WASHINGTON, D.C. 20549
COMMISSION FILE NUMBER: 333-100046
CINTEL CORP.
433 N. Camden Drive, Suite 400, Beverly Hills, CA 90210
Gregory Sichenzia, Esq.
Marcelle S. Balcombe, Esq.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
The number of shares of registrant’s common stock outstanding, as of May 19, 2009 was 95,300,196.
CINTEL CORP.
ITEM 1. FINANCIAL STATEMENTS
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Nature of the Business
Cintel Corp., formerly Link2 Technologies, Inc. (“Cintel” or the "Company") incorporated in Nevada in August 1996, primarily owns and manages its subsidiaries which have been engaged in the business of developing network solutions to improve internet traffic, manufacturing semiconductor and electrical components, and designing, manufacturing and installing automated assembly machinery and testing equipments based on customers’ specification. The subsidiaries' businesses also include Customer Relationship Management (CRM) solution, call center operation and database marketing.
On September 30, 2003, the Company acquired 100% of the outstanding voting stocks of Cintel Co. Ltd. (“Cintel Korea”) and in return, the shareholders of Cintel Korea received 16,683,300 shares (approximately 82%) of the Company’s common stock. This transaction was a reverse-takeover by Cintel Korea whereby Cintel Korea’s shareholders acquired the control of the Company. Cintel Korea, located in Seoul, Korea, was in the business of developing network solutions to improve technical limitations to the internet traffic. During 2007, Cintel Korea ceased the network solution operation due to lack of profitability.
On October 30, 2006, the Company acquired 51% of the outstanding voting stocks of Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. ("PSTS") in China for $16.5 million. In March 2008, the Company contributed $4.9 million of additional capital to PSTS to proportionately match the additional investments made by the minority shareholders of PSTS. PSTS was incorporated on March 2, 2004 without share capital pursuant to the commercial law of the PRC to manufacture semiconductor and electrical components.
On May 18, 2007, the Company acquired 100% of the outstanding voting stocks of Bluecomm Korea, Co. Ltd. (“Bluecomm”) in Korea for $6.5 million. Bluecomm is engaged in the business of Customer Relationship Management (CRM) solution and consulting, call-center operation, and database marketing. It also provides total solutions for call-center outsourcing and Home Service Center (HSC) hosting. Bluecomm commenced its CRM related business in October 2005, and entered into an agreement with Pizza Hut Korea to provide HSC and data base management operations services in June 2006. The service agreement with Pizza Hut Korea ended as of September 30, 2008, and as a result, the CRM business has substantially declined.
On August 27, 2007, the Company acquired 50.1% of the outstanding voting stocks of Phoenix Digital Tech Co. Ltd. (“PDT”) in Korea for $34.7 million. PDT is in the business of designing, manufacturing and installing automated assembly line for Flat Panel Displays, and manufacturing and testing of PCB related equipment based on customers’ specification.
Acquisitions of these foreign subsidiaries were financed through the Company's convertible debentures as described in Note 12.
The Company has sustained recurring losses, and reported net loss of $1.9 million for the period ended March 31, 2009, and working capital deficiency of $16.0 million as of March 31, 2009. As a result, the company’s accumulated deficits aggregated $23.3 million as of March 31, 2009.
Note 2 – Summary of Significant Accounting Policies:
The following summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The consolidated financial statements include the accounts of Cintel Corp. and its wholly-owned or majority-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Minority interest in subsidiaries represents the minority stockholders' proportionate share of the net assets and the results of operations of subsidiaries in Korea and China.
Where the functional currency of the Company's foreign subsidiaries is the local currency, all assets and liabilities are translated into U.S. dollars, in accordance with Statement of Financial Accounting Standards (“SFAS”) No 52, Foreign Currency Translation, using the exchange rate on the consolidated balance sheet date, and revenues and expenses are translated at average rates prevailing during the period. Accounts and transactions denominated in foreign currencies have been re-measured into functional currencies before translated into U.S. dollars. Foreign currency transaction gains and losses are included as a component of other income and expense. Gains and losses from foreign currency translation are included as a separate component of comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results may differ materially from these estimates. In addition, any changes in these estimates or their related assumptions could have a materially adverse effect on the Company's operating results.
Revenue Recognition
The majority of the Company's product revenues are recognized upon shipment or delivery and acceptance of products by customers, when pervasive evidence of a sales arrangement exists, the price is fixed or determinable, the title has transferred and collection of resulting receivables is reasonably assured.
Manufactured products (machinery and equipments) based on customers' specifications are subject to specific rights of returns, and revenue recognition is deferred until the products are installed, tested and approved by the customers. For merchandise products, the Company recognizes revenue upon shipment of products, when title is passed and the amount collectible can reasonably be determined. All amounts billed to a customer related to shipping and handling are classified as revenue, while all costs incurred by the Company for shipping and handling are classified as cost of revenues. Revenues generated by Customer Relationship Management consulting and database marketing services are recognizes as the services are performed, while the call center operation revenues are recognized at the end of each month when the relating time costs can be reasonably determined.
Advertising Costs
The Company's policy is to expense advertising costs as they are incurred. Advertising expenses were $3,811 and $107,007 for the periods ended March 31, 2009 and 2008, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Sales and Value-Added Taxes
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the Company's statement of operations.
Cash and Cash Equivalents
Cash includes currency, checks issued by others, other currency equivalents, current deposits and passbook deposits held by financial institutions. Cash equivalents consist primarily of cash deposits in money market funds that are available for withdrawal without restriction. The investments that mature within three months from the investment date are also included as cash equivalents.
Cash deposits that are restricted as to usage, withdrawal or pledged as security are disclosed separately and not included in the cash total for the purpose of the statements of cash flow. At March 31, 2009 and December 31, 2008, such restricted cash aggregated $0.4 million and $ 0.6 million, respectively$1,242,582.
Accounts Receivable
Trade accounts receivable are presented at face value less allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of probable credit losses in the existing accounts receivable. The Company determines the allowance based on Company’s historical experience and review of specifically identified accounts and ageing data. The Company reviews its allowance for doubtful accounts periodically. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Accounts receivables are shown net of allowance for doubtful accounts of $3.2 million and $2.3 million as of March 31, 2009 and December 31, 2008, respectively. All of the net trade receivables are pledged as collateral on bank debts.
Investments
Investments are accounted in accordance with Statement of Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. For all investment securities, unrealized losses that are considered to be other than temporary are considered impairment losses and included in the statements of operations.
Available-for-sale investments include marketable short-term investments and long-term investments in marketable securities. Short-term investments in marketable debt securities are reported at fair value and include all debt securities regardless of their maturity dates. Long-term investments in marketable equity securities are reported at fair value. Unrealized gains and losses on marketable debt and equity securities, net of related tax, are recorded as a separate component of comprehensive income in stockholders' equity until realized.
Investments in long-term non-marketable equity securities are recorded at cost and consist primarily of non-marketable common and preferred stock of private companies with less than 20% of the voting rights. Gains and losses on securities sold are included in the statement of operations. In the event that the carrying value of the investments exceeds its fair value and the decline in value is determined to be other than temporary, the unrealized losses are considered impairment losses and recognized as a component. Investments classified as held-to-maturity are carried at amortized cost in the absence of any other than temporary decline in value.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Investments subject to significant influence have been recorded using the equity method.
Inventories
Inventories are stated at lower of cost or market. Cost is computed on a first in, first out basis for raw materials and supplies. Work-in-process, manufactured finished goods and merchandise goods are stated at the lower of cost or net realizable value, where cost is computed using weighted average method and net realizable value is determined by deducting applicable selling expenses from selling price.
The Company determines that a certain level of inventory must be carried to maintain an adequate supply of product for customers. This inventory level may vary based upon orders received from customers or internal forecasts of demand for these products. Other consideration in determining inventory levels include the stage of products in the product life cycle, design win activity, manufacturing lead times, customer demand, and competitive situations in the marketplace. Should any of these factors develop other than anticipated, inventory level may be materially affected.
Property and Equipment
Property and equipment, including renewals and betterments, are stated at cost. Cost of renewals and betterment that extend the economic useful lives of the related assets are capitalized. Expenditures for ordinary repairs and maintenance are charged to expense as incurred. Gain or loss on sale or disposition of assets is included in the statement of operations.
Depreciation is provided using the straight-line method over the following estimated useful lives of the assets.
| Buildings located in China | 20 years |
| Buildings located in Korea | 30 years |
| Machinery and equipment | 5 - 10 years |
| Measuring equipment | 5 years |
| Furniture and fixtures | 5 years |
| Vehicles | 5 years |
| Software | 5 years |
| Landscaping | 5 years |
| Structure | 5 years |
Construction-in-progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use.
Government Grants
Government grants without obligation to repay are recognized as reduction of the depreciable basis of the assets that are associated with the grants.
Long-Lived Assets Impairment
The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use and eventual disposition of the asset. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values. When assets are removed from operations and held for sale, the impairment loss is estimated as the excess of the carrying value of the assets over their fair value.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other intangible assets under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under this standard, goodwill is tested for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying amount of goodwill exceeds its implied fair value.
The two-step impairment test identifies potential goodwill impairment and measures the amount of a goodwill impairment loss to be recognized (if any). The first step of the goodwill impairment test, used to indentify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses management estimates of future cash flows to perform the first step of the goodwill impairment test. Management's estimates include assumptions about future conditions such as future revenues, gross margins, operating expenses and industry trends. The second step is only performed if impairment is indicated after first step is performed, which involve measuring the actual impairment to goodwill.
SFAS 142 also requires that intangible assets with definitive lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset's carrying value may not be recoverable. Currently the Company amortizes acquired intangible assets with definite lives over periods ranging primarily from five to ten years.
Research and Development Costs
Research and development costs consist primarily of salaries and subcontracting expenses and are expensed as incurred.
Fair Value of Financial Instruments
The Company determines the estimated fair value of financial instruments using available market information and valuation methodologies considered to be appropriate. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of investments, derivative instruments and convertible debt are based on market data. Carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturity of these financial instruments.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Derivative Instruments
All of the Company's derivative instruments are recognized as assets and liabilities in the statement of financial position and measured at fair value. On the date a derivative contract is entered into, the Company designates the derivative as either a hedge of the fair value of a recognized assets or liability ("fair-value" hedge), as a hedge of the variability of cash flows to be received or paid ("cash-flow" hedge) or as a foreign currency hedge. Changes in the fair value of a derivative that is highly effective and is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedge risk, are recorded in current period earnings. Effective changes in the fair value of a derivative that is highly effective and is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income until earnings are affected by the variability of the cash flows. Changes in the fair value of derivatives that are highly effective and are designated and qualify as a foreign-currency hedge are recorded in either current period earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to be settled in a foreign currency) or a cash-flow hedge (e.g., a foreign-currency-denominated forecasted transaction).
The Company also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. If it were to be determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company would discontinuing hedge accounting prospectively.
The Company would discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated or exercised; (3) the derivative is no longer designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; (4) the hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designation of the derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as a highly effective fair-value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for changes in fair value. When a fair value hedge on an interest-bearing financial instrument (such as an interest swap) is cancelled and hedge accounting is discontinued, the hedge item is no longer adjusted for changes in its fair value, and the remaining asset or liability will be amortized to earnings over the remaining life of the hedged item. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was previously recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gain or loss in current period earnings.
Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk," requires disclosure of any significant off-balance sheet risk and credit risk concentration. Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, short-term investments, accounts receivable and loan receivables. Cash equivalents and short-term investments are maintained with high quality institutions, the composition and maturities of which are regularly monitored by management. The Company diversifies its investments to reduce the exposure to loss from any single issuer, sector or bank.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The Company provides credit to its customers in the normal course of operations. It carries out, on a continuing basis, credit checks of its customers, and maintains allowance for credit losses contingent upon management’s forecasts. For loan receivables, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value. Concentration of credit risk arises when a group of customers having similar characteristics such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions.
As of March 31, 2009, the Company had four major customers which accounted for about 12% of the total accounts receivable. For the period ended March 31, 2009, the Company had four major customers which accounted for about 44% of the total revenue.
Product Warranties
The Company warrants manufactured finished goods against defects in material and workmanship under normal use and service for period of one year. A liability for estimated future costs under product warranties is recorded when products are shipped.
Litigation and Settlement Costs
The Company may be involved in legal actions arising in the ordinary course of business. The Company records an estimated loss for a loss contingency when both of the following conditions are met: (1) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (2) the amount of loss can be reasonably estimated.
Income Taxes
The Company accounts for income taxes pursuant to the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109.
The calculation of the Company's tax provision involves the application of complex tax rules and regulations within multiple jurisdictions throughout the world. The Company's tax liabilities include estimates for all income-related taxes that the Company believes are probable and that can be reasonably estimated. To the extent that the Company’s estimates are understated, additional charges to the provision for income taxes would be recorded in the period in which the Company determines such understatement. If the Company's income tax estimates are overstated, income tax benefits will be recognized when realized.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Comprehensive Income
The Company records its other comprehensive income under SFAS No. 130, "Reporting of Comprehensive Income". SFAS 130 which establishes standards for reporting and presentation of comprehensive income and its components. The Company’s other comprehensive income represents unrealized gain or loss on available-for-sale marketable securities and foreign currency translation adjustment.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Earnings (Loss) per Share
SFAS No. 128, “Earnings per Share” requires disclosure on the financial statements of basic and diluted earnings per share. Basic earning (loss) per share is computed by dividing the net earning (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earning (loss) per share is determined using the weighted average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.
Reclassifications
Certain reclassifications have been made to the prior year consolidated financial statement presentation to correspond to the current period’s format. Total equity and net income are unchanged due to these reclassifications.
Recent Accounting pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (“SAB No 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under SAB No. 108, the Company should quantify errors using both a balance sheet and income statement approach (“dual approach”) and evaluate whether either approach results in a misstatement that is material when all relevant quantitative and qualitative factors are considered. The adoption of SAB 108 does not have material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. SFAS No. 159 requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements.” Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation.
In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active," which amends SFAS 157 by incorporating "an example to illustrate key considerations in determining the fair value of a financial asset" in an inactive market. FSP 157-3 is effective upon issuance and should be applied to prior periods for which financial statements have not been issued. The adoption of FSP 157-3, effective October 2008, had no impact on the Company's results of operation or financial position.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (i.e. minority) interests in subsidiaries as equity in the Consolidated Financial Statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling financial interest in the subsidiary. SFAS 160 also requires expanded disclosure that distinguishes between the interests of the controlling owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for the Company’s financial statements for the year beginning on January 1, 2009, and earlier adoption is not permitted. The adoption of SFAS 160 had no material impact on the Company’s financial condition and results of operations.
In December 2007, the FASB issued Statement No. 141R, (revised 2007) "Business Combinations" ("SFAS 141R"). SFAS 141R replaces the current standard on business combinations and has significantly changed the accounting for and reporting of business combinations in consolidated financial statements. This statement requires an entity to measure the business acquired at fair value and to recognize goodwill attributable to any noncontrolling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. The statement will also result in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. In addition, the statement requires payments to third parties for consulting, legal, audit, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends Statement 133 by requiring expanded disclosures about an entity's derivative instruments and hedging activities, but does not change Statement 133's scope or accounting. This statement requires increased qualitative, quantitative, and credit-risk disclosures. SFAS 161 also amends Statement No. 107 to clarify that derivative instruments are subject to Statement 107's concentration-of-credit-risk disclosures. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS 161 will require the Company to provide additional disclosures about derivative instruments and hedging activities beginning January 1, 2009.
In May 2008, the FASB issued SFAS No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles." This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement will be effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The adoption of SFAS 162 had no significant impact on the Company's results of operations and financial position.
In November 2008, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No. 08-6 ("EITF 08-6"), "Equity Method Investment Accounting Considerations." EITF 08-6 address questions that have risen about the application of the equity method of accounting for investments after the effective date of both SFAS 141(R), "Business Combination", and SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements". EITF is effective for fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-6 had no significant impact on the Company's results of operations and financial position.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Inventories
Inventories consist of the following as of March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Raw materials and supplies | | $ | 3,209 | | | $ | 4,015 | |
| Work-in-process | | | 6,830 | | | | 5,813 | |
| Finished goods | | | 3,950 | | | | 3,140 | |
| | | | | | | | | |
| Total | | $ | 13,989 | | | $ | 12,968 | |
Note 4 –Notes Receivable
Notes receivable consist of the following as of March 31, 2009 and December 31, 2008:
| | | | | | | | | |
| | | | March 31, 2009 | | | | December 31, 2008 | |
| | | | | |
| | | | | | | | | |
| Loan receivable from Vision Tech, a private company in China. 7% interest, payable interest only in quarterly installments. Guaranteed by the shareholders of the debtor. Matures in January 2009. | | $ | - | | | $ | 172 | |
| Loan receivable from Phoenix Holdings, a private company in Korea. 8% interest, payable interest only in quarterly installments. Matures in September 2009. | | | 10,122 | | | | 11,093 | |
| Loan receivable from Lion Property Holdings, a private company in Korea. 8% interest, payable interest and principal at maturity. Guaranteed by the BKLCD stocks (75,000 shares). Matures in June 2009. | | | 3,254 | | | | 3,566 | |
| Various loan receivables from Phoenix Patro, a private company in Korea. 8.5% to 12% interest, payable interest only in quarterly installments. Matures in 2009 and 2010. | | | 4,338 | | | | 1,109 | |
| Other loans receivable | | | 87 | | | | 98 | |
| | | | 17,801 | | | | 16,038 | |
| | | | | | | | | |
| Less: current portion | | | 17,744 | | | | 15,957 | |
| | | | | | | | | |
| Loan receivable, net of current | | $ | 57 | | | $ | 81 | |
In the ordinary course of business, the Company had and expects to continue to have transactions, including borrowings, with unrelated and affiliated companies. In the opinion of management, such transactions were on similar terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consist of the following as of March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | |
| Prepaid expenses | | $ | 368 | | | $ | 255 | |
| Advance payments to vendors | | | 6,884 | | | | 5,534 | |
| Deposits made for investments | | | - | | | | 3,803 | |
| Other current assets | | | 2,915 | | | | 2,790 | |
| | | | | | | | | |
| Total | | $ | 10,167 | | | $ | 12,382 | |
Note 6 – Investments
| | | March 31, 2009 | | | December 31, 2008 | |
| Short-term Investments: | | | | | | |
| | | | | | | |
| Time deposits and commercial papers | | $ | 8,003 | | | $ | 1,419 | |
| Available-for-sale securities | | | 4,020 | | | | 4,223 | |
| Held-to-maturity securities | | | 10,469 | | | | 11,474 | |
| | | | | | | | | |
| Total | | $ | 22,492 | | | $ | 17,116 | |
The following is a summary of available-for-sale securities as of March 31, 2009 and December 31, 2008:
| March 31, 2009 | | Cost | | | Gross Unrealized gain | | | Gross Unrealized (loss) | | | Estimated Fair value | |
| | | | | | | | | | | | | |
| | | (in thousands) | |
| | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 3,954 | | | $ | 231 | | | $ | (165 | ) | | $ | 4,020 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2008 | | Cost | | | Gross Unrealized gain | | | Gross Unrealized (loss) | | | Estimated Fair value | |
| | | (in thousands) | |
| | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 4,333 | | | $ | 97 | | | $ | (207 | ) | | $ | 4,223 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Held-to-maturity securities
Investments in held-to-maturity securities consisted of corporate and municipal bonds with maturities of less than one year and are recorded at net of amortized cost. Total investments in held-to-maturity securities aggregated to $10.5 million and $11.5 million as of March 31, 2009 and December 31, 2008, which approximate their fair value.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
| Long-Term Investments: | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Non-marketable securities | | $ | 19,578 | | | $ | 16,296 | |
| Equity method investments | | | 12,419 | | | | 12,998 | |
| Derivative and other investments | | | 5,250 | | | | 5,508 | |
| | | | | | | | | |
| Total | | $ | 37,247 | | | $ | 34,802 | |
Equity method investments
The Company held the following equity method investments at March 31, 2009 and December 31, 2008:
March 31, 2009 | | Ownership | | | Carrying Value | |
| | | | | | (in thousands) | |
| | | | | | | |
| D-Network | | | 31.3 | % | | $ | 1,715 | |
| Phoenix Holding | | | 25.5 | % | | | 3,535 | |
| Phoenix Asset Investment | | | 27.4 | % | | | 7,169 | |
| | | | | | | | | |
| | | | | | | $ | 12,419 | |
December 31, 2008 | | Ownership | | | Carrying Value | |
| | | | | | (in thousands) | |
| | | | | | | |
| Radion Tech | | | 31.3 | % | | $ | 1,884 | |
| Phoenix Holding | | | 25.5 | % | | | 3,086 | |
| Phoenix Asset Investment | | | 27.4 | % | | | 8,028 | |
| | | | | | | | | |
| | | | | | | $ | 12,998 | |
Note 7 – Property, Plant and Equipment
Property, plant and equipment consist of the following at March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Land | | $ | 17,619 | | | $ | 19,749 | |
| Buildings and improvements | | | 40,537 | | | | 43,663 | |
| Machinery and equipment | | | 30,603 | | | | 30,981 | |
| Furniture and fixtures | | | 7,975 | | | | 8,531 | |
| Vehicles | | | 410 | | | | 481 | |
| Software | | | 40 | | | | 40 | |
| Small tools | | | 502 | | | | 518 | |
| | | | 97,686 | | | | 103,963 | |
| | | | | | | | | |
| Less: accumulated depreciation | | | (20,286 | ) | | | (20,022 | ) |
| | | | 77,400 | | | | 83,941 | |
| | | | | | | | | |
| Assets held for sale* | | | 4,767 | | | | 5,224 | |
| Construction-in-progress | | | 11,199 | | | | 9,250 | |
| | | | | | | | | |
| Property and equipment, net | | $ | 93,366 | | | $ | 98,415 | |
Depreciation expenses for the periods ended March 31, 2009 and 2008 were $139,630 and $286,286, respectively.
* During 2008, the Company relocated its manufacturing facilities and administrative office in Pyung-Taek, Korea to larger facilities in a nearby city. The vacant property in Pyung-Taek has been placed on sale. The management has assessed the recoverability based on undiscounted cash flows expected to result from the sale of the property and determined that no significant impairment occurred as of March 31, 2009.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Goodwill
The following table sets forth changes in the carrying of goodwill at March 31, 2009 and December 31, 2008:
| | | (in thousands) | |
| | | | |
| Balance as of January 1, 2008 | | $ | 26,593 | |
Reduction in goodwill associated with deconsolidation of a subsidiary due to ownership dilution | | | (3,525 | ) |
| Goodwill impairment* | | | (4,179 | ) |
| Fair value adjustments | | | (440 | ) |
| | | | | |
| Balance as of December 31, 2008 | | $ | 18,449 | |
| Fair value adjustments | | | (990 | ) |
| | | | | |
| Balance as of March 31, 2009 | | $ | 17,459 | |
* During the year ended December 31, 2007, the Company recorded $4.2 million of goodwill in connection with the acquisition of Bluecomm. During 2008, Bluecomm's business has substantially wound down due to lost of major customers and inability to retain new customers. The Company determined that the goodwill is fully impaired as of December 31, 2008.
Note 9 – Other Intangible Assets
Intangible assets consist of the following at March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Land rights | | $ | 436 | | | $ | 437 | |
| Accumulated amortization | | | (49 | ) | | | (47 | ) |
| | | | 387 | | | | 390 | |
| Other intangible assets, net | | | 828 | | | | 975 | |
| | | | | | | | | |
| Net carrying amount | | $ | 1,215 | | | $ | 1,365 | |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The Company has an agreement with the government of China for the use of land until February 14, 2054. According to the agreement, the Company is obligated to pay an annual management fee of approximately $2,400, and the land has to be used for manufacturing purposes.
Other intangible assets include patents, technology rights and in-process research and development costs and are amortized over its estimated useful life of three to seven years. Amortization expenses on these intangible assets for the periods ended March 31, 2009 and 2008 were $34,991 and $56,058, respectively.
Note 10 – Notes Payable
Notes payable consist of the following at March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | December 31, 2008 |
| | | (in thousands) |
| | | | | |
| Note payable to Kong-Sang Bank of China, payable monthly interest only at 4.66%. The note matures in January 2009. | | $ - | | $ 910 |
| | | | | |
| Note payable to Kong-Sang Bank of China, payable monthly interest only at 7.3%. The note matures in July 2009. | | 5,122 | | 5,130 |
| | | | | |
| Note payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR plus 3.5%. The note matures in January 2009. | | - | | 691 |
| | | | | |
| Note payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR plus 2%. The note matures in February 2009. | | - | | 984 |
| | | | | |
| Note payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR plus 2.2%. The note matures in June 2009. | | 350 | | - |
| | | | | |
| Notes payable to Hana Bank of Korea, payable monthly interest only, at 7.5% to 8.98%. The notes are secured by real property in Korea and mature in 2009. | | 1,763 | | 1,932 |
| | | | | |
| Notes payable to Shin-Han Bank of Korea, payable monthly interest-only at 6.23% to 7.53%. The notes are secured by real estate and mature in June and November 2009. | | 4,338 | | 4,754 |
| | | | | |
| Notes payable to City Bank of Korea, payable monthly interest only at 6.45% to 8.36%. The notes are secured by real estate and mature in July 2009 and January 2010. | | 9,011 | | 9,876 |
| | | | | |
| Notes payable to Korea Exchange Bank, payable monthly interest only, at 6.56% to 8.41%. The notes are guaranteed by sister company, and mature in April and May 2009. | | 3,615 | | 4,754 |
| | | | | |
| Note payable to Kook Min Bank of Korea, payable monthly interest only, at 6.44%. The note is secured by a deed of trust covering the Company’s real property and matures in July 2009. | | 7,546 | | 8,271 |
| | | | | |
| Note payable to Citi Bank Korea, payable monthly interest-only, at 5.45% to 5.56%. The notes mature in January and July 2010. | | 15,779 | | 17,293 |
| | | | | |
| Note payable to Sam Sung Electronics, bearing no interest. The note is secured by a deed of trust covering the Company’s real property and matures in December 2011. | | 461 | | 506 |
| | | | | |
| Note payable to Kiup Bank, payable monthly interest only, at 6.89% to 7.90%. The notes are secured by a deed of trust covering the Company’s real property and mature in March 2010. | | 8,991 | | 9,846 |
| | | | | |
| Notes payable to Woori Bank, payable monthly interest only at 7.93%. The note is unsecured and matures in October 2009. | | 6,348 | | 6,968 |
| | | | | |
| Notes payable to Industrial Bank of Korea, payable monthly interest only at 6.32% to 7.98%. The note matures in February and March 2010. | | 3,977 | | 4,358 |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | |
| Notes payable to Hana Bank Korea, payable monthly interest only at 5.5% to 5.95%. The note matures in April and August 2009. | | | 2,531 | | | | 2,773 | |
| | | | | | | | | |
| Notes payable to Woori Bank, payable monthly interest only at 5.94% to 6.33%. The notes are secured by real property, and mature in October 2009. | | | 7,230 | | | | 7,924 | |
| | | | | | | | | |
| Notes payable to Korea Exchange Bank, payable monthly interest only at 6.67%. The notes are secured by the Company’s real property and mature in April 2009. | | | 2,169 | | | | 2,377 | |
| | | | | | | | | |
| Note payable to Kook Min Bank of Korea, payable monthly interest only at 8.87%. The note is unsecured and matures in August 2009. | | | 2,169 | | | | 2,377 | |
| | | | | | | | | |
| Notes payable to Citi Bank Korea, payable monthly interest only at 5.00% to 5.91%. The note matures in April and May 2009. | | | 2,403 | | | | 2,594 | |
| | | | | | | | | |
| Loan payable to local government with annual interest rate at 5.38%. The loan matures in January 2009. | | | - | | | | 13 | |
| | | | | | | | | |
| Notes payable to Hana Bank Korea, payable monthly interest only at 5.38. The note matures in March 2015 and March 2017. | | | 1,085 | | | | 1,189 | |
| | | | | | | | | |
| Notes payable to Industrial Bank of Korea, payable monthly interest-only at 4.7%, and matures in December 2009 and May 2010 | | | 2,892 | | | | 3,170 | |
| | | | | | | | | |
| Notes payable to Shin-Han Bank of Korea, payable monthly interest only at 4.54 %. The notes mature in June 2011. | | | 1,885 | | | | 2,295 | |
| | | | | | | | | |
| Notes payable issued in 2008. This note matures in April 2009 at 3 month CD plus 2.15%. | | | - | | | | 4,754 | |
| | | | | | | | | |
| Loan payable to local government with annual principal payment of $10,422, bearing no interest. The loan is unsecured and matures in October 2009 | | | | | | | | |
| | | | | | | | | |
| Notes payable to Merrill Lynch. The note matured in January 2009. | | | - | | | | 2,500 | |
| | | | | | | | | |
| Notes payable to Hana Bank Korea, payable monthly interest only at 5.33%. The note was secured by real property and matures in March 2010. | | | 4,337 | | | | - | |
| | | | | | | | | |
| Notes payable to Industrial Bank of Korea, and matures in March 2010 | | | 2,169 | | | | | |
| | | | | | | | | |
| Notes payable to Industrial Bank of Korea, and matures in February 2017 | | | 7,230 | | | | - | |
| | | | 103,408 | | | | 108,246 | |
| Less: current portion | | | 73,133 | | | | 82,761 | |
Long-term debt | | $ | 30,275 | | | $ | 25,485 | |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Following is a summary of principal maturities of notes payable over the next five years:
Years ending December 31, | | Amount (in thousands) | |
| | | | |
| 2009 | | $ | 53,658 | |
| 2010 | | | 39,926 | |
| 2011 | | | 1,508 | |
| 2012 | | | 273 | |
| 2013 and thereafter | | | 8,043 | |
| | | | | |
| Total | | $ | 103,408 | |
Note 11 – Employee Severance Benefits
Employees and directors with one year or more of service are entitled to receive a lump-sum payment upon termination of their employment based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors are to terminate their employment as of the balance sheet date. The severance benefits for the period ended March 31, 2009 and 2008, were $102,216 and $169,542, respectively.
Note 12 – Convertible Debentures
Pursuant to SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," the Company accounts for the convertible debentures as liability at face values and no formal accounting recognition is assigned to the values inherent in the conversion features.
Convertible debentures outstanding at March 31, 2009 and December 31, 2008, are summarized as follows:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Convertible debenture - A | | $ | 15,284 | | | $ | 15,284 | |
| Convertible debenture - B | | | 64,920 | | | | 64,920 | |
| Convertible debenture - C | | | 10,820 | | | | 10,820 | |
| Convertible debenture - D | | | 12,129 | | | | 13,024 | |
| Bond with warrants - UBP | | | 7,206 | | | | 7,761 | |
| | | | | | | | | |
| Carrying amount | | $ | 110,359 | | | $ | 111,809 | |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Convertible Debenture -A
The Convertible Debenture - A, issued on October 30, 2006, is non-interest bearing, unsecured, and matures on October 30, 2011. The bonds are convertible into common stock of the Company at $0.50 per share. The holders have a right to adjust the conversion price at any time between April 1, 2008 and September 30, 2011. The adjustments discount is made using the formula of 100% x ($0.50 - previous 3 months average share price)/$0.50, and is limited to a maximum of 30%. The holders can exercise their conversion rights any time from October 25, 2006 to September 30, 2011. As of March 31, 2009, no bonds have been converted.
For any unconverted amount as of October 30, 2011, interest accrues at the rate of 8% per annum provided that PSTS generates revenues of $65.8 million or more and an operating profit of $6.8 million or more in 2007, and revenue of $95.4 million and an operating profit of $10.6 million in 2008. If the conditions are not achieved, interest accrues at 10% per annum. Interest is due and payable in cash on the maturity date of October 30, 2011.
Convertible Debenture - B
The Convertible Debenture - B, issued on April 12, 2007 matures on April 12, 2012 and is convertible into shares of common stock of the Company at the option of the holder at the rate of $0.70 per share. The coupon rate of the bond is at the compounded interest rate of 2.3% per annum. If the bond is not converted during the period commencing on the issuance date through one month prior to the maturity date, interest accrues at 8% per annum.
The debenture agreement requires the Company to pursue to list its common stock on either NASDAQ, London Stock Exchange, Hong Kong Stock Exchange or Singapore Exchange Securities Trading Limited, and to use its best efforts to obtain such listing by October 31, 2009. If the Company completes the listing process prior to the end of October of 2009, the holder is entitled, on or after the fourth anniversary of the issuance of the debenture, to exercise its put option to redeem the debenture at the face value plus interest at 8% per annum. If the Company defaults, and if such default is not cured within 60 days, the holder is entitled to exercise its put option to redeem the debenture at the face value plus interest at 19% per annum.
As amended in November 2008, if such listing by October 31, 2009 for any reason not solely attributable to the holder of the debenture, the holder is entitled to exercise its put option to redeem the partial amount of the principal amount of $21.6 million and is also entitled to receive interest on the outstanding principal balance of the debenture calculated at the compounded rate of 14% per annum. In addition, if such listing by October 31, 2010, the holder is entitled to exercise its put option to redeem the outstanding balance of the debenture and is also entitled to receive interest at the compounded rate of 14% per annum.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The Company agreed to pledge as security all convertible bonds subscribed by the Company using the proceeds from the debenture. As of March 31, 2009, proceeds from the bonds aggregating $11.2 million11,173,519 were invested in a convertible debenture issued by STS, and these debentures have been pledged as security for this Convertible Debenture-B.
Convertible Debenture - C
The Convertible Debenture - C was issued on April 12, 2007, with a maturity date of April 12, 2012. The debenture is convertible into shares of common stock of the Company at the option of the holder at the rate of $0.70 per share. The coupon rate of the bond is at the rate of 2.3% per annum. If the bond is not converted during the period commencing on the issuance date through one month prior to the maturity date, interest accrues at the rate of 8% per annum
At any time during the period from November 1, 2009 to March 12, 2012, the holder is entitled to exercise its put option to redeem the debentures at the face value thereof, in which case the holder is entitled to interest at 8% per annum. If the Company defaults, the holder is entitled to exercise its put option to redeem the debentures at the face value if the default is not cured within 60 days, in which case the holder is entitled to receive interest at 19 % per annum.
Convertible Debenture - D
The Convertible Debenture - D was issued by PDT, a majority-owned subsidiary of the Company, in August, November, and December 2007, respectively, with maturity dates in December 2010 through September 2012. These debentures are convertible into shares of common stock of PDT at the option of the holders at the range of $80.15 to $96.17 per share. The coupon rate of the bonds ranges from 0.0% to 2.4% per annum. If the bond is not converted during the period commencing on the issuance date through one month prior to the maturity date, interest accrues at the rate of 8% per annum.
At any time during the period from September 2007 to August 2012, the holders are entitled to exercise their put option to redeem the debentures at the face value thereof, in which case the holder is entitled to interest at 8% per annum. If the Company defaults, the holders are entitled to exercise their put options to redeem the debentures at the face value if the default is not cured within 60 days, in which case the holders are entitled to receive interest at 19 % to 20% per annum.
Bond with warrants
The bond with warrant was issued by UB Precision ("UBP"), a subsidiary of majority-owned subsidiary of the Company, in April 2008, with maturity date in April 2011. Face amount of the bond is $7.92 million (KRW 10,000,000,000) with zero stated interest rate. These debentures are convertible into shares of UB Precision at the option of the holders at $2.85 (KRW 3,600) per share any time between April 30, 2008 and March 31, 2011. If the bond is not converted during the period, interest accrues at the rate of 5% per annum.
The convertible debentures have not been included in the calculation of the diluted (loss) per share as their inclusion would be anti-dilutive.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 13 - Income Taxes
The Company adopted the provisions of FIN No. 48 on January 1, 2008, and there was no material effect on the financial statements at the date of adoption. There was no cumulative effect related to adopting FIN No. 48.
Corporate income tax rates applicable to the Korean subsidiaries in 2009 and 2008 were 16.5% of the first 100 million Korean Won ($105,700) of taxable income and 29.7% on the excess. For the United States operations, the corporate tax rates range from 10% to 34%. The Company provided a valuation allowance equal to the deferred tax amounts resulting from the tax losses in the United States, as it is not likely that they will be realized. Tax losses from the Korean subsidiaries can be carried forward for five years to offset future taxable income. The U.S. tax losses can be carried forward for 15 to 20 years to offset future taxable income. The Company has accumulated about $13,222,000 and $8,711,000 of taxable losses in its Korea and US operations, respectively. The utilization of the Korean losses expires in years 2008 to 2012 and the US losses in years 2019 to 2027. PSTS is exempt from income taxes under the Chinese tax law for the first two profitable tax years. Taxable income in the third to fifth profitable tax years will be taxed at 5% and subsequently the applicable tax rate will be 10%.
The provision for income taxes for the periods ended March 31, 2009 and 2008 are summarized as follows:
| | | Three Months Ended March 31, | |
| | | 2009 | | | 2008 | |
| | | (in thousands) | |
| Current income tax provision: | | | | | | |
| U.S. | | $ | - | | | $ | - | |
| Foreign taxes of subsidiaries | | | 9 | | | | 1 | |
| | | | 9 | | | | 1 | |
| Deferred income tax benefit: | | | - | | | | - | |
| | | | | | | | | |
| Income tax expense | | $ | 9 | | | $ | 1 | |
The Company has deferred tax assets (liabilities) at March 31, 2009 and December 31, 2008 as follows:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
Research and development expenses amortized over 5 years for tax purposes | | $ | - | | | $ | - | |
| Other timing differences | | | - | | | | - | |
| Net operating loss carryforwards | | | 7,798 | | | | 5,877 | |
| | | | 7,798 | | | | 5,877 | |
| Valuation allowance | | | (7,798 | ) | | | (5,877 | ) |
| | | | | | | | | |
| | | $ | - | | | $ | - | |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 14 - Capital
The Company's capital transactions for the periods ended March 31, 2009 and 2008 are as follows:
In March 2009, 68,857 common shares held by a subsidiary were provided for consulting services at the value of $10,734.
As of March 31, 2009, 11,872,967 common shares held by a subsidiary of a majority-owned subsidiary were eliminated and presented as treasury stock.
Stock Warrants and Options
The Company has accounted for its stock options and warrants in accordance with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148 "Accounting for Stock - Based compensation - Transition and Disclosure." Value of options granted has been estimated by the Black Scholes option pricing model. The assumptions are evaluated annually and revised as necessary to reflect market conditions and additional experience. The following assumptions were used:
| | | March 31, 2009 | | | December 31, 2008 | |
| Interest rate | | | 6.5 | % | | | 6.5 | % |
| Expected volatility | | | 70 | % | | | 70 | % |
| Expected life in years | | | 5 | | | | 6 | |
| Expected dividends | | | - | | | | - | |
In 1999, the Board of Directors of Cintel Korea adopted a stock option plan to allow employees to purchase ordinary shares of the Cintel Korea.
The stock option plan granted 96,000 options for the common stock of Cintel Korea having a $0.425 nominal par value each and an exercise price of $0.425. In 2002, 53,000 stock options were cancelled. In 2003, an additional 30,000 stock options were cancelled.
In March 2000, 225,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.68. From this grant, 135,000 options were cancelled in 2002, and an additional 47,000 options were cancelled in 2003.
In February 2001, 30,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.72. In 2003, all of these stock options were cancelled.
In March 2003, 65,000 stock options were granted having a $0.425 nominal par value each and an exercise price of $0.71. In the same year, 15,000 of these stock options were cancelled.
The options vest gradually over a period of 3 years from the date of grant. The term of each option shall not be more than 8 years from the date of grant. No options have vested during the periods ended March 31, 2009 and 2008 and no option is outstanding at March 31, 2009.
The stock options have not been included in the calculation of the diluted earnings per share as their inclusion would be anti-dilutive.
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 15 – Related Party Transactions
Significant transactions with companies affiliated by common control for the periods ended and at March 31, 2009 and December 31, 2008, are summarized as follows:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands) | |
| | | | | | | |
| Accounts receivable from STS | | $ | 966 | | | $ | 704 | |
| Accounts receivable from BKLCD (fka We-Tech) | | | - | | | | 125 | |
| Sales to STS | | | 10,126 | | | | 66,809 | |
| Sales to BKLCD (fka We-Tech) | | | 4 | | | | 2,282 | |
| Purchase from STS | | | 8,368 | | | | 49,311 | |
These transactions were in the normal course of business and recorded at an exchange value established and agreed upon by the above mentioned parties.
Note 16 – Appropriated Retained Earnings
The Company's majority owned subsidiary, PDT, is required to appropriate a part of their net profits for statutory surplus reserve and reserve for technological development and business investment. For the statutory surplus reserve, an amount equivalent to 10% or more of the declared dividends is transferred to the reserve until the reserve reaches 50% of the registered capital of PDT. The reserve is not distributable as cash dividends but can be converted into capital upon approval of the Company.
In January 2009, PDT's Board of Directors approved a corporate readjustment of its account in the form of a quasi reorganization in which the Company's accumulated deficits of $13.9 million was charged to paid-in capital.
Note 17 - Loss per Share
The following reconciles the numerators and denominators of the basic and diluted per share computation for the periods ended March 31, 2009 and December 31, 2008:
| | | March 31, 2009 | | | December 31, 2008 | |
| | | (in thousands, except per share amounts) | |
| Numerator for basic and diluted earnings per share: | | | | | | |
| Net loss | | $ | (1,922 | ) | | $ | (2,596 | ) |
| | | | | | | | | |
| Denominator: | | | | | | | | |
Basic and diluted weighted average shares outstanding | | | 83,424 | | | | 97,824 | |
| | | | | | | | | |
| Basic and diluted loss per share | | $ | (0.02 | ) | | $ | (0.03 | ) |
Note 18 - Commitments
(a) The Company leases its premises under a non-cancellable lease agreement which will expire in August 2009. Future minimum annual payments (exclusive of taxes and insurance) under the lease are $9,189 for the period ended August 31, 2009. Rent expenses paid during the periods ended March 31, 2009 and 2008 were $11,439 and $23,699, respectively.
(b) The Company is committed to vehicle lease obligations which expire in June, 2010. Future minimum annual payments (exclusive of tax and insurance) under the lease are as follows:
| Years | | Amount | |
| 2009 | | $ | 42,199 | |
| 2010 | | | 34,580 | |
| 2011 | | | 2,149 | |
| | | $ | 78,928 | |
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
(c) The Company’s Korean subsidiary, PDT, has outstanding guaranty agreements on behalf of affiliated companies. PDT is obligated to perform under these agreements if guarantees of the affiliated companies failed to pay principal and interest payments to the lender when due. Including accrued interest, the maximum potential amount of future (undiscounted) payments under these guaranty agreements is $12 million.
In accordance with FASB interpretation No. 45, provisions related to recognizing a liability at inception for the fair value of the guarantor’s obligation do not apply since common control is considered to be existed with guarantees. Guaranty agreements were as follows as of March 31, 2009:
| Guarantee | | Maturity | | Guaranteed For | | Amount |
| BKLCD | | January 20, 2012 | | Loan | | $ 3,600,000 |
| BKLCD | | September 7, 2009 | | Loan | | $ 2,400,000 |
| BKLCD | | June 25, 2009 | | Loan | | $ 515,055 |
| Info Space | | February 6, 2009 | | Stand-by L/C | | $ 2,700,000 |
| Info Space | | May 5, 2009 | | Stand-by L/C | | $ 2,000,000 |
Note 19 – Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under SFAS No. 157, fair value measurements are not adjusted for transaction costs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy under SFAS No. 157 are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices in markets that are not active, quoted prices for similar assets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset.
Level 3 - Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).
CINTEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The following summarizes the financial instruments measured at fair value on a recurring basis in accordance with SFAS 157 as of March 31, 2009:
| | | | | | Fair Value Measuring Using | |
| | | Total Fair Value | | | Quoted Prices in Active Markets for Identical (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | (in thousands) | |
| | | | | | | | | | | | | |
| Available-for-sale securities | | $ | 4,020 | | | $ | - | | | $ | 4,020 | | | $ | - | |
Note 20 - Cumulative Effect of Changes in Accounting Policy
During 2008, the Company's majority-owned subsidiary, PDT, changed its accounting policy for revenue recognition on the sales of certain manufactured products (machinery and equipment). This policy change was necessary as it related to an amendment of terms in sales with the major customers. In the new policy, the point in revenue recognition time has been moved to a later point in time. Previously, revenue was recognized upon shipment of products; the new policy does not recognize revenue until the products are installed and tested and an acceptance is released by the customer. The Company considers that the new policy better conforms to the terms of sales. Prior year financial statements have been adjusted to reflect the change in revenue recognition timing retroactively to facilitate the comparability with the financial statements as of March 31, 2009 and for the period then ended.
The effect of the changes for the period ended March 31, 2008, as it was retroactively applied, is as follows:
For the period ended March 31, 2008 | | Under new Method | | | Under old Method | | | Effect of Change | |
| | | (in thousands) | |
| | | | | | | | | | |
| Statement of operation: | | | | | | | | | |
| Sales | | $ | 62,891 | | | $ | 52,647 | | | $ | 10,244 | |
| Cost of sales | | | 60,750 | | | | 50,506 | | | | 10,244 | |
| Net loss | | | (2,596 | ) | | | (2,596 | ) | | | - | |
Special Note on Forward-Looking Statements.
Certain statements in “Management’s Discussion and Analysis or Plan of Operation” below, and elsewhere in this annual report, are not related to historical results, and are forward-looking statements. Forward-looking statements present our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements frequently are accompanied by such words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other words and terms of similar meaning. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this quarterly report. Subsequent written and oral forward looking statements attributable to us or to persons acting in our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth below and elsewhere in this annual report, and in other reports filed by us with the SEC.
CinTel Corp and its subsidiaries (the “Company”, “we,” “us,” or “our”) are a global provider of semiconductor packaging, display/semiconductor/factory automation related manufacturing equipments and facilities, and CRM/DBM services. Founded in 1997, we evolved from being an internet traffic management (“ITM”) solution provider to a semiconductor-focused company in 2006. We manufacture and supply a broad range of semiconductor packaging products that address the needs of advanced electronic devices and products. We also produce standardized equipments that are utilized for display and semiconductor industries. Our factory automation related manufacturing facilities provide customized in-line distribution systems.
We have established relationships with our customers worldwide such as Samsung Electronics, Hynix Semiconductor, and Fairchild Semiconductor in the semiconductor industry. Our customers in factory automation and display industry include Samsung Electronics, S-LCDSamsung SDI, Samsung Techwin, and Samsung Corning Precision Glass.
We currently have major operations in China and Korea with a production capacity increase planned with several expansions of current operations. We intend to commence a major production expansion project in China in 2009 to become a more rounded total semiconductor solution provider through the transfer of new high-end products and product diversification. In addition, we have built a new manufacturing plant in Korea to increase our production in the semiconductor/display equipment and facility industry.
CinTel Corp. (formerly Link2 Technologies) was incorporated in the State of Nevada on August 16, 1996. The initial business focus was to develop a 3D animation and digital effects studio that would provide high-end 3D animation and digital effects to the music video industry.
On September 30, 2003, Link2 Technologies entered into a definitive Share Exchange Agreement with CinTel Co., Ltd., a Korean corporation ("CinTel Korea") and the shareholders of CinTel Korea. Pursuant to the Share Exchange Agreement, we acquired 100% of the issued and outstanding capital stock of CinTel Korea in exchange for 16,683,300 shares of our common stock. CinTel Korea was founded in 1997 and has provided various Internet Traffic Management solutions to businesses and consumers. All of the business operations were comprised of developing, manufacturing and distributing Internet Traffic Management solutions to businesses and consumers in order to manage and control large traffic.
CinTel Korea introduced Korea's first dynamic server load balancer, and marketed Internet Traffic Management products since its inception, such as the PacketCruz (TM) family of products, iCache, i2one, and Proximator. The Internet Traffic Management solutions were marketed to customers around the world, helping them improve Internet traffic management, service levels (QOS: Quality of Service), and the user experience (QOC: Quality of Content).
In the last three years we have shifted our focus from Internet Traffic Management to becoming a semiconductor and LCD assembly holding company. The company’s focus has included investments in several high growth subsidiaries and divesting some non-performing subsidiaries. CinTel now has holdings that directly manufacture semiconductor packaging, NAND flash memory packaging, LCD assembly, and testing specialists, as well as provide a solution for memory applications for home appliances, semiconductor, TFT-LCD application products and Factory Automation Design.
We produce multiple products lines throughout our separate subsidiaries. These product lines focus mainly on the semiconductor and LCD assembly core product lines. Our product line includes a number of related and unrelated products and services as follows:
PSTS provides all aspects of semiconductor packaging (except foundry of chips) including packaging types of: DIP, SOP, TSSOP, QFP and ETQFP products. Printed Board Assembly (“PBA”) and Wafer. PSTS's main products also include NAND flash memory production.
Printer Board Assembly has been a mainstay of the product lines. During the year this product was phased out and will no longer be offered in this plant.
Factory Automation Design (FAD) is a service that allows PDT to create cost effective production lines for their customer base. PDT designs and implements Automated Distribution Facilities (ADF) for our customers. These facilities allow reduced labor costs and quality production of high tech products. Computerized automation allows for the systems to be produced in a highly controlled and consistent manner.
PDT produces Scriber & Break in-line systems, Screen Printer and AOI scanning systems for enterprise level customers. In a never-ending effort to improve yield and optimize the wafer manufacturing process, automated optical inspection (AOI) has become an integral part of semiconductor fabrication. The ability to provide both high performance point-to-point motion and extremely smooth constant velocity scanning moves has enabled PDT to become a leading provider of critical motion systems for AOI applications.
PDT’s subsidiary, UB Precision provides testing products such as LCD/OLED probe stations for display and probe card for semiconductor.
Bluecomm provides customer relationship management services. These services include running of call centers for full service customer support. Bluecomm also provides database management and marketing services for customers that allows customers to outsource all management of these systems. This allows them to provide detailed marketing and database services to their customers with little or no internal staffing.
; (in thousands USD)
The company generated revenues of approximately $26.8 million and approximately $62.9 million for the three months ended March 31, 2009 and 2008, respectively, which reflects a decrease of approximately $36 million. Revenues are comprised of the sale of products, and services.
The gross revenue of PSTS for the three months ended March 31, 2009 was $11.6 million, a 42.0% decrease from $20.1 million for the same period in 2008. The gross revenue of PDT for the three months ended March 31, 2009 including its two subsidiaries were $15.2 million, 50.6% decrease from $30.8 million in 2008. The decrease reflects the impact of the slowing economy and low demand in the semiconductor market.
Bluecomm’s gross revenue for the three months ended March 31, 2009 was $0.1 million, 94% decrease from $1.7 million in 2008. Bluecomm provided customer relationship management services for Pizza Hut Korea including call center operation for customer support, however, the contract with Pizza Hut Korea was terminated in 2008.
The cost of sales for the three months ended March 31, 2009 and 2008 was $25.4 million and $60.7 million, respectively, a decrease of 58.1%,. Our gross margins for the three months ended March 31, 2009 and 2008 was $1.4 million and $2.1 million respectively.
Total operating expenses for the three months ended March 31, 2009 and 2008 totaled approximately $3.3 million and $4.4 million, respectively, resulting in a decrease of $1.1 million or 25.0%.
The operating loss for the three months ended March 31, 2009 and 2008 totaled $1.8million and $2.3 million, respectively. Management anticipates that the company will see operating profit commencing from around late 2009. Management also anticipates that PDT’s operating profit will increase as the production of its factory automationFA division increase its manufacturing capability in its expanded plant.
The net loss for the three months ended March 31, 2009 and 2008 totaled $1.9 million and $2.6 million, respectively.
In summary, the company incurred the net loss mainly due to low operating results of its subsidiaries and their subsidiaries and other losses from non-operating items including interest expenses and foreign currency transaction loss. However, the company expects to see operating profit in the late 2009 based on the increased production driven by the plant expansion and the production line extension of our subsidiaries.
As of March 31, 2009 our cash balance was $6.8 million compared to $23.5 million at December 31, 2008. Total current assets at Mach 31, 2009 were $89.6 million compared to $101.5 million at December 31, 2008. We currently plan to use the cash balance and cash generated from operations for our growth through operation and facility expansion by our subsidiaries.
For the three months ended March 31, 2009, net cash used in operating activities was $7.5 million as compared to $20.9 million for the three months ended March 31, 2008. The decrease in cash used in operating activities can be attributed to the increase in the account receivable and the decrease in the account payable.
For the three months ended March 31, 2009, net cash used in investing activities was $10.5 million, compared to net cash used in investing activities of $14.0 million for the three months ended March 31, 2008. The cash used in the period ended March 31, 2009, primarily represents acquisition of investments and payments on loan receivables.
Net cash provided by financing activities during the three months ended, March 31,2009 and 2008 was $3.3 million and $33.6 million, respectively, which consisted primarily of the proceeds from notes and principal payment of payables.
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
Basis of Consolidation - The merger of the Company and CinTel Korea has been recorded as the recapitalization of the Company, with the net assets of the Company brought forward at their historical basis. The intention of the management of CinTel Korea was to acquire the Company as a shell company listed on NASDAQ. Management does not intend to pursue the business of the Company. As such, accounting for the merger as the recapitalization of the Company is deemed appropriate.
Currency Translation - The Company's functional currency is Korean won. Adjustments to translate those statements into U.S. dollars at the balance sheet date are recorded in other comprehensive income. Foreign currency transactions of the Korean operation have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses have been charged to income in the year.
Investments - - Investments in available-for-sale securities are being recorded in accordance with FAS-115 "Accounting for Certain Investments in Debt and Equity Securities". Equity securities that are not held principally for the purpose of selling in the near term are reported at fair market value when it is readily determinable, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity.
The allowance for credit losses is management’s estimate of incurred losses in our customer and commercial accounts receivables. Management performs detailed review of individual portfolios to determine if impairment has occurred and to assess the adequacy of the allowance for credit losses, based on historical and current trends and other factors affecting credit losses. When receivables are past due for a period exceeding 2 years, a 100% allowance for credit losses is established without an individual analysis of the customer. A 100% allowance for credit losses is established, in an amount determined to be uncollectible, for the customer whom is not discontinuing operations or is facing financial issues that could result in discontinuance of business based on the assumptions management believes are reasonably likely to occur in future.
On December 31, 2007, the allowance for credit losses was $2.2 million of $21.8 million in accounts receivables and on December 31, 2007, the allowance for credit losses was $1.9 million of $20.3 million of accounts receivables. The allowance for credit losses in 2008 saw an increase of $0.4 million (20.5%) compared to 2007. However, the allowance ratio for credit losses rose from 9.3% to 10.4%. The company expects that the allowance for credit losses will decrease over the long-term.
Concentration of Credit Risk - SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk", requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration. The Company maintains cash and cash equivalents with major Korean financial institutions. The Company's provides credit to its clients in the normal course of its operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent credit losses which, once they materialize, are consistent with management's forecasts. For other debts, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value. Concentration of credit risk arises when a group of clients having a similar characteristic such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions. The Company does not have any significant risk with respect to a single client.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" (“SAB No 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under SAB No. 108, the Company should quantify errors using both a balance sheet and income statement approach (“dual approach”) and evaluate whether either approach results in a misstatement that is material when all relevant quantitative and qualitative factors are considered. The adoption of SAB 108 does not have material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. SFAS No. 159 requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements.” Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation.
In October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active," which amends SFAS 157 by incorporating "an example to illustrate key considerations in determining the fair value of a financial asset" in an inactive market. FSP 157-3 is effective upon issuance and should be applied to prior periods for which financial statements have not been issued. The adoption of FSP 157-3, effective October 2008 had no impact on the Company's results of operation or financial position.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling (i.e. minority) interests in subsidiaries as equity in the Consolidated Financial Statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling financial interest in the subsidiary. SFAS 160 also requires expanded disclosure that distinguishes between the interests of the controlling owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for the Company’s financial statements for the year beginning on January 1, 2009, and earlier adoption is not permitted. The adoption of SFAS 160 had no material impact on the Company’s financial condition and results of operations.
In December 2007, the FASB issued Statement No. 141R, (revised 2007) "Business Combinations" ("SFAS 141R"). SFAS 141R replaces the current standard on business combinations and has significantly changed the accounting for and reporting of business combinations in consolidated financial statements. This statement requires an entity to measure the business acquired at fair value and to recognize goodwill attributable to any noncontrolling interests (previously referred to as minority interests) rather than just the portion attributable to the acquirer. The statement will also result in fewer exceptions to the principle of measuring assets acquired and liabilities assumed in a business combination at fair value. In addition, the statement requires payments to third parties for consulting, legal, audit, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities an Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends Statement 133 by requiring expanded disclosures about an entity's derivative instruments and hedging activities, but does not change Statement 133's scope or accounting. This statement requires increased qualitative, quantitative, and credit-risk disclosures. SFAS 161 also amends Statement No. 107 to clarify that derivative instruments are subject to Statement 107's concentration-of-credit-risk disclosures. SFAS 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS 161 will require the Company to provide additional disclosures about derivative instruments and hedging activities beginning January 1, 2009.
In May 2008, the FASB issued SFAS No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles." This statement identifies the sources of accoutning principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement will be effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The adoption of SFAS 162 had no significant impact on the Company's results of operations and financial position.
In November 2008, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue No. 08-6 ("EITF 08-6"), "Equity Method Investment Accounting Considerations." EITF 08-6 address questions that have risen about the application of the equity method of accounting for investments after the effective date of both SFAS 141(R), "Business Combination", and SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements". EITF is effective for fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-6 had no significant impact on the Company's results of operations and financial position.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. There was no change to our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed on April 15, 2009.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
