CINTECH SOLUTIONS, INC.
Condensed Financial Statements for the
Three Months Ended September 30, 2001
and 2000 and Independent Accountants'
Report
[Deloitte & Touche Letterhead]
DELOITTE
& TOUCHE
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 September 30, 2001 and 2000 and the related condensed
statements of operations, stockholders' equity and cash flows for the three
months then ended (all expressed in U.S. dollars). These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying 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
October 16, 2001
CINTECH SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2001, JUNE 30, 2001 AND SEPTEMBER 30, 2000
- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 2001 JUNE 30, 2000
(UNAUDITED) 2001 (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 283,746 $ 641,883 $ 2,181,256
Marketable securities (Note 2) 5,294,849 6,284,141 5,501,589
Accounts receivable, trade - (Net of
allowance of $138,097, $94,958 and
$69,698 at September 30, 2001, June 30, 2001,
and September 30, 2000, respectively) (Note 1) 387,123 301,389 974,973
Inventory (Note 1) 23,399 21,387 19,780
Prepaid expenses 98,469 73,845 16,128
Deferred income taxes (Note 6) 505,826 497,671 561,360
------------ ------------ ------------
Total current assets 6,593,412 7,820,316 9,255,086
------------ ------------ ------------
FIXED ASSETS (Note 1):
Equipment 1,248,709 1,198,675 1,203,064
Furniture and fixtures 325,756 325,756 288,773
------------ ------------ ------------
Total 1,574,465 1,524,431 1,491,837
Less accumulated depreciation (1,259,086) (1,208,086) (1,070,166)
------------ ------------ ------------
Total fixed assets - net 315,379 316,345 421,671
------------ ------------ ------------
SOFTWARE DEVELOPMENT COSTS-Net (Note 1) 1,843,705 1,807,357 1,478,683
DEFERRED INCOME TAXES (Note 6) 502,234 186,580
------------ ------------ ------------
Total other assets - net 2,345,939 1,993,937 1,478,683
------------ ------------ ------------
TOTAL $ 9,254,730 $ 10,130,598 $ 11,155,440
============ ============ ============
</Table>
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 115,459 $ 134,919 $ 196,030
Accrued liabilities:
Accrued wages and compensation 275,736 505,310 331,894
Accrued income taxes 65,558
Warranty reserve 73,582 82,382 119,658
Other 96,219 115,615 196,781
Deferred maintenance revenue (Note 1) 601,171 638,193 724,231
------------ ------------ ------------
Total current liabilities 1,162,167 1,476,419 1,634,152
------------ ------------ ------------
DEFERRED INCOME TAXES (NOTE 6) 108,817
------------ ------------ ------------
STOCKHOLDERS' EQUITY (Notes 1,4,5)
Common stock 9,008,289 9,008,289 9,006,013
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (1,589,193) (1,027,577) (267,009)
------------ ------------ ------------
Total stockholders' equity 8,092,563 8,654,179 9,412,471
============ ============ ============
TOTAL $ 9,254,730 $ 10,130,598 $ 11,155,440
============ ============ ============
See notes to condensed financial statements and independent accountants' report.
-2-
CINTECH SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- -------------------------------------------------------------------------------
2001 2000
----------- -----------
NET SALES (Note 1)
Product sales $ 1,214,107 $ 2,023,783
Services and other sales 399,051 586,934
----------- -----------
Total net sales 1,613,158 2,610,717
----------- -----------
COST OF PRODUCTS SOLD AND SERVICES PROVIDED (Note 1):
Cost of products sold 502,815 568,261
Cost of services and other sales 77,280 111,686
----------- -----------
Total cost of products sold and services provided 580,095 679,947
----------- -----------
GROSS PROFIT 1,033,063 1,930,770
RESEARCH AND DEVELOPMENT 278,770 264,404
SELLING, GENERAL AND ADMINISTRATIVE (Notes 1, 3) 1,691,550 1,667,818
----------- -----------
LOSS FROM OPERATIONS (937,257) (1,452)
OTHER INCOME 51,832 126,299
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION/(BENEFIT) (885,425) 124,847
INCOME TAX PROVISION/(BENEFIT) (Note 6) (323,809) 38,682
----------- -----------
NET INCOME (LOSS) $ (561,616) $ 86,165
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE (Note 4) $ (0.05) $ 0.01
=========== ===========
See notes to condensed financial statements and independent accountants' report.
-3-
CINTECH SOLUTIONS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
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 (2,000 shares) 580 580
NET INCOME 86,165 86,165
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 $ 9,006,013 $ 675,757 $ (2,290) $ (267,009) $ 9,412,471
=========== =========== =========== =========== ===========
BALANCE AT JUNE 30, 2001 $ 9,008,289 $ 675,757 $ (2,290) $(1,027,577) $ 8,654,179
NET LOSS (561,616) (561,616)
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2001 $ 9,008,289 $ 675,757 $ (2,290) $(1,589,193) $ 8,092,563
=========== =========== =========== =========== ===========
See notes to condensed financial statements and independent accountants' report.
-4-
CINTECH SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (561,616) $ 86,165
----------- -----------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation 51,000 96,000
Amortization of software development costs 189,000 19,547
Deferred income tax provision/(benefit) (323,809) 47,702
Provision for doubtful accounts 43,139 45,189
Changes in assets and liabilities:
Increase in accounts receivable (128,873) (150,727)
(Increase) decrease in inventory (2,012) 26,189
(Increase) decrease in other assets (24,624) 15,003
Decrease in accounts payable (19,460) (151,634)
Decrease in accrued expenses (257,770) (319,742)
Decrease in deferred maintenance revenue (37,022) (108,297)
----------- -----------
Total adjustments (510,431) (480,770)
----------- -----------
Net cash used in operating activities (1,072,047) (394,605)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of marketable securities 989,292 326,605
Purchase of fixed assets (50,034) (24,281)
Expenditures for software development costs (225,348) (248,082)
----------- -----------
Net cash provided by investing activities 713,910 54,242
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES-
Proceeds from exercise of stock options 580
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (358,137) (339,783)
CASH AND CASH EQUIVALENTS:
Beginning of period 641,883 2,521,039
----------- -----------
End of period $ 283,746 $ 2,181,256
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid $ 185 $ 1,100
=========== ===========
See notes to condensed financial statements and independent accountants' report.
-5-
CINTECH SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND AS OF SEPTEMBER 30, 2001 AND 2000 AND FOR THE
THREE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE-MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 IS UNAUDITED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Cintech Solutions, Inc. (the "Company") develops and
markets Internet technology solutions to manage and analyze interactions
with customers, partners, and associates for improved relationships and
informed decision-making. In concert with the Internet technology
solutions, 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. The differences in accounting
principles generally accepted in the United States of America and Canada
are described in Note 7. 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.
-6-
DEPRECIATION - Fixed assets are carried at cost. Depreciation is computed
using an accelerated method over the following useful lives:
Equipment 3-5 years
Furniture and fixtures 2-7 years
INVENTORY - Inventories are valued at the lower of cost or market, with
cost being computed using the first-in, first-out method. Inventories
consist of:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2001 2001 2000
-------- -------- --------
Literature and other documentation $ 16,007 $ 13,195 $ 14,256
Computer hardware 12,905 12,205 10,441
Allowance for obsolete inventory (5,513) (4,013) (4,917)
-------- -------- --------
Total inventory $ 23,399 $ 21,387 $ 19,780
======== ======== ========
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 SEPTEMBER 30,
-----------------------------------------------
2001 2000
Amount % Amount %
---------------------- -----------------------
Distributor A $1,093,569 68% $1,831,272 70%
The Company had gross accounts receivable from major distributors, each of
which was in excess of 10% of the Company's total accounts receivable, as
follows:
PERCENT OF
GROSS
ACCOUNTS
DISTRIBUTORS RECEIVABLE
September 30, 2001 2 75%
June 30, 2001 2 71%
September 30, 2000 1 76%
INTERNATIONAL SALES - The Company had international sales as follows:
SALES FOR THE THREE-MONTHS
ENDED SEPTEMBER 30,
------------------------------------------------
2001 2000
----------------------- -----------------------
AMOUNT % AMOUNT %
Canada $ 59,065 4 % $ 75,131 3 %
-7-
SOFTWARE DEVELOPMENT COSTS - Costs incurred internally for creation of the
computer software product are charged to research and development expense
when incurred until technological feasibility has been established for the
product. Thereafter, until general release, all software production costs
are capitalized and subsequently reported at the lower of amortized cost
or net realizable value. The capitalized costs are amortized on a
straight-line basis over the estimated economic life of the product.
Costs capitalized were $225,348 and $248,082 and related amortization was
$189,000 and $19,547 for the three-months ended September 30, 2001 and
2000, 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 $274,496 and $487,361 for the
three-months ended September 30, 2001 and 2000, 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.
-8-
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 SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities." All items mature within one year. The cost and
market value of the investments are summarized below:
NET
AMORTIZED UNREALIZED
DESCRIPTION COST MARKET GAIN (LOSS)
September 30, 2001 - Federal Agency Notes $5,294,849 $5,299,585 $ 4,736
========== ========== ==========
June 30, 2001 - Federal Agency Notes $6,284,141 $6,284,163 $ 22
========== ========== ==========
September 30, 2000 - Federal Agency Notes $5,501,589 $5,507,250 $ 5,661
========== ========== ==========
3. OPERATING LEASES
OPERATING LEASES - The Company leases its office facility in Norwood,
Ohio. This operating lease, which began in March 1995 and expires in April
2002, calls for escalating lease payments over the term of the lease. The
Company records lease expense on a straight-line basis over the life of
the lease.
Rent expense for the leased office facility in Norwood was $85,946 and
$85,390 for the three-month periods ended September 30, 2001 and 2000,
respectively.
In fiscal 2001, the Company signed a lease agreement for a new office
facility in Blue Ash, Ohio. This operating lease, which begins in December
2001 and expires in November 2011, calls for escalating lease payments
over the term of the lease. The Company will record lease expense on a
straight-line basis over the life of the lease. No lease payments are due
until occupancy in December 2001.
The annual minimum rent to be paid under the operating lease agreement for
the facility in Blue Ash, Ohio, is as follows:
Period Ending September 30:
2002 $ 616,240
2003 739,493
2004 739,493
2005 739,493
2006 739,493
2007 and after 4,263,548
-9-
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 September 30, 2001 15,000,000 12,327,727 12,325,727 2,000
========== ========== ========== ==========
Balance at June 30, 2001 15,000,000 12,327,727 12,325,727 2,000
========== ========== ========== ==========
Balance at September 30, 2000 15,000,000 12,325,328 12,323,328 2,000
========== ========== ========== ==========
Income (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 earnings (loss) per share were determined
as follows:
THREE-MONTHS ENDED THREE-MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
BASIC EPS
Income (loss) available to
common stockholders $ (561,616) 12,325,727 $ (0.05) $ 86,165 12,323,328 $ 0.01
EFFECT OF DILUTIVE SECURITIES
Stock options 663,592
---------- ---------- -------- ---------- ---------- -----
DILUTED EPS
Income (loss) available to
common stockholders
and assumed conversions $ (561,616) 12,325,727 $ (0.05) $ 86,165 12,986,920 $ 0.01
========== ========== ======== ========== ========== =====
Stock options representing 1,655,563 shares and 20,000 shares for the
three-months ended September 30, 2001 and 2000, respectively, were not
included in computing diluted earnings (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 of options, to employees, 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 2000, 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
-10-
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.
Deferred taxes consist of the following:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2001 2001 2000
Current deferred tax asset - Deferred revenue
and other $ 505,826 $ 497,671 $ 561,360
=========== =========== ===========
Non-current deferred tax asset - Carryforwards
and credits $ 1,239,716 $ 909,523 $ 482,656
Non-current deferred tax liability - Deferred
software development costs and other (737,482) (722,943) (591,473)
----------- ----------- -----------
Net non-current deferred tax asset/(liability) $ 502,234 $ 186,580 $ (108,817)
=========== =========== ===========
The provision (benefit) for income taxes for the three-months ended
September 30, 2001 and 2000 consists of the following:
FOR THE THREE-MONTHS
ENDED SEPTEMBER 30,
------------------------
2001 2000
Current provision (benefit) $ - $ (9,020)
Deferred provision (benefit) (323,809) 47,702
--------- ---------
Income tax expense provision (benefit) $(323,809) $ 38,682
========= =========
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 September 30,
-11-
2001, the Company has available net operating loss carryforwards for U.S.
Federal tax purposes of approximately $2,552,000 that will expire in 2021.
Also at September 30, 2001, for U.S. Federal tax purposes, the Company has
research and development credit carryforwards available to offset future
income taxes of approximately $219,000, which will begin to expire in
2017.
7. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("CANADIAN GAAP AND U.S. GAAP")
These condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
During the periods ended September 30, 2001 and 2000, differences between
Canadian GAAP and U.S. GAAP arose as a result of depreciation. For U.S.
GAAP purposes, furniture and fixtures, equipment, leasehold improvements,
and computer equipment are depreciated over useful lives of seven, five,
two, and three years, respectively, using an accelerated method. For
Canadian GAAP purposes, furniture and fixtures, equipment, leasehold
improvements, and computer equipment are to be depreciated over useful
lives of five, three, two, and three years, respectively, using a
straight-line method. The difference in methodology results in additional
depreciation expense under Canadian GAAP of $7,755 and $38,244 for the
periods ended September 30, 2001 and 2000, respectively. The difference
does not have a material effect on the earnings (loss) per share
calculation for either period.
* * * * *
-12-