CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Organization and Nature of the Business
Cintel
Corp., formerly Link2 Technologies, Inc. (“Cintel” or the "Company")
incorporated in Nevada in August 1996, primarily owns and manages its
subsidiaries which have been engaged in the business of developing network
solutions to improve internet traffic, manufacturing semiconductor and
electrical components, and designing, manufacturing and installing automated
assembly machinery and testing equipments based on customers’ specification. The
subsidiaries' businesses also include Customer Relationship Management (CRM)
solution, call center operation and database marketing.
On
September 30, 2003, the Company acquired 100% of the outstanding voting stocks
of Cintel Co. Ltd. (“Cintel Korea”) and in return, the shareholders of Cintel
Korea received 16,683,300 shares (approximately 82%) of the Company’s common
stock. This transaction was a reverse-takeover by Cintel Korea whereby Cintel
Korea’s shareholders acquired the control of the Company. Cintel Korea, located
in Seoul, Korea, was in the business of developing network solutions to improve
technical limitations to the internet traffic. During 2007, Cintel Korea ceased
the network solution operation due to lack of profitability.
On
October 30, 2006, the Company acquired 51% of the outstanding voting stocks of
Phoenix Semiconductor Telecommunication (Suzhou) Co., Ltd. ("PSTS") in China for
$16.5 million. In March 2008, the Company contributed $4.9 million of additional
capital to PSTS to proportionately match the additional investments made by the
minority shareholders of PSTS. PSTS was incorporated on March 2, 2004 without
share capital pursuant to the commercial law of the PRC to manufacture
semiconductor and electrical components.
On May
18, 2007, the Company acquired 100% of the outstanding voting stocks of Bluecomm
Korea, Co. Ltd. (“Bluecomm”) in Korea for $6.5 million. Bluecomm is engaged in
the business of Customer Relationship Management (CRM) solution and consulting,
call-center operation, and database marketing. It also provides total solutions
for call-center outsourcing and Home Service Center (HSC) hosting. Bluecomm
commenced its CRM related business in October 2005, and entered into an
agreement with Pizza Hut Korea to provide HSC and data base management
operations services in June 2006. The service agreement with Pizza Hut Korea
ended as of September 30, 2008, and as a result, the CRM business has
substantially declined.
On August
27, 2007, the Company acquired 50.1% of the outstanding voting stocks of Phoenix
Digital Tech Co. Ltd. (“PDT”) in Korea for $34.7 million. PDT is in the business
of designing, manufacturing and installing automated assembly line for Flat
Panel Displays, and manufacturing and testing of PCB related equipment based on
customers’ specification.
Acquisitions
of these foreign subsidiaries were financed through the Company's convertible
debentures as described in Note 12.
The
Company has sustained recurring losses, and reported net loss of $1.9 million
for the period ended March 31, 2009, and working capital deficiency of $16.0
million as of March 31, 2009. As a result, the company’s accumulated deficits
aggregated $23.3 million as of March 31, 2009.
Note
2 – Summary of Significant Accounting Policies:
The
following summary of significant accounting policies of the Company is presented
to assist in understanding the Company’s financial statements. The financial
statements and notes are representations of the Company’s management, who is
responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the financial
statements.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Basis
of Presentation
The
consolidated financial statements include the accounts of Cintel Corp. and its
wholly-owned or majority-owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
Minority
interest in subsidiaries represents the minority stockholders' proportionate
share of the net assets and the results of operations of subsidiaries in Korea
and China.
Where the
functional currency of the Company's foreign subsidiaries is the local currency,
all assets and liabilities are translated into U.S. dollars, in accordance with
Statement of Financial Accounting Standards (“SFAS”) No 52, Foreign Currency
Translation, using the exchange rate on the consolidated balance sheet date, and
revenues and expenses are translated at average rates prevailing during the
period. Accounts and transactions denominated in foreign currencies have been
re-measured into functional currencies before translated into U.S. dollars.
Foreign currency transaction gains and losses are included as a component of
other income and expense. Gains and losses from foreign currency translation are
included as a separate component of comprehensive income.
Use
of Estimates
The
preparation of 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 the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the period. These estimates are often based on complex judgments and
assumptions that management believes to be reasonable but are inherently
uncertain and unpredictable. Actual results may differ materially from these
estimates. In addition, any changes in these estimates or their related
assumptions could have a materially adverse effect on the Company's operating
results.
Revenue
Recognition
The
majority of the Company's product revenues are recognized upon shipment or
delivery and acceptance of products by customers, when pervasive evidence of a
sales arrangement exists, the price is fixed or determinable, the title has
transferred and collection of resulting receivables is reasonably
assured.
Manufactured
products (machinery and equipments) based on customers' specifications are
subject to specific rights of returns, and revenue recognition is deferred until
the products are installed, tested and approved by the customers. For
merchandise products, the Company recognizes revenue upon shipment of products,
when title is passed and the amount collectible can reasonably be determined.
All amounts billed to a customer related to shipping and handling are classified
as revenue, while all costs incurred by the Company for shipping and handling
are classified as cost of revenues. Revenues generated by Customer Relationship
Management consulting and database marketing services are recognizes as the
services are performed, while the call center operation revenues are recognized
at the end of each month when the relating time costs can be reasonably
determined.
Advertising
Costs
The
Company's policy is to expense advertising costs as they are incurred.
Advertising expenses were $3,811 and $107,007 for the periods ended March 31,
2009 and 2008, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Sales
and Value-Added Taxes
Taxes
collected from customers and remitted to governmental authorities are presented
on a net basis in the Company's statement of operations.
Cash
and Cash Equivalents
Cash
includes currency, checks issued by others, other currency equivalents, current
deposits and passbook deposits held by financial institutions. Cash equivalents
consist primarily of cash deposits in money market funds that are available for
withdrawal without restriction. The investments that mature within three months
from the investment date are also included as cash equivalents.
Cash
deposits that are restricted as to usage, withdrawal or pledged as security are
disclosed separately and not included in the cash total for the purpose of the
statements of cash flow. At March 31, 2009 and December 31, 2008, such
restricted cash aggregated $0.4 million and $ 0.6 million,
respectively$1,242,582.
Accounts
Receivable
Trade
accounts receivable are presented at face value less allowance for doubtful
accounts. The allowance for doubtful accounts is the Company’s best estimate of
probable credit losses in the existing accounts receivable. The Company
determines the allowance based on Company’s historical experience and review of
specifically identified accounts and ageing data. The Company reviews its
allowance for doubtful accounts periodically. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.
Accounts
receivables are shown net of allowance for doubtful accounts of $3.2 million and
$2.3 million as of March 31, 2009 and December 31, 2008, respectively. All of
the net trade receivables are pledged as collateral on bank debts.
Investments
Investments
are accounted in accordance with Statement of Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The Company determines the appropriate classification of debt securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. For all investment securities, unrealized losses that are considered to be
other than temporary are considered impairment losses and included in the
statements of operations.
Available-for-sale
investments include marketable short-term investments and long-term investments
in marketable securities. Short-term investments in marketable debt securities
are reported at fair value and include all debt securities regardless of their
maturity dates. Long-term investments in marketable equity securities are
reported at fair value. Unrealized gains and losses on marketable debt and
equity securities, net of related tax, are recorded as a separate component of
comprehensive income in stockholders' equity until realized.
Investments
in long-term non-marketable equity securities are recorded at cost and consist
primarily of non-marketable common and preferred stock of private companies with
less than 20% of the voting rights. Gains and losses on securities sold are
included in the statement of operations. In the event that the carrying value of
the investments exceeds its fair value and the decline in value is determined to
be other than temporary, the unrealized losses are considered impairment losses
and recognized as a component. Investments classified as held-to-maturity are
carried at amortized cost in the absence of any other than temporary decline in
value.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Investments
subject to significant influence have been recorded using the equity
method.
Inventories
Inventories
are stated at lower of cost or market. Cost is computed on a first in, first out
basis for raw materials and supplies. Work-in-process, manufactured finished
goods and merchandise goods are stated at the lower of cost or net realizable
value, where cost is computed using weighted average method and net realizable
value is determined by deducting applicable selling expenses from selling
price.
The
Company determines that a certain level of inventory must be carried to maintain
an adequate supply of product for customers. This inventory level may vary based
upon orders received from customers or internal forecasts of demand for these
products. Other consideration in determining inventory levels include the stage
of products in the product life cycle, design win activity, manufacturing lead
times, customer demand, and competitive situations in the marketplace. Should
any of these factors develop other than anticipated, inventory level may be
materially affected.
Property
and Equipment
Property
and equipment, including renewals and betterments, are stated at cost. Cost of
renewals and betterment that extend the economic useful lives of the related
assets are capitalized. Expenditures for ordinary repairs and maintenance are
charged to expense as incurred. Gain or loss on sale or disposition of assets is
included in the statement of operations.
Depreciation
is provided using the straight-line method over the following estimated useful
lives of the assets.
|
Buildings
located in China
|
20
years
|
|
Buildings
located in Korea
|
30
years
|
|
Machinery
and equipment
|
5 -
10 years
|
|
Measuring
equipment
|
5
years
|
|
Furniture
and fixtures
|
5
years
|
|
Vehicles
|
5
years
|
|
Software
|
5
years
|
|
Landscaping
|
5
years
|
|
Structure
|
5
years
|
Construction-in-progress
is stated at cost, which includes the cost of construction and other direct
costs attributable to the construction. No provision for depreciation is made on
construction in progress until such time as the relevant assets are completed
and put into use.
Government
Grants
Government
grants without obligation to repay are recognized as reduction of the
depreciable basis of the assets that are associated with the
grants.
Long-Lived
Assets Impairment
The
Company accounts for impairment of long-lived assets in accordance with SFAS No.
144, Accounting for Impairment or Disposal of Long-Lived Assets. Long-lived
assets, such as property and equipment, and purchased intangible assets subject
to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use and eventual disposition of the asset. In
the event such cash flows are not expected to be sufficient to recover the
recorded value of the assets, the assets are written down to their estimated
fair values. When assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value of the assets
over their fair value.
Goodwill
and Other Intangible Assets
The
Company accounts for goodwill and other intangible assets under SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). Under this standard,
goodwill is tested for impairment annually or more frequently if certain events
or changes in circumstances indicate that the carrying amount of goodwill
exceeds its implied fair value.
The
two-step impairment test identifies potential goodwill impairment and measures
the amount of a goodwill impairment loss to be recognized (if any). The first
step of the goodwill impairment test, used to indentify potential impairment,
compares the fair value of a reporting unit with its carrying amount, including
goodwill. The Company uses management estimates of future cash flows to perform
the first step of the goodwill impairment test. Management's estimates include
assumptions about future conditions such as future revenues, gross margins,
operating expenses and industry trends. The second step is only performed if
impairment is indicated after first step is performed, which involve measuring
the actual impairment to goodwill.
SFAS 142
also requires that intangible assets with definitive lives be amortized over
their estimated useful lives and reviewed for impairment whenever events or
changes in circumstances indicate an asset's carrying value may not be
recoverable. Currently the Company amortizes acquired intangible assets with
definite lives over periods ranging primarily from five to ten
years.
Research
and Development Costs
Research
and development costs consist primarily of salaries and subcontracting expenses
and are expensed as incurred.
Fair
Value of Financial Instruments
The
Company determines the estimated fair value of financial instruments using
available market information and valuation methodologies considered to be
appropriate. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The fair value of investments, derivative instruments and
convertible debt are based on market data. Carrying amounts of cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Derivative
Instruments
All of
the Company's derivative instruments are recognized as assets and liabilities in
the statement of financial position and measured at fair value. On the date a
derivative contract is entered into, the Company designates the derivative as
either a hedge of the fair value of a recognized assets or liability
("fair-value" hedge), as a hedge of the variability of cash flows to be received
or paid ("cash-flow" hedge) or as a foreign currency hedge. Changes in the fair
value of a derivative that is highly effective and is designated and qualifies
as a fair-value hedge, along with the loss or gain on the hedged asset or
liability that is attributable to the hedge risk, are recorded in current period
earnings. Effective changes in the fair value of a derivative that is highly
effective and is designated and qualifies as a cash-flow hedge are recorded in
other comprehensive income until earnings are affected by the variability of the
cash flows. Changes in the fair value of derivatives that are highly effective
and are designated and qualify as a foreign-currency hedge are recorded in
either current period earnings or other comprehensive income, depending on
whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm
commitment that is to be settled in a foreign currency) or a cash-flow hedge
(e.g., a foreign-currency-denominated forecasted transaction).
The
Company also assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of the hedged
items. If it were to be determined that a derivative is not highly effective as
a hedge or that it has ceased to be a highly effective hedge, the Company would
discontinuing hedge accounting prospectively.
The
Company would discontinue hedge accounting prospectively when (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is no longer designated as a hedge
instrument, because it is unlikely that a forecasted transaction will occur; (4)
the hedged firm commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When
hedge accounting is discontinued because it is determined that the derivative no
longer qualifies as a highly effective fair-value hedge, the derivative will
continue to be carried on the balance sheet at its fair value, and the hedged
asset or liability will no longer be adjusted for changes in fair value. When a
fair value hedge on an interest-bearing financial instrument (such as an
interest swap) is cancelled and hedge accounting is discontinued, the hedge item
is no longer adjusted for changes in its fair value, and the remaining asset or
liability will be amortized to earnings over the remaining life of the hedged
item. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in
earnings. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the derivative will continue
to be carried on the balance sheet at its fair value, and any asset or liability
that was previously recorded pursuant to recognition of the firm commitment will
be removed from the balance sheet and recognized as a gain or loss in current
period earnings.
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. Financial instruments that potentially subject the Company to
credit risk consist of cash equivalents, short-term investments, accounts
receivable and loan receivables. Cash equivalents and short-term investments are
maintained with high quality institutions, the composition and maturities of
which are regularly monitored by management. The Company diversifies its
investments to reduce the exposure to loss from any single issuer, sector or
bank.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The
Company provides credit to its customers in the normal course of operations. It
carries out, on a continuing basis, credit checks of its customers, and
maintains allowance for credit losses contingent upon management’s forecasts.
For loan receivables, the Company determines, on a continuing basis, the
probable losses and sets up a provision for losses based on the estimated
realizable value. Concentration of credit risk arises when a group of customers
having similar characteristics such that their ability to meet their obligations
is expected to be affected similarly by changes in economic
conditions.
As of
March 31, 2009, the Company had four major customers which accounted for about
12% of the total accounts receivable. For the period ended March 31, 2009, the
Company had four major customers which accounted for about 44% of the total
revenue.
Product
Warranties
The
Company warrants manufactured finished goods against defects in material and
workmanship under normal use and service for period of one year. A liability for
estimated future costs under product warranties is recorded when products are
shipped.
Litigation
and Settlement Costs
The
Company may be involved in legal actions arising in the ordinary course of
business. The Company records an estimated loss for a loss contingency when both
of the following conditions are met: (1) information available prior to issuance
of the financial statements indicates that it is probable that an asset had been
impaired or a liability had been incurred at the date of the financial
statements, and (2) the amount of loss can be reasonably estimated.
Income
Taxes
The
Company accounts for income taxes pursuant to the FASB issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes", (“FIN 48”). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in the Company’s
financial statements in accordance with SFAS No. 109.
The
calculation of the Company's tax provision involves the application of complex
tax rules and regulations within multiple jurisdictions throughout the world.
The Company's tax liabilities include estimates for all income-related taxes
that the Company believes are probable and that can be reasonably estimated. To
the extent that the Company’s estimates are understated, additional charges to
the provision for income taxes would be recorded in the period in which the
Company determines such understatement. If the Company's income tax estimates
are overstated, income tax benefits will be recognized when
realized.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. 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. FIN 48 prescribes a recognition
threshold and measurement attributes for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.
Comprehensive
Income
The
Company records its other comprehensive income under SFAS No. 130, "Reporting of
Comprehensive Income". SFAS 130 which establishes standards for reporting and
presentation of comprehensive income and its components. The Company’s other
comprehensive income represents unrealized gain or loss on available-for-sale
marketable securities and foreign currency translation adjustment.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Earnings
(Loss) per Share
SFAS No.
128, “Earnings per Share” requires disclosure on the financial statements of
basic and diluted earnings per share. Basic earning (loss) per share is computed
by dividing the net earning (loss) by the weighted average number of shares of
common stock outstanding during the period. Diluted earning (loss) per share is
determined using the weighted average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents,
consisting of shares that might be issued upon exercise of common stock options
and warrants.
Reclassifications
Certain
reclassifications have been made to the prior year consolidated financial
statement presentation to correspond to the current period’s format. Total
equity and net income are unchanged due to these reclassifications.
Recent
Accounting pronouncements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" (“SAB No 108”). SAB No. 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement. Under SAB No. 108, the Company should quantify errors using both a
balance sheet and income statement approach (“dual approach”) and evaluate
whether either approach results in a misstatement that is material when all
relevant quantitative and qualitative factors are considered. The adoption of
SAB 108 does not have material impact on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits
entities to measure financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. An entity would
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year provided the entity also elects to apply the
provisions of SFAS No. 157 "Fair Value Measurements.” Upon implementation, an
entity shall report the effect of the first remeasurement to fair value as a
cumulative-effect adjustment to the opening balance of retained earnings. Since
the provisions of SFAS No. 159 are applied prospectively, any potential impact
will depend on the instruments selected for fair value measurement at the time
of implementation.
In
October 2008, the FASB issued FSP 157-3, "Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active," which amends SFAS
157 by incorporating "an example to illustrate key considerations in determining
the fair value of a financial asset" in an inactive market. FSP 157-3 is
effective upon issuance and should be applied to prior periods for which
financial statements have not been issued. The adoption of FSP 157-3, effective
October 2008, had no impact on the Company's results of operation or financial
position.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements" (“SFAS 160”). SFAS 160 requires all entities
to report noncontrolling (i.e. minority) interests in subsidiaries as equity in
the Consolidated Financial Statements and to account for transactions between an
entity and noncontrolling owners as equity transactions if the parent retains
its controlling financial interest in the subsidiary. SFAS 160 also requires
expanded disclosure that distinguishes between the interests of the controlling
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160
is effective for the Company’s financial statements for the year beginning on
January 1, 2009, and earlier adoption is not permitted. The adoption of SFAS 160
had no material impact on the Company’s financial condition and results of
operations.
In
December 2007, the FASB issued Statement No. 141R, (revised 2007) "Business
Combinations" ("SFAS 141R"). SFAS 141R replaces the current standard on business
combinations and has significantly changed the accounting for and reporting of
business combinations in consolidated financial statements. This statement
requires an entity to measure the business acquired at fair value and to
recognize goodwill attributable to any noncontrolling interests (previously
referred to as minority interests) rather than just the portion attributable to
the acquirer. The statement will also result in fewer exceptions to the
principle of measuring assets acquired and liabilities assumed in a business
combination at fair value. In addition, the statement requires payments to third
parties for consulting, legal, audit, and similar services associated with an
acquisition to be recognized as expenses when incurred rather than capitalized
as part of the business combination. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008.
In March
2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities an Amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 amends Statement 133 by requiring expanded disclosures
about an entity's derivative instruments and hedging activities, but does not
change Statement 133's scope or accounting. This statement requires increased
qualitative, quantitative, and credit-risk disclosures. SFAS 161 also amends
Statement No. 107 to clarify that derivative instruments are subject to
Statement 107's concentration-of-credit-risk disclosures. SFAS 161 is effective
for fiscal years beginning on or after November 15, 2008. The adoption of SFAS
161 will require the Company to provide additional disclosures about derivative
instruments and hedging activities beginning January 1, 2009.
In May
2008, the FASB issued SFAS No. 162 ("SFAS 162"), "The Hierarchy of Generally
Accepted Accounting Principles." This statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This statement will be effective 60 days following the SEC's
approval of the PCAOB amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles." The
adoption of SFAS 162 had no significant impact on the Company's results of
operations and financial position.
In
November 2008, the FASB Emerging Issues Task Force ("EITF") issued EITF Issue
No. 08-6 ("EITF 08-6"), "Equity Method Investment Accounting Considerations."
EITF 08-6 address questions that have risen about the application of the equity
method of accounting for investments after the effective date of both SFAS
141(R), "Business Combination", and SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements". EITF is effective for fiscal years beginning
on or after December 15, 2008. The adoption of EITF 08-6 had no significant
impact on the Company's results of operations and financial
position.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
3 - Inventories
Inventories
consist of the following as of March 31, 2009 and
December 31,
2008
:
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
|
$
|
3,209
|
|
|
$
|
4,015
|
|
|
Work-in-process
|
|
|
6,830
|
|
|
|
5,813
|
|
|
Finished
goods
|
|
|
3,950
|
|
|
|
3,140
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,989
|
|
|
$
|
12,968
|
|
Note
4 –Notes Receivable
Notes
receivable consist of the following as of March 31, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
receivable from Vision Tech, a private company in China. 7% interest,
payable interest only in quarterly installments. Guaranteed by the
shareholders of the debtor. Matures in January
2009.
|
|
$
|
-
|
|
|
$
|
172
|
|
|
Loan
receivable from Phoenix Holdings, a private company in Korea. 8% interest,
payable interest only in quarterly installments. Matures in September
2009.
|
|
|
10,122
|
|
|
|
11,093
|
|
|
Loan
receivable from Lion Property Holdings, a private company in Korea. 8%
interest, payable interest and principal at
maturity. Guaranteed by the BKLCD stocks (75,000 shares).
Matures in June 2009.
|
|
|
3,254
|
|
|
|
3,566
|
|
|
Various
loan receivables from Phoenix Patro, a private company in Korea. 8.5% to
12% interest, payable interest only in quarterly installments. Matures in
2009 and 2010.
|
|
|
4,338
|
|
|
|
1,109
|
|
|
Other
loans receivable
|
|
|
87
|
|
|
|
98
|
|
|
|
|
|
17,801
|
|
|
|
16,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
17,744
|
|
|
|
15,957
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
receivable, net of current
|
|
$
|
57
|
|
|
$
|
81
|
|
In the
ordinary course of business, the Company had and expects to continue to have
transactions, including borrowings,
with
unrelated and affiliated companies. In the opinion of management, such
transactions were on similar terms, including interest rates and collateral, as
those prevailing at the time of comparable transactions with other persons and
did not involve more than a normal risk of collectability or present any other
unfavorable features to the Company.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
5 – Prepaid Expenses and Other Assets
Prepaid
expenses and other current assets consist of the following as of March 31, 2009
and December 31, 2008:
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
368
|
|
|
$
|
255
|
|
|
Advance
payments to vendors
|
|
|
6,884
|
|
|
|
5,534
|
|
|
Deposits
made for investments
|
|
|
-
|
|
|
|
3,803
|
|
|
Other
current assets
|
|
|
2,915
|
|
|
|
2,790
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,167
|
|
|
$
|
12,382
|
|
Note
6 – Investments
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Short-term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposits and commercial papers
|
|
$
|
8,003
|
|
|
$
|
1,419
|
|
|
Available-for-sale
securities
|
|
|
4,020
|
|
|
|
4,223
|
|
|
Held-to-maturity
securities
|
|
|
10,469
|
|
|
|
11,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,492
|
|
|
$
|
17,116
|
|
Available-for-sale
securities
The
following is a summary of available-for-sale securities as of March 31, 2009 and
December 31, 2008:
|
March
31, 2009
|
|
Cost
|
|
|
Gross
Unrealized
gain
|
|
|
Gross
Unrealized (loss
)
|
|
|
Estimated
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
3,954
|
|
|
$
|
231
|
|
|
$
|
(165
|
)
|
|
$
|
4,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
Cost
|
|
|
Gross
Unrealized
gain
|
|
|
Gross
Unrealized
(loss)
|
|
|
Estimated
Fair
value
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
4,333
|
|
|
$
|
97
|
|
|
$
|
(207
|
)
|
|
$
|
4,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities
Investments
in held-to-maturity securities consisted of corporate and municipal bonds with
maturities of less than one year and are recorded at net of amortized cost.
Total investments in held-to-maturity securities aggregated to $10.5 million and
$11.5 million as of March 31, 2009 and December 31, 2008, which approximate
their fair value.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
|
Long-Term
Investments:
|
|
March
31,
2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Non-marketable
securities
|
|
$
|
19,578
|
|
|
$
|
16,296
|
|
|
Equity
method investments
|
|
|
12,419
|
|
|
|
12,998
|
|
|
Derivative
and other investments
|
|
|
5,250
|
|
|
|
5,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,247
|
|
|
$
|
34,802
|
|
Equity
method investments
The
Company held the following equity method investments at March 31, 2009 and
December 31, 2008:
|
March
31, 2009
|
|
Ownership
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
D-Network
|
|
|
31.3
|
%
|
|
$
|
1,715
|
|
|
Phoenix
Holding
|
|
|
25.5
|
%
|
|
|
3,535
|
|
|
Phoenix
Asset Investment
|
|
|
27.4
|
%
|
|
|
7,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,419
|
|
|
December
31, 2008
|
|
Ownership
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Radion
Tech
|
|
|
31.3
|
%
|
|
$
|
1,884
|
|
|
Phoenix
Holding
|
|
|
25.5
|
%
|
|
|
3,086
|
|
|
Phoenix
Asset Investment
|
|
|
27.4
|
%
|
|
|
8,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,998
|
|
Note
7 – Property, Plant and Equipment
Property,
plant and equipment consist of the following at March 31, 2009 and December 31,
2008:
|
|
|
March
31,
2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
17,619
|
|
|
$
|
19,749
|
|
|
Buildings
and improvements
|
|
|
40,537
|
|
|
|
43,663
|
|
|
Machinery
and equipment
|
|
|
30,603
|
|
|
|
30,981
|
|
|
Furniture
and fixtures
|
|
|
7,975
|
|
|
|
8,531
|
|
|
Vehicles
|
|
|
410
|
|
|
|
481
|
|
|
Software
|
|
|
40
|
|
|
|
40
|
|
|
Small
tools
|
|
|
502
|
|
|
|
518
|
|
|
|
|
|
97,686
|
|
|
|
103,963
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(20,286
|
)
|
|
|
(20,022
|
)
|
|
|
|
|
77,400
|
|
|
|
83,941
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
held for sale*
|
|
|
4,767
|
|
|
|
5,224
|
|
|
Construction-in-progress
|
|
|
11,199
|
|
|
|
9,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
93,366
|
|
|
$
|
98,415
|
|
Depreciation
expenses for the periods ended March 31, 2009 and 2008 were $139,630 and
$286,286, respectively.
* During
2008, the Company relocated its manufacturing facilities and administrative
office in Pyung-Taek, Korea to larger facilities in a nearby city. The vacant
property in Pyung-Taek has been placed on sale. The management has assessed the
recoverability based on undiscounted cash flows expected to result from the sale
of the property and determined that no significant impairment occurred as of
March 31, 2009.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
8 – Goodwill
The
following table sets forth changes in the carrying of goodwill at March 31, 2009
and December 31, 2008:
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Balance
as of January 1, 2008
|
|
$
|
26,593
|
|
|
Reduction
in goodwill associated with deconsolidation
of
a subsidiary due to ownership dilution
|
|
|
(3,525
|
)
|
|
Goodwill
impairment*
|
|
|
(4,179
|
)
|
|
Fair
value adjustments
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
$
|
18,449
|
|
|
Fair
value adjustments
|
|
|
(990
|
)
|
|
|
|
|
|
|
|
Balance
as of March 31, 2009
|
|
$
|
17,459
|
|
* During
the year ended December 31, 2007, the Company recorded $4.2 million of goodwill
in connection with the acquisition of Bluecomm. During 2008, Bluecomm's business
has substantially wound down due to lost of major customers and inability to
retain new customers. The Company determined that the goodwill is fully impaired
as of December 31, 2008.
Note
9 – Other Intangible Assets
Intangible
assets consist of the following at March 31, 2009 and December 31,
2008:
|
|
|
March
31,
2009
|
|
|
December 31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Land
rights
|
|
$
|
436
|
|
|
$
|
437
|
|
|
Accumulated
amortization
|
|
|
(49
|
)
|
|
|
(47
|
)
|
|
|
|
|
387
|
|
|
|
390
|
|
|
Other
intangible assets, net
|
|
|
828
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
carrying amount
|
|
$
|
1,215
|
|
|
$
|
1,365
|
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The
Company has an agreement with the government 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 purposes.
Other
intangible assets include patents, technology rights and in-process research and
development costs and are amortized over its estimated useful life of three to
seven years. Amortization expenses on these intangible assets for the periods
ended March 31, 2009 and 2008 were $34,991 and $56,058,
respectively.
Note
10 – Notes Payable
Notes
payable consist of the following at March 31, 2009 and December 31,
2008:
|
|
|
March
31, 2009
|
|
December
31, 2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Note
payable to Kong-Sang Bank of China, payable monthly interest only at
4.66%. The note matures in January 2009.
|
|
$ -
|
|
$ 910
|
|
|
|
|
|
|
|
Note
payable to Kong-Sang Bank of China, payable monthly interest only at 7.3%.
The note matures in July 2009.
|
|
5,122
|
|
5,130
|
|
|
|
|
|
|
|
Note
payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR
plus 3.5%. The note matures in January 2009.
|
|
-
|
|
691
|
|
|
|
|
|
|
|
Note
payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR
plus 2%. The note matures in February 2009.
|
|
-
|
|
984
|
|
|
|
|
|
|
|
Note
payable to Kong-Sang Bank of China, payable monthly interest only at LIBOR
plus 2.2%. The note matures in June 2009.
|
|
350
|
|
-
|
|
|
|
|
|
|
|
Notes
payable to Hana Bank of Korea, payable monthly interest only, at 7.5% to
8.98%. The notes are secured by real property in Korea and
mature in 2009.
|
|
1,763
|
|
1,932
|
|
|
|
|
|
|
|
Notes
payable to Shin-Han Bank of Korea, payable monthly interest-only at 6.23%
to 7.53%. The notes are secured by real estate and mature in June and
November 2009.
|
|
4,338
|
|
4,754
|
|
|
|
|
|
|
|
Notes
payable to City Bank of Korea, payable monthly interest only at 6.45% to
8.36%. The notes are secured by real estate and mature in July 2009 and
January 2010.
|
|
9,011
|
|
9,876
|
|
|
|
|
|
|
|
Notes
payable to Korea Exchange Bank, payable monthly interest only, at 6.56% to
8.41%. The notes are guaranteed by sister company, and mature in April and
May 2009.
|
|
3,615
|
|
4,754
|
|
|
|
|
|
|
|
Note
payable to Kook Min Bank of Korea, payable monthly interest only, at
6.44%. The note is secured by a deed of trust covering the Company’s real
property and matures in July 2009.
|
|
7,546
|
|
8,271
|
|
|
|
|
|
|
|
Note
payable to Citi Bank Korea, payable monthly interest-only, at 5.45% to
5.56%. The notes mature in January and July 2010.
|
|
15,779
|
|
17,293
|
|
|
|
|
|
|
|
Note
payable to Sam Sung Electronics, bearing no interest. The
note is secured by a deed of trust covering the Company’s real property
and matures in December 2011.
|
|
461
|
|
506
|
|
|
|
|
|
|
|
Note
payable to Kiup Bank, payable monthly interest only, at 6.89% to
7.90%. The notes are secured by a deed of trust covering the
Company’s real property and mature in March 2010.
|
|
8,991
|
|
9,846
|
|
|
|
|
|
|
|
Notes
payable to Woori Bank, payable monthly interest only at
7.93%. The note is unsecured and matures in October
2009.
|
|
6,348
|
|
6,968
|
|
|
|
|
|
|
|
Notes
payable to Industrial Bank of Korea, payable monthly interest only at
6.32% to 7.98%. The note matures in February and March
2010.
|
|
3,977
|
|
4,358
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
Notes
payable to Hana Bank Korea, payable monthly interest only at 5.5% to
5.95%. The note matures in April and August 2009.
|
|
|
2,531
|
|
|
|
2,773
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Woori Bank, payable monthly interest only at 5.94% to
6.33%. The notes are secured by real property, and mature in
October 2009.
|
|
|
7,230
|
|
|
|
7,924
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Korea Exchange Bank, payable monthly interest only at 6.67%.
The notes are secured by the Company’s real property and mature in April
2009.
|
|
|
2,169
|
|
|
|
2,377
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Kook Min Bank of Korea, payable monthly interest only at 8.87%.
The note is unsecured and matures in August 2009.
|
|
|
2,169
|
|
|
|
2,377
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Citi Bank Korea, payable monthly interest only at 5.00% to
5.91%. The note matures in April and May 2009.
|
|
|
2,403
|
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payable to local government with annual interest rate at
5.38%. The loan matures in January 2009.
|
|
|
-
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Hana Bank Korea, payable monthly interest only at 5.38. The
note matures in March 2015 and March 2017.
|
|
|
1,085
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Industrial Bank of Korea, payable monthly interest-only at
4.7%, and matures in December 2009 and May 2010
|
|
|
2,892
|
|
|
|
3,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Shin-Han Bank of Korea, payable monthly interest only at 4.54
%. The notes mature in June 2011.
|
|
|
1,885
|
|
|
|
2,295
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable issued in 2008. This note matures in April 2009 at 3
month CD plus 2.15%.
|
|
|
-
|
|
|
|
4,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payable to local government with annual principal payment of $10,422,
bearing no interest. The loan is unsecured and matures in October
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Merrill Lynch. The note matured in January
2009.
|
|
|
-
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Hana Bank Korea, payable monthly interest only at 5.33%. The
note was secured by real property and matures in March
2010.
|
|
|
4,337
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Industrial Bank of Korea, and matures in March
2010
|
|
|
2,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to Industrial Bank of Korea, and matures in February
2017
|
|
|
7,230
|
|
|
|
-
|
|
|
|
|
|
103,408
|
|
|
|
108,246
|
|
|
Less:
current portion
|
|
|
73,133
|
|
|
|
82,761
|
|
|
Long-term
debt
|
|
$
|
30,275
|
|
|
$
|
25,485
|
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Following
is a summary of principal maturities of notes payable over the next five
years:
|
Years
ending December 31,
|
|
Amount
(in
thousands)
|
|
|
|
|
|
|
|
2009
|
|
$
|
53,658
|
|
|
2010
|
|
|
39,926
|
|
|
2011
|
|
|
1,508
|
|
|
2012
|
|
|
273
|
|
|
2013
and thereafter
|
|
|
8,043
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,408
|
|
Note
11 – Employee Severance Benefits
Employees
and directors with one year or more of service are entitled to receive a
lump-sum payment upon termination of their employment based on their length of
service and rate of pay at the time of termination. Accrued severance benefits
represent the amount which would be payable assuming all eligible employees and
directors are to terminate their employment as of the balance sheet date. The
severance benefits for the period ended March 31, 2009 and 2008, were $102,216
and $169,542, respectively.
Note
12 – Convertible Debentures
Pursuant
to SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity," the Company accounts for the
convertible debentures as liability at face values and no formal accounting
recognition is assigned to the values inherent in the conversion
features.
Convertible
debentures outstanding at March 31, 2009 and December 31, 2008, are summarized
as follows:
|
|
|
March
31,
2009
|
|
|
December 31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture - A
|
|
$
|
15,284
|
|
|
$
|
15,284
|
|
|
Convertible
debenture - B
|
|
|
64,920
|
|
|
|
64,920
|
|
|
Convertible
debenture - C
|
|
|
10,820
|
|
|
|
10,820
|
|
|
Convertible
debenture - D
|
|
|
12,129
|
|
|
|
13,024
|
|
|
Bond
with warrants - UBP
|
|
|
7,206
|
|
|
|
7,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount
|
|
$
|
110,359
|
|
|
$
|
111,809
|
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Convertible
Debenture -A
The
Convertible Debenture - A, issued on October 30, 2006, is non-interest bearing,
unsecured, and matures on October 30, 2011. The bonds are convertible into
common stock of the Company at $0.50 per share. The holders have a right to
adjust the conversion price at any time between April 1, 2008 and September 30,
2011. The adjustments discount is made using the formula of 100% x ($0.50 -
previous 3 months average share price)/$0.50, and is limited to a maximum of
30%. The holders can exercise their conversion rights any time from October 25,
2006 to September 30, 2011. As of March 31, 2009, no bonds have been
converted.
For any
unconverted amount as of October 30, 2011, interest accrues at the rate of 8%
per annum provided that PSTS generates revenues of $65.8 million or more and an
operating profit of $6.8 million or more in 2007, and revenue of $95.4 million
and an operating profit of $10.6 million in 2008. If the conditions are not
achieved, interest accrues at 10% per annum. Interest is due and payable in cash
on the maturity date of October 30, 2011.
Convertible
Debenture - B
The
Convertible Debenture - B, issued on April 12, 2007 matures on April 12, 2012
and is convertible into shares of common stock of the Company at the option of
the holder at the rate of $0.70 per share. The coupon rate of the bond is at the
compounded interest rate of 2.3% per annum. If the bond is not converted during
the period commencing on the issuance date through one month prior to the
maturity date, interest accrues at 8% per annum.
The
debenture agreement requires the Company to pursue to list its common stock on
either NASDAQ, London Stock Exchange, Hong Kong Stock Exchange or Singapore
Exchange Securities Trading Limited, and to use its best efforts to obtain such
listing by October 31, 2009. If the Company completes the listing process prior
to the end of October of 2009, the holder is entitled, on or after the fourth
anniversary of the issuance of the debenture, to exercise its put option to
redeem the debenture at the face value plus interest at 8% per annum. If the
Company defaults, and if such default is not cured within 60 days, the holder is
entitled to exercise its put option to redeem the debenture at the face value
plus interest at 19% per annum.
As
amended in November 2008, if such listing by October 31, 2009 for any reason not
solely attributable to the holder of the debenture, the holder is entitled to
exercise its put option to redeem the partial amount of the principal amount of
$21.6 million and is also entitled to receive interest on the outstanding
principal balance of the debenture calculated at the compounded rate of 14% per
annum. In addition, if such listing by October 31, 2010, the holder is entitled
to exercise its put option to redeem the outstanding balance of the debenture
and is also entitled to receive interest at the compounded rate of 14% per
annum.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The
Company agreed to pledge as security all convertible bonds subscribed by the
Company using the proceeds from the debenture. As of March 31, 2009, proceeds
from the bonds aggregating $11.2 million11,173,519 were invested in a
convertible debenture issued by STS, and these debentures have been pledged as
security for this Convertible Debenture-B.
Convertible
Debenture - C
The
Convertible Debenture - C was issued on April 12, 2007, with a maturity date of
April 12, 2012. The debenture is convertible into shares of common stock of the
Company at the option of the holder at the rate of $0.70 per share. The coupon
rate of the bond is at the rate of 2.3% per annum. If the bond is not converted
during the period commencing on the issuance date through one month prior to the
maturity date, interest accrues at the rate of 8% per annum
At any
time during the period from November 1, 2009 to March 12, 2012, the holder is
entitled to exercise its put option to redeem the debentures at the face value
thereof, in which case the holder is entitled to interest at 8% per annum. If
the Company defaults, the holder is entitled to exercise its put option to
redeem the debentures at the face value if the default is not cured within 60
days, in which case the holder is entitled to receive interest at 19 % per
annum.
Convertible
Debenture - D
The
Convertible Debenture - D was issued by PDT, a majority-owned subsidiary of the
Company, in August, November, and December 2007, respectively, with maturity
dates in December 2010 through September 2012. These debentures are convertible
into shares of common stock of PDT at the option of the holders at the range of
$80.15 to $96.17 per share. The coupon rate of the bonds ranges from 0.0% to
2.4% per annum. If the bond is not converted during the period commencing on the
issuance date through one month prior to the maturity date, interest accrues at
the rate of 8% per annum.
At any
time during the period from September 2007 to August 2012, the holders are
entitled to exercise their put option to redeem the debentures at the face value
thereof, in which case the holder is entitled to interest at 8% per annum. If
the Company defaults, the holders are entitled to exercise their put options to
redeem the debentures at the face value if the default is not cured within 60
days, in which case the holders are entitled to receive interest at 19 % to 20%
per annum.
Bond
with warrants
The bond
with warrant was issued by UB Precision ("UBP"), a subsidiary of majority-owned
subsidiary of the Company, in April 2008, with maturity date in April 2011. Face
amount of the bond is $7.92 million (KRW 10,000,000,000) with zero stated
interest rate. These debentures are convertible into shares of UB Precision at
the option of the holders at $2.85 (KRW 3,600) per share any time between April
30, 2008 and March 31, 2011. If the bond is not converted during the period,
interest accrues at the rate of 5% per annum.
The
convertible debentures have not been included in the calculation of the diluted
(loss) per share as their inclusion would be anti-dilutive.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
13 - Income Taxes
The
Company adopted the provisions of FIN No. 48 on January 1, 2008, and there was
no material effect on the financial statements at the date of adoption. There
was no cumulative effect related to adopting FIN No. 48.
Corporate
income tax rates applicable to the Korean subsidiaries in 2009 and 2008 were
16.5% of the first 100 million Korean Won ($105,700) of taxable income and 29.7%
on the excess. For the United States operations, the corporate tax rates range
from 10% to 34%. The Company provided a valuation allowance equal to the
deferred tax amounts resulting from the tax losses in the United States, as it
is not likely that they will be realized. Tax losses from the Korean
subsidiaries can be carried forward for five years to offset future taxable
income. The U.S. tax losses can be carried forward for 15 to 20 years to offset
future taxable income. The Company has accumulated about $13,222,000 and
$8,711,000 of taxable losses in its Korea and US operations, respectively. The
utilization of the Korean losses expires in years 2008 to 2012 and the US losses
in years 2019 to 2027. PSTS is exempt from income taxes under the Chinese tax
law for the first two profitable tax years. Taxable income in the third to fifth
profitable tax years will be taxed at 5% and subsequently the applicable tax
rate will be 10%.
The
provision for income taxes for the periods ended March 31, 2009 and 2008 are
summarized as follows:
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Current
income tax provision:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Foreign
taxes of subsidiaries
|
|
|
9
|
|
|
|
1
|
|
|
|
|
|
9
|
|
|
|
1
|
|
|
Deferred
income tax benefit:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
9
|
|
|
$
|
1
|
|
The
Company has deferred tax assets (liabilities) at March 31, 2009 and December 31,
2008 as follows:
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
Research
and development expenses
amortized
over 5 years for tax purposes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Other
timing differences
|
|
|
-
|
|
|
|
-
|
|
|
Net
operating loss carryforwards
|
|
|
7,798
|
|
|
|
5,877
|
|
|
|
|
|
7,798
|
|
|
|
5,877
|
|
|
Valuation
allowance
|
|
|
(7,798
|
)
|
|
|
(5,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 14 -
Capital
The
Company's capital transactions for the periods ended March 31, 2009 and 2008 are
as follows:
In March
2009, 68,857 common shares held by a subsidiary were provided for consulting
services at the value of $10,734.
As of
March 31, 2009, 11,872,967 common shares held by a subsidiary of a
majority-owned subsidiary were eliminated and presented as treasury
stock.
Stock
Warrants and Options
The
Company has accounted for its stock options and warrants in accordance with SFAS
123 "Accounting for Stock - Based Compensation" and SFAS 148 "Accounting for
Stock - Based compensation - Transition and Disclosure." Value of options
granted has been estimated by the Black Scholes option pricing model. The
assumptions are evaluated annually and revised as necessary to reflect market
conditions and additional experience. The following assumptions were
used:
|
|
|
March
31,
2009
|
|
|
December
31, 2008
|
|
|
Interest
rate
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
|
Expected
volatility
|
|
|
70
|
%
|
|
|
70
|
%
|
|
Expected
life in years
|
|
|
5
|
|
|
|
6
|
|
|
Expected
dividends
|
|
|
-
|
|
|
|
-
|
|
In 1999,
the Board of Directors of Cintel Korea adopted a stock option plan to allow
employees to purchase ordinary shares of the Cintel Korea.
The stock
option plan granted 96,000 options for the common stock of Cintel Korea having a
$0.425 nominal par value each and an exercise price of $0.425. In 2002, 53,000
stock options were cancelled. In 2003, an additional 30,000 stock options were
cancelled.
In March
2000, 225,000 stock options were granted having a $0.425 nominal par value each
and an exercise price of $0.68. From this grant, 135,000 options were cancelled
in 2002, and an additional 47,000 options were cancelled in 2003.
In
February 2001, 30,000 stock options were granted having a $0.425 nominal par
value each and an exercise price of $0.72. In 2003, all of these stock options
were cancelled.
In March
2003, 65,000 stock options were granted having a $0.425 nominal par value each
and an exercise price of $0.71. In the same year, 15,000 of these stock options
were cancelled.
The
options vest gradually over a period of 3 years from the date of grant. The term
of each option shall not be more than 8 years from the date of grant. No options
have vested during the periods ended March 31, 2009 and 2008 and no option is
outstanding at March 31, 2009.
The stock
options have not been included in the calculation of the diluted earnings per
share as their inclusion would be anti-dilutive.
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note
15 – Related Party Transactions
Significant
transactions with companies affiliated by common control for the periods ended
and at March 31, 2009 and December 31, 2008, are summarized as
follows:
|
|
|
March
31,
2009
|
|
|
December
31, 2008
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable from STS
|
|
$
|
966
|
|
|
$
|
704
|
|
|
Accounts
receivable from BKLCD (fka We-Tech)
|
|
|
-
|
|
|
|
125
|
|
|
Sales
to STS
|
|
|
10,126
|
|
|
|
66,809
|
|
|
Sales
to BKLCD (fka We-Tech)
|
|
|
4
|
|
|
|
2,282
|
|
|
Purchase
from STS
|
|
|
8,368
|
|
|
|
49,311
|
|
These
transactions were in the normal course of business and recorded at an exchange
value established and agreed upon by the above mentioned parties.
Note
16 – Appropriated Retained Earnings
The
Company's majority owned subsidiary, PDT, is required to appropriate a part of
their net profits for statutory surplus reserve and reserve for technological
development and business investment. For the statutory surplus reserve, an
amount equivalent to 10% or more of the declared dividends is transferred to the
reserve until the reserve reaches 50% of the registered capital of PDT. The
reserve is not distributable as cash dividends but can be converted into capital
upon approval of the Company.
In
January 2009, PDT's Board of Directors approved a corporate readjustment of its
account in the form of a quasi reorganization in which the Company's accumulated
deficits of $13.9 million was charged to paid-in capital.
Note
17 - Loss per Share
The
following reconciles the numerators and denominators of the basic and diluted
per share computation for the periods ended March 31, 2009 and December 31,
2008:
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
(in
thousands, except per share amounts)
|
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,922
|
)
|
|
$
|
(2,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
shares
outstanding
|
|
|
83,424
|
|
|
|
97,824
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Note
18 - Commitments
(a) The
Company leases its premises under a non-cancellable lease agreement which will
expire in August 2009. Future minimum annual payments (exclusive of taxes and
insurance) under the lease are $9,189 for the period ended August 31, 2009. Rent
expenses paid during the periods ended March 31, 2009 and 2008 were $11,439 and
$23,699, respectively.
(b) The
Company is committed to vehicle lease obligations which expire in June, 2010.
Future minimum annual payments (exclusive of tax and insurance) under the lease
are as follows:
|
Years
|
|
Amount
|
|
|
2009
|
|
$
|
42,199
|
|
|
2010
|
|
|
34,580
|
|
|
2011
|
|
|
2,149
|
|
|
|
|
$
|
78,928
|
|
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
(c) The
Company’s Korean subsidiary, PDT, has outstanding guaranty agreements on behalf
of affiliated companies. PDT is obligated to perform under these agreements if
guarantees of the affiliated companies failed to pay principal and interest
payments to the lender when due. Including accrued interest, the maximum
potential amount of future (undiscounted) payments under these guaranty
agreements is $12 million.
In
accordance with FASB interpretation No. 45, provisions related to recognizing a
liability at inception for the fair value of the guarantor’s obligation do not
apply since common control is considered to be existed with guarantees. Guaranty
agreements were as follows as of March 31, 2009:
|
Guarantee
|
|
Maturity
|
|
Guaranteed
For
|
|
Amount
|
|
BKLCD
|
|
January
20, 2012
|
|
Loan
|
|
$ 3,600,000
|
|
BKLCD
|
|
September
7, 2009
|
|
Loan
|
|
$ 2,400,000
|
|
BKLCD
|
|
June
25, 2009
|
|
Loan
|
|
$ 515,055
|
|
Info
Space
|
|
February
6, 2009
|
|
Stand-by
L/C
|
|
$ 2,700,000
|
|
Info
Space
|
|
May
5, 2009
|
|
Stand-by
L/C
|
|
$ 2,000,000
|
Note
19 – Fair Value of Financial Instruments
Effective
January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value
Measurements ("SFAS No. 157"). SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants.
Under SFAS No. 157, fair value measurements are not adjusted for transaction
costs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurement) and the lowest priority to
unobservable inputs (level 3 measurements).
The three
levels of the fair value hierarchy under SFAS No. 157 are described
below:
Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets.
Level 2 -
Significant other observable inputs other than Level 1 prices such as quoted
prices in markets that are not active, quoted prices for similar assets, or
other inputs that are observable, either directly or indirectly, for
substantially the full term of the asset.
Level 3 -
Significant unobservable inputs that reflect a reporting entity's own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The fair
values of securities available for sale are generally determined by matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities' relationship to other
benchmark quoted securities (Level 2 inputs).
CINTEL
CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
The
following summarizes the financial instruments measured at fair value on a
recurring basis in accordance with SFAS 157 as of March 31, 2009:
|
|
|
|
|
|
Fair
Value Measuring Using
|
|
|
|
|
Total
Fair
Value
|
|
|
Quoted
Prices in
Active
Markets for Identical
(Level
1)
|
|
|
Significant
Other Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
4,020
|
|
|
$
|
-
|
|
|
$
|
4,020
|
|
|
$
|
-
|
|
Note
20 - Cumulative Effect of Changes in Accounting Policy
During
2008, the Company's majority-owned subsidiary, PDT, changed its accounting
policy for revenue recognition on the sales of certain manufactured products
(machinery and equipment). This policy change was necessary as it related to an
amendment of terms in sales with the major customers. In the new policy, the
point in revenue recognition time has been moved to a later point in time.
Previously, revenue was recognized upon shipment of products; the new policy
does not recognize revenue until the products are installed and tested and an
acceptance is released by the customer. The Company considers that the new
policy better conforms to the terms of sales. Prior year financial statements
have been adjusted to reflect the change in revenue recognition timing
retroactively to facilitate the comparability with the financial statements as
of March 31, 2009 and for the period then ended.
The
effect of the changes for the period ended March 31, 2008, as it was
retroactively applied, is as follows:
|
For
the period ended
March
31, 2008
|
|
Under
new
Method
|
|
|
Under
old
Method
|
|
|
Effect
of
Change
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of operation:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
62,891
|
|
|
$
|
52,647
|
|
|
$
|
10,244
|
|
|
Cost
of sales
|
|
|
60,750
|
|
|
|
50,506
|
|
|
|
10,244
|
|
|
Net
loss
|
|
|
(2,596
|
)
|
|
|
(2,596
|
)
|
|
|
-
|
|