UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 2004
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 333-100046
----------
CINTEL CORP.
(Exact name of Registrant as specified in its charter)
____________________
NEVADA
(State or other Jurisdiction of 52-2360156
Incorporation or organization). (IRS Employer I.D. No.)
___________________________
1001 W. CHELTENHAM AVE.
MELROSE PARK, PA 19027
(215) 782-8201
(Address, including zip code, and telephone and facsimile numbers, including
area code, of
registrant's executive offices)
___________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of September 30, 2004: 20,944,300 shares of common stock, $.001
par value per share.
-1-
CINTEL CORP.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements Periods Ended
September 30, 2004 and 2003 (unaudited)
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations . . . . . . . . . . . . 4-5
Consolidated Statements of Changes in Stockholders' Equity . 6
Consolidated Schedule of Expenses. . . . . . . . . . . . . . 7-8
Consolidated Statement of Cash Flows . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . 10-17
Item 2. Management's Discussion and Analysis or Plan of Operation . . 17
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
-2-
PART I
CINTEL CORP.
Consolidated Balance Sheets
September 30, 2004 and 2003
2004 2003
ASSETS
CURRENT
Cash and cash equivalents (note 3) . . $ 258,725 $ 345,997
Accounts receivable (net of allowance
for doubtful accounts of
$414,133; 2003 - $139,934) 1,330,677 3,285,885
Inventory. . . . . . . . . . . . . . . 250,974 333,080
Prepaid and sundry assets. . . . . . . 110,706 318,506
Loans receivable . . . . . . . . . . . 4,846 -
Deferred taxes . . . . . . . . . . . . 118,412 64,453
-----------------------------
2,074,340 4,347,921
DEFERRED TAXES . . . . . . . . . . . . 576,743 353,567
EQUIPMENT (note 4) . . . . . . . . . . 555,273 727,770
INVESTMENTS. . . . . . . . . . . . . . 43,609 43,740
-----------------------------
$ 3,249,965 $ 5,472,998
=============================
LIABILITIES
CURRENT
Accounts payable . . . . . . . . . . . $ 1,008,171 $ 2,088,770
Loans payable - current (note 5) . . . 1,549,820 1,210,372
-----------------------------
2,557,991 3,299,142
LOANS PAYABLE (note 5) . . . . . . . . 51,439 48,548
-----------------------------
2,609,430 3,347,690
-----------------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 6) . . . . . . . . 20,944 20,314
PAID IN CAPITAL. . . . . . . . . . . . 4,486,600 4,427,330
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) . . . . . . . . . . . . 6,145 7,183
ACCUMULATED DEFICIT. . . . . . . . . . (3,873,154) (2,329,519)
-----------------------------
640,535 2,125,308
-----------------------------
$ 3,249,965 $ 5,472,998
=============================
APPROVED ON BEHALF OF THE BOARD
"SANG DON KIM" "KYO JIN KANG"
- ------------------------------------ -----------------------------
Director Director
-3-
CINTEL CORP.
Consolidated Statement of Operations
Nine Months Ended September 30, 2004 and 2003
2004 2003
REVENUE
Finished goods. . . . . . . . . . . . . . . . . $ 535,537 $ 1,254,505
Merchandise . . . . . . . . . . . . . . . . . . 798,712 2,578,192
Services. . . . . . . . . . . . . . . . . . . . 33,941 10,762
-------------------------
$ 1,368,190 $ 3,843,459
COST OF SALES
Finished goods. . . . . . . . . . . . . . . . . $ 396,771 $ 890,660
Merchandise . . . . . . . . . . . . . . . . . . 780,190 2,671,978
-------------------------
1,176,961 3,562,638
-------------------------
GROSS PROFIT. . . . . . . . . . . . . . . . . . 191,229 280,821
EXPENSES (page 6) . . . . . . . . . . . . . . . 1,108,999 1,229,507
-------------------------
OPERATING LOSS. . . . . . . . . . . . . . . . . (917,770) (948,686)
-------------------------
OTHER
Interest and other income . . . . . . . . . . . (12,338) (17,229)
Foreign exchange. . . . . . . . . . . . . . . . 1,093 176
Interest expense. . . . . . . . . . . . . . . . 111,753 76,950
-------------------------
100,508 59,897
-------------------------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . . (1,018,278) (1,008,583)
Deferred income taxes . . . . . . . . . . . . . (163,000) (161,000)
-------------------------
NET LOSS. . . . . . . . . . . . . . . . . . . . $ (855,278) $ (847,583)
=========================
BASIC LOSS PER SHARE. . . . . . . . . . . . . . $ (0.04) $ (0.05)
=========================
WEIGHTED AVERAGE NUMBER OF
SHARES (note 6). . . . . . . . . . . . . . . . 20,455,411 16,683,300
=========================
-4-
CINTEL CORP.
Consolidated Statement of Operations
Three Months Ended September 30, 2004 and 2003
2004 2003
REVENUE
Finished goods. . . . . . . $ 387,965 $ 585,179
Merchandise . . . . . . . . 160,080 966,149
Services. . . . . . . . . . 10,650 10,077
-------------------------
$ 558,695 $ 1,561,405
COST OF SALES
Finished goods. . . . . . . $ 232,524 $ 298,446
Merchandise . . . . . . . . 150,325 1,026,015
-------------------------
382,849 1,324,461
GROSS PROFIT. . . . . . . . 175,846 236,944
EXPENSES (page 6) . . . . . 342,298 391,494
-------------------------
OPERATING LOSS. . . . . . . (166,452) (154,550)
-------------------------
OTHER
Interest and other income . (2,073) (4,669)
Foreign exchange. . . . . . - 287
Interest expense. . . . . . 61,735 24,018
-------------------------
59,662 19,636
-------------------------
LOSS BEFORE INCOME TAXES. . (226,114) (174,186)
Deferred income taxes . . . (47,000) (41,000)
-------------------------
NET LOSS. . . . . . . . . . $ (179,114) $ (133,186)
=========================
BASIC LOSS PER SHARE. . . . $ (0.01) $ (0.01)
=========================
WEIGHTED AVERAGE NUMBER OF
SHARES (note 6). . . . . . 20,737,634 16,683,300
=========================
-5-
CINTEL CORP.
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2004 and 2003
PAID IN ACCUMULATED
CAPITAL IN OTHER TOTAL
NUMBER OF CAPITAL EXCESS OF COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES STOCK PAR VALUE INCOME (LOSS) DEFICIT EQUITY
------------------------------------------------------------------------
Balance, January 1, 2003. . 8,431,000 $ 8,431 $4,465,439 $(47,125) $(1,481,936) $2,944,809
Common shares cancelled
for no consideration . . . (4,800,000) (4,800) 4,800 - - -
Common shares issued
on acquisition of Cintel
Co., Ltd.. . . . . . . . . 16,683,300 16,683 (88,586) - - (71,903)
Employee stock options
vested . . . . . . . . . . - - 45,677 - - 45,677
Foreign exchange on
translation. . . . . . . . - - - 54,308 - 54,308
Net Loss. . . . . . . . . . - - - - (847,583) (847,583)
------------------------------------------------------------------------
Balance, September 30, 2003 20,314,300 $20,314 $4,427,330 $ 7,183 $(2,329,519) $2,125,308
========================================================================
Balance, January 1, 2004. . 20,314,300 $20,314 $4,427,330 $(38,627) $(3,017,876) $1,391,141
Common shares issued fo
r consulting services . . . 630,000 630 59,270 - - 59,900
Foreign exchange on
translation. . . . . . . . - - - 44,772 - 44,772
Net Loss. . . . . . . . . . - - - - (855,278) (855,278)
------------------------------------------------------------------------
Balance, September 30, 2004 20,944,300 $20,944 $4,486,600 $ 6,145 $(3,873,154) $ 640,535
========================================================================
-6-
CINTEL CORP.
Consolidated Schedule of Expenses
Nine Months Ended September 30, 2004 and 2003
2004 2003
EXPENSES
Salaries . . . . . . . . $ 292,046 373,136
Research and development 230,978 $ 350,179
Professional fees. . . . 168,934 108,820
Rent . . . . . . . . . . 62,527 67,093
Employee benefits. . . . 49,026 55,779
Repairs and maintenance. 14,663 -
Travel . . . . . . . . . 35,378 33,044
Office and general . . . 23,798 23,241
Communications . . . . . 23,268 18,204
Entertainment. . . . . . 21,632 19,460
Taxes and dues . . . . . 15,058 23,387
Advertising. . . . . . . 10,981 31,725
Royalties. . . . . . . . 7,424 7,496
Insurance. . . . . . . . 3,378 14,293
Bad debts. . . . . . . . - (24,652)
Depreciation . . . . . . 149,908 128,302
----------------------
$1,108,999 $1,229,507
======================
-7-
CINTEL CORP.
Consolidated Schedule of Expenses
Three Months Ended September 30, 2004 and 2003
2004 2003
EXPENSES
Salaries . . . . . . . . $ 98,247 124,485
Research and development 37,829 $ 51,517
Professional fees. . . . 79,625 32,444
Rent . . . . . . . . . . 23,145 25,573
Employee benefits. . . . 17,209 26,549
Communications . . . . . 12,369 6,048
Entertainment. . . . . . 9,822 3,482
Office and general . . . 7,148 10,748
Taxes and dues . . . . . 6,721 7,611
Royalties. . . . . . . . 2,466 2,470
Travel . . . . . . . . . 238 17,781
Insurance. . . . . . . . 175 3,135
Advertising. . . . . . . - 28,802
Bad debts. . . . . . . . - (391)
Depreciation . . . . . . 47,304 51,240
------------------
$342,298 $391,494
==================
-8-
CINTEL CORP.
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2004 and 2003
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (855,278) $(847,583)
Adjustments for working capital and
non-cash items:
Depreciation. . . . . . . . . . . . . . . . . . . . 149,908 128,302
Income taxes. . . . . . . . . . . . . . . . . . . . - (5,152)
Employee stock options vested . . . . . . . . . . . - 45,677
Accounts receivable . . . . . . . . . . . . . . . . 1,071,040 232,617
Inventory . . . . . . . . . . . . . . . . . . . . . (96,871) (101,452)
Prepaid and sundry assets . . . . . . . . . . . . . 45,339 99,996
Deferred taxes. . . . . . . . . . . . . . . . . . . (163,000) (160,750)
Accounts payable. . . . . . . . . . . . . . . . . . (695,097) 445,142
Common stock issued for consulting services . . . . 59,900 -
----------------------
(484,059) (163,203)
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment, net . . . . . . . . . . . 2,910 (509,803)
Loans receivable. . . . . . . . . . . . . . . . . . (4,803) 287,004
----------------------
(1,893) (222,799)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans payable . . . . . . . . . . . . . . . . . . . 193,286 (62,346)
----------------------
FOREIGN EXCHANGE ON CASH AND CASH EQUIVALENTS . . . 16,824 15,453
----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . (275,842) (432,895)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR. . . 534,567 778,892
----------------------
CASH AND CASH EQUIVALENTS - END OF YEAR . . . . . . $ 258,725 $ 345,997
======================
INTEREST AND INCOME TAXES PAID
During the year, the company had cash flows arising
from interest and income taxes paid as follows:
Interest paid . . . . . . . . . . . . . . . . . . . $ 107,877 $ 69,505
======================
Income taxes paid . . . . . . . . . . . . . . . . . $ - $ -
======================
-9-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
1. OPERATIONS AND BUSINESS
Cintel Corp., formerly Link2 Technologies, Inc. ("the Company"), was
incorporated in the State of Nevada on August 16, 1996 and on April 24, 2001
changed its name from "Great Energy Corporation International" to Link2
Technologies, Inc. On September 30, 2003 the Company changed its name to
Cintel Corp.
On September 30, 2003, the Company entered into a definitive Share Exchange
Agreement (the "Agreement") with Cintel Co., Ltd., ("Cintel Korea") a Korean
corporation and its shareholders. The Agreement provided for the acquisition by
the Company from the shareholders of 100% of the issued and outstanding capital
stock of Cintel Korea. In exchange, the shareholders of Cintel Korea received
16,683,300 shares of the Company. As a result, the shareholders of Cintel Korea
controlled 82% of the Company. While the Company is the legal parent, as a
result of the reverse-takeover, Cintel Korea became the parent company for
accounting purposes.
Upon completion of the share exchange, the business operations of Cintel
Korea constituted virtually all of the business operations of the Company.
Cintel Korea develops network solutions to address technical limitations to
the Internet. Cintel Korea has developed what it believes is the first Korean
server load balancing technology. Cintel Korea is now focused on the
development of advanced solutions for Internet traffic management. The
business operations of Cintel Korea are located in Seoul, Korea.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company are in accordance with generally accepted
accounting principles of the United States of America, and their basis of
application is consistent. Outlined below are those policies considered
particularly significant:
a) Basis of Financial Statement Presentation
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America with the
assumption that the Company will be able to realize its assets and discharge its
liabilities in the normal course of business.
b) 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.
-10-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
c) Unit of Measurement
The US Dollar has been used as the unit of measurement in these financial
statements.
d) Use of Estimates
Preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and related notes to financial statements. These estimates are based
on management's best knowledge of current events and actions the Company may
undertake in the future. Actual results may ultimately differ from estimates,
although management does not believe such changes will materially affect the
financial statements in any individual year.
e) Revenue Recognition
The Company recognizes revenues upon delivery of merchandise sold, and when
services are rendered for maintenance contracts.
f) Cash and Cash Equivalents
Cash includes currency, cheques issued by others, other currency equivalents,
current deposits and passbook deposits. Cash equivalents include securities and
short-term money market instruments that can be easily converted into cash. The
investments that mature within three months from the investment date, are also
included as cash equivalents.
g) 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 with unrealized holding gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity.
h) Inventories
Inventories are stated at the lower of cost or net realizable value. Net
realizable value is determined by deducting selling expenses from selling price.
The cost of inventories is determined on the first-in first-out method, except
for materials-in-transit for which the specific identification method is used.
-11-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
i) Equipment
Equipment is stated at cost. Major renewals and betterments are capitalized and
expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over a period of 5
years.
j) Government Grants
Government grants are recognized as income over the periods necessary to match
them with the related costs that they are intended to compensate.
k) 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.
l) Financial Instruments
Fair values of cash equivalents, short-term and long-term investments and
short-term debt approximate cost. The estimated fair values of other financial
instruments, including debt, equity and risk management instruments, have been
determined using market information and valuation methodologies, primarily
discounted cash flow analysis. These estimates require considerable judgment in
interpreting market data, and changes in assumptions or estimation methods could
significantly affect the fair value estimates.
m) Income Tax
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes". Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. 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.
-12-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
n) Earnings or Loss per Share
The Company adopted FAS No.128, "Earnings per Share" which requires disclosure
on the financial statements of "basic" and "diluted" earnings (loss) per share.
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the year. Diluted
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding plus common stock
equivalents (if dilutive) related to stock options and warrants for each year.
o) 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.
3. CASH AND CASH EQUIVALENTS
The following amounts included in cash and cash equivalents are restricted for
use by the Company:
a) The company has provided $117,328 as security for bank loans to employees
to purchase the Company's shares. As at September 30, 2004, the loans
outstanding amounted to approximately $98,000.
b) The company has provided $121,242 as security for one of the bank loans
described in note 5. The loan will mature on November 12, 2004.
-13-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
4. EQUIPMENT
Equipment is comprised as follows:
2004 2003
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
------------------------------------------
Furniture and fixtures $ 34,185 $ 19,849 $ 23,845 $ 15,431
Equipment. . . . . . . 565,651 424,680 519,137 328,426
Vehicles . . . . . . . 13,429 12,756 13,469 10,102
Software . . . . . . . 622,090 222,797 623,954 98,676
------------------------------------------
$1,235,355 $680,082 $1,180,405 $452,635
------------------------------------------
Net carrying amount. . $555,273 $727,770
-------- --------
5. LOANS PAYABLE
2004 2003
CURRENT LONG-TERM TOTAL Total
-----------------------------------------------
Bank loans. . . . . . . . . . . . . . . . . $1,214,640 $ - $1,214,640 $1,131,260
Promissory note . . . . . . . . . . . . . . 39,000 - 39,000 39,000
Government loans (1, 2, 3 & 4). . . . . . . 27,700 61,921 89,621 95,677
Discount of interest-free government loans. (2,298) (10,482) (12,780) (7,017)
Notes payable (1, 2 & 3). . . . . . . . . . 270,778 - 270,778 -
-----------------------------------------------
$1,549,820 $ 51,439 $1,601,259 $1,258,920
===============================================
Bank Loans
Bank loans bear interest at 6.6% to 8.77% with different maturities from October
to December 2004. The loans are repayable upon maturity. The loans are secured
by a guarantee by the Korean Technology Credit Guarantee Fund to a maximum of
$443,000, a limited guarantee by the chief executive officer and cash collateral
of $121,242 as described in note 3b.
Promissory Note
The promissory note is non-interest bearing, unsecured and due on demand.
-14-
CINTEL CORP.
Notes to Consolidated Financial Statements
September 30, 2004 and 2003
5. LOANS PAYABLE (cont'd)
Government Loan #1
The loan is non-interest bearing, repayable in annual payments of $15,582 and
matures July 2005.
Government Loan #2
The loan is non-interest bearing, repayable in annual payments of $11,236 and
matures July 2005.
Government Loan #3
The loan is non-interest bearing, repayable in annual payments of $5,000
starting 2006 and matures October 2009.
Government Loan #4
The loan is non-interest bearing, repayable in annual payments of $3,419
starting 2006 and matures October 2009.
Note Payable #1
Note Payable of approximately $36,500 is non-interest bearing, unsecured and due
on demand.
Note Payable #2
Note Payable of approximately $43,500 bears interest at 5% per month and is due
on maturity in October 2004.
Note Payable #3
Note Payable of approximately $190,778 bears interest at 4% per annum and is due
on maturity in November 2004.
6. CAPITAL STOCK
Authorized
50,000,000 common shares, par value $0.001 per share
2004 2003
Issued
20,944,300 common shares (2003 - 20,314,300) $ 20,944 $ 20,314
======================
In June 2004, 300,000 common shares were issued for consulting services at
the value of $33,000.
-15-
6. CAPITAL STOCK (cont'd)
In July 2004, 160,000 common shares were issued for consulting services at
the value of $12,800.
In August 2004, 50,000 common shares were issued for consulting services at
the value of $4,500.
In September 2004, 120,000 common shares were issued for consulting
services at the value of $9,600.
On September 30, 2003, the Company cancelled 4,800,000 shares of common
stock for no consideration. As well, the Company granted a 2 to 5 reverse stock
split. The reverse split has retroactively been taken into consideration in the
consolidated financial statements and the calculation of earnings per share.
Finally, the Company issued 16,683,300 common shares in exchange for 100% of the
outstanding shares of Cintel Co., Ltd.
Stock Warrants and Options
The Company 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." The value of options
granted has been estimated using 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:
2004 2003
Interest rate. . . . . 6.5% 6.5%
Expected volatility. . 70% 70%
Expected life in years 6 6
In 1999, the Board of Directors of Cintel Korea adopted an option plan to allow
employees to purchase ordinary shares of the Cintel Korea.
In August 1999, the share option plan granted 96,000 stock 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 and in 2003, an additional 30,000 of
these 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. In 2002, 135,000 and in 2003, an
additional 47,000 of these stock options were cancelled.
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.
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6. CAPITAL STOCK (cont'd)
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
outstanding options vested in the six months ended September 30, 2004 (2003;
$45,678). The 2003 amounts have been expensed in the statements of operations.
The stock options have not been included in the calculation of the diluted
earnings per share as their inclusion would be antidilutive.
7. CONTINGENT LIABILITIES AND COMMITMENTS
a) The Company has entered into a contract with iMimic Networking, Inc. for
the use of the iMimic solution within Korea starting November 17, 2000. For the
use of this solution, the Company paid $70,000 as an upfront payment and pays a
$640 royalty for each product sold that uses the iMimic solution. The Company
is also required to pay an annual royalty fee of $10,000. The contract has no
fixed termination date.
b) The Company is committed to a lease obligation which expires in June
2005. Future minimum annual payments (exclusive of taxes and insurance) under
the lease are as follows:
2005 $ 48,000
------------
c) On September 14, 2004, the Company entered into a Standby Equity
Distribution Agreement with US-based investment fund Cornell Capital Partners
LP. Under the terms of the agreement, Cornell has committed to provide up to $5
million of funding to the Company over a 24 month period, to be drawn down at
the Company's discretion through the sale of the Company's common stock to
Cornell. The purchase price of said shares purchased under the agreement, with
respect to any advance, will be equal to 98% of the lowest closing bid price of
the Common Stock on the listed market for the five days immediately following
the notice date for the advance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- -------------------------------------------------------------
This report may contain "forward-looking" statements. Examples of
forward-looking statements include, but are not limited to: (a) projections of
our revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of our plans and
objectives; (c) statements of our future economic performance; (d) statements of
assumptions underlying other statements and statements about us and our business
relating to the future; and (e) any statements using the words "anticipate,"
"expect," "may," "project," "intend" or similar expressions.
2. General
Founded in 1997, CinTel Co., Ltd. (CinTel), a cutting edge technology company,
introduced Korea's first dynamic server load balancer, which we believe has now
proven to be a world-class product. CinTel's award winning Internet Traffic
Management (ITM) solutions are marketed to customers around the world, helping
them to improve Internet traffic management, service levels (QOS: Quality of
Service), and the user experience (QOC: Quality of Content). Today, CinTel is a
public company listed on the OTCBB (Symbol: CNCN). CinTel is also a network
integration provider and value-added reseller for various network solutions
including a new solid state disk solution.
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CinTel provides a comprehensive line of advanced ITM solutions that help network
operators meet the growing need to manage Web access, secure content, improve
users' experiences, and reduce server loads and bandwidth demands.
In addition, a joint research effort with IBM on a revolutionary DVS system
should open CinTel's future star market. Since the demands of the DVS market has
increased rapidly with high growth rates in various areas including government
and other large public groups, CinTel believes investing in DVS research will
develop highly advanced and competitive systems for tomorrow's DVS market.
3. Results of Operations
Our sales revenue for the nine month period ended September 30, 2004 was
$1,368,190, compared to $3,843,459 for the comparable period ended September 30,
2003. Our operating loss for the nine month period ended September 30, 2004 was
$(917,770). Our operating loss for the nine month period ended September 30,
2003 was $(948,686). Our interest expenses for the nine month period ended
September 30, 2004 was $113,202. It has increased over 100% compared with that
for the six month period ended June 30, 2004.
We believe our continued operating loss is mainly caused by an increase in
production costs and interest expenses and the decrease in sales revenue is due
to the recession of Korean economy. Due to the recession of the Korean economy,
the competition among IT companies has been getting severe.
To overcome the unfavorable environment, the Company has focused on investment
to improve its product competitiveness and attracting foreign capital. As the
result, CinTel entered into a $5 million standby equity distribution agreement
(SEDA) with Cornell Capital Partners on September 14, 2004. Through the
agreement, the Company will keep doing its best to expand its market to the US
and Europe, and to develop new products (e.g., DVS solution and iLog).
We believe the Company is now on course to grow its revenue in such a way that
profitability from business operations will begin to emerge.
4. Recent Events
On Aug. 11, 2004, the Company announced that it won the '2004 Korea Emerging
High-Quality Technology Award' for its new business of 'Solid-State Disks'
(SST-V1) and its 'System Performance Improvement Consulting'. The Seoul Economy
Daily, established in 1960, is one of the key economy publications in Korea with
daily circulation of 200,000. The Korea Emerging High-Quality Technology Award
is awarded by the Seoul Economy Daily to contributors who advance the Korean IT
and manufacturing industries. It selected the top business enterprise companies
from among 5,000 companies in each industrial category. Typically, prize
winners benefit from the associated publicity gaining added research
opportunities, peer technical acknowledgements and sales opportunities.
CinTel's SST-V1 Solid-State Disk Solution was developed to improve input/output
speed of existing server systems that require higher speeds due to the ever
evolving complexity of information environments. The SST-V1 improves system
efficiency of customers' sites when used independently or with existing server
systems, at the customers' option.
Sang Don Kim, CinTel's CEO said, "This award is our reward for meticulous and
persistent hard-work. It highlights the benefits of Solid-State Disk Solutions
and the associated system performance improvements by focusing on the dramatic
benefits. We are confident we will achieve our target goals with our SST-V1
business." "
The Company announced on Aug. 18, 2004 that it extended its agreement with Korea
Telecom (KT), Korea's largest telecommunication company, for CinTel's flagship
product, the 'iCache', for an additional year. CinTel's iCache product line has
been proving its outstanding performance and superior quality by outperforming
its competition in several benchmark tests that were performed by KT.
KT is a world-class telecommunication solution provider with services that
include ADSL, VDSL, Leased Line, Satellite, Cable Services and High Speed
Internet Network Infrastructure, and a customer base exceeding 20 millions as of
January 2004. In 2002 CinTel provided KT with 10 of its iCache-7020 models and
in 2003 with an additional 15 of its iCache-8010 models. This year KT has added
an additional 9 iCache-8010 models. CinTel's newest iCache-8010 model provides
the needed processing speed and stability for KT's Kornet system, a
sophisticated combination of high-speed data telecommunications and voice
telephony services. CinTel's
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iCache-8010, enables KT to provide faster service
to its customers who access global web-sites via Kornet while reducing KT's
costs for international line usage. Additionally, by utilizing iCache's unique
filtering services, KT is able to stabilize its telecommunication lines. CinTel
plans to provide similar solutions to other large and medium ISP companies both
domestically and globally as these companies seek solutions in reducing
operating costs while increasing system performance. CinTel's new iCache models
fulfill these needs.
On Sept. 14, 2004, the Company announced that it entered into a Standby Equity
Distribution Agreement ("SEDA") with US-based investment fund Cornell Capital
Partners LP ("Cornell").
Under the terms of the SEDA, Cornell has committed to provide up to $5 million
of funding to CinTel over a 24 month period, to be drawn down at CinTel's
discretion through the sale of CinTel's common stock to Cornell. The purchase
price of said shares purchased under the SEDA, with respect to any advance, will
be equal to 98% of the lowest closing bid price of the Common Stock on the
listed market for the five days immediately following the notice date for the
advance.
The SEDA facility may be used in whole or in part entirely at CinTel's
discretion. The issuance of the shares according to the Agreement is subject to
an effective registration statement.
"We are very pleased with our arrangement with Cornell," said Sang-Don Kim
President and CEO of the Company. "The Standby Equity Distribution Agreement
will address two important needs for us -- providing a ready source of cash for
general and special corporate purposes and increasing the liquidity of the
market for our common stock, which should be a benefit for our shareholders," he
added. In our view, the sectors, in which CinTel operates, show enormous
potential," said David Ratzker VP Capital Markets at Cornell Capital. "We look
forward to a long-term relationship with the Company."
On September 23, 2004, the Company announced that Shinhan Bank has selected
CinTel's flagship product, the 'iCache 7020' series for its nationwide data
network. One of Korea's leading financial institutions Shinhan Bank offers
retail, corporate, and international banking services. The first South Korean
bank to provide online banking to its customers, Shinhan has some 340 domestic
branches and numerous global branch offices including Great Britain, China, Hong
Kong, Vietnam, Japan and the United States. The bank restructured itself as a
financial holding company in 2001 to manage its banking, insurance, investment,
and securities units. From this expanded platform, Shinhan serves all major
components of Korea's corporate and retail banking and financial services
markets.
Shinhan Bank is part of parent company Shinhan Financial Group, one of South
Korea's major financial institutions. Shinhan Financial Group, is registered
with the U.S. Securities Exchange Commission and listed on the New York Stock
Exchange (NYSE) since September 2003.
As one of leading bank in Korea, Shinhan Bank forecast possible excessive
outgoing data traffic which can be caused by internal users in the near future;
it has searched for a proper solution which can enhance the reliability and
performance for its future traffic. CinTel's Technical Director, Mr. Kil Won
Seo said "We made recommendations to Shinhan Bank focusing on the needs of their
outgoing traffic. After the installation of icache server, the response time for
internal users has decreased significantly." Mr. Sang Don Kim, CinTel's CEO
added "We have provided Shinhan Bank with the world's best Internet Traffic
Management product. This agreement proves again CinTel's ability to meet the
demands of world-class enterprises. Financial institutions such as Shinhan Bank
put great value not only in access speed but also cost-effectiveness, stability,
and reliability. Our icache series addresses these areas, giving them the
comfort level they've been searching for."
On Sept. 27, 2004, the Company announced that its Vice president, Yongchol Cho,
had presented at Friedland Capital's & Research Works' Equities 2004 Conference
featuring companies covered by the research firm, Research Works on September
29th in New York City.
Friedland Capital brings together publicly-traded global companies at events
with the financial community in a variety of industry sectors across the United
States and Europe. Friedland Capital events provide companies a platform to
showcase their management teams, company strategy and business plans. During
this important presentation Mr. Cho presented Cintel's corporate message to key
members of the investment community including portfolio managers, analysts,
brokers and investment bankers.
Friedland Capital has been in business since 1979. The US based corporate
finance advisory firm, Friedland Capital Inc. and its principals have assisted
emerging growth companies worldwide in enhancing shareholder value and achieving
their US corporate finance objectives. Friedland Capital has offices in New
York, New Jersey, Chicago and Denver. Friedland Capital is also the world's
largest sponsor of financial community and investment events, sponsoring over
150 conferences and luncheons annually in 18 US cities and three European
cities.
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The Research Works, Inc. is an equity research boutique founded in 1992 and
focused on small-cap, microcap and penny stocks. Their principal objective is to
discover undervalued small companies and help them achieve fair value for their
stocks by producing high-quality research reports that are grounded in
fundamental analysis and employ state-of-the-art equity valuation models.
5. Projections
Management believes that its current business development plans will increase
the business of CinTel significantly over the next twelve months. Management
believes that it can achieve operating income of $1,500,000 during that time on
revenues of $13,000,000 against cost of sales of $8,700,000 and operating
expenses of $2,800,000. It should be noted that these projections are in stark
departure from the operating results CinTel experienced in 2003 and are premised
upon management's belief that it can significantly grow its business during the
next twelve months and that the growth will lead to profitable operations. The
projections anticipate an increase in sales of approximate 145% with
corresponding increases in cost of sales and operating expenses of only 65% and
58% respectively. These projections are further premised upon the following
assumptions of management.
- - We assume a slow-growth economy without major recession.
- - We assume of course that there are no unforeseen changes in technology to
make products immediately obsolete.
- - Nature and Limitation of Projections -This financial projection is based on
sales volume at the levels described in the projections of this paragraph and
presents, to the best of management's knowledge and belief, the company's
expected assets, liabilities, capital, revenues, and expenses. The projections
reflect management's judgment of the expected conditions and its expected course
of action, given the hypothetical assumptions.
- - Revenues - The Company's revenue is derived primarily from subscriptions.
Revenue projections are based on the 1999 sales in the comparable market
nationwide, based on industry average.
- - Expenses - The Company's expenses are primarily those of salaries, sales
commissions, development costs, operating costs, and administrative costs.
Other expenses are based on management's estimates and industry averages.
6. Trends
The popularity of the Internet has resulted in an ever-increasing number of
users transmitting rapidly increasing volumes of data, and the data getting more
complex. The number of web users is expected to increase, as the broadband
becomes much more common and widely spread. Increasingly, content providers are
incorporating audio and video into their sites. Consumers are steadily
increasing the duration of online sessions with the broadband connections. The
end result of such a mass scale usage is congestion. The Internet has also
evolved into the platform for many mission-critical applications, such as
e-commerce/e-learning, and financial business. In other words, wherever we find
the Internet and web, there will be a market for the ITM solutions and
importance of it will increase more and more. The upside potential for the ITM
industry, specially caching field, over the next two years is significant and
expansion by acquisition is a must in order to survive this industry, reflecting
the current trend of networking technology, that is a merging of technologies
into one.
7. Liquidity
As of September 30, 2004, CinTel had cash and cash equivalents totaling
$258,725. Management believes it has the resources necessary to maintain its
current business operations in the short term. However, during the next twelve
months, CinTel plans to focus on new business enterprises and expanding its
global market through mergers with alliance partners in the United States. In
order to pursue these plans aggressively, we will need additional investment
capital. We have not decided at this time how this money is to be raised. We
anticipate, however, that it will be through the issuance of capital stock or
bonds.
8. Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
-2-
ITEM 3 - CONTROLS AND PROCEDURES
We have evaluated, with the participation of our Chief Executive Officer and
Principal Financial Officer, the effectiveness of our disclosure controls and
procedures as of September 30, 2004. Based on this evaluation, our Chief
Executive Officer and Principal Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that we record,
process, summarize, and report information required to be disclosed by us in our
quarterly reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commission's rules and forms.
During the quarterly period covered by this report, there were no changes in our
internal controls over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings other than in the
normal course of business nor is any of its property subject to pending legal
proceedings material to the fiscal well-being of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER. DESCRIPTION
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
31.1 . promulgated under the Securities Exchange Act of 1934, as amended
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
31.2 . promulgated under the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
32.1 . as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
32.2 . as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*
(b) Reports on Form 8-K.
Not Applicable
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: November 20, 2004
CINTEL CORP.
By: /s/ Sang Don Kim
-------------------------------
Name: Sang Don Kim
Title: Chief Executive Officer
By: /s/ Kyo Jin Kang
-------------------------------
Name: Kyo Jin Kang
Title: Principal Financial Officer
Principal Accounting Officer
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