Cintech Solutions 10QSB 2002 Q3 Quarterly report (small business)

EXHIBIT 99

Cintech Solutions, Inc.

Condensed Financial Statements for the Three and
Nine-Months Ended March 31, 2002 and 2001 and
Independent Accountants’ Report

INDEPENDENT ACCOUNTANTS’ REPORT

To the Directors of
    Cintech Solutions, Inc.

We have reviewed the accompanying condensed balance sheets of Cintech Solutions, Inc. (the “Company”) as of March 31, 2002 and 2001 and the related condensed statements of operations, stockholders’ equity and cash flows for the three months and nine months then ended (all expressed in U.S. dollars). These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytic procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the balance sheet of the Company as of June 30, 2001, and the related statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 24, 2001, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of June 30, 2001 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

April 16, 2002

CINTECH SOLUTIONS, INC.

CONDENSED BALANCE SHEETS
MARCH 31, 2002, JUNE 30, 2001 AND MARCH 31, 2001

			March 31,						March 31,
ASSETS			2002			June 30,			2001
			(Unaudited)			2001			(Unaudited)
CURRENT ASSETS:
	Cash and cash equivalents (Note 1)		$	392,915		$	641,883		$	177,922
	Marketable securities (Note 2)			3,173,441			6,284,141			6,860,093
	Accounts receivable, trade — (Net of allowance of $76,155, $94,958 and $68,160 at March 31, 2002, June 30, 2001, and March 31, 2001, respectively) (Note 1)			533,369			301,389			317,433
	Inventory (Note 1)			20,327			21,387			15,763
	Prepaid expenses			199,386			73,845			100,990
	Refundable income taxes									15,506
	Deferred income taxes (Note 6)			427,338			497,671			542,271
		Total current assets		4,746,776			7,820,316			8,029,978
FIXED ASSETS (Note 1):
	Equipment			1,340,286			1,198,675			1,263,403
	Furniture and fixtures			8,677			325,756			297,855
		Total		1,348,963			1,524,431			1,561,258
	Less accumulated depreciation			(986,859	)		(1,208,086	)		(1,193,612	)
		Total fixed assets — net		362,104			316,345			367,646
SOFTWARE DEVELOPMENT
	COSTS-Net (Note 1)			1,937,829			1,807,357			1,746,646
DEFERRED INCOME TAXES (Note 6)				1,154,418			186,580			157,093
		Total other assets		3,092,247			1,993,937			1,903,739
TOTAL			$	8,201,127		$	10,130,598		$	10,301,363

				March 31,						March 31,
LIABILITIES AND				2002			June 30,			2001
STOCKHOLDERS' EQUITY				(Unaudited)			2001			(Unaudited)
CURRENT LIABILITIES:
	Accounts payable			$	138,614		$	134,919		$	61,939
	Accrued liabilities:
		Accrued wages and compensation			251,059			505,310			355,479
		Warranty reserve			66,460			82,382			92,730
		Accrued lease termination costs (Note 3)			28,341
		Other			174,791			115,615			137,384
	Deferred maintenance revenue (Note 1)				611,784			638,193			710,330
			Total current liabilities		1,271,049			1,476,419			1,357,862
STOCKHOLDERS’ EQUITY (Notes 1, 4, 5):
	Common stock				9,008,724			9,008,289			9,008,289
	Contributed capital				675,757			675,757			675,757
	Treasury stock				(2,290	)		(2,290	)		(2,290	)
	Accumulated deficit				(2,752,113	)		(1,027,577	)		(738,255	)
			Total stockholders’ equity		6,930,078			8,654,179			8,943,501
TOTAL				$	8,201,127		$	10,130,598		$	10,301,363

See notes to condensed financial statements and independent accountants’ report.

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CINTECH SOLUTIONS, INC.

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE-MONTHS AND NINE-MONTHS ENDED MARCH 31, 2002 AND 2001

				For the Three-Months Ended						For the Nine-Months Ended
				March 31,						March 31,
				2002			2001			2002			2001
NET SALES (Note 1):
	Product sales			$	1,011,503		$	760,588		$	3,631,240		$	4,888,659
	Services and other sales				393,202			492,031			1,150,396			1,638,701
			Total net sales		1,404,705			1,252,619			4,781,636			6,527,360
COST OF PRODUCTS SOLD AND SERVICES PROVIDED (Note 1):
	Cost of products sold				373,218			398,354			1,285,815			1,571,983
	Cost of services and other sales				72,289			122,572			207,422			355,466
		Total cost of products sold and services provided			445,507			520,926			1,493,237			1,927,449
GROSS PROFIT					959,198			731,693			3,288,399			4,599,911
RESEARCH AND DEVELOPMENT					265,288			232,801			846,294			744,687
LEASE TERMINATION COSTS (Note 3)											104,397
SELLING, GENERAL AND ADMINISTRATIVE (Notes 1, 3)					1,711,170			1,551,344			5,072,501			4,884,873
LOSS FROM OPERATIONS					(1,017,260	)		(1,052,452	)		(2,734,793	)		(1,029,649	)
OTHER INCOME					31,543			122,532			112,752			355,843
LOSS BEFORE INCOME TAX BENEFIT					(985,717	)		(929,920	)		(2,622,041	)		(673,806	)
INCOME TAX BENEFIT (Note 6)					(334,548	)		(368,612	)		(897,505	)		(288,725	)
NET LOSS				$	(651,169	)	$	(561,308	)	$	(1,724,536	)	$	(385,081	)
BASIC AND DILUTED LOSS PER COMMON SHARE (Note 4)				$	(0.05	)	$	(0.05	)	$	(0.14	)	$	(0.03	)

See notes to condensed financial statements and independent accountants’ report.

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CINTECH SOLUTIONS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 2002 AND 2001

	Common										Total
	Stock		Contributed		Treasury			Accumulated			Stockholders'
	No Par Value		Capital		Stock			Deficit			Equity
BALANCE AT JUNE 30, 2000	$	9,005,433	$	675,757	$	(2,290	)	$	(353,174	)	$	9,325,726
STOCK OPTIONS EXERCISED (4,399 shares)		2,856										2,856
NET LOSS									(385,081	)		(385,081	)
BALANCE AT MARCH 31, 2001	$	9,008,289	$	675,757	$	(2,290	)	$	(738,255	)	$	8,943,501
BALANCE AT JUNE 30, 2001	$	9,008,289	$	675,757	$	(2,290	)	$	(1,027,577	)	$	8,654,179
STOCK OPTIONS EXERCISED (1,500 shares)		435										435
NET LOSS									(1,724,536	)		(1,724,536	)
BALANCE AT MARCH 31, 2002	$	9,008,724	$	675,757	$	(2,290	)	$	(2,752,113	)	$	6,930,078

See notes to condensed financial statements and independent accountants’ report.

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CINTECH SOLUTIONS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTHS ENDED MARCH 31, 2002 AND 2001

					2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(1,724,536	)	$	(385,081	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation				97,572			219,446
		Amortization of software development costs				455,205			322,878
		Deferred income tax benefit				(897,505	)		(199,119	)
		Provision for doubtful accounts				(18,803	)		43,651
		Changes in assets and liabilities:
			(Increase) decrease in accounts receivable			(213,177	)		508,351
			Decrease in inventory			1,060			30,206
			Increase in other assets			(125,541	)		(69,859	)
			Increase (decrease) in accounts payable			3,695			(285,725	)
			Decrease in accrued expenses			(210,997	)		(463,546	)
			Increase in accrued lease termination costs			28,341
			Decrease in deferred maintenance revenue			(26,409	)		(122,198	)
				Total adjustments		(906,559	)		(15,915	)
				Net cash used in operating activities		(2,631,095	)		(400,996	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Redemption (purchase) of marketable securities					3,110,700			(1,031,899	)
	Purchase of fixed assets					(178,331	)		(93,702	)
	Proceeds on disposal of fixed assets					35,000
	Expenditures for software development costs					(585,677	)		(819,376	)
				Net cash provided by (used in) investing activities		2,381,692			(1,944,977	)
CASH FLOWS FROM FINANCING ACTIVITIES -
	Proceeds from exercise of stock options					435			2,856
NET DECREASE IN CASH AND CASH EQUIVALENTS						(248,968	)		(2,343,117	)
CASH AND CASH EQUIVALENTS:
	Beginning of period					641,883			2,521,039
	End of period				$	392,915		$	177,922
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid					$	14,516		$	16,512

See notes to condensed financial statements and independent accountants’ report.

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CINTECH SOLUTIONS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND AS OF MARCH 31, 2002 AND 2001 AND FOR THE THREE-MONTH AND NINE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE AND NINE-MONTHS ENDED MARCH 31, 2002 AND 2001 IS UNAUDITED)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Nature of Business- Cintech Solutions, Inc. (the “Company”) develops and markets interaction management software to help businesses manage voice and data contacts with their customers, partners, and associates. In concert with the interaction management software, the Company also provides services, such as installation, training, project management, consulting and maintenance support.
	Basis of Presentation- The condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X and are expressed in United States dollars. There are no significant differences in accounting principles generally accepted in the United States of America and Canada. The information disclosed in the notes to the financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2001 has not changed materially unless otherwise disclosed herein. Financial information as of June 30, 2001 included in these condensed financial statements has been derived from the audited financial statements included in that report. In management’s opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made.
	Results of operations are not necessarily indicative of the results that may be expected for future interim periods or for the full year.
	Use of Estimates- The preparation of the financial statements in conformity with 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	Revenue- Generally, the Company records product and service revenue when the product is shipped and the service is provided. Also, the Company records an estimate of potential future returns of product sold at the time of sale.
	Deferred Maintenance Revenue- The Company sells product maintenance agreements which provide for no-cost upgrade of software. These agreements normally cover periods ranging from 1-5 years with revenue being recognized on a straight-line basis over the maintenance period.
	Warranty Reserve- At the time of sale, the Company accrues for warranty costs relating to software replacement or on site support to be provided during the first twelve months following the sale. Costs associated with supporting product under warranty are charged to the reserve instead of current period cost. The reserve is adjusted periodically based upon actual experience.
	Depreciation- Fixed assets are carried at cost. Depreciation is computed using a straight line method over the following useful lives:

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Equipment	3-5 years
Furniture and Fixtures	2-10 years

During 2002, the Company changed its method of accounting for depreciation from an accelerated method. The effects of such change were not material to the financial statements.

Inventory- Inventories are valued at the lower of cost or market, with cost being computed using the first-in, first-out method. Inventories consist of:

	March 31,			June 30,			March 31,
	2002			2001			2001
Literature and other documentation	$	16,414		$	13,195		$	8,898
Computer hardware		12,007			12,205			11,334
Allowance for obsolete inventory		(8,094	)		(4,013	)		(4,469	)
Total inventory	$	20,327		$	21,387		$	15,763

Significant Customers- Most of the Company’s sales are to distributors in the voice-centric call center solutions market. The Company had sales to major distributors, as follows:

	Sales for the Three-Months Ended March 31,										Sales for the Nine-Months Ended March 31,
	2002					2001					2002					2001
	Amount		%			Amount		%			Amount		%			Amount		%
Distributor A	$	893,944		64	%	$	615,507		49	%	$	3,292,448		69	%	$	4,350,997		67	%
Distributor B		169,816		12	%		156,330		13	%		323,718		7	%		547,399		8	%
Total	$	1,063,760		76	%	$	771,837		62	%	$	3,616,166		76	%	$	4,898,396		75	%

The Company had gross accounts receivable from major distributors, each of which was in excess of 10% of the Company’s total accounts receivable, as follows:

			Percent of
			Gross
			Accounts
	Distributors		Receivable
March 31, 2002		2		77	%
June 30, 2001		2		71	%
March 31, 2001		2		60	%

International Sales- The Company’s international sales to Canada were approximately 2% and 3% of total sales for the three-months ended March 31, 2002 and 2001, and approximately 2% of total sales for the nine-months ended March 31, 2002 and 2001, respectively.

Software Development Costs- Costs incurred internally for creation of the computer software product are charged to research and development expense when incurred until technological feasibility has been established for the product. Thereafter, until general release, all software production costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. The capitalized costs are amortized on a straight-line basis over the estimated economic life of the product.

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Costs capitalized were $160,444 and $398,968 and related amortization was $153,876 and $213,000 for the three-months ended March 31, 2002 and 2001, respectively. Costs capitalized were $585,677 and $819,376 and related amortization was $455,205 and $322,878 for the nine-months ended March 31, 2002 and 2001, respectively. The Company periodically evaluates the capitalized cost relative to potential sales and accelerates the write-off when appropriate.

Licensing Fee- The Company has agreements with distributors which require the payment of a license fee on certain software sales made by the distributors. This license fee is for the distribution of the Company’s products. License fee expense was $184,969 and $162,096 for the three-months ended March 31, 2002 and 2001, respectively. License fee expense was $708,966 and $1,046,082 for the nine-months ended March 31, 2002 and 2001, respectively.

Fair Value of Financial Instruments- The carrying value of certain of the Company’s financial instruments, such as cash, trade accounts receivable and trade accounts payable, approximate their fair values.

Accounting Pronouncements —In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. This statement will have no impact on the Company’s financial statements.

In June, 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement goodwill, as well as other intangibles determined to have an indefinite life will no longer be amortized; however these assets will be reviewed for impairment on a periodic basis. This statement will have no impact on the Company’s financial statements.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement applies to legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 requires the recognition of the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement will have no impact on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and applies to recognized long-lived assets of an entity to be held and used or to be disposed of. This statement will have no impact on the Company’s financial statements.

Cash and Cash Equivalents- For purposes of reporting cash flows, the Company considers all money market instruments to be cash equivalents.

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2.	MARKETABLE SECURITIES
	The Company maintains various investments in federal agency notes which are classified as held-to-maturity and are reported at amortized cost in accordance with FASB Statement No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” All items mature within one year. The cost and market value of theses investments are summarized below:

					Net
	Amortized				Unrealized
Description	Cost		Market		Gain (Loss)
March 31, 2002 - Federal Agency Notes	$	3,086,395	$	3,038,260	$	(48,135	)
June 30, 2001 - Federal Agency Notes	$	6,284,141	$	6,284,163	$	22
March 31, 2001 - Federal Agency Notes	$	6,860,093	$	6,864,720	$	4,627

During the third quarter of 2002, the Company received 1,512 shares of stock through the demutualization of an insurance company. The value of this stock as of March 31, 2002 was $87,046. Management has classified the securities as available for sale. The unrealized gain related to common stock was not material as of March 31, 2002.

3.	OPERATING LEASES
	Operating Leases- During the second quarter of 2002, the Company accrued for costs associated with terminating its Norwood, Ohio lease and relocating its office facility.
	In fiscal 2001, the Company signed a lease agreement for a new office facility in Blue Ash, Ohio. This operating lease, which began in December 2001 and expires in November 2011, calls for escalating lease payments over the term of the lease. The Company records lease expense on a straight-line basis over the life of the lease.
	In fiscal 2001, the Company signed leased agreements for office equipment and furniture. These operating leases began in December 2001 and expire in November 2005 and November 2006, respectively.
	The annual minimum rent to be paid under the operating lease agreements is as follows:

Period Ending March 31:
	2003	$	1,069,389
	2004		1,069,389
	2005		1,069,389
	2006		1,012,842
	2007		875,853
	2008 and after		3,864,280

Rent expense for the leased office space was $229,192 and $93,341 for the three-month periods ended March 31, 2002 and 2001. Rent expense for the leased office space was $456,882 and $249,942 for the nine-month periods ended March 31, 2002 and 2001. The lease expense for the equipment and furniture was $87,422 and $99,934 for the three-month and nine-month period ended March 31, 2002.

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4.	CAPITAL STOCK AND INCOME PER SHARE
	The following schedule is a summary of the Company’s shares of capital stock.

			Common				In
	Authorized		Issued		Outstanding		Treasury
Balance at March 31, 2002		15,000,000		12,329,227		12,327,227		2,000
Balance at June 30, 2001		15,000,000		12,327,727		12,325,727		2,000
Balance at March 31, 2001		15,000,000		12,327,727		12,325,727		2,000

Loss per common share was based on the weighted average number of common shares outstanding during each period. Accordingly, the sum of the individual quarters may not equal the year to date total

The Company’s basic and diluted loss per share were determined as follows:

	Three-Months Ended								Three-Months Ended
	March 31, 2002									March 31, 2001
	Loss			Shares		Per Share				Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount				(Numerator)			(Denominator)		Amount
Basic EPS
Loss available to common stockholders	$	(651,169	)		12,327,227	$	(0.05	)		$	(561,308	)		12,325,727	$	(0.05	)
Effect of Dilutive Securities
Stock options
Diluted EPS
Loss available to common stockholders and assumed conversions	$	(651,169	)		12,327,227	$	(0.05	)		$	(561,308	)		12,325,727	$	(0.05	)

	Nine-Months Ended								Nine-Months Ended
	March 31, 2002								March 31, 2001
	Loss			Shares		Per Share			Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic EPS
Loss available to common stockholders	$	(1,724,536	)		12,327,227	$	(0.14	)	$	(385,081	)		12,324,128	$	(0.03	)
Effect of Dilutive Securities
Stock options
Diluted EPS
Loss available to common stockholders and assumed conversions	$	(1,724,536	)		12,327,227	$	(0.14	)	$	(385,081	)		12,324,128	$	(0.03	)

Stock options representing 1,442,598 shares and 991,513 shares for the three-months ended March 31, 2002 and 2001, respectively, were not included in computing diluted loss per share because their effects were antidilutive. Stock options representing 1,442,598 shares and 664,842 shares for the nine-months

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ended March 31, 2002 and 2001, respectively, were not included in computing diluted loss per share because their effects were antidilutive

5.	STOCK OPTION PLAN
	During 1994, the Board of Directors approved a plan providing for the granting, to employees, options for the purchase of a maximum of 1,500,000 shares of common stock. In 1996, the plan was amended to provide for non-employee eligibility. In 1999, the plan was amended and restated to include in one document all previous amendments and other non-material changes designed to improve the operation of the plan and to reserve an additional 1,000,000 shares for issuance under the plan. Excluding the options granted in February 1994, all options have been granted at an exercise price equal to the fair market value at the date of grant and become exercisable equally over a period ranging from one to four years. The February 1994 options were granted at a price below fair market value at the date of grant and were subsequently adjusted to market. The 1994 options granted became exercisable equally over a two-year period. All options expire at the end of ten years from the date of grant or are subject to the performance provisions of specific grants.
	The Company has adopted the disclosure only provision of SFAS No. 123 and applies APB Opinion No. 25 in accounting for its stock options. Proforma disclosure reflecting the financial impact of compensation cost for stock option grants made in fiscal years 2001 and 2000, determined using the fair value method consistent with SFAS No. 123, were presented in the footnotes to the 2001 annual report.
6.	INCOME TAXES
	Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

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Deferred taxes consist of the following:

	March 31,			June 30,			March 31,
	2002			2001			2001
Current deferred tax asset — Deferred revenue and other	$	427,338		$	497,671		$	542,271
Non-current deferred tax asset — Carryforwards and credits	$	1,929,550		$	909,523		$	855,752
Non-current deferred tax liability — Deferred software development costs and other		(775,132	)		(722,943	)		(698,659	)
Net non-current deferred tax asset	$	1,154,418		$	186,580		$	157,093

The benefit for income taxes for the three-months and nine-months ended March 31, 2002 and 2001 consists of the following:

	For the Three-Months						For the Nine-Months
	Ended March 31,						Ended March 31,
	2002			2001			2002			2001
Current benefit	$	—		$	(50,805	)	$	—		$	(72,747	)
Deferred benefit		(334,548	)		(317,807	)		(897,505	)		(215,978	)
Income tax expense benefit	$	(334,548	)	$	(368,612	)	$	(897,505	)	$	(288,725	)

The primary differences between the statutory rate for federal income tax and the effective income tax rate are the benefits from research and development credits and state tax losses generated during the current year. At March 31, 2002, the Company has available net operating loss carryforwards for U.S. Federal tax purposes of approximately $4,403,000 that will expire in 2021. Also at March 31, 2002, for U.S. Federal tax purposes, the Company has research and development credit carryforwards available to offset future income taxes of approximately $280,000 which will begin to expire in 2017.

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