Exhibit 99.1
CINTECH SOLUTIONS, INC.
Financial Statements for the
Three Months Ended
September 30, 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 September 30, 2002 and 2001 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, 2002, 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 23, 2002, 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, 2002 is fairly stated, in all respects,
in relation to the balance sheet from which it has been derived.
"/s/ Deloitte & Touche LLP"
October 18, 2002
CINTECH SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002, JUNE 30, 2002 AND SEPTEMBER 30, 2001
- --------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2002 2002 2001
ASSETS (UNAUDITED) (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 208,071 $ 224,893 $ 283,746
Marketable securities held to maturity (Note 2) 1,618,474 2,443,024 5,294,849
Marketable securities available for sale (Note 2) 98,280 102,030
Accounts receivable, trade - (Net of allowance
of $26,684, $4,824 and $138,097 at
September 30, 2002, June 30, 2002, and
September 30, 2001, respectively) (Note 1) 670,991 657,372 387,123
Inventory (Note 1) 14,912 19,976 23,399
Prepaid expenses 128,441 133,451 98,469
Income tax receivable 144,000 144,000
Deferred income taxes (Note 6) 420,025 418,712 505,826
---------- ---------- ----------
Total current assets 3,303,194 4,143,458 6,593,412
---------- ---------- ----------
FIXED ASSETS (Note 1):
Equipment 1,394,130 1,367,897 1,248,709
Furniture and fixtures 19,424 19,424 325,756
---------- ---------- ----------
Total 1,413,554 1,387,321 1,574,465
Less accumulated depreciation (1,082,918) (1,042,997) (1,259,086)
---------- ---------- ----------
Total fixed assets - net 330,636 344,324 315,379
---------- ---------- ----------
SOFTWARE DEVELOPMENT COSTS -
Net (Note 1) 1,866,671 1,927,993 1,843,705
DEFERRED INCOME TAXES (Note 6) 1,332,190 1,332,190 502,234
---------- ---------- ----------
Total other assets - net 3,198,861 3,260,183 2,345,939
---------- ---------- ----------
TOTAL $6,832,691 $7,747,965 $9,254,730
========== ========== ==========
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' 2002 2002 2001
EQUITY (UNAUDITED) (UNAUDITED)
CURRENT LIABILITIES:
Accounts payable $ 113,664 $ 154,631 $ 115,459
Accrued liabilities:
Accrued wages and compensation 301,574 361,519 275,736
Other 359,843 298,996 169,801
Deferred maintenance revenue (Note 1) 701,266 649,330 601,171
--------- --------- ---------
Total current liabilities 1,476,347 1,464,476 1,162,167
--------- --------- ---------
STOCKHOLDERS' EQUITY (Notes 1,4,5):
Common stock 9,008,724 9,008,724 9,008,289
Contributed capital 675,757 675,757 675,757
Treasury stock (2,290) (2,290) (2,290)
Accumulated deficit (4,347,567) (3,422,859) (1,589,193)
Accumulated other comprehensive income 21,720 24,157
--------- --------- ---------
Total stockholders' equity 5,356,344 6,283,489 8,092,563
--------- --------- ---------
TOTAL $6,832,691 $7,747,965 $9,254,730
========== ========== ==========
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 ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
--------- ---------
NET SALES (Note 1):
Product sales $1,266,755 $1,214,107
Services and other sales 338,517 399,051
--------- ---------
Total net sales 1,605,272 1,613,158
--------- ---------
COST OF PRODUCTS SOLD AND SERVICES PROVIDED (Note 1):
Cost of products sold 553,795 502,815
Cost of services and other sales 43,509 77,280
--------- ---------
Total cost of products sold and services provided 597,304 580,095
--------- ---------
GROSS PROFIT 1,007,968 1,033,063
RESEARCH AND DEVELOPMENT 263,587 278,770
SELLING, GENERAL AND ADMINISTRATIVE (Notes 1,3) 1,675,549 1,691,550
---------- ---------
LOSS FROM OPERATIONS (931,168) (937,257)
OTHER INCOME 6,460 51,832
---------- ---------
LOSS BEFORE INCOME TAX BENEFIT (924,708) (885,425)
INCOME TAX BENEFIT (Note 6) (323,809)
--------- ---------
NET LOSS $(924,708) $(561,616)
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE (Note 4) $(0.08) $(0.05)
========= ========
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 THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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ACCUMULATED
COMMON OTHER TOTAL
STOCK CONTRIBUTED TREASURY ACCUMULATED COMPREHENSIVE STOCKHOLDERS' NET INCOME
NO PAR VALUE CAPITAL STOCK DEFICIT INCOME EQUITY (LOSS)
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
=========== ========= ======== ============ ===========
BALANCE AT JUNE 30, 2002 $ 9,008,724 $ 675,757 $ (2,290) $ (3,422,859) $ 24,157 $ 6,283,489
NET LOSS (924,708) (924,708) $ (924,708)
UNREALIZED LOSS ON
SECURITIES, net of tax (2,437) (2,437) (2,437)
------------ --------- -------- ------------ -------- ----------- ----------
BALANCE AT SEPTEMBER 30, 2002 $ 9,008,724 $ 675,757 $ (2,290) $ (4,347,567) $ 21,720 $ 5,356,344 $ (927,145)
=========== ========= ======== ============ ======== =========== ==========
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 THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(924,708) $(561,616)
--------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 39,921 51,000
Amortization of software development costs 214,089 189,000
Deferred income taxes (323,809)
Provision for doubtful accounts 21,860 43,139
Changes in assets and liabilities:
Increase in accounts receivable (35,479) (128,873)
Decrease (increase) in inventory 5,064 (2,012)
Decrease (increase) in other assets 5,010 (24,624)
Decrease in accounts payable (40,967) (19,460)
Increase (decrease) in accrued expenses 902 (257,770)
Increase (decrease) in deferred maintenance revenue 51,936 (37,022)
--------- -----------
Total adjustments 262,336 (510,431)
--------- -----------
Net cash used in operating activities (662,372) (1,072,047)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of marketable securities 824,550 989,292
Expenditures for software development costs (152,767) (225,348)
Purchase of fixed assets (26,233) (50,034)
--------- -----------
Net cash provided by investing activities 645,550 713,910
--------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (16,822) (358,137)
CASH AND CASH EQUIVALENTS:
Beginning of period 224,893 641,883
--------- -----------
End of period $208,071 $283,746
========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION-Taxes paid $220 $185
========= ===========
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, 2002 AND AS OF SEPTEMBER 30, 2002 AND 2001 AND FOR THE
THREE-MONTH PERIODS THEN ENDED (INFORMATION RELATED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
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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, 2002 has not changed materially unless
otherwise disclosed herein. Financial information as of June 30, 2002
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.
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DEPRECIATION - Fixed assets are carried at cost. Depreciation is computed
using a straight-line method over the following useful lives:
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:
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2002 2002 2001
Literature and other documentation $8,534 $13,563 $16,007
Computer hardware 10,745 10,780 12,905
Allowance for obsolete inventory (4,367) (4,367) (5,513)
-------- -------- --------
Total inventory $14,912 $19,976 $23,399
======== ======== ========
SIGNIFICANT CUSTOMERS - Most of the Company's sales are to distributors in
the voice-centric call center solutions market. The Company had sales to a
major distributor of $1,105,259 (69%) and $1,093,569 (68%) for the
three-months ended September 30, 2002 and 2001, respectively.
The Company had gross accounts receivable from two major distributors of
77%, 75% and 75% of total accounts receivable as of September 30, 2002,
June 30, 2002 and September 30, 2001, respectively.
INTERNATIONAL SALES - The Company's international sales to Canada were
approximately 4% of total sales for the three-months ended September 30,
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.
Costs capitalized were $152,767 and $225,348 and related amortization was
$214,089 and $189,000 for the three-months ended September 30, 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 $301,749 and $274,496 for the
three-months ended September 30, 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.
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ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("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 had no impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." This Statement rescinds FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment
of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
This Statement amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This statement had no impact on the Company's
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This Statement requires recognition of a liability for a cost associated
with an exit or disposal activity when the liability is incurred, as
opposed to being recognized at the date an entity commits to an exit plan
under EITF No. 94-3. This Statement also establishes that fair value is
the objective for initial measurement of the liability. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002, with earlier application encouraged. 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.
RECLASSIFICATIONS - Certain fiscal 2002 amounts have been reclassified to
conform to fiscal 2003 presentations.
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2. MARKETABLE SECURITIES
HELD TO MATURITY - 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 the investments are
summarized below:
NET
AMORTIZED UNREALIZED
DESCRIPTION COST MARKET (LOSS) GAIN
September 30, 2002 - Federal Agency Notes $1,618,474 $1,607,859 $(10,615)
=========== =========== =========
June 30, 2002 - Federal Agency Notes $2,443,024 $2,424,880 $(18,144)
=========== =========== =========
September 30, 2001 - Federal Agency Notes $5,294,849 $5,299,585 $ 4,736
=========== =========== =========
AVAILABLE FOR SALE - During 2002, the Company received stock with a fair
value of $64,865 through the demutualization of an insurance company. The
fair value of this stock as of September 30, 2002 was $98,280. Management
has classified the securities as available for sale. The unrealized gain
of $21,720 (net of tax of $11,695) related to these shares was recorded in
Accumulated Other Comprehensive Income as of September 30, 2002.
3. OPERATING LEASES
During the second quarter of fiscal 2002, the Company accrued $104,397 for
costs associated with terminating its Norwood, Ohio lease and relocating
its office facility. This operating lease expired during the fourth
quarter of fiscal 2002.
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 2002, the Company signed lease agreements for office equipment
and furniture with a bank. These operating leases began in December 2001
and expire in November 2005 and November 2006, respectively. In August
2002, the Company agreed to maintain a compensating balance of cash and
securities equal to amounts owed under these lease agreements with the
same bank. The compensating balance was approximately $1.2 million at
September 30, 2002.
The annual minimum rent to be paid under the operating lease agreements is
as follows:
Year Ending September 30:
2003 $1,060,163
2004 1,069,389
2005 1,069,389
2006 928,021
2007 840,004
2008 & After 3,450,250
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Rent expense for the leased office space was $225,719 and $85,946 for the
three-month periods ended September 30, 2002 and 2001, respectively. The
lease expense for the equipment and furniture was $83,365 for the
three-month period ended September 30, 2002.
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, 2002 15,000,000 12,329,227 12,327,227 2,000
=========== =========== =========== =====
Balance at June 30, 2002 15,000,000 12,329,227 12,327,227 2,000
=========== =========== =========== =====
Balance at September 30, 2001 15,000,000 12,327,727 12,325,727 2,000
=========== =========== =========== =====
Income 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
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
---------------------------------------- ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
Basic and Diluted EPS (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Loss available to
common stockholders $ (924,708) 12,327,227 $ (0.08) $ (561,616) 12,325,727 $ (0.05)
Stock options representing 1,705,648 shares in 2002 and 1,655,563 shares
in 2001 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 of options, to employees, for the purchase of a maximum of
1,500,000 shares of common stock (the "Plan"). 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.
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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 2002 and 2001, determined using the
fair value method consistent with SFAS No. 123, were presented in the
footnotes to the 2002 annual report.
During the quarter ended September 30, 2002, 166,450 options were granted
under the Plan.
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,
2002 2002 2001
Current deferred tax asset - Deferred
revenue and other $447,853 $418,712 $505,826
Less valuation allowance (27,828)
----------- ----------- -----------
Net current deferred tax asset $420,025 $418,712 $505,826
=========== =========== ===========
Non-current deferred tax asset-Carryforwards
and credits $2,520,250 $2,116,395 $1,239,716
Non-current deferred tax liability- Deferred
software development costs and other (746,668) (784,205) (737,482)
----------- ----------- -----------
Total non-current deferred tax asset 1,773,582 1,332,190 502,234
Less valuation allowance (441,392)
----------- ----------- -----------
Net non-current deferred tax asset $1,332,190 $1,332,190 $502,234
=========== =========== ===========
The benefit for income taxes for the three-months ended September 30, 2002
and 2001 consists of the following:
FOR THE THREE-MONTHS
ENDED SEPTEMBER 30,
2002 2001
Deferred benefit $(469,220) $(323,809)
Increase in the valuation allowance 469,220
--------- ---------
Total $ $(323,809)
========= =========
The primary difference between the statutory rate for federal income tax
and the effective income tax rate for the three months ended September 30,
2002 is the establishment of a valuation allowance. For the prior year,
the difference is the result of the benefits from research and development
credits and
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state tax losses generated during the period. At September 30, 2002, the Company
has available net operating loss carryforwards for U.S. Federal tax purposes of
approximately $5,859,000 that will expire in 2021. Also at September 30, 2002,
for U.S. Federal tax purposes, the Company has research and development credit
carryforwards available to offset future income taxes of approximately $493,000,
which will begin to expire in 2017.
See independent accountants' report.
*****
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