Item 1 Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

Cash and cash equivalents

Short-term Investments

Accounts receivable, trade (net of allowance for doubtful accounts of $21,000 and $30,000, respectively)

Inventories, net

Prepaid expenses and other current assets

 

Total Current Assets

 

PROPERTY AND EQUIPMENT

 

Cost

Less accumulated depreciation

 

Property and Equipment (Net)

 

OTHER ASSETS:

 

Software development costs (net of accumulated amortization of $2,958,639 and $3,332,886, respectively)

Pension assets

Deposits and other assets

 

Total Other Assets

 

 

TOTAL ASSETS

 

 

 

CURRENT LIABILITIES:

Accounts payable

Accrued compensation and related taxes

Deferred revenue

Current portion of pension obligation

Other accrued liabilities

 

 

Total Current Liabilities

 

Pension obligation

 

 

Total Liabilities

 

 

STOCKHOLDERS’ (DEFICIT) EQUITY:

Common Stock, par value $.10; shares authorized, 40,000,000; shares issued and outstanding, 9,993,956 and 9,852,954

Additional paid-in capital

Accumulated deficit

Treasury stock (80,225 shares, at cost)

Accumulated other comprehensive income

 

Total Stockholders’ (Deficit) Equity

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

NET SALES

Product sales

Service sales

 

Total Net Sales

 

 

COSTS AND OPERATING EXPENSES:

Cost of sales

Engineering and software development

Selling, general and administrative

 

Total Costs and Operating Expenses

 

LOSS FROM OPERATIONS

 

NET INTEREST INCOME

 

 

LOSS BEFORE INCOME TAXES

 

INCOME TAXES

 

 

NET LOSS

 

 

NET LOSS PER SHARE

Basic

 

Diluted

 

OPERATING ACTIVITIES:

Net Loss

Adjustments to reconcile net loss to net cash flows provided by operating activities

Depreciation and amortization

Bad debt expense (recovery)

Share based compensation expense

Pension assets

Loss on disposal of fixed assets

Unrealized gain on sale of investments

 

Changes in assets and liabilities

Accounts receivable

Inventories

Prepaid expenses and other current assets

Deposits and other assets

Accounts payable

Accrued compensation and related taxes

Deferred revenue

Other accrued liabilities

Pension obligation

 

Net cash flows provided (used) by operating activities

 

 

INVESTING ACTIVITIES:

Sale of investments

Capitalized software development costs

Additions to property and equipment

 

Net cash flows used by investing activities:

 

FINANCING ACTIVITY:

Transfer of Cash Surrender Values

Exercise of stock options

Proceeds from employee stock purchase plan

 

Net cash flows provided by financing activities

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

Cash Transactions:

Income taxes paid, net

Interest paid

The major classifications of property and equipment at September 30, 2009, and December 31, 2008 were:

Machinery and equipment

Computer hardware and software

Furniture and fixtures

Leasehold improvements

 

 

 

For the nine months ended September 30, 2009, the Company recorded depreciation expense of $233,139. Depreciation expense for the nine months ended September 30, 2008 was $215,783.

The Company’s share-based compensation consists of restricted stock and stock options, generally vesting over periods ranging from one to four years. For the nine months ended September 30, 2009, the Company awarded restricted stock grants totaling 107,000 shares vesting over three years, and 40,000 stock options vesting over four years. During the first nine months of 2008 the Company awarded 470,000 restricted shares, and 140,500 stock options.

A summary of the status of the Company’s stock option plan as of September 30, 2009 is presented below:

Outstanding as of December 31, 2008

Granted

Exercised

Canceled

 

 

Outstanding as of September 30, 2009

 

 

Options exercisable at September 30, 2009

 

Total comprehensive income (loss) for the three and nine months ended September 30, 2009 and 2008 were as follows:

Net loss

Reclassification to net periodic benefit cost

Unrealized change — pension

Unrealized change on investments

 

Total comprehensive loss

 

ASC 260-10 (SFAS 128) “Earnings Per Share” as amended in September 2009, requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding options issued by the Company are reflected in diluted EPS using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options.

 

Net Loss

 

Weighted average common shares outstanding

 

Net loss per common share

 

 

 

Net loss

 

Weighted average common shares outstanding

Additional dilutive effect of stock options and warrants after application of treasury stock method

 

Weighted average dilutive shares outstanding

 

 

Net loss per common share assuming full obligation

 

Our agreements with customers generally require us to indemnify the customer against claims that our software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard respects, including our right to replace an infringing product. As of September 30, 2009 we had not experienced any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. We do not expect significant claims related to these indemnification obligations, and consequently, we have not established any related reserves.

The Company sponsors an employee incentive savings plan under Section 401(k) for all eligible employees. The Company’s contributions to the plan are discretionary. During the first nine months of 2009, the Company contributed $23,868 to employees’ 401k accounts. There were no contributions to the plan during the first nine months of 2008.

The Company also sponsors an unfunded Supplemental Executive Retirement Program (“SERP”), which is a non-qualified plan that provides certain key employees defined pension benefits. Periodic pension expense for the three and nine months ended September 30, 2009 and 2008 consists of the following:

Current Service Cost

Amortization of Prior Service Cost

Interest Cost

Unrealized change

 

 

Pension Expense

 

The Company paid pension obligations of $360,544 for the nine months ended September 30, 2009 and $326,569 for the nine months ended September 30, 2008.

The discount rate used in determining the actuarial present value of the projected benefit obligation was 6.0% for the nine month periods ended September 30, 2009 and 2008.

The Company maintains life insurance covering certain key employees under its Supplemental Executive Retirement Program with the Company named as beneficiary. The Company intends to use the death benefits of these policies, as well as loans against the accumulating cash surrender value of the policies, to fund future pension obligations. The total death benefit associated with these policies is $10.2 million, with an associated accumulated cash surrender value of approximately $2,875,000 at September 30, 2009. The accumulated cash surrender values of these policies at December 31, 2008 was approximately $3,161,000.

The projected pension benefits paid or expected to be paid under this plan are as follows, assuming retirement at 65 and a life expectancy of 80 years for all participants:

Q4 2009

2010

2011

2012

2013

2014 - 2018

The Company has a contractual obligation to maintain certain health benefits for two of its former chief executive officers. These benefits are accounted for as Post Retirement Healthcare Benefits, (“PRHB”). Periodic PRHB expensed and paid for the three and nine months ended September 30, 2009 and 2008 consists of the following:

 

Current Service Cost

Interest Cost

 

 

PRHB Expense

 

The projected PRHB paid or expected to be paid are as follows:

Q4 2009

2010

2011

2012

2013

2014 - 2018

Subsequent events were evaluated through November 12, 2009, the date the financial statements were issued.

 

Gross expenditures for engineering & software development

Less: Software development costs capitalized

 

Net expense for engineering and software

 

In December 2007, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) 805-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations”. ASC 805-10 establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 805-10 did not have a material effect on the Company’s financial statements.

In December 2007, the Financial Accounting Standards Board issued ASC 810-10, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. ASC 810-10 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 810-10 did not have a material effect on the Company’s financial statements.

In March 2008, the Financial Accounting Standards Board issued ASC 815-10, formerly (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 815-10 did not have a material effect on the Company’s financial statements.

In May 2008, the Financial Accounting Standards Board issued ASC 944, formerly SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”). ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. ASC 944 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 944 did not have a material effect on the Company’s financial statements.

In June 2008, the Financial Accounting Standards Board issued ASC 260-10, formerly FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”. ASC 260-10 clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends or dividend equivalents before vesting should be considered participating securities. We have granted and expect to continue to grant restricted stock that contain non-forfeitable rights to dividends and will be considered participating securities upon adoption of ASC 260-10. As participating securities, we will be required to include these instruments in the calculation of our basic earnings per share (“EPS”), and we will need to calculate basic EPS using the “two-class method.” Restricted stock is currently included in our dilutive EPS calculation using the treasury stock method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. ASC 260-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 260-10 did not have a material effect on the Company’s financial statements.

In December 2008, the Financial Accounting Standards Board issued ASC 715-20, formerly FASB Staff Position (FSP) SFAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”). ASC 715-20 requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. ASC 715-20 is effective for fiscal years ending after December 15, 2009. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 715-10 did not have a material effect on the Company’s financial statements.

In May 2009, the Financial Accounting Standards Board issued ASC 855-10, formerly SFAS No. 165, “Subsequent Events” (“SFAS 165”). ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of ASC 855-10 did not have a material effect on the Company’s financial statements.

In June 2009, the Financial Accounting Standards Board issued ASC 105-10, formerly SFAS No. 168, “ The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). ASC 105-10 replaces Statement 162 and establishes the FASB Accounting Standards Codification^TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 105-10 did not have a material effect on the Company’s financial statements.

Revenue recognition

Capitalization of software development costs

Allowance for Doubtful Accounts

Pension liability

Financial Statements as set forth under Item 1 of this report on Form 10-Q

Exhibits required to be filed by Item 601 of Regulation S-K

Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-18 (File No. 2-96787) filed on March 22, 1985)

 

Bylaws (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form S-8 filed on October 5, 1992)

 

Letter Agreement dated as of March 29, 2007 by and between the Company and David G. Mazzella (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 3, 2007)

 

Letter Agreement dated as of July 30, 2007 by and between the Company and Martin LoBiondo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2007)

 

Amended and Restated Board of Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 26, 2007)

 

Consulting Agreement dated as of December 12, 2007 by and between the Company and David G. Mazzella (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 13, 2007)

 

Employment Agreement dated as of December 17, 2007 by and between the Company and Anthony C. Mazzullo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2007)

 

Letter Agreement dated as of February 4, 2008 by and between the Company and Douglas F. Smith (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 4, 2008)

 

Restricted Stock Award Agreement dated as of January 1, 2008 by and between the Company and Anthony C. Mazzullo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 25, 2008)

 

2008 Incentive Plan for Management and Key Employees (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 2, 2008)

2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit F to the Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders filed on April 29, 2008)

 

Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 18, 2008)

 

Amended Salary Continuation Agreement dated as of October 10, 2008 by and between the Company and Ronald C. Lundy (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2008)

 

Form of 2008 Employee Stock Purchase Plan Enrollment Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (File No. 333-155286) filed on November 12, 2008)

 

Code of Business Conduct and Ethics (incorporated by reference to Exhibit E to the Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders filed on April 29, 2008)

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Schedules required to be filed by Regulation S-X

none

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.