UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER: 000-24985
PACIFICNET INC.
(Exact name of small business issuer in its charter)
DELAWARE 91-2118007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 New Bright Building, 11 Sheung Yuet Road, N/A
Kowloon Bay, Kowloon, Hong Kong (Zip Code)
(address of principal Executive offices)
ISSUER'S TELEPHONE NUMBER: 011-852-2876-2900
UNIT 2710, HONG KONG PLAZA, 188 CONNAUGHT ROAD WEST, HONG KONG
--------------------------------------------------------------
(Former Name and Address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES /X/ NO / /
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES / / NO /X/
There were 10,826,983 shares of the Company's common stock outstanding on
September 30, 2005.
Transitional Small Business Disclosure Format (check one): YES / / NO /X/
Page 1
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS..............................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........12
ITEM 3. CONTROLS AND PROCEDURES..........................................22
PART II - OTHER INFORMATION...................................................23
ITEM 1. LEGAL PROCEEDINGS................................................23
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS......23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............23
ITEM 5. OTHER INFORMATION................................................23
ITEM 6. EXHIBITS.........................................................23
SIGNATURES....................................................................24
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited. In thousands of United States dollars
except par values and share numbers)
SEPTEMBER 30, 2005 DECEMBER 31, 2004
(UNAUDITED) (AUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,778 $ 6,764
Restricted cash - pledged bank deposit 369 3,501
Accounts Receivables (net of allowance for doubtful accounts of $0) 8,501 5,644
Inventories 1,749 1,297
Loans receivable from related parties 1,349 --
Loans receivable from third parties 1,597 --
Other Current Assets 4,301 4,325
--------- ---------
TOTAL CURRENT ASSETS 22,644 21,531
Property and Equipment, net 2,422 1,118
Investments in affiliated companies and subsidiaries 1,279 1,063
Marketable equity securities - available for sale 438 29
Goodwill 13,449 8,912
--------- ---------
TOTAL ASSETS $ 40,232 $ 32,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 645 $ 651
Bank Loans-current portion 1,385 1,327
Capital Lease Obligations - current portion 137 80
Accounts Payable 2,327 3,150
Accrued Expenses and other payables 1,233 128
Provision for taxation 66 10
Due to related party 513 --
--------- ---------
TOTAL CURRENT LIABILITIES 6,306 5,346
Long-term liabilities: --
Bank Loans - non current portion 16 69
Capital Lease Obligations - non current portion 101 129
--------- ---------
TOTAL LONG-TERM LIABILITIES 117 198
--------- ---------
TOTAL LIABILITIES 6,423 5,544
--------- ---------
Minority Interests in Consolidated Subsidiaries 3,718 2,396
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $0.0001, Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common Stock, par value $0.0001, Authorized - 125,000,000 shares Issued and
outstanding:
Sep 30, 2005 - 11,961,687 issued; 10,826,983 outstanding
December 31, 2004 - 10,627,737 shares issued, 9,791,583 outstanding 1 1
Treasury Stock, at cost - 836,154 shares (104) (104)
Additional Paid-In Capital 57,653 53,916
Cumulative Other Comprehensive Loss (2) (24)
Accumulated Deficit (27,457) (29,076)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 30,091 24,713
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,232 $ 32,653
========= =========
See condensed notes to consolidated financial statements.
Page 3
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In thousands of United States dollars, except earnings/(loss) per share and share amounts)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Revenues
Product sales 6,040 5,477 18,177 12,063
Services and others 4,682 2,577 12,430 7,577
--------- --------- --------- ---------
TOTAL REVENUES: $ 10,722 $ 8,054 $ 30,607 $ 19,640
--------- --------- --------- ---------
Cost of revenues
Product sales (5,655) (5,027) (16,557) (10,790)
Services and others (3,078) (1,655) (8,196) (4,934)
--------- --------- --------- ---------
TOTAL COST OF REVENUES (8,733) (6,682) (24,753) (15,724)
Gross profit 1,989 1,372 5,854 3,916
Selling, general and administrative expenses (775) (782) (2,531) (2,325)
Depreciation and amortization (133) (74) (274) (214)
Interest expenses (54) (53) (182) (162)
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 1,027 463 2,867 1,215
Interest income 70 6 155 16
Other income (expense), net 256 78 577 159
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES
AND MINORITY INTEREST 1,353 547 3,599 1,390
Benefit (Provision) for income taxes 14 -- (43) --
Share of income of associated companies 8 -- 12 --
Minority Interests (764) (411) (1,949) (1,062)
--------- --------- --------- ---------
NET EARNINGS AVAILABLE TO COMMON STOCKHOLDERS $ 611 $ 136 $ 1,619 $ 328
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE: $ 0.06 $ 0.02 $ 0.16 $ 0.05
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE: $ 0.05 $ 0.02 $ 0.15 $ 0.05
========= ========= ========= =========
See condensed notes to consolidated financial statements.
Page 4
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars, except loss per share and share amounts)
NINE MONTHS
ENDED SEPTEMBER 30,
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings 1,619 328
Adjustment to reconcile net earnings to net cash used in operating activities:
Equity earnings (loss) of associated company (12) (23)
Provision for income taxes 43 --
Minority Interest 1,322 1,622
Depreciation and amortization 274 214
Accounts receivable and other current assets (2,832) (2,386)
Inventories (452) (1,237)
Accounts payable and accrued expenses 338 611
-------- --------
Net cash provided by (used in) operating
activities 300 (871)
CASH FLOWS FROM INVESTMENT ACTIVITIES
Decrease in restricted cash 3,132 --
Increase in purchase of marketable securities (409) (858)
Acquisition of property and equipment (1,346) (1,039)
Acquisition of subsidiaries (2,022) (1,302)
Acquisition of investee company (216) (385)
-------- --------
Net cash used in investing activities (861) (3,584)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Increase in loan receivables (1,597) --
Loans from related parties (1,349) --
Increase in loan from a related party 513 --
Advances (repayments) under bank line of credit (7) (50)
Increase (repayment) of amount borrowed under capital lease obligations 29 (2,415)
Proceeds from sale of common stock -- 2,813
Increase in share consideration post acquisition of subsidiaries -- 564
Repurchase of treasury shares -- (99)
Proceeds from exercise of stock options and warrants 981 74
Advances under bank loans 5 1,990
-------- --------
Net cash provided by (used in) financing activities (1,425) 2,877
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,986) (1,578)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,764 2,900
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,778 $ 1,322
======== ========
CASH PAID FOR:
Interest 182 162
Income taxes 34 --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Investment in subsidiaries acquired through issuance of common stock $ 2,762 $ 6,500
Common stock issued as a result of exercise of stock options -- $ 2
See condensed notes to consolidated financial statements.
Page 5
PACIFICNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2004, as filed with the
SEC.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have been made.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Examples include provisions for returns and impairment losses,
accounting for income taxes, bad debts, and property, plant and equipment lives
for depreciation purposes. Actual results may differ from these estimates. The
results of operations for the three and nine month period ended September 30,
2005 are not necessarily indicative of the operating results that may be
expected for the entire year ending December 31, 2005. These financial
statements should be read in conjunction with the notes to the financial
statements and the Management's Discussion and Analysis included elsewhere in
this report.
STOCK-BASED COMPENSATION
During the quarter ended September 30, 2005, the Company did not grant any stock
options and no options were canceled, forfeited, or exercised. As of September
30, 2005, there were 1,207,100 stock options outstanding and 376,100 options
exercisable. The weighted average exercise price of the options outstanding and
exercisable is $3.82 and $2.12, respectively, and the weighted average remaining
contractual life is 3.25 and 1.25 years, respectively.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost for stock options
is recognized for stock option awards granted at or above fair market value. Had
compensation expense for the Company's stock-based compensation plans been
determined under FAS No. 123, based on the fair market value at the grant dates,
the Company's pro forma net earnings (loss) and pro forma net earnings (loss)
per share would have been reflected as follows at September 30:
Three months ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------- -------- ----------- --------
Net earnings
As reported $ 611 $ 136 $ 1,619 $ 328
Less, stock-based employee compensation cost, net of tax -- -- (2,740) --
-------- -------- ----------- --------
Pro forma $ 611 $ 51 $ (1,121) $ 192
======== ======== =========== ========
Earnings (loss) per share
Basic
As reported $ 0.06 $ 0.02 $ 0.16 $ 0.05
======== ======== =========== ========
Pro forma $ 0.06 $ 0.01 $ (0.11) $ 0.03
======== ======== =========== ========
Diluted
As reported $ 0.05 $ 0.02 $ 0.15 $ 0.04
======== ======== =========== ========
Pro forma $ 0.05 $ 0.01 $ (0.10) $ 0.03
======== ======== =========== ========
Page 6
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. SFAS No.
123R will require the Company to expense SBP awards with compensation cost for
SBP transactions measured at fair value. On March 29, 2005, the SEC issued Staff
Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the
interaction between SFAS No. 123R and certain SEC rules and regulations and
provides the SEC's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC issued a release which
amends the compliance dates for SFAS No. 123R. We expect the adoption of SFAS
No. 123R and SAB 107 to have a material impact on the Company's financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 replaces APB Opinion No. 20 "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. We do not expect the adoption of SFAS No. 154 to have any impact on the
Company's financial statements.
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is based on the weighted average number of
shares of common stock outstanding during the period. Diluted EPS is based on
the weighted average number of shares of common stock outstanding plus dilutive
common stock equivalents such as additional shares issued as if in-the-money
options and warrants were exercised (utilizing the treasury stock method) during
the period. Diluted EPS for 2005 excludes the potential dilutive effect of
500,000 warrants because their impact would be antidilutive based on current
market prices. All per share and per share information are adjusted
retroactively to reflect stock splits and changes in par value, when applicable.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Numerator-net earnings $ 611 $ 136 $ 1,619 $ 328
Denominator-weighted average shares to compute
basic EPS 10,826,983 7,284,615 10,171,224 6,960,854
=========== =========== =========== ===========
Basic EPS shares 10,826,983 7,284,615 10,171,224 6,960,854
Potential dilutive from assumed exercise of stock
options and warrants 918,760 517,892 859,147 627,365
----------- ----------- ----------- -----------
Denominator - weighted average number of shares 11,745,743 7,802,507 11,030,371 7,588,219
=========== =========== =========== ===========
Basic earnings per share $ 0.06 $ 0.02 $ 0.16 $ 0.05
Diluted earnings per share $ 0.05 $ 0.02 $ 0.15 $ 0.04
3. BUSINESS ACQUISITIONS
In April, 2005, the Company completed the acquisition of a controlling interest
in Guangzhou 3G Information Technology Co. Ltd. ("Guangzhou3G-WOFE"), through
the purchase of a 51% interest of Guangzhou3G-WOFE's parent company, Pacific 3G
Information & Technology Co. Limited (Guangzhou3G-BVI), a British Virgin Islands
company.
PacificNet Holdings agreed to purchase 23,050 shares (the "Sale Shares") of
3G-BVI from Asiafame International Limited, Stargain International Limited and
Trilogic Investments Limited, with principle place of business located in the
People's Republic of China (the "Sellers"), and directly subscribed to 3G-BVI to
purchase 5,000 shares (the "Subscribed Shares").
The total consideration paid for the Sale Shares was payable as follows:
(i) USD$1,183,000 payable to the Sellers in cash within 30 days after the
closing of the transaction;
Page 7
(ii) USD$4,182,000, by delivery of 522,750 shares of common stock, par value
$0.0001 per share (the "Common Stock") of PacificNet (the "PacificNet Shares")
to the Sellers. The PacificNet Shares are to be held in an escrow account with
an Escrow Agent designated by PacificNet Holdings. The first installment of the
PacificNet Shares in the amount of 130,050 will be released 45 days after the
closing of the transaction. The remaining installments will be released in equal
installments of 98,175 shares within 30 days after the end of each quarter,
including the quarter ended March 31, 2005, provided that Guangzhou 3G attains
certain net income milestones by the end of each quarter. The Sellers will be
entitled to receive all of the PacificNet Shares if Guangzhou 3G has achieved
cumulative net income for the year ended December 31, 2005 of not less than
USD$2,000,000. The Sellers appointed Tony Tong and Victor Tong, PacificNet's
current CEO and President, respectively, as proxy for the Sellers for a period
of 10 years with full power to vote the PacificNet Shares at all meetings of
stockholders of the Registrant; and
(iii) issuance of warrants to purchase up to 100,000 shares of the PacificNet's
Common Stock. The exercise price of the warrants is the 5-Day Volume Weighted
Average Price of the PacificNet's Common Stock prior to March 30, 2005. The
warrant is exercisable for a period of 3 years.
PacificNet Holdings subscribed to 3G-BVI to purchase an additional 5,000 shares.
The total purchase price for the Subscribed Shares is USD$500,000, payable
within 45 days after the delivery of (i) stock powers transferring the Sale
Shares to PacificNet Holdings; (ii) stock certificates for the Sale Shares and
the Subscribed Shares; (iii) an executed Subscription Agreement for the
Subscribed Shares; and (iv) minutes of the Board of Directors and shareholders
of Guangzhou 3G and 3G-BVI approving the transaction. Net assets acquired
totaled $253,000 representing total assets acquired of $495,000 less liabilities
assumed of $242,000.
PACT included the financial results of the subsidiary in its consolidated 2005
financial results from the date of the purchase April 2005 through September 30,
2005. Guangzhou3G-WOFE was set up as a wholly-owned foreign enterprise ("WOFE")
in the PRC immediately prior to the acquisition and therefore no unaudited pro
forma results are required.
4. STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED.
For the three months ended September 30, 2005, the Company issued (i) 98,175
shares of restricted common stock in connection with acquisitions of certain
subsidiaries.
For the nine months period ended September 30, 2005, the Company issued (i)
378,400 shares of restricted common stock in connection with acquisitions of
certain subsidiaries and (ii) 57,000 shares of common stock as a result of
exercise of options and 600,000 shares of common stock from the exercise of
warrants for cash consideration totaling $981,400.
WARRANTS EXERCISED.
For the nine months ended September 30, 2005, the Company received $870,000 from
Sino Mart Management Limited ("Sino Mart") as a result of Sino Mart's exercise
of a warrant to purchase 600,000 shares of common stock at a price of $1.45 per
share. Background of the warrant: On March 28 2002, the Company completed a
$3,480,000 private placement by issuing 2,400,000 shares of common stock at a
price of $1.45 per share to Sino Mart Management Limited ("Sino Mart"), whose
executive director Mr. TONG Cho-Sam is the father of the chairman and CEO of the
Company. In addition, the Company issued Sino Mart a warrant to purchase up to
an additional 600,000 shares of common stock at $1.45 per share. The warrant is
fully exercisable beginning on April 1, 2002. The $3,480,000 private placement
transaction (including the 600,000 warrants) was approved at a special
stockholder meeting held on March 25, 2002. (See Note 6)
Total warrants outstanding as of September 30, 2005 are 1,121,138. The weighted
average remaining life is 2.72 years and the weighted average price per share is
$6.99 per share.
COMMON STOCK REPURCHASE PROGRAM.
--------------------------------
The Company's Board of Directors has approved a Corporate Stock Repurchase
Program to purchase up to US$800,000 worth of outstanding shares of its common
stock in open market transactions, from time to time, in compliance with Rule
10b-18 of the Securities Exchange Act of 1934 and all other applicable
securities regulations. The purpose of the repurchase program is to enhance
shareholder value. During the three months ended September 30, 2005, the Company
did not repurchase any shares.
Page 8
5. SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes standards for
reporting information about operating segments. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing
performance. As segment reporting only occurred after the acquisition of
Clickcom and GZ3G value added services (VAS) businesses, prior period's
comparative information cannot be reclassified into these three business units,
but have been reclassified into the operating segments by subsidiary types.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company's chief
operating decision making group is the Company's Business Committee, comprising
the Company's Chief Executive Officer, Chief Financial Officer and its senior
management team, who allocate resources and evaluate performance of segments
based on the following table of condensed income statement and total assets.
Accordingly, other items such as external sales, inter-segment sales, interest
revenue (expense), income tax expense (benefit), depreciation and amortization
are not disclosed by segment, since this information is not used by the
Company's chief operating decision making group to assess the operating
performance of individual segments.
The Company's reportable segments are operating units, which represent the
operations of the Company's significant business operations.
Our operations include the following three groups:
(1) Outsourcing Services: including Business Process Outsourcing (BPO), call
center, IT Outsourcing (ITO) and software development services.
(2) Value-Added Telecom Services (VAS): including Interactive Voice Response
(IVR), SMS and related VAS.
(3) Communication Distribution Services: including calling cards,
GSM/CDMA/XiaoLingTong products, multimedia self-service Kiosks.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes the Company's other
insignificant services and corporate related items, and, as it relates to
segment profit (loss), income and expense not allocated to reportable segments:
3. COMMUNICATIONS
1. OUTSOURCING DISTRIBUTION
FOR THE THREE MONTHS BUSINESS 2.VAS BUSINESS BUSINESS ADMIN & OTHER TOTAL
ENDED SEPTEMBER 30, 2005 (US $000) ($) ($) ($) ($) ($)
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Revenues 3,362 2,546 4,678 136 10,722
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Earnings (loss) before income taxes and 323 1,171 102 (243) 1,353
minority interest
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Total Assets 6,541 8,383 10,047 15,261 40,232
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
3. COMMUNICATIONS
1. OUTSOURCING DISTRIBUTION
FOR THE THREE MONTHS ENDED BUSINESS 2. VAS BUSINESS BUSINESS ADMIN & OTHER TOTAL
SEPTEMBER 30, 2004 (US $000) ($) ($) ($) ($) ($)
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Revenues 2,545 1,489 3,988 32 8,054
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Earnings (loss) before income taxes and 292 380 48 (173) 547
minority interest
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Total Assets 4,745 3,252 273 11,289 19,559
Page 9
3. COMMUNICATIONS
1. OUTSOURCING DISTRIBUTION
FOR THE NINE MONTHS BUSINESS 2.VAS BUSINESS BUSINESS ADMIN & OTHER TOTAL
ENDED SEPTEMBER 30, 2005 (US $000) ($) ($) ($) ($) ($)
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Revenues 9,828 7,092 13,408 279 30,607
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Earnings (loss) before income taxes and 911 2,716 425 (453) 3,599
minority interest
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Total Assets 6,644 8,383 10,047 15,158 40,232
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
3. COMMUNICATIONS
1. OUTSOURCING DISTRIBUTION
FOR THE NINE MONTHS ENDED BUSINESS 2.VAS BUSINESS BUSINESS ADMIN & OTHER TOTAL
SEPTEMBER 30, 2004 (US $000) ($) ($) ($) ($) ($)
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Revenues 6,847 4,270 7,793 730 19,640
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Earnings (loss) before income taxes and 743 1,133 100 (586) 1,390
minority interest
---------------------------------------- -------------------- ------------------- -------------------- ----------------- -----------
Total Assets 4,745 3,252 273 11,289 19,559
6. RELATED PARTY TRANSACTIONS
Loan receivable from related parties
As at September 30, 2005, there was a total loan receivable of US$1,349,000 due
from related parties including US$795,000 due from Cheer Era (30% owned by
PACT), US$192,000 due from a director of PACT's subsidiary, Soluteck, and
US$362,000 due from the shareholder of Yueshen, a subsidiary of PACT. The terms
of these three related parties loan receivables are below:
LOAN TO CHEER ERA
As at September 30, 2005, there was a total loan receivable of US$795,000
outstanding from Cheer Era, a 30% owned investee of PACT. The purpose of the
loan was a working capital loan to finance the expansion of Cheer Era's business
in Europe and North America. The repayment of this loan will be due around end
of 2005 with 8% interest per annum or be due on September 30, 2006 with 7.5%
interest per annum, plus 8% penalty interest in case of overdue. The loan is
collateralized with 149,459 PACT shares owned by the two equity owners of Cheer
Era having 70% majority stake in Cheer Era, and the remaining assets and equity
ownership of Cheer Era.
LOAN TO SOLUTEK'S DIRECTOR
As at September 30, 2005, there was a loan outstanding of US$192,000 receivable
from a director of Soluteck, payable in three equal installments of US$72,314
each, being principal plus interest, due on 14th of December for three
consecutive years ending 2007. The interest rate for the loan is 8% per annum
plus 5% penalty interest in case of overdue. The loan is collateralized with
100,000 PACT shares owned by the borrowing director and Ms Iris Lo, and the
remaining assets of Smartime Holding Ltd.
LOAN TO YUESHEN'S SHAREHOLDER
As at September 30, 2005, a US$362,000 loan receivable was outstanding from the
shareholder of a PACT's subsidiary, Yueshen for the purpose of repaying the
working capital loan by the predecessor of Yueshen advanced prior to PACT's
acquisition. This loan is collateralized with PACT shares owned by the
shareholder of Yueshen.
DUE TO RELATED PARTY
As at September 30, 2005, a US$513,000 loan was outstanding from Epro to a
shareholder of Epro. On August 5, 2005, US$513,000 was advanced to Epro for a
period of 5 years at 6.5% interest per annum for working capital purposes.
Page 10
7. GOODWILL
The Company has one class of goodwill arising from business combination
resulting from the acquisitions of our subsidiaries. We currently have six (6)
reporting units: Linkhead, EPRO, YueShen, Smartime/Soluteck, Clickcom-WOFE, and
Guangzhou 3G-WOFE for the purpose of goodwill assessment. We determine our
reporting units if the entity constituted a business, financial information was
available, and segment management can regularly review the operating results of
that component. We allocated goodwill amongst the reporting units based on the
consideration paid in shares and cash minus the proportional share of the fair
value of net assets and liabilities at the time of acquisition specific to each
reporting unit. The fair value of each reporting unit represents the amount at
which the unit as a whole could be bought or sold in a current transaction
between willing parties in an open marketplace.
The total carrying amount of goodwill recorded on the balance sheet at September
30, 2005 is US$13,449,000 and the changes in the carrying amount of goodwill for
the following reporting periods are summarized below:
Distribution of
Communications
(US$000s) VAS Outsourcing Products Total
----------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 $ (147) $ 567 $ -- $ 420
Goodwill acquired during the year 4,416 2,976 1,100 8,492
Impairment losses -- -- -- --
Goodwill written off related to sale of business unit -- -- -- --
-------------------------------------------------------------
Balance as of December 31, 2004 4,269 3,543 1,100 8,912
Goodwill acquired during the 3 months 220 -- -- 220
Impairment losses -- -- -- --
Goodwill written off related to sale of business unit -- -- -- --
-------------------------------------------------------------
Balance as of March 31, 2005 4,489 3,543 1,100 9,132
Goodwill acquired during the3 months 3,516 -- -- 3,516
Impairment losses -- -- -- --
Goodwill written off related to sale of business unit -- -- -- --
-------------------------------------------------------------
Balance as of June 30, 2005 $ 8,005 $ 3,543 $ 1,100 $12,648
-------------------------------------------------------------
Increase in goodwill due to contingent consideration
earned by subsidiary 801 801
-------------------------------------------------------------
Balance as of September 30, 2005 $ 8,806 $ 3,543 $ 1,100 $13,449
==============================================================
We have assessed the need to record impairment losses on our goodwill assets at
least annually or when an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. Our assessment includes using a combination of qualitative/quantitative
analyses such as DCF/PE multiples based on 5 year profit forecasts, and
published comparables, where applicable. Management concluded that there have
been no material adverse changes on the operating environments during the
reporting periods that would have otherwise affected the carrying value of the
goodwill. In addition, there has been no disposal of any reporting subsidiaries
and, as a result, no gain or loss is recognized during those reporting periods.
8. MARKETABLE SECURITIES
The total carrying amount of marketable securities recorded on the balance sheet
at September 30, 2005 is US$438,000 and the changes in the carrying amount of
marketable securities for the following reporting periods are summarized below:
Amount in
(US$000s)
---------------------------------------------------------- --------------
Balance as of December 31, 2004 $ 29
Marketable securities purchased during 2Q05 409
-------------
Cost as at September 30, 2005 438
Unrealised gains or (losses) --
--------------
Balance as of September 30, 2005 438
Page 11
9. INCOME TAXES
The Company is subject to US federal income taxes, Hong Kong profits tax, and
the People's Republic of China income taxes.
o The Company has a loss position generated by the parent company and is
not subject to U.S. income tax.
o The Company's subsidiaries which are based in the People's Republic of
China ("PRC") are governed by the Income Tax Law of the PRC concerning
Foreign Investment Enterprises ("FIEs") and Foreign Enterprises and
various local income tax laws (the "Income Tax Laws"). Under the Income
Tax Laws, FIEs generally are subject to an income tax at an effective
rate of 33% (30% state income taxes plus 3% local income taxes) on
incomes reported in the statutory financial statements after
appropriate tax adjustments, unless the enterprise is located in a
specially designated region for which more favorable effective tax
rates are applicable at a reduced rate of 15%. The subsidiaries
operating in the PRC are exempted from income taxes in the first and
second years and allowed a fifty percent reduction in the standard tax
rates in the third to fifth years. The Company is not subject to any
local income tax of 3% until the exemption and reduction periods
expire. Ultimately, for Chinese income tax purposes, the tax position
of the Company must be approved by the appropriate Chinese taxing
authority. The first year the Company's PRC entities will be subject to
income tax is 2006,assuming taxable profits are achieved.
o For the Company's entities that are based in Hong Kong the subsidiaries
are subject to Hong Kong profits tax at a rate of 17.5%. The Company
has net operating loss carryforwards of approximately $2.2M that are
available as at the year ended December 31, 2004 to offset future
taxable income in Hong Kong.
No tax benefits have been recorded related to the loss carryforwards generated
by the Company or any or it subsidiaries as management is uncertain as to the
likelihood of their realization.
Based on management best estimates, a tax provision estimate of approximately
$43,000 was made for the nine months ended September 30, 2005, as a result of
increasing profit before taxes for certain subsidiaries located in the PRC.
Interim estimates are subject to change as the year progresses and more
information becomes available.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, the matters discussed in this Form 10-QSB
contain forward-looking statements that involve risks or uncertainties.
Generally, the words "believes," "anticipates," "may," "will," "should,"
"expect," "intend," "estimate," "continue," and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including the matters set forth in this report or other reports
or documents we filed with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from
those projected. Undue reliance should not be placed on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to update these forward-looking statements. Readers should carefully review the
risks described in other documents we filed from time to time with the
Securities and Exchange Commission, including the Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2004, the Quarterly Reports on Form
10-QSB filed by the Company and Current Reports on Form 8-K (including any
amendments to such reports). References in this filing to the "Company",
"Group", "we", "us", and "our" refer to PacificNet Inc. and its subsidiaries.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. SFAS No.
123R will require the Company to expense SBP awards with compensation cost for
SBP transactions measured at fair value. On March 29, 2005, the SEC issued Staff
Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the
interaction between SFAS No. 123R and certain SEC rules and regulations and
provides the SEC's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC issued a release which
amends the compliance dates for SFAS No. 123R. We expect the adoption of SFAS
No. 123R and SAB 107 to have a material impact on the Company's financial
statements.
Page 12
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 replaces APB Opinion No. 20 "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. We do not expect the adoption of SFAS No. 154 to have any impact on the
Company's financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis or plan of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to accounts receivable reserves,
provisions for impairment losses of affiliated companies and other intangible
assets, income taxes and contingencies. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We evaluate the collectibility of our trade receivables based on a combination
of factors. We regularly analyze our significant customer accounts, and, when we
become aware of a specific customer's inability to meet its financial
obligations to us, such as in the case of bankruptcy filings or deterioration in
the customer's operating results or financial position, we record a specific
reserve for bad debt to reduce the related receivable to the amount we
reasonably believe is collectible. We also record reserves for bad debt for all
other customers based on a variety of factors including the length of time the
receivables are past due, the financial health of the customer, macroeconomic
considerations and historical experience. If circumstances related to specific
customers change, our estimates of the recoverability of receivables could be
further adjusted. In the event that our trade receivables become uncollectible,
we would be forced to record additional adjustments to receivables to reflect
the amounts at net realizable value. The accounting effect of this entry would
be a charge to income, thereby reducing our net profit. Although we consider the
likelihood of this occurrence to be remote based on past history and the current
status of our accounts, there is a possibility of this occurrence.
INCOME TAXES
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We have considered future market
growth, forecasted earnings, future taxable income, and prudent and feasible tax
planning strategies in determining the need for a valuation allowance. We
currently have recorded a full valuation allowance against net deferred tax
assets as we currently believe it is more likely than not that the deferred tax
assets will not be realized.
CONTINGENCIES
We may be subject to certain asserted and unasserted claims encountered in the
normal course of business. It is our belief that the resolution of these matters
will not have a material adverse effect on our financial position or results of
operations, however, we cannot provide assurance that damages that result in a
material adverse effect on our financial position or results of operations will
not be imposed in these matters. We account for contingent liabilities when it
is probable that future expenditures will be made and such expenditures can be
reasonably estimated.
Page 13
VALUATION OF LONG-LIVED ASSETS INCLUDING GOODWILL AND PURCHASED INTANGIBLE
ASSETS
We review property, plant and equipment, goodwill and purchased intangible
assets for impairment at least annually or whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
Our asset impairment review assesses the fair value of the assets based on the
future cash flows the assets are expected to generate. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition of the asset
(if any) are less than the carrying value of the asset. This approach uses our
estimates of future market growth, forecasted revenue and costs, expected
periods the assets will be utilized and appropriate discount rates. Such
evaluations of impairment of long-lived assets including goodwill arising on a
business combination and purchased intangible assets are an integral part of,
but not limited to, our strategic reviews of our business and operations
performed in conjunction with restructuring actions. When an impairment is
identified, the carrying amount of the asset is reduced to its estimated fair
value. Deterioration of our business in a geographic region or within a business
segment in the future could also lead to impairment adjustments as such issues
are identified. The accounting effect of an impairment loss would be a charge to
income, thereby reducing our net profit.
NATURE OF THE OPERATIONS OF THE COMPANY
NATURE OF BUSINESS
We were incorporated in the state of Delaware in 1987. Our business consists of
three groups, all of which operate within the outsourcing and telecommunications
industries in China, which includes the People's Republic of China (PRC), or
mainland China, Hong Kong Special Administrative Region (HKSAR), and Macau
Special Administrative Region. We intend to continue to grow our business by
acquiring and managing growing technology and network communications businesses
with established products and customers in China. Our current subsidiaries are
grouped into the following three divisions providing various voice focused
telecom services:
(1) Outsourcing Services [Human Voice Service]: including Business Process
Outsourcing (BPO), CRM, call center, IT Outsourcing (ITO) and software
development services. PacificNet's Outsourcing Services Group includes the
following subsidiaries: PacificNet Epro, Smartime (aka Soluteck Shenzhen), and
PacificNet Solutions. Our business process outsourcing services generate
revenues from call center services, call center management software sales, and
training and consulting. We invoice our call center clients monthly at per seat
monthly rates, a base price plus commission per call, or a per hour charge rate,
depending on the customer's preference. Our call center software clients pay per
license, for which there is usually a one-time charge on sale of the software
and annual maintenance fees for service. We charge per project for our
consulting and training services and for our telecom VAS, which are invoiced
throughout the project.
(2) Value-Added Telecom Services (VAS) [Machine Voice Service]: including
Interactive Voice Response (IVR), SMS and related VAS. PacificNet's VAS Group
includes the following subsidiaries: Linkhead, Clickcom, and Guangzhou 3G (aka
Sunroom). Our telecom VAS often includes a post-sale service contract for
systems integration and consulting services for which we bill separately.
(3) Communication Products Distribution Services Group [Voice Product
Distribution Service]: including calling cards, GSM/CDMA/XiaoLingTong products,
and multimedia self-service entertainment kiosks. This group includes the
following subsidiaries: PacificNet Communications, Yueshen, and Cheer Era. Our
calling card and related mobile telecom products are mostly sold
cash-on-delivery.
Our clients include the leading telecom operators, banks, insurance, travel,
marketing, and service companies, as well as telecom consumers, in Greater
China. Clients include China Telecom, China Netcom, China Mobile, China Unicom,
PCCW, Hutchison Telecom, CSL, SmarTone, Sunday, Swire Travel, Coca-Cola, SONY,
Samsung, TNT Express, Huawei, TCL, Dun & Bradstreet, American Express, Bank of
China, DBS, Hong Kong Government, and Hongkong Post. Headquartered in Hong Kong
and Minneapolis USA, PacificNet employs over 1,400 staff in its various
subsidiaries in China with offices in Beijing, Shenzhen, Guangzhou, Shandong,
and 27 provinces in China.
Page 14
During the third fiscal quarter ended September 30, 2005, we have continued to
win business from high-profile Chinese and multinational companies conducting
business in China such as China Mobile, China Unicom, China Telecom, Bank of
China, Ping An Insurance, TCL, TNT Express, Watsons, Hutchison, etc. All of our
business units remain productive, and we continue to focus on penetrating the
CRM and VAS/IVR markets through organic growth and via acquisition. With the
launch of the 'iPACT' IVR-Alliance program, we hope to sign up new local IVR
service providers to join our unified brand and IVR content and service
offerings, under a chain of unified service standard under the iPACT brand. We
believe this segment will contribute to revenue growth, market share
improvement, and stronger partnerships with all the major telecom operators and
local IVR service providers in China. We believe that our fundamentals are good
and that market opportunities for growth and profitability in China's CRM and
VAS sector are vast.
THE FOLLOWING ARE SOME OF THE HIGHLIGHTS IN THE THIRD QUARTER AND EVENTS
SUBSEQUENT TO THE END OF THE THIRD QUARTER:
* "iPACT" VAS Alliance Program
In July, PacificNet announced the launch of a new IVR-Alliance program called
"iPACT" at the 2005 Voice Value-added Service (VAS) Conference. Under this iPACT
program, PacificNet plans to sign up qualified Voice-VAS and IVR service
providers as profit sharing partners in China under a unified brand "iPACT".
PacificNet will provide to qualified VAS-Alliance partners, on a profit sharing
basis, all of the hardware, software, application, and content for VAS,
including a variety of IVR and other wireless and fixed-line VAS content,
including color ring back tone services, background music services, VICQ mobile
instant messaging services, sports news, weather forecasts, stock market, humor,
songs and mobile karaoke, mobile TV, games, entertainment, as well as
community-oriented services, such as chatline and dating services. Mobile and
fixed-line phone users can access PacificNet's VAS-Alliance services through
Guangzhou 3G presence in 26 provinces in China. PacificNet and its subsidiary
Guangzhou 3G are working together in rolling out the pilot test for iPACT, and
have signed up five iPACT partners as early pilot sites covering the following
regions: Shenzhen, Yantai, Zhenzhou, Guizhou and Shangdong.
* Hitching International Acquisition Status
On October 3, PacificNet announced that it had entered into an agreement to
acquire a majority and controlling interest in Hitching International
Corporation ("HIC"). Through its subsidiary in Shenzhen China, HIC operates one
of the leading Direct Response Television (DRTV) infomercial marketing companies
for financial advisory services in China. HIC is headquartered in Shenzhen China
with more than 600 employees in its DRTV infomercial telemarketing call center.
The DRTV call center, with about 400 phone lines, occupies about 35,000 sq.
feet. PacificNet is currently in the process of due diligence of legal,
regulatory and financial information to be reviewed.
* Nasdaq National Market Listing
On October 6, PacificNet's common stock listing was transferred from the NASDAQ
SmallCap to the NASDAQ National Market. Management believes that this move may
increase liquidity and visibility of PacificNet's common stock within the
investment community.
* Call Center Expansion in Guangzhou China
Due to the recent increase in the demand for telemarketing and call center
services, PacificNet Epro announced in October the purchase of a new 250-seat
call center facility in China, to support the rapidly growing business of the
company. The new contact center is located in a Grade-A office building in
Guangzhou, occupying one floor with over 18,000 sq. ft. This new site will
supplement the existing 400-seat, 800-agents call center facility in Hong Kong,
which has been operating at or above full capacity for the past year. The
combined Hong Kong-China operation will expand Epro's total call center capacity
to 650 seats and over 1,200 agents, serving existing and new clients in both
Hong Kong and mainland China.
Page 15
PacificNet Epro believes that the contact center expansion in Guangzhou may lead
to annual revenue growth in the coming years. Furthermore, the new facility in
China should lead to growth in profit margin because the labor cost and office
facility is less than half of the cost in Hong Kong. To date, PacificNet Epro
has invested RMB 10 million for the initial set up of the new Guangzhou contact
center site and plans to invest another RMB 10 million for a second stage
expansion.
On October 19, PacificNet announced that its PacificNet Epro ("Epro") subsidiary
has acquired a 70% ownership interest in Guangzhou JunFeng Network Technology
Co. Ltd. (JunFeng). The purchase price will be paid for via PacificNet Epro's
existing cash. The acquisition is expected to be reflected in PacificNet Epro's
2006 earnings. JunFeng is a call center and value-added telecom service provider
based in Guangzhou that owns various Value-Added Services (VAS) and call center
licenses. These licenses are instrumental for PacificNet to develop contact
center business in China. A wide array of supporting services are provided,
including professional inbound services, outbound services, facilities
management and IVRS support services, to meet clients' diversified needs.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements presented in this report include the
financial statements of the Company, its subsidiaries and its variable interest
entities. All significant inter-company transactions and balances are eliminated
in consolidation. Investments in 50% or less owned affiliates over which the
Company exercises significant influence, but not control, are accounted for
using the equity method. The Company's share of earnings (losses) of these
companies is included in the accompanying consolidated statement of operations.
We prepare our consolidated financial statements in accordance with U.S. GAAP.
The preparation of these financial statements requires us 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, as well as the reported amount of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and
assumptions, including those related to revenues and cost of revenues under
customer contracts, warranty obligations, bad debts, income taxes, goodwill and
other intangible assets, and litigation. We base our estimates and assumptions
on historical experience and on various other factors that we believe are
reasonable. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect the more significant assumptions and estimates used in the preparation of
our consolidated financial statements.
FOREIGN EXCHANGE
A majority of our call center services revenues and expenses relating to
hardware sales are denominated in Hong Kong dollars, and substantially all of
our revenues and expenses relating to the value added services (VAS) components
of our business are denominated in Renminbi. The value of our shares will be
affected by the foreign exchange rate between U.S. dollars and Renminbi because
the value of our business is effectively denominated in Renminbi, while our
shares are traded in U.S. dollars. Furthermore, an increase in the value of the
Renminbi may require us to exchange more U.S. dollars into Renminbi to meet the
working capital requirements of our subsidiaries in China. Depreciation of the
value of the U.S. dollar will also reduce the value of the cash we hold in U.S.
dollars, which we may use for purposes of future acquisitions or other business
expansion. We actively monitor our exposure to these risks and adjust our cash
position in the Renminbi and the U.S. dollar when we believe such adjustments
will reduce our foreign exchange risks.
REVENUE RECOGNITION
We generate revenues from four primary sources: call center software, business
services, mobile services and applications, and call center and telemarketing
services. We recognize revenue in accordance with US GAAP. The specific
literature that we follow in connection with revenue recognition is the
Securities and Exchange Commission's Staff Accounting Bulletin No. 104 Revenue
Recognition, the American Institute of Certified Public Accountants Statement of
Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-9
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions, FASB Emerging Issues Task Force ("EITF") 00-21, Revenue
Arrangements with Multiple Deliverables, and in certain instances EITF No.
99-19, Reporting Revenue Gross as a Principal versus Net as an Agent and SOP
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
Page 16
We recognize revenue when there is persuasive evidence of an arrangement, the
product has been shipped and title has passed or the services have been
delivered, the price is fixed or determinable and collectibility is probable. If
an acceptance period is required, we recognize revenues upon the earlier of
customer acceptance or the expiration of the acceptance period. Our agreements
with customers, resellers and distributors do not contain product return rights.
If the fee is not fixed or determinable due to the existence of extended payment
terms, revenue is recognized periodically as payments become due, provided all
other conditions for revenue recognition are met.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated.
------------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100.0% 100% 100%
------------------------------------------------------------------------------------------------------------------------------------
Cost of
Revenues (81.4%) (83.0%) (80.9%) (80.1%)
------------------------------------------------------------------------------------------------------------------------------------
Gross Margin 18.6% 17.0% 19.1% 19.9%
------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expense (7.2%) (9.7%) (8.3%) (11.8%)
------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization (1.3%) (0.9%) (0.8%) (1.1%)
------------------------------------------------------------------------------------------------------------------------------------
Interest expenses (0.5%) (0.7%) (0.6%) (0.8%)
------------------------------------------------------------------------------------------------------------------------------------
Earnings from operation 9.6% 5.7% 9.4% 6.2%
------------------------------------------------------------------------------------------------------------------------------------
Interest income 0.7% 0.1% 0.5% 0.1%
------------------------------------------------------------------------------------------------------------------------------------
Other income net 2.3% 1.0% 1.9% 0.8%
------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interests 12.6% 6.8% 11.8% 7.1%
------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 0.1% 0.0% (0.1%) 0.0%
------------------------------------------------------------------------------------------------------------------------------------
Share of income of associated companies 0.1% 0.0% 0.0% 0.0%
------------------------------------------------------------------------------------------------------------------------------------
Minority
interest (7.1%) (5.1%) (6.4%) (5.4%)
------------------------------------------------------------------------------------------------------------------------------------
Net earning 5.7% 1.7% 5.3% 1.7%
------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2004
REVENUES. Revenues for the three months ended September 30, 2005 were
$10,722,000, an increase of $2,668,000 from $8,054,000 for the three months
ended September 30, 2004. The increase in revenues is primarily due to the
increased business as a result of the acquisition of Guangzhou 3G completed in
April 2005. Several of our businesses experience fluctuations in quarterly
performance. Traditionally, the first quarter from January to March is a low
season for our call center business due to the long Lunar New Year holidays in
China. Revenues from the VAS and IVR segment can vary from quarter to quarter
due to new product launches and the seasonality of certain product lines. For
the three months ended September 30, 2005, revenues of $3,362,000 (2004:
$1,489,000), $2,546,000 (2004: $2,545,000), and $4,677,000 (2004: $3,988,000)
were derived from the services rendered by the Company's three operating units,
which include the following three groups:
(1) Outsourcing Services: including Business Process Outsourcing (BPO), call
center, IT Outsourcing (ITO) and software development services.
(2) Value-Added Telecom Services (VAS): including Interactive Voice Response
(IVR), SMS and related VAS.
Page 17
(3) Communication Distribution Services: including calling cards, GSM/ CDMA/
XiaoLingTong products, multimedia self-service Kiosks.
Summarized financial information concerning each of our main operating units is
set forth in the following table. The "Admin & Other" column included our other
insignificant subsidiaries and corporate related items.
1.Outsourcing 2.VAS Business 3.Communications
FOR THE PERIOD ENDED Business Distribution Distribution Admin & Other Total
SEPTEMBER 30, 2005 ($) ($) Business ($) ($) ($)
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
Revenues 3,362,000 2,546,00 4,678,000 136,000 10,722,000
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
Earings (loss) before 323,000 1,171,000 102,000 (243,000) 1,353,000
income taxes and
minority interests
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
FOR THE THREE 1.Outsourcing 2.VAS Business 3.Communications Admin & Other Total
MONTHS ENDED Business Distribution
SEPTEMBER 30, 2004 ($) ($) Business ($) ($) ($)
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
Revenues 2,545,000 1,489,000 3,988,000 32,000 8,054,000
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
Earings (loss) before 292,000 397,000 48,000 (173,000) 564,000
income taxes and
minority interests
------------------------- --------------------- -------------------- -------------------- ------------------ ----------------
COST OF REVENUES. Cost of revenues for the three months ended September 30 was
$8,733,000, an increase of $2,051,000 from $6,682,000 for the three months ended
September 30, 2004. The increase is directly associated with the corresponding
increase in costs related to the increased business due to the acquisition of
Guangzhou 3G.
GROSS PROFIT. Gross profit for the three months ended September 30 was
$1,989,000, an increase of $617,000 from $1,372,000 for the three months ended
September 30, 2004. Gross margin for the three months ended September 30, 2005
was 19% of total revenues compared to 17% for the same period in 2004. We
believe that our gross margin overall approximates the industry standards. The
improvement on gross margins for both from the prior periods was primarily due
to higher margin acquisitions added to PACT in the first and second quarters of
2005, such as PACT 3G and Clickcom, both WOFEs are set up with revenues net of
operating costs from the PRC operating entities. In addition, the proportionate
increase of high-margin investees in Groups (1) outsourcing services and Group
(2) VAS services have outgrown the 2-5% of low-margin investees under Group (3)
Communication Distribution Services for both quarters.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, totaled
$962,000 for the three months ended September 30, 2005, an increase of $53,000,
from $909,000 for the three months ended September 30, 2004. This increase
resulted from increasing the size of our operations, which included increased
premises costs and staff costs.
INCOME TAXES. Interim income tax provisions are based upon management's estimate
of taxable income and the resulting consolidated effective income tax rate for
the full year. As a result, such interim estimates are subject to change as the
year progresses and more information becomes available.
MINORITY INTERESTS. Minority interests for the three months ended September 30,
2005 totaled $(764,000), compared with $(411,000) for the same period in the
prior year. The increase is due to an increase in the number of our subsidiaries
which resulted in a greater number of outside ownership interests consolidated
with the parent for financial reporting purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2004
REVENUES. Revenues for the nine months ended September 30, 2005 were
$30,607,000, an increase of $10,967,000 from $19,640,000 for the nine months
ended September 30, 2004. As a contrast to prior period revenue, contributions
by Epro, Linkhead, and Yueshen, in the aggregate, were 95% of total revenues.
Revenues for the nine months ended September 30, 2005 were mainly derived from
the following 3 sources:
Page 18
s(a) Newly acquired subsidiaries in Group (1) Outsourcing Services such as
Smartime has added approximately $2.8 million to nine months ended September 30,
2005 as compared to the same period in the prior year;
(b) Newly acquired subsidiary in Group (2) Value-added Telecom Services, such as
PACT 3G and Clickcom, have together added approximately $2.3 million revenues in
the nine months ended September 30, 2005 as compared to the same period in the
prior year; and
(c) The remaining incremental revenues for nine months ended September 30, 2005
as compared to prior period were derived from growth from existing subsidiaries
such as Yue Shen (Group 3), Linkhead (Group 2), EPRO (Group 1) and PACT
Communications for $3.3m, $0.5m , $0.1m and $1.5m respectively.
COST OF REVENUES. Cost of revenues for the nine months ended September 30, 2005
was $24,753,000, an increase of $9,029,000 from $15,724,000 for the nine months
ended September 30, 2004. This increase is directly associated with the costs
related to the increased business due to the acquisition of the newly acquired
subsidiaries.
GROSS MARGIN AND GROSS MARGIN RATIO. Gross margin for the nine months ended
September 30, 2005 was $5,854,000, an increase of $1,938,000 from $3,916,000 for
the nine months ended September 30, 2004. As explained above, the improvement on
gross margins for both three months and nine months periods from the prior
periods was primarily due to higher margin acquisitions added to PACT during the
first and second quarters of 2005, such as PACT 3G and Clickcom; both WOFEs are
set up with revenues net of operating costs from the PRC operating entities. In
addition, the proportionate increase of high-margin investees in groups (1)
outsourcing services and group (2) VAS services have outgrown the 2-5% of
low-margin investees under group (3) Communication Distribution Services for
both quarters. Group (3) as contributor to the overall gross margin contributor
has been decreasing for the nine months ended September 30, 2005 as compared to
the prior period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, totaled
$2,987,000 for the nine months ended September 30, 2005, an increase of
$286,000, from $2,701,000 for the nine months ended September 30, 2004. This
increase resulted from increasing the size of our operations, which included
increased premises costs and staff costs, mainly attributable to the operations
of Epro, Linkhead, Yueshen and Smartime.
OTHER INCOME. Other income was $732,000 for the nine months ended September 30,
2005, as compared to $152,000 for the nine months ended September 30, 2004,
primarily due to non-operating gains from sale of properties and interest income
during the first nine months of 2005.
OTHER INCOME (EXPENSE) For the nine months ended September 30, 2005,
non-operating income or sundry income included in the Statement of Operations
was mainly derived from gains from sales of real estate properties of
approximately$120,000, gains from investment of securities $113,000, other
income from system integration services of approximately $287,000, and other
miscellaneous income.
EQUITY EARNINGS IN UNDISTRIBUTED EARNINGS OF INVESTEE COMPANY. The Company
recorded $12,000 in equity earnings in its investee company for the nine month
ended September 30, 2005 compared with $nil for the same period in the prior
year, derived primarily from 30%-owned investee, Cheer Era Limited, which was
acquired in April 2004.
INCOME TAXES. A tax provision estimate of approximately $43,000 was made for the
nine months ended September 30, 2005, as a result of increasing profit before
taxes for some of the subsidiaries based on management best estimates. Interim
estimates are subject to change as the year progresses and more information
becomes available.
MINORITY INTEREST. Share of earnings by minority interest for the nine months
ended September 30, 2005 was $1,949,000, as compared with $1,062,000 for the
same period in the prior year representing increased sharing of earnings by
newly acquired subsidiaries such as PACT 3G, Clickcom, Smartime since September
30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS. As of September 30, 2005, the Company had cash and
cash equivalents of $4,778,000 as compared to $6,764,000 at December 31, 2004.
Page 19
WORKING CAPITAL. The Company's working capital increased to $16,338,000 at
September 30, 2005, as compared to $16,185,000 at December 31, 2004. When
compared to balances at December 31, 2004, the increase in working capital at
September 30, 2005 was due to cash proceeds received for the exercise of options
and warrants of approximately $981,000 offset by consideration paid for the
acquisition of Clickcom and Guangzhou 3G.
NET CASH FROM OPERATING ACTIVITIES. Net cash raised in operating activities was
$300,000 for the nine months ended September 30, 2005 as compared to net cash
used in operating activities of $871,000 for the nine months ended September 30,
2004. The decrease in net cash used in operating activities in the nine months
ended September 30, 2005 was primarily due to increase in earnings for the
period ended September 30, 2005. Net cash used in operating activities of
$871,000 for the nine months ended September 30, 2004, resulted primarily from
net earnings of $328,000, increased by non-cash items totaling $1,813,000 and
decreased by changes in operating assets of $3,012,000.
NET CASH FROM INVESTING ACTIVITIES. Net cash used in investing activities was
$861,000 for the nine months ended September 30, 2005 compared to $3,584,000 for
the comparative prior period. Net cash used in investing activities in the nine
months ended September 30, 2005 was primarily due to the acquisition of
Guangzhou 3G and Clickcom for $2,022,000 and the acquisition of property and
equipment for $1,346,000 offset by a decrease in restricted cash of $3,132,000
and purchases of marketable securities of $409,000. Net cash used in investing
activities for the nine months ended September 30, 2004 was $3,854,000
representing the acquisition of subsidiary companies, interest in investee
company, and property and equipment of $1,302,000, $385,000 and $1,039,000,
respectively. The additions to property and equipment were a result of the
expansion of the CRM and call center business in Hong Kong.
NET CASH FROM FINANCING ACTIVITIES. Net cash used in financing activities for
the nine months ended September 30, 2005 was $1,425,000 representing funds
advanced from related parties and other loan receivables of $2,433,000 offset by
funds raised from the exercise of stock options and warrants totaling $981,000.
Net cash provided by financing activities for the nine months ended September
30, 2004 was $2,877,000 representing net proceeds from issuance of common stock
of $2,813,000, net proceeds from shares issued to certain sellers in the
post-acquisition of subsidiaries for payments made to sellers to finance the
acquisitions of $564,000, net cash proceeds received from the exercise of stock
options of $74,000 and advances under bank loans of $1,990,000, offset by
repayments on debt of $2,465,000 and repurchase of treasury shares of $99,000.
RELATED PARTY TRANSACTIONS:
LOAN RECEIVABLE FROM RELATED PARTIES
As at September 30, 2005, there was a total loan receivable of US$1,349,000 due
from related parties including US$795,000 due from Cheer Era (30% owned by
PACT), US$192,000 due from a director of PACT's subsidiary, Soluteck, and
US$362,000 due from the shareholder of Yueshen, a subsidiary of PACT. The terms
of these three related parties loan receivables are below:
LOAN TO CHEER ERA
As at September 30, 2005, there was a total loan receivable of US$795,000
outstanding from Cheer Era, a 30% owned investee of PACT. The purpose of the
loan was a working capital loan to finance the expansion of Cheer Era's business
in Europe and North America. The repayment of this loan will be due at the end
of 2005 with 8% interest per annum or be due on September 30, 2006 with 7.5%
interest per annum, plus 8% penalty interest in case it has not been timely
paid. The loan is collateralized with 149,459 PACT shares owned by the two
equity owners of Cheer Era having 70% majority stake in Cheer Era, and the
remaining assets and equity ownership of Cheer Era.
LOAN TO SOLUTEK'S DIRECTOR
As at September 30, 2005, there was a loan outstanding of US$192,000 receivable
from a director of Solutek, payable in three equal installments of US$72,314
each, being principal plus interest, due on December 14 for three consecutive
years ending 2007. The interest rate for the loan is 8% per annum plus 5%
penalty interest in case it has not been timely paid. The loan is collateralized
with 100,000 PACT shares owned by the borrowing director and Ms Iris Lo, and the
remaining assets of Smartime Holding Ltd.
LOAN TO YUESHEN'S SHAREHOLDER
As at September 30, 2005, a US$362,000 loan receivable was outstanding from the
shareholder of a PACT's subsidiary, Yueshen for the purpose of repaying the
working capital loan by the predecessor of Yueshen advanced prior to PACT's
acquisition. This loan is collateralized with PACT shares owned by the
shareholder of Yueshen.
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LOAN PAYABLE TO RELATED PARTY
As at September 30, 2005, a US$513,000 loan was outstanding from Epro to a
shareholder of Epro. In August 2005, US$513,000 was advanced to Epro for a
period of 5 years at 6.5% interest per annum for working capital purposes.
COMMON STOCK - EXERCISE OF WARRANTS
On March 28 2002, we completed a $3,480,000 private placement by issuing
2,400,000 shares of common stock at a price of $1.45 per share to Sino Mart
Management Limited ("Sino Mart"), whose executive director Mr. TONG Cho-Sam is
the father of the chairman and CEO of the Company. In addition, the Company
issued Sino Mart a warrant to purchase up to an additional 600,000 shares of
common stock at $1.45 per share. The warrant is fully exercisable beginning on
April 1, 2002. The $3,480,000 private placement transaction (including the
600,000 warrant) was approved at a special stockholder meeting held on March 25,
2002. For the nine months ended September 30, 2005, we received $870,000 from
Sino Mart Management Limited ("Sino Mart") as a result of Sino Mart's exercise
of a warrant to purchase 600,000 shares of common stock at a price of $1.45 per
share.
INFLATION. Inflation has not had a material impact on the Company's business in
recent years.
CURRENCY EXCHANGE FLUCTUATIONS. All of the Company's revenues are denominated
either in U.S. dollars or Hong Kong dollars, while its expenses are denominated
primarily in Hong Kong dollars and Renminbi ("RMB"), the currency of the
People's Republic of China. The value of the RMB-to-U.S. dollar or Hong Kong
dollar-to-United States dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Since 1994, the conversion of Renminbi into foreign currencies, including U.S.
dollars, has been based on rates set by the People's Bank of China, which are
set daily based on the previous day's interbank foreign exchange market rates
and current exchange rates on the world financial markets. Since 1994, the
official exchange rate generally has been stable. Recently there has been
increased political pressure on the Chinese government to decouple the RMB from
the United States dollar. Although a devaluation of the Hong Kong dollar or RMB
relative to the United States dollar would likely reduce the Company's expenses
(as expressed in United States dollars), any material increase in the value of
the Hong Kong dollar or RMB relative to the United States dollar would increase
the Company's expenses, and could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has never engaged in currency hedging operations and has no present intention to
do so.
On July 21, 2005, the Chinese government changed its policy of pegging the value
of the Renminbi to the U.S. dollar. This revaluation of the Renminbi is based on
a conversion of Renminbi (RMB) into United States dollars (USD) at an exchange
rate of USD1.00 = RMB8.11. Under the new policy, the Renminbi will be permitted
to fluctuate within a band against a basket of certain foreign currencies. This
change in policy resulted initially in an approximately 2.0% appreciation in the
value of the Renminbi against the U.S. dollar and could result in further and
more significant appreciations. Although the Company generates substantially all
of its revenues in Renminbi which has become more valuable in U.S. dollar terms,
the Company's U.S. dollar cash deposits are subject to foreign currency
translations which will impact net income.
For the financial figures stated in this Form 10-QSB, the conversion of Renminbi
(RMB) into U.S. dollar (USD) is based on USD1.00=RMB8.268. Therefore, the
conversion rate is based on the rate prior to the Renminbi revaluation on July
21, 2005. As management believes that the net effect for the difference between
the interim exchange rate and the conversion rate stated in this Form 10-QSB is
not material, the foreign currency translation will be revisited as at the year
ending December 31.
There is a risk that fluctuations in the value of the Renminbi with respect to
other currencies could adversely affect our business and financial results.
OFF-BALANCE SHEET ARRANGEMENTS. We had no outstanding derivative financial
instruments, off-balance sheet guarantees, interest rate swap transactions or
foreign currency forward contracts. We did not engage in trading activities
involving non-exchange traded contracts during 2005.
CONTRACTUAL OBLIGATIONS.
We have significant cash resources to meet our contractual obligations as of
September 30, 2005, as detailed below:
Page 21
Contractual Obligations Total 1 year 1-3 years 4-5 years After 5 years
---------- ---------- ---------- ---------- ----------
Line of credit $ 645,000 $ 645,000 -- -- --
Bank Loans $1,401,000 $1,385,000 $ 16,000 -- --
Capital leases $ 238,000 $ 137,000 $ 101,000 -- --
---------- ---------- ----------
Total cash contractual obligations $2,284,000 $2,167,000 $ 117,000
========== ========== ==========
CONCENTRATION OF CREDIT RISK. All of the Company's revenues are derived in Asia
and Greater China. The Company does not have any single customer that accounts
for more than 10% of its revenues or 10% of its purchases. If the Company was
unable to derive any revenue from Asia and Greater China, it would have a
significant, financially disruptive effect on the normal operations of the
Company. Based on the current economic environment in China, the Company does
not expect any material adverse impact to its business, financial condition and
results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS. Several of our businesses experience
fluctuations in quarterly performance. Traditionally, the first quarter from
January to March is a low season for our call center business due to the long
Lunar New Year holidays in China. Revenue and income from operations for the
call center and VAS tend to be higher in the fourth quarter due to special
holiday promotions. Internet/Direct Commerce revenues also tend to be higher in
the fourth quarter due to increased consumer spending during that period.
Revenues from the VAS and IVR segment can vary from quarter to quarter due to
new product launches and the seasonality of certain product lines.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our chief executive officer and the chief financial officer, the
Company conducted an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period
covered by this report (the "Evaluation Date"). Based on this evaluation, the
Company's chief executive officer and chief financial officer concluded as of
the Evaluation Date that the Company's disclosure controls and procedures were
effective such that the material information required to be included in our
Securities and Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
relating to the Company, including our consolidating subsidiaries, and this
information was accumulated and communicated to management, including our
principal executive and principal financial officers, to allow timely decisions
regarding required disclosure during the period when this report was being
prepared.
There were no changes in the Company's internal controls over financial
reporting or in other factors that could materially affect, or are reasonably
likely to materially affect, our internal control over financial reporting as
well as these controls subsequent to the Evaluation Date.
Page 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report:
Exhibit
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13A-14(A)/15D-15(E) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13A-14(A)/15D-15(E) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
2002), filed herewith.
Page 23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PACIFICNET INC.
DATE: NOVEMBER 14, 2005 BY: /S/ TONY TONG
----------------------------------------
TONY TONG
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: NOVEMBER 14, 2005 BY: /S/ WANG SHAO JIAN
----------------------------------------
WANG SHAO JIAN
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Page 24