 % Other % 22,103 1 -------- --- -------- --- Total $ 15,355 0 % $ 77,832 4 % ======== === ======== ===
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 $76,343 and $45,856 and related amortization was $36,000 for the three months ended September 30, 1998 and 1997. 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 FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement, which is effective for the 1999 fiscal year, expands or modifies disclosures and, accordingly, will have no impact on the Company's reported financial position, result of operations or cash flows. In 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which is effective for all periods beginning after June 15, 1999, will have no impact on the Company's reported financial position, results of operations or cash flows. The Company adopted FASB Statement No. 128, "Earnings Per Share," during the quarter ended December 31, 1997. Earnings per share of prior periods have been restated (see Note 5). The Company also adopted FASB Statement No. 130, "Reporting Comprehensive Income" during the quarter ended September 30, 1998. However, as the Company had no items of comprehensive income, there was no impact on the Company's financial statements. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the Company considers all money market instruments to be cash equivalents. RECLASSIFICATION - Certain fiscal year 1998 amounts have been reclassified in order to conform to fiscal year 1999 presentation. -8- 10 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) September 30, 1998 - Federal Agency Notes $ 1,384,260 $ 1,384,585 $ 325 =========== =========== ===== June 30, 1998 - Federal Agency Notes $ 916,832 $ 915,957 $ (875) =========== =========== ===== September 30, 1997 - US Treasury Bills/Federal Notes $ 602,048 $ 602,503 $ 455 =========== =========== =====
3. OPERATING LEASES OPERATING LEASES - The Company leases its office facility in Norwood, Ohio. This operating lease, which began in March 1995 and expires in April 2002, calls for escalating lease payments over the term of the lease. The Company records lease expense on a straight-line basis over the life of the lease. The annual minimum rent to be paid under the operating lease agreement for the facility in Norwood, Ohio is as follows: Period Ending September 30: 1999 $ 205,000 2000 213,750 2001 220,000 2002 128,331 Rent expense for the leased office space was $73,277 in each of the three-month periods ended September 30, 1998 and 1997. 4. NOTE PAYABLE The Company had a Term Note Payable - Bank bearing interest at the prime lending rate (8.25%) which was paid in full, principal and interest, on December 19, 1997. 5. CAPITAL STOCK AND INCOME PER SHARE The following schedule is a summary of the Company's shares of capital stock at September 30, 1998, June 30, 1998, and September 30, 1997.
Common In Authorized Issued Outstanding Treasury Balance 15,000,000 12,281,751 12,279,751 2,000 ========== ========== ========== =====
-9- 11 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 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------------------------ ------------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT BASIC EPS Income available to common stockholders $ 1,005,006 12,279,751 $ 0.08 $ 105,784 12,279,751 $ 0.01 EFFECT OF DILUTIVE SECURITIES Stock options 153,110 53,872 ----------- ---------- ------ --------- ---------- ------ DILUTED EPS Income available to common stockholders and assumed conversions $ 1,005,006 12,432,861 $ 0.08 $ 105,784 12,333,623 $ 0.01 =========== ========== ====== ========= ========== ======
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 year 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. -10- 12 Deferred taxes consist of the following:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 1998 1998 1997 Current deferred tax asset: Deferred revenue $ 171,213 $ 150,488 $ 105,911 Inventory reserve 289,585 296,866 306,929 Accrued compensation 8,197 8,197 7,581 Reserves not currently deductible 11,632 9,655 20,546 Accrued rent 25,543 26,554 25,231 ----------- ----------- ----------- Total 506,170 491,760 466,198 Less valuation allowance (506,170) (491,760) (466,198) ----------- ----------- ----------- Net $ -- $ -- $ -- =========== =========== =========== Non-current deferred tax asset: Net operating loss carryforward $ 1,674,180 $ 2,027,953 $ 2,276,079 Research and development credits 184,425 178,925 162,225 ----------- ----------- ----------- Total 1,858,605 2,206,878 2,438,304 Non-current deferred tax liability: Deferred software development costs (90,256) (76,540) (116,973) ----------- ----------- ----------- Net non-current deferred tax asset 1,768,349 2,130,338 2,321,331 Less valuation allowance (1,768,349) (2,130,338) (2,321,331) ----------- ----------- ----------- Net $ -- $ -- $ -- =========== =========== ===========
The provision for income taxes for the three months ended September 30, 1998 and 1997 consists of the following:
1998 1997 Current provision $ -- $ -- Deferred provision 347,579 32,028 --------- --------- Total 347,579 32,028 Decrease in the valuation allowance (347,579) (32,028) --------- --------- Income tax expense $ -- $ -- ========= =========
At September 30, 1998, the Company has net operating loss carryforwards of approximately $4,900,000 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 September 30, 1998, for U.S. Federal tax purposes, the Company has research and development credit carryforwards available to offset future income taxes of approximately $184,000 which will begin to expire in 2002. -11- 13 8. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("CANADIAN GAAP AND U.S. GAAP") These financial statements have been prepared in accordance with accounting principles generally accepted in the United States. During the periods presented, differences between Canadian GAAP and U.S. GAAP arose as a result of depreciation. For U.S. GAAP purposes, furniture and fixtures, equipment, and computer equipment are depreciated over useful lives of seven, five, and three years, respectively, using an accelerated method. For Canadian GAAP purposes, furniture and fixtures, equipment, and computer equipment are to be depreciated over useful lives of five, three, and three years, respectively, using a straight-line method. The difference in methodology results in a reported US GAAP net income in excess of Canadian GAAP of $6,517 and $5,546 for the periods ended September 30, 1998 and 1997, respectively. The difference does not have a material effect on the earnings per share calculation for either period. * * * * * * -12- EX-27 3 EXHIBIT 27
5 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 1,701,860 1,384,260 1,577,355 34,211 69,301 4,736,514 839,656 729,304 5,112,326 1,569,048 0 0 0 8,982,842 (5,439,564) 5,112,326 3,292,092 3,292,092 385,059 1,060,382 1,242,908 0 0 1,005,006 0 1,005,006 0 0 0 1,005,006 0.08 0.08
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