UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 30, 2006
CINTEL CORP.
(Exact name of registrant as specified in its charter)
Nevada 333-100046 52-2360156
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification Number)
9900 Corporate Campus Drive, Suite 3,000, Louisville, KY 40223
(Address of principal executive offices) (zip code)
(502) 657-6077
(Registrant's telephone number, including area code)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Explanatory Note:
This Form 8-K/A is being filed as an amendment to the Form 8-K filed by Cintel
Corp. related to events which occurred on October 24, 2006. The only portion of
such Form 8-K being amended is to include the financial statements required to
be filed thereunder.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2005 and 2004
Statements of Operations and Comprehensive Loss for the periods ended December
31, 2005 and 2004
Statements of Owners' Equity for the periods ended December 31, 2005 and 2004
Statements of Cash Flows for the periods ended December 31, 2005 and 2004
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Consolidated Balance Sheet as September 30, 2006
Pro-forma Consolidated Statement of Deficit Nine Months ended September 30, 2006
Pro-forma Consolidated Statement of Operations Nine Months ended September 30,
2006
Notes to Pro-Forma Consolidated Financial Statements
(c) Exhibits.
Exhibit
Number Description
- -------- ------------------------------------------------------------------
10.1 Stock Purchase Agreement by and between Cintel Corp. and STS
Semiconductor & Telecommunications Co., Ltd. (1)
99.1 Press Release dated October 30, 2006 (1)
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
on November 3, 2006.
1
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CINTEL CORP.
Dated: January 16, 2007 By: /s/ Sang Don Kim
-----------------------
Sang Don Kim
Chief Executive Officer
2
INDEX
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2005 and 2004 F-2
Statements of Operations and Comprehensive Loss for the Periods ended
December 31, 2005 and 2004 F-3
Statements of Owner's Equity for the for the Periods ended December 31,
2005 and 2004 F-4
Statements of Cash Flows for the for the Periods ended December 31, 2005
and 2004 F-5
Notes to Financial Statements F-6
Pro Forma Consolidated Balance Sheet as September 30, 2006 F-17
Pro-forma Consolidated Statement of Deficit Nine Months ended September
30, 2006 F-18
Pro-forma Consolidated Statement of Operations Nine Months ended
September 30, 2006 F-19
Notes to Pro-Forma Consolidated Financial Statements F-20
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Owners of
Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. :
We have audited the balance sheets of Phoenix Semiconductor
Telecommunication (Suzhou) Co., Ltd. (a corporation organized under the laws of
People's Republic of China) as of December 31, 2005 and 2004, and the related
statements of operations and comprehensive loss, owners' equity, and cash flows
for the year ended December 31, 2005, and for the period from March 2, 2004,
(date of incorporation) through December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have , nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Phoenix Semiconductor
Telecommunication (Suzhou) Co., Ltd. as of December 31, 2005, and 2004 , and the
results of its operations and its cash flows for period from March 2, 2004 (date
of incorporation) to December 31, 2004, and the year ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
January 8, 2007.
- F-1 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Balance Sheets
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2005 2004
ASSETS
Current Assets
Cash and cash equivalents (note 3) $ 1,647,448 $ 1,000,400
Accounts receivable (net of allowance for doubtful
account, 2005-$Nil, 2004-$Nil) (note 11) 1,699,567 137,273
Inventories (note 4) 3,135,469 74,829
Prepaid and other 394,628 182,845
---------------------------
Total Current Assets 6,877,112 1,395,347
Property, Plant and Equipment, Net (note 5) 20,918,897 15,396,678
Land Right, Net (note 6) 355,686 353,987
---------------------------
Total Assets $ 28,151,695 $ 17,146,012
===========================
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities (note 11) $ 4,184,254 $ 904,574
Loans payable - current (note 7) 2,537,194 -
---------------------------
Total Current Liabilities 6,721,448 904,574
Loans Payable, less current portion (note 8) 7,468,066 8,017,436
---------------------------
Total Liabilities 14,189,514 8,922,010
---------------------------
Commitments and Contingencies (note 12)
OWNERS' EQUITY
Capital (note 9) 16,900,000 9,500,000
Cumulative Other Comprehensive Income (Loss) 238,284 (1,080)
Accumulated Deficit (3,176,103) (1,274,918)
---------------------------
13,962,181 8,224,002
---------------------------
Total Liabilities and Owners' Equity $ 28,151,695 $ 17,146,012
===========================
(The accompanying notes to the financial statements are an integral part of
these balance sheet.)
- F-2 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Statements of Operations and Comprehensive Loss
Periods Ended December 31, 2005, and 2004
(Presented in U.S. Dollars)
March 2, to
December 31,
2005 2004
Revenues (note 11) $ 12,513,173 $ 389,716
Cost of Sales 13,341,271 657,777
---------------------------
Gross Loss (828,098) (268,061)
---------------------------
Expenses
Salaries and employee benefits 233,607 289,207
Office and general 87,970 345,093
Bad debts (note 11) 100,504 -
Depreciation and amortization 94,617 99,278
Rent 77,251 74,329
Fees, charges and others 33,523 58,910
Travel 25,097 44,166
---------------------------
652,569 910,983
---------------------------
Operating Loss (1,480,667) (1,179,044)
Other Income (Expense)
Interest expense, net (420,518) (95,874)
---------------------------
Net Loss (1,901,185) (1,274,918)
Foreign Currency Translation 239,364 (1,080)
---------------------------
Total Comprehensive Loss $ (1,661,821) $ (1,275,998)
===========================
Basic and Diluted Loss per Share (note 9) $ - $ -
===========================
Weighted Average Number of Shares (note 9) - -
===========================
(The accompanying notes to the financial statements are an integral part of
these balance sheet.)
- F-3 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Statements of Owners' Equity
Periods Ended December 31, 2005,and 2004
(Presented in U.S. Dollars)
Cumulative
Other Total
Comprehensive Accumulated Owners'
Capital (Loss) Income Deficit Equity
-------------------------------------------------------
Balance, March 2, 2004 $ - $ - $ - $ -
Investment during the period 9,500,000 - - 9,500,000
Foreign exchange on translation - (1,080) - (1,080)
Net loss for the period - - (1,274,918) (1,274,918)
-------------------------------------------------------
Balance, December 31, 2004 $ 9,500,000 $ (1,080) $ (1,274,918) $ 8,224,002
=======================================================
Balance, January 1, 2005 $ 9,500,000 $ (1,080) $ (1,274,918) $ 8,224,002
Investment during the year 7,400,000 - - 7,400,000
Foreign exchange on translation - 239,364 - 239,364
Net loss for the year - - (1,901,185) (1,901,185)
-------------------------------------------------------
Balance, December 31, 2005 $ 16,900,000 $ 238,284 $ (3,176,103) $ 13,962,181
=======================================================
(The accompanying notes to the financial statements are an integral part of
these balance sheet.)
- F-4 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Statements of Cash Flows
Periods Ended December 31, 2005, and 2004
(Presented in U.S. Dollars)
March 2, to
December 31,
2005 2004
Cash Flows from Operating Activities
Net loss $ (1,901,185) $ (1,274,918)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation on property, plant and equipment 1,487,090 193,046
Amortization of land right 7,277 6,000
Changes in assets and liabilities:
Accounts receivable (1,536,000) (137,318)
Inventories (3,014,036) (74,854)
Prepaid and other (204,066) (182,905)
Accounts payable and accrued liabilities 3,208,896 904,873
---------------------------
Net cash (used in) operating activities (1,952,024) (566,076)
---------------------------
Cash Flows from Investing Activities
Acquisition of property, plant, and equipment (6,673,497) (15,594,887)
Acquisition of land right - (360,106)
---------------------------
Net cash (used in) investing activities (6,673,497) (15,954,993)
---------------------------
Cash Flows from Financing Activities
Proceeds from loans payable 1,831,350 8,020,090
Proceeds from capital investment 7,400,000 9,500,000
---------------------------
Net cash provided by financing activities 9,231,350 17,520,090
---------------------------
Foreign Exchange on Cash and Cash Equivalents 41,219 1,379
---------------------------
Increase in Cash and Cash Equivalents 647,048 1,000,400
Cash and Cash Equivalents - beginning of year/period 1,000,400 -
---------------------------
Cash and Cash Equivalents - end of year/period $ 1,647,448 $ 1,000,400
===========================
Supplemental Disclosures of Cash Flow Information
During the year, the Company had cash flows arising
from income taxes paid and cash flows arising from
interest paid as follows:
Interest $ 434,024 $ 71,978
===========================
Income taxes $ - $ -
===========================
(The accompanying notes to the financial statements are an integral part of
these balance sheet.)
- F-5 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
1. Operations and Business
Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd., (the "Company")
conducts its operations in the Wujiang Economic Development Zone, Jinagsu,
People's Republic of China ("PRC"). The Company was incorporated on March
2, 2004, without share capital, pursuant to the commercial law of the PRC
to engage in the business of manufacturing semiconductor and other
electrical components for sale to the Korean market.
2. Summary of Significant Accounting Policies
The accounting policies of the Company are in accordance with accounting
principles generally accepted in 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, under the accrual method of accounting, with the assumption
that the Company will be able to realize its assets and discharge its
liabilities in the normal course of business.
b) Revenue Recognition
The Company recognizes revenues when there is a definitive sales
agreement, and upon shipment of products when title passed and the
amount collectible can reasonably be determined.
c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes currency,
checks issued by others, other currency equivalents and current
deposits. Cash equivalents include securities and short-term money
market instruments that can be easily converted into cash. Investments
that mature within three months from the investment date, are also
included as cash equivalents.
d) Inventories
Raw material and supplies are stated at the lower of cost or market
value, using the first in first out weighted average cost method.
Work-in-progress is stated at the lower of cost or market value, using
the first in fist out weighted average cost method. Net realizable
value is determined by deducting applicable selling expenses from the
product selling price.
- F-6 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2. Summary of Significant Accounting Policies (cont'd)
e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized and expenditures for repairs and
maintenance are charged to expense as incurred. Upon disposition of an
asset, its cost and related accumulated depreciation or amortization
are removed from the accounts, and any resulting gain or loss is
recognized. Depreciation, based on the estimated useful lives of the
assets, is provided as follows:
Buildings 20 years straight line
Equipment 10 years straight line
Measuring equipment 5 years straight line
Furniture and equipment 5 years straight line
Vehicles and transportation equipment 5 years straight line
Computer software 5 years straight line
Landscaping 5 years straight line
f) Land Right
Land right is stated at cost. Amortization, based on the estimated
useful life of the asset, is provided on a straight line basis over 50
years.
g) 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.
h) Foreign Currency Translation
The Company accounts for foreign currency translation pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). The Company's functional
currency is the Chinese Yuan. Under SFAS No. 52, all assets and
liabilities are translated into United States dollars using the
current exchange rate at the end of each fiscal period. Revenues and
expenses are translated using the average exchange rates prevailing
throughout the respective periods. Translation adjustments are
included in other comprehensive income (loss) for the period. Certain
transactions of the Company are denominated in United States dollars.
Translation gains or losses related to such transactions are
recognized for each reporting period in the related statement of
operations and comprehensive income (loss).
- F-7 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2. Summary of Significant Accounting Policies (cont'd)
i) Financial Instruments
Unless otherwise noted, it is management's opinion that the Company is
not exposed to significant interest, currency or credit risks arising
from the financial instruments. The fair value of the financial
instruments approximates their carrying values, unless otherwise
noted.
Currency Risk
-------------
The Company has foreign currency risk as liabilities and expenses are
denominated in foreign currencies. Depreciation or appreciation of the
Chinese Yuan against foreign currencies affects the Company's results
of operations and comprehensive income (loss).
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. The Company maintains
cash and cash equivalents with major Chinese financial institutions.
The Company provides credit to its clients in the normal course of its
operations. It carries out, on a continuing basis, credit checks of
its clients, and maintains provisions for contingent credit losses
that, 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.
For the year ended December 31, 2005, the Company had one major
customer, STS Semiconductor & Telecommunications Co. Ltd. ("STS"),
which accounted for 88% (2004 - 100%) of the total revenue.
j) Impairment of Long-lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. Recoverability is assessed based on the
carrying amount of a long-lived asset compared to the sum of the
future undiscounted cash flows expected to result from the use and the
eventual disposal of the asset. An impairment loss is recognized when
the carrying amount is not recoverable and exceeds fair value.
For the periods ended December 31, 2005 and 2004, no events or
circumstances occurred for which an evaluation of the recoverability
of long-lived assets was required.
- F-8 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2. Summary of Significant Accounting Policies (cont'd)
k) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income
("SFAS No. 130") establishes standards for reporting and presentation
of comprehensive income and its components in a full set of financial
statements. Comprehensive income is presented in the statements of
owners' equity, and consists of net earnings and unrealized gains
(losses) on available for sale marketable securities; foreign currency
translation adjustments and changes in market value of future
contracts that qualify as a hedge; and negative equity adjustments
recognized in accordance with SFAS No. 87. SFAS No. 130 requires only
additional disclosures in the financial statements and does not affect
the Company's financial position or results of operations.
l) 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.
m) Advertising Costs
Advertising costs are charged to operations when incurred, except for
magazine advertisements, which are charged to expense when the
advertising first takes place. For the periods ended December 31, 2005
and 2004, advertising costs amounted to $203 and $9,426, respectively.
n) Earnings per Share
FAS No.128, "Earnings per Share" requires disclosure on the financial
statements of "basic" and "diluted" earnings per share. Basic earnings
per share, which does not include any dilutive securities, is computed
by dividing the earnings available to common stockholders by the
weighted average number of common shares outstanding for the year. In
contrast, diluted earnings per share considers the potential dilution
that could occur from other financial instruments that would increase
the total number of outstanding shares of common stock. The company is
not permitted to issue capital stock as per note 9 , and as such,
earnings per share information has not been presented in the
statements.
- F-9 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2. Summary of Significant Accounting Policies (cont'd)
o) Recent Accounting Pronouncements
In March 2006, Financial Accounting Standards Board ("FASB") issued
SFAS No. 156, "Accounting for Servicing of Financial Assets - An
Amendment of FASB Statement No.14", In a significant change to current
guidance, SFAS No. 156 permits an entity to choose either of the
following subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities: (1)
Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156
is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company is currently reviewing
the effect, if any, the proposed guidance will have on its financial
position and results of operations.
In July 2006 FASB issued Financial Accounting Standards Interpretation
No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes- An
interpretation of FASB Statement No.109". FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises' financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition
threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently reviewing
the effect, if any, FIN 48 will have on its financial position and
results of operations.
In September 2006, the Securities and Exchange Commission ("SEC")
staff issued Staff Accounting Bulletin No. 108 ("SAB No. 108"),
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was
issued to provide consistency in how registrants quantify financial
statement misstatements. The Company is required to and will initially
apply SAB No. 108 in connection with the preparation of its annual
financial statements for the year ending December 31, 2006. The
Company does not expect the application of SAB No. 108 to have a
material effect on its financial position and results of operations.
In September 2006, FASB issued SFAS No. 157, "Fair Value
Measurements," which is effective for calendar year companies on
January 1, 2008. The statement defines fair value, establishes a
framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair
value measurements. The statement codifies the definition of fair
value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the
principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability and
establishes a fair value hierarchy that prioritizes the information
used to develop those assumptions. The Company is currently assessing
the potential impacts of implementing this standard.
- F-10 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
2. Summary of Significant Accounting Policies (cont'd)
o) Recent Accounting Pronouncements (cont'd)
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans
- An Amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("SFAS
No. 158"). SFAS No.158 requires an employer to recognize the funded
status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur
through comprehensive income. The funded status of a benefit plan is
defined as the difference between the fair value of the plan assets
and the plans benefit obligation. For a pension plan the benefit
obligation is the projected benefit obligation and for any other
postretirement benefit plan, such as a retiree health care plan, the
benefit obligation is the accumulated postretirement benefit
obligation. SFAS No. 158 requires an employer to recognize as a
component of other comprehensive income, net of tax, the gains and
losses and prior service costs or credits that arise during the period
but that are not recognized as components of net periodic benefit
costs pursuant to SFAS No. 87. SFAS No. 158 also requires an employer
to measure the funded status of a plan as of the date of its year-end.
Additional footnote disclosure is also required about certain effects
on net periodic benefit cost for the next year that arise from the
delayed recognition of gains or losses, prior service costs or
credits, and transition asset or obligation. Except for the year-end
measurement requirement, SFAS No. 158 is effective for the year ending
December 31, 2006. The Company does not anticipate that the adoption
of this statement will have a material effect on its financial
position and results of operations.
3. Cash and Cash Equivalents
Cash and cash equivalent includes restricted cash in the amount of
$344,014 (2004 - $270,770), which has been pledged as collateral on
performance bonds as required by the Chinese Customs Department. An
additional $186,097 (2004 - Nil) has been pledged as security for a
bank credit facility to be utilized for the purchase of equipment.
4. Inventories
2005 2004
---- -----
Raw materials $2,087,167 $ -
Work-in-progress 702,149 45,294
Supplies 346,153 29,535
-------------------------------
$3,135,469 $74,829
===============================
- F-11 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
5. Property, Plant and Equipment
Property, plant and equipment are comprised as follows:
2005 2004
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------------------------------------------------------
Buildings $10,197,093 $ 482,031 $ 8,699,611 $ 72,497
Equipment 10,251,986 1,002,036 6,062,672 84,831
Measuring equipment 1,386,284 50,429 207,066 9,280
Furniture and equipment 548,582 93,791 402,512 15,199
Vehicles and transportation
equipment 137,937 34,420 134,485 9,352
Computer software 18,358 4,488 17,898 796
Landscaping 58,792 12,940 65,480 1,091
-----------------------------------------------------
$22,599,032 $ 1,680,135 $15,589,724 $ 193,046
-----------------------------------------------------
Net carrying amount $20,918,897 $15,396,678
=========== ===========
6. Land Right
The Company has an agreement with the government of the Republic of China
for the use of land until February 14, 2054. According to the agreement,
the Company is obligated to pay an annual management fee of approximately
$2,400, and the land has to be used for manufacturing. The Company has the
right to apply for renewal by notifying the government no later than six
months prior to the expiry of the agreement. The government has no
obligation to approve the renewal application.
2005 2004
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------------------------------------------------------
$ 369,224 $ 13,538 $359,987 $ 6,000
-----------------------------------------------------
Net carrying amount $ 355,686 $ 353,987
- F-12 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
7. Loans Payable - Current
2005 2004
---- ----
Industrial and Commercial Bank of China $ 1,858,500 $ -
Current portion of long-term loan (note 8) 678,694 -
---------------------------------
$ 2,537,194 $ -
=================================
The Industrial and Commercial Bank of China loan is unsecured, payable
monthly interest only at 5.74% per annum and matures May 20, 2006.
8. Loans Payable - Long-Term
Interest Rate 2005 2004
------------- ---- ----
China Construction Bank (Loan #1) Prime $ 5,146,760 $ 5,017,436
China Construction Bank (Loan #2) LIBOR plus 1.18% 3,000,000 3,000,000
-------------------------
Sub-total 8,146,760 8,017,436
Less: current portion (678,694) -
--------------------------
$ 7,468,066 $8,017,436
==========================
The China Construction Bank loans are repayable quarterly commencing
October 29, 2006 , and mature on July 29, 2009. The loans are guaranteed by
all property, plant and equipment as described in note 5.
Principal repayments of long-term debts is comprised as follows:
2006 $ 678,694
2007 2,714,776
2008 2,714,776
2009 2,038,514
----------
$8,146,760
==========
- F-13 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
9. Capital
Foreign owned companies in China are not permitted to issue capital stock.
Percentage of ownership and voting rights of the owners are determined by
the proportion of their capital investment in the company which is
registered with the government.
According to the Articles of Incorporation, the authorized capital is a
maximum of $29,500,000. The authorized capital can be increased by
application to the government. The Company is required to obtain a minimum
capital of $20,000,000 within three years of incorporation and maintain it
as long as the Company exists. On October 30, 2006, the company met its
minimum capital requirement (see note 13).
As there is no share capital, earnings per share has not been calculated or
presented in the statements of operations and comprehensive(loss).
10. Income Taxes
The Company accounts for income taxes pursuant to "SFAS" No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates. The effects of future changes in tax laws or rates are not
anticipated.
For the first two profitable taxation years, taxable income of the Company
is exempt from income taxes. Taxable income in the third to fifth
profitable taxation years will be taxed at 5% and subsequently the
applicable tax rate will be 10%.
The taxable income is determined by off-setting the income for tax purpose
of the year with tax losses carried forward from prior years. Tax losses
can be carried forward for five years. The Company provided a valuation
allowance equal to the deferred tax amounts resulting from the tax losses
as it is not more likely than not that they will be realized. The Company
has accumulated approximately $3,176,000 of taxable losses, which can be
used to offset future taxable income. The utilization of the losses expires
in 2009 ($1,275,000) and 2010 ($1,901,000).
Under SFAS No. 109 income taxes are recognized for the following: a) amount
of tax payable for the current year, and b) deferred tax liabilities and
assets for future tax consequences of events that have been recognized
differently in the financial statements than for tax purposes.
- F-14 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
10. Income Taxes (cont'd)
The Company has deferred income tax assets as follows:
2005 2004
---- ----
Deferred tax Assets - beginning of the year/period $ 63,700 $ -
Net operating loss carryforwards 95,100 63,700
Valuation allowance (158,800) (63,700)
-----------------------------
Deferred tax Assets - end of the year/period $ - $ -
=============================
11. Related Party Transactions
During the year, the Company entered into the following transactions with
STS and We-Tech Corporation ("We-Tech"). STS and We-Tech are 71% and 29%
owners of the Company respectively:
Accounts receivable - STS $ 801,164 $ 137,273
Accounts receivable - We-Tech $ 562,321 $ -
Accounts payable - STS $ 2,101,162 $ 3,200
Accounts payable - We-Tech $ 853,597 $ -
Sales - STS $10,976,510 $ 389,716
Sales - We-Tech $ 707,558 $ -
Purchase - STS $11,020,103 $ 157,576
Purchase - We-Tech $ 3,321,285 $ -
Bad debts - We-Tech $ 100,504 $ -
These transactions were in the normal course of business and recorded at an
exchange value established and agreed upon by the above mentioned parties.
- F-15 -
PHOENIX SEMICONDUCTOR TELECOMMUNICATION (SUZHOU) CO., LTD.
Notes to Financial Statements
December 31, 2005, and 2004
(Presented in U.S. Dollars)
12. Commitments and Contingencies
The Company is committed to pay a management fee to the government of
approximately $2,400 per annum for the use of land as per note 6.
Per the Articles of Incorporation, the Company has to maintain a
minimum capital of $20,000,000 (see note 9).
13. Subsequent Events
On January 19, 2006, "STS" invested additional capital in the amount
of $3,100,000 into the Company. Thereby , the Company then met the
minimum capital requirement in accordance with the Articles of
Incorporation as described in note 9.
On October 30, 2006, the majority owner, STS entered into a Equity
Purchase Agreement to sell 51% of the total equity of the Company for
an aggregate purchase price of $16,500,000 to Cintel Corp., an entity
publicly traded in the United States.
- F-16 -
CINTEL CORP.
Pro-forma Consolidated Balance Sheet
September 30, 2006
Unaudited
Cintel Corp. PSTS Cintel Corp. Cintel Corp.
(US) (China) (US) (US)
Sept. 30, Sept. 30, Pro-forma Pro-forma Dec. 31,
2006 2006 Adjustments Sept. 30, 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 1,333,510 $ 3,790,271 $ (1,215,705) $ 3,908,076 $ 3,489,449
Accounts receivable, net 616,894 5,156,592 -- 5,773,486 1,023,460
Inventory 581,384 5,298,528 (9,345) 5,870,567 448,575
Prepaid and sundry assets 889,813 518,333 -- 1,408,146 364,113
Deferred taxes -- -- -- -- 10,453
------------------------------------------------------------------------------------
Total Current Assets 3,421,601 14,763,724 (1,225,050) 16,960,275 5,336,050
Properties, Plant and Equipment 449,066 25,286,994 (142,242) 25,593,818 580,559
Investments 1,926,404 -- -- 1,926,404 2,528,078
Investments in Available for Sale
Securities 17,025 -- -- 17,025 --
Deferred Taxes -- -- -- -- 1,211,693
Land Right -- 368,402 -- 368,402 --
Goodwill -- -- 7,648,198 7,648,198 --
------------------------------------------------------------------------------------
Total Assets $ 5,814,096 $ 40,419,120 $ 6,280,906 $ 52,514,122 $ 9,656,380
------------------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable $ 447,092 $ 6,729,901 $ -- $ 7,176,993 $ 959,904
Loans payable - current 53,509 10,534,917 -- 10,588,426 651,994
------------------------------------------------------------------------------------
Total Current Liabilities 500,601 17,264,818 -- 17,765,419 1,611,898
Accrued Severance 87,503 -- -- 87,503 69,356
Loans Payable 32,067 5,500,599 -- 5,532,666 38,654
Convertible Debentures -- -- 15,284,295 15,284,295 8,853,191
Non Controlling Interest -- -- 8,650,314 8,650,314 --
------------------------------------------------------------------------------------
Total Liabilities 620,171 22,765,417 23,934,609 47,320,197 10,573,099
------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital Stock 87,619 20,000,000 (20,000,000) 87,619 42,379
Additional Paid in Capital 14,319,408 -- -- 14,319,408 5,351,058
Treasury Stock (5,630) -- -- (5,630) (5,630)
Accumulated Other
Comprehensive Income (Loss) (207,510) 762,870 (762,870) (207,510) 121,739
Accumulated Deficit (8,999,962) (3,109,167) 3,109,167 (8,999,962) (6,426,265)
------------------------------------------------------------------------------------
5,193,925 17,653,703 (17,653,703) 5,193,925 (916,719)
------------------------------------------------------------------------------------
Total Liabilities And Stockholders' Equity $ 5,814,096 $ 40,419,120 $ 6,280,906 $ 52,514,122 $ 9,656,380
====================================================================================
(The accompanying notes are an integral part of these pro-forma consolidated financial statements.)
- F-17 -
CINTEL CORP.
Pro-forma Consolidated Statement of Deficit
Nine Months Ended September 30, 2006
Unaudited
Cintel Corp. PSTS Cintel Corp. Cintel Corp.
(US) (China) (US) (US)
Sept. 30, Sept. 30, Pro-forma Pro-forma Dec. 31,
2006 2006 Adjustments Sept. 30, 2006 2005
--------------------------------------------------------------------------
Accumulated Deficit- beginning of period $(7,630,164) $(3,176,103) $ 3,176,103 $(7,630,164) $(4,789,133)
Net Loss (1,369,798) 66,936 (66,936) (1,369,798) (1,637,132)
---------------------------------------------------------------------------
Accumulated Deficit - end of period $(8,999,962) $(3,109,167) $ 3,109,167 $(8,999,962) $(6,426,265)
============================================================================
(The accompanying notes are an integral part of these pro-forma consolidated financial statements.)
- F-18 -
CINTEL CORP.
Pro-forma Consolidated Statement of Operations
Nine Months Ended September 30, 2006
Unaudited
Cintel Corp. PSTS Cintel Corp. Cintel Corp.
(US) (China) (US) (US)
Sept. 30, Sept. 30, Pro-forma Pro-forma Dec. 31,
2006 2006 Adjustments Sept. 30, 2006 2005
-----------------------------------------------------------------------------
Revenue
Merchandise $ 3,980,325 $ -- $ -- $ 3,980,325 $ 1,594,311
Finished goods 76,680 40,376,663 (40,376,663) 76,680 546,942
Services 66,018 -- -- 66,018 67,207
-----------------------------------------------------------------------------
4,123,023 40,376,663 (40,376,663) 4,123,023 2,208,460
-----------------------------------------------------------------------------
Cost of Sales
Merchandise 3,795,287 -- -- 3,795,287 1,459,216
Finished goods 51,538 38,999,449 (38,999,449) 51,538 415,235
-----------------------------------------------------------------------------
3,846,825 38,999,449 (38,999,449) 3,846,825 1,874,451
-----------------------------------------------------------------------------
Gross Profit 276,198 1,377,214 (1,377,214) 276,198 334,009
-----------------------------------------------------------------------------
Expenses
Office and general 291,196 725,421 (725,421) 291,196 442,322
Salaries and employee benefits 516,423 -- -- 516,423 374,866
Professional fees 454,436 -- -- 454,436 329,889
Travel 185,190 -- -- 185,190 206,878
Depreciation 170,908 -- -- 170,908 198,375
Taxes and dues 595 -- -- 595 44,879
Research and development 18,940 -- -- 18,940 99,320
-----------------------------------------------------------------------------
1,637,688 725,421 (725,421) 1,637,688 1,696,529
-----------------------------------------------------------------------------
Operating Loss (1,361,490) 651,793 (651,793) (1,361,490) (1,362,520)
-----------------------------------------------------------------------------
Other Income (Expense)
Interest income 46,714 -- -- 46,714 (18,133)
Other income 106,261 649 (649) 106,261 --
Loss on disposition of equipment -- (58,871) 58,871 -- --
Foreign exchange (7,577) -- -- (7,577) 3,978
Interest expense (27,636) (526,635) 526,635 (27,636) 309,279
Amortization of deferred financing fees (90,000) -- -- (90,000) 150,000
Share of income from equity investment 16,303 -- -- 16,303 --
Employee benefit on repurchase of common stock -- -- -- -- 97,288
-----------------------------------------------------------------------------
44,065 (584,857) 584,857 44,065 542,412
-----------------------------------------------------------------------------
Loss Before Income Taxes (1,317,425) 66,936 (66,936) (1,317,425) (1,904,932)
Current 52,373 -- -- 52,373 --
Deferred income taxes -- -- -- -- (267,800)
-----------------------------------------------------------------------------
Net Loss (1,369,798) $ 66,936 $ (66,936) $ (1,369,798) $ (1,637,132)
-----------------------------------------------------------------------------
Foreign currency translation adjustment 391,287 762,870 (762,870) 391,287 97,913
Unrealized loss on investment (720,536) -- -- (720,536) --
-----------------------------------------------------------------------------
Total Comprehensive Loss $ (1,699,047) $ (695,934) $ 695,934 $ (1,699,047) $ (1,539,219)
=============================================================================
(The accompanying notes are an integral part of these pro-forma consolidated financial statements.)
- F-19 -
CINTEL CORP.
Notes to Pro-forma Consolidated Financial Statements
September 30, 2006
Unaudited
1. Basis of Presentation:
These unaudited pro-forma consolidated financial statements have been
prepared to give effect to the following:
On October 30, 2006, Cintel Corp. ("Cintel") entered into a Equity
Purchase Agreement with STS Semiconductor & Telecommunications Co.,
Ltd. ("STS"), a Korean corporation for the acquisition of 51% of the
total equity of Phoenix Semiconductor Telecommunication (Suzhou) Co.,
Ltd. ("PSTS") for an aggregate purchase price of $16,500,000. The
purchase price was paid from the proceeds of Cintel's convertible
bonds financing pursuant to which the Company sold an aggregate of
$15,284,295 principle amount in convertible bonds.
PSTS is a limited liability company organized in the People's Republic
of China with its principle offices in Wujang, Jiangsu, PRC.
The pro-forma consolidated financial statements are based on the
balance sheets of the following:
a) Cintel as at September 30, 2006 (unaudited) and December 31, 2005
(audited).
b) PSTS as at September 30, 2006 (unaudited).
The pro-forma consolidated financial statements include the statement
of operations for the following:
a) Cintel for the nine months ended September 30, 2006 (unaudited)
and for the year ended December 31, 2005 (audited).
b) PSTS for the nine months ended September 30, 2006 (unaudited).
The pro-forma consolidated balance sheet as at September 30, 2006
gives effect to the transactions as at October 30, 2006 and the
pro-forma statement of operations for the nine months ended September
30, 2006 gives effect to the transactions as if they had taken place
at the beginning of the period.
The pro-forma consolidated financial statements are not necessarily
indicative of the actual results that would have occurred had the
proposed transactions occurred on the dates indicated and not
necessarily indicative of future earnings or financial position.
2. Pro-forma Adjustments:
The consolidation of Cintel with PSTS was accounted for by the
purchase method, with the net assets of PSTS brought forward at their
fair market value basis, and the following adjustments:
a) To record the issuance of the convertible bonds by Cintel for the
investment in PSTS.
b) To eliminate PSTS 49% non controlling interest.
c) To reallocate the fair value of the purchase of PSTS.
- F-20 -