SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2004

 

OR

 

 

 

For the transition period from             to               

 

COMMISSION FILE NUMBER   000-32621

 

 

INTAC INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Unit 6-7, 32/F., Laws Commercial Plaza

788 Cheung Sha Wan Road

Kowloon, Hong Kong

 (Address of principal executive offices)

 

011 (852) 2385.8789

(Registrant’s telephone number)

 

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. ý Yes    o No.

                Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý

 

                Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  21,121,455 shares of $.001 par value Common Stock outstanding as of November 15, 2004.

 

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

INTAC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(expressed in U.S. Dollars)

 

		September 30,			December 31,
		2004			2003
		(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	8,545,479		$		2,810,574
Restricted cash		—			2,800,000
Trade accounts receivable (net of allowance for doubtful accounts of $0 for both periods)		20,401,154			4,000,286
Inventories		417,085			232,371
Deposits paid		224,693			250,133
Short-term note receivable		372,510			—
Advances to officers of subsidiaries and employees		25,650			—
Foreign sales tax receivable		1,152			335,993
Total current assets		29,987,723			10,429,357
Equipment, net		1,218,107			883,061
Other assets		542,262			499,682
Advances to officers of subsidiaries and employees		—			346,090
Internet portal database gateway, net		258,814			304,487
Goodwill		1,230,327			59,021
Total assets		$	33,237,233		$		12,521,698
Liabilities and Stockholders’ Equity
Current liabilities
Trade accounts payable		$	12,211,475		$	1,577,408
Short-term note payable to bank		—			2,728,202
Accrued expenses		469,888			480,069
Deferred revenue		405,982			—
Due to shareholder		145,757			99,084
Income taxes payable		323,815			—
Deposits received		14,103			221,389
Total current liabilities		13,571,020			5,106,152
Minority interest in consolidated joint venture		—			695,408
Stockholders’ Equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized; 21,121,455 and 20,189,455 shares issued and outstanding, respectively		21,121			20,189
Additional paid-in capital		20,206,707			8,062,801
Accumulated deficit		(589,176		)	(1,563,505			)
Accumulated other comprehensive income		27,561			200,653
Total stockholders’ equity		19,666,213			6,720,138
Total liabilities and stockholders’ equity		$	33,237,233		$	12,521,698

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INTAC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(expressed in U.S. Dollars)
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2004				2003				2004				2003
Revenues		$	33,259,314			$	32,279,560			$	64,465,383			$	66,455,012
Cost of goods sold		30,897,597				31,042,270				59,415,086				63,892,330
Gross profit		2,361,717				1,237,290				5,050,297				2,562,682
Operating expenses
Distribution expenses		244,382				386,015				647,594				636,743
Selling, general and administrative expenses		1,493,780				638,289				3,614,553				1,999,326
Total expenses		1,738,162				1,024,304				4,262,147				2,636,069
Income (loss) from operations		623,555				212,986				788,150				(73,387			)
Other income (expenses)
Foreign currency exchange gain (loss)		112,536				(3,747			)	113,438				(616			)
Interest income (expense), net		20,605				(561			)	11,926				(7,865			)
Minority interest in loss of consolidated joint venture		48,412				—				366,715				—
Other income, net		16,431				2,835				24,746				25,325
Total other income		197,984				(1,473			)	516,825				16,844
Income (loss) before income taxes		821,539				211,513				1,304,975				(56,543			)
Income taxes		(201,701			)	(36,678			)	(330,646			)	(36,678			)
Net income (loss)		$		619,838		$		174,835		$		974,329		$		(93,221	)
Net income (loss) per share — basic		$		0.03		$		0.01		$		0.05		$		0.00
Net income (loss) per share — diluted		$		0.03		$		0.01		$		0.05		$		0.00
Weighted average number of shares outstanding — basic		21,077,455				19,339,455				20,574,344				19,239,455
Weighted average number of shares outstanding — diluted		21,323,077				19,667,886				20,870,056				19,546,085

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INTAC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in U.S. Dollars)
(Unaudited)

		Nine Months Ended September 30,
		2004			2003
Cash flows from operating activities:
Net income (loss) for the period		$	974,329		$	(93,221	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation of equipment		169,243			62,667
Amortization of internet portal database gateway		45,673			—
Minority interest in loss of consolidated joint venture		(366,715		)	—
Compensation in connection with restricted stock award		174,996			174,996
Other comprehensive income (loss)		(173,092		)	46,932
Gain on sale of subsidiary		(15,055		)	—
Loss (gain) on sale of equipment		15,695			(2,838		)
Changes in operating assets and liabilities:
Trade accounts receivable		(16,302,851		)	(4,678,032		)
Inventories		(207,685		)	(858,723		)
Deposits paid		25,440			953,920
Short-term note receivable		(7,140		)	—
Advances to officers of subsidiaries and employees		320,440			—
Foreign sales tax receivable		(148,522		)	509,448
Trade accounts payable and accrued expenses		10,891,782			4,499,212
Deferred revenue		405,982			—
Income taxes payable		323,815			(35,920		)
Deposits received		(207,286		)	(56,389		)
Net cash provided by (used in) operating activities		(4,080,951		)	522,052
Cash flows from investing activities:
Restricted cash deposit		2,800,000			(2,800,000		)
Purchase of equipment		(577,573		)	(17,320		)
Cash included in sale of subsidiary		(132,921		)	—
Investment in and advances to joint venture		—			(1,476,409		)
Purchase of other assets		(78,783		)	(25,289		)
Proceeds from sale of equipment		—			37,156
Net cash provided by (used in) investing activities		2,010,723			(4,281,862		)
Cash flows from financing activities:
Proceeds from issuance of common stock, net		11,969,843			4,500,000
Incremental purchase of Intac Purun shares		(1,500,000		)	—
Borrowings from (repayments to) shareholder, net		63,492			(79,836		)
Borrowings from (repayments to) bank		(2,728,202		)	2,728,202
Net cash provided by financing activities		7,805,133			7,148,366
Net increase in cash and cash equivalents		5,734,905			3,388,556
Cash and cash equivalents at beginning of period		2,810,574			589,572
Cash and cash equivalents at end of period		$	8,545,479		$	3,978,128

 

Supplemental disclosure of cash flow information:

 

Cash paid for interest		$	38,450		$	8,174
Cash paid for taxes		$	—		$	39,598

                                                                                                                                               ;            

The accompanying notes are an integral part of these consolidated financial statements.

 

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INTAC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004
(Unaudited)

1.                                      GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)                                  Description of Business and Basis of Presentation

INTAC International, Inc. (“INTAC” or the “Company”) is a U.S. holding company focused on the exploitation of strategic business opportunities available in China and the Asia-Pacific Rim.  The Company currently maintains offices in China (Hong Kong, Beijing and Tianjin), Germany (Frankfurt) and the United States (Dallas, Texas).  During the periods reported, the Company’s principal operations involved the distribution of premium brand wireless handsets from wholesalers, manufacturers and other distributors to network operators, agents, resellers, dealers and retailers and, to a much lesser extent, automobile distribution from Europe into mainland China.   The Company has announced the redirection of its business plan from the traditional distribution of wireless handsets to its Internet portals in China, Joyba.com (www.joyba.com) and phrbank.com (www.phrbank.com), offering a full range of career development and affinity services.

 

In October 2003, INTAC formed a new Internet joint venture, Beijing Intac Purun Educational Development Ltd. (“Intac Purun”), with China Putian Corporation (“Putian”) and the Ministry of Education in The People’s Republic of China (“PRC”).  Intac Purun was established to meet the growing need for expanding the employment opportunities for graduates of higher level education institutions in the PRC. The Ministry of Education has already established a database of graduates which is being made exclusively available to Intac Purun.  Intac Purun offers a full range of services through its Internet portals and Career Service Centers.  These include Campus Employment Services which provide online information to university students who are looking for internships and jobs, and employers, who are looking for qualified trainees and employees.  Social Employment Services provide online information to young professionals who are looking for jobs, and employers who are looking for employees.  In addition to Educational and Career Services, the Company believes it will also derive substantial revenue from a variety of affinity services such as popular mobile services like games, movies, television, music, jokes, star signs, ring tones, phone background pictures and dating services.  These will be delivered through SMS, MMS, WAP and IVR services.  These mobile services are the result of the Company partnering with China Unicom and China Mobile, and having obtained all the necessary Content Provider licenses.  These life-style services, contents and applications are tailored towards the Company’s target groups.

 

These products will reach the same target groups and be offered through the same distribution channels as the Company’s Career Development Services.  Intac Purun will position itself to be the one-stop Internet Information, Education and Entertainment Portal for Chinese Students.  It is anticipated that in the future, the portal will be developed further to offer a variety of premium products and services to subscribers.

 

At the time of formation, the joint venture was owned 45% by INTAC, 15% by Putian, 30% by a private investor group and 10% by the Ministry of Education.  In June 2004, INTAC purchased an additional 15% interest in Intac Purun from Putian.  This additional 15% indirect interest brings INTAC’s total ownership in Intac Purun to 60%.

 

In September 2004, INTAC formed two new Companies, Beijing Intac Media Advertising Company Limited (“Intac Advertising”) and Beijing Intac Meidi Technology Development Company Limited (“Intac Technology”), both China corporations.  Intac Advertising and Intac Technology were established to provide advertising services and value added services in support of Intac Purun.

In order to meet ownership requirements under PRC law which restrict or prohibit foreign investors from operating in certain industries such as providing advertising services and value added services through the internet, in September 2004, the Company made loans of $1.3 million to Tianjin Weilian, a PRC corporation and Mr. Zou Jingchen (“Mr. Zou”), a Chinese national.  Tianjin Weilian and Mr. Zou are 100% equity investors of Intac Advertising and Intac Technology.  These loans were made to finance Tianjin Weilian and Mr. Zou, on behalf of the

 

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Company, for the purpose of establishing Intac Advertising and Intac Technology.  A total of 100% of the outstanding shares of both Intac Advertising and Intac Technology, representing the 100% ownership, are pledged as collateral for these loans from INTAC and all operating, economic, voting and other rights were assigned to INTAC by Tianjin Weilian and Mr. Zou.

 

The accompanying consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-KSB for the year ended December 31, 2003, are unaudited (except for the December 31, 2003 balance sheet, which was derived from the Company’s audited consolidated financial statements). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“USGAAP”). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included.

 

Operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the entire fiscal year.

 

(b)           Principles of Consolidation

The accompanying consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, INTAC International Holdings Limited, New Tech Handels GmbH (through August 31, 2004), INTAC Holdco Corp., FUTAC Group Limited, Global Creative International Limited, INTAC Telecommunications Limited, Intac Tianjin International Trading Co., formerly “Intac Auto Mobile Trading Company Limited”, INTAC Deutschland GmbH, Beijing Intac Advertising Company Limited, and Beijing Intac Meidi Technology Development Company Limited.

The Company has consolidated the financial statements of Intac Purun from inception because Purun has been controlled by the Company since inception.  All intercompany balances and transactions have been eliminated in consolidation.

In consolidating Intac Purun since inception, the Company applied the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 94 “Consolidation of All Majority-Owned Subsidiaries”, and by analogy the guidance in EITF 96-16 “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders have Certain Approval or Veto Rights.” INTAC is designated as the operating partner for the joint venture and has had effective control through control of the Board of Directors since inception.  INTAC appoints the majority of the Board of Directors which hires management and controls the day to day activities of Intac Purun making it the primary controlling shareholder.  Accordingly, management has concluded that it is necessary to consolidate Intac Purun in order to properly reflect the substance of the Company’s control position.

(c)                                  Liquidity

As of September 30, 2004 and December 31, 2003, INTAC had an accumulated deficit of $589,176 and $1,563,505, respectively, primarily due to net losses from operations and a distribution to its principal shareholder made in 2001. The Company raised equity financing of $4.5 million in September 2003.  Proceeds of the $4.5 million private placement were used to fund the Company’s participation in Intac Purun, as well as for working capital.  The Company also raised equity financing of $12.0 million in May 2004.  Proceeds from the $12.0 million private placement will be used to expand Intac Purun’s Internet portal business, for strategic acquisitions or business alliances, and for general working capital purposes.  The Company filed a registration statement in May 2004 with the Securities and Exchange Commission registering the resale by the selling shareholders of the 1,800,000 private placement shares plus 2,000,000 additional shares for possible future issuance by the Company.  The registration statement became effective on July 29, 2004.

As of September 30, 2004 and December 31, 2003, INTAC maintained unrestricted cash of $8,545,479 and $2,810,574, respectively.  The Company measures liquidity through working capital (measured by current assets less current liabilities).  As of September 30, 2004 and December 31, 2003, INTAC maintained working capital of

 

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$16,416,703 and $5,323,205, respectively.  The increase in working capital is primarily due to the equity financing of $12.0 million raised in May 2004 and the net income of the Company.

The Company believes that it currently has adequate capital for at least the next twelve months; however, longer-term plans may require the Company to obtain additional financing through the issuance of debt, equity, other securities or a combination thereof in order to take advantage of the Company’s other strategic agreements and business alliances.  In addition, the Company may seek to obtain a working capital or other traditional loan facilities from banks or other lending sources.  Unless the Company is able to continue to improve its operating performance, additional outside financing required to execute its longer-term business plan would be difficult to obtain on acceptable terms, if at all.  As of the date of this Report, the Company does not have any other financing arrangements, nor does the Company have any commitments to obtain such an arrangement with any bank or other third party.  If the Company raises capital by issuing equity or convertible debt securities, the percentage ownership of its stockholders at the time of issuance will be reduced.  Any new securities may have rights, preferences or privileges senior to those of its common shareholders.  There can be no assurances that the Company will be able to obtain additional financing on terms which are acceptable to it.

(d)      Concentration of Credit Risk and Accounts Receivable

The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers.  The Company’s accounts receivable are not collateralized.  At September 30, 2004 and December 31, 2003 there was no allowance for uncollectible accounts.

(e)      Revenue Recognition For Internet Portal Business

Revenues from services provided under contractual agreements relating primarily to access to our database or for the delivery of training material and the provision of examination support, are generally deferred and recognized over the life of the respective contracts which presently range from 1 to 2 years.  Once the contract has been executed, accounts receivable and deferred income are recorded in the consolidated balance sheet with subsequent cash collections reducing the accounts receivable balance. Generally, cash is collected upon the signing of a contract or shortly thereafter.  Costs in connection with providing the services are charged to expense as incurred.

Other revenues such as non-advertising revenues derived from e-subscription fees, e-commerce services, and e-technology services are anticipated to be generated in the future. Generally, e-subscriptions will be derived principally from providing value added short messaging services.  The Company contracts with third party mobile operators for certain services related to e-subscriptions transmitted to its users and records the fee charged by third party mobile phone operators as cost of revenues. E-subscription revenues and e-commerce services are generally recognized in the month in which the service is performed. Other e-technology revenues, typically resulting from providing online services, will also generally be deferred and recognized over the life of the contract.  To date, the Company has not generated significant revenue from these sources and expects to finalize its revenue recognition principles and related accounting policy based upon the specific terms and conditions of the underlying contractual arrangements.

 (f)                                 Foreign Currency Translation

The functional currency of the Company is the Hong Kong dollar (“HK$”). The accompanying consolidated financial statements have been expressed in United States dollars, the reporting currency of the Company.

Reported assets and liabilities of INTAC’s foreign subsidiaries have been translated at the rate of exchange at the end of each period. Revenues and expenses have been translated at the weighted average rate of exchange in effect during the respective period. Gains and losses resulting from translation are accumulated in other comprehensive income in stockholders’ equity. Realized and unrealized translation gain (loss) on currency transactions between foreign entities is included in other income (expenses) in the accompanying statements of operations.

 

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(g)                                 Income Taxes

Income taxes are accounted for under the asset and liability method. 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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 (h)                              Net Loss Per Share — Basic and Diluted

Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of common shares and dilutive potential common shares, if any, outstanding during the period.  Computation of diluted income per share for the three and nine months ended September 30, 2004 and three months ended September 30, 2003 includes dilutive stock options and a restricted stock award granted under the terms of the Company’s 2001 Long Term Incentive Plan.  Stock options and the restricted stock award were not included in the computation of diluted net loss per share for the nine months ended September 30, 2003 as their effect would be anti-dilutive.

(i)                                    Use of Estimates

Management of INTAC has made various estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses to prepare these consolidated financial statements in conformity with USGAAP. Actual results could differ from those estimates.

(j)      Software Development Costs

 

In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” internally-generated software development costs associated with new products and significant enhancements to existing software products are expensed as incurred until technological feasibility has been established.  Software development costs that qualify for capitalization include the salaries and benefits of the software engineers assigned to the products, internal and external quality assurance testing costs, overhead allocations primarily associated with rent and facilities costs and the costs of outsourced development activity and independent product testing and certification labs.  Software development costs not qualifying for capitalization are recorded as selling, general and administrative expense.  Capitalized software development costs, including purchased software, if any, are amortized after being put into use, using the greater of the revenue method or the straight-line method generally with useful lives of three years or less.  At each balance sheet date, the Company evaluates the estimated net realizable value of each software product and when required, records write-downs of net book value to net realizable value of any product for which the net book value is in excess of net realizable value.  The net realizable value is the estimated future gross revenue of each product reduced by the estimated future costs of completing and disposing of that product, including the costs of completing in process development and customer support.  No software development costs have been incurred through September 30, 2004.

 

(k)      Research and Development Costs

 

The Company expects to incur research and development costs that relate primarily to the development of new software and websites.  Research and development costs are comprised primarily of salaries and related benefits expenses, contract labor and prototype, and other related expenses and are charged to expense as incurred. No research and development costs have been incurred through September 30, 2004.

 

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(l)      Stock Option Plans and Stock-Based Compensation

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 (as amended), the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123 (as amended).

 

For purposes of pro forma disclosure, the estimated fair value of the option is amortized to expense over the option’s vesting period.  Had the Company determined compensation based on the fair value at the date of grant for its options under SFAS No. 123 (as amended), net income (loss) and net income (loss) per share for the three and nine months ended September 30, 2004 and 2003, would have changed as follows:

 

		Three Months Ended September 30,							Nine Months Ended September 30,
		2004			2003				2004				2003
Net income (loss), as reported		$	619,838		$	174,835			$	974,329			$	(93,221	)
Add:  Total stock-based employee compensation expense included in reported net income (loss)		58,332			58,332				174,996				174,996
Deduct:  Total stock-based employee compensation expense determined under fair value based method		(232,848		)	(108,681			)	(628,130			)	(326,041		)
Pro forma net income (loss)		$	445,332		$		124,486		$	521,195			$	(244,266	)
Net income (loss) per share:
Basic and diluted —
As reported		$	0.03		$		0.01		$	0.05			$	(0.00	)
Pro forma		$	0.02		$	0.01			$		0.02		$	(0.01	)

 

 

2.             INVENTORIES

Inventories for wireless handsets are stated at the lower of cost or net realizable value, calculated on the first-in, first-out basis, and are comprised of finished goods.  Net realizable value is determined on the basis of anticipated sales proceeds less estimated costs for selling expenses.  Inventories for vehicles are stated at the actual amount paid to manufacturers or market, if lower.  At September 30, 2004, inventory consisted of wireless handsets totaling $9,510 and vehicles totaling $407,575.

3.             INVESTMENT IN INTAC PURUN

 

On January 15, 2004, INTAC announced the redirection of its business plan from the traditional distribution of premium brand wireless handsets to its new Internet joint venture, Intac Purun.  Intac Purun was formed in October 2003 with China Putian Corporation and the Ministry of Education in the PRC.  The Company initially invested $2.3 million cash in the newly founded Internet joint venture which at inception was owned 45% by INTAC, 15% by Putian, 30% by a private investor group and 10% by the Ministry of Education.  The Company is in the process of transferring the 45% indirect ownership to be owned directly by the Company.  This process involves coordination with the PRC.  The Company expects this process to be completed by Dec 31, 2004.

 

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In June 2004, INTAC purchased an additional 15% interest in Intac Purun from Putian for $1.5 million. There are ownership requirements under PRC law which restrict or prohibit foreign investors from operating in certain industries such as Internet content provider, online stock trading and Internet access.  In order to meet these requirements, in June 2004, the Company made loans of $1.5 million to Mr. Zou Jingchen and Ms. Tian Jinmei.  Mr. Jingchen and Ms. Jinmei are the equity investors of Tianjin Chengtai International Trading Limited (“Chengtai”), a company incorporated in the PRC.  These loans were made to finance Mr. Jingchen and Ms. Jinmei, on behalf of the Company, for the purpose of establishing Chengtai which purchased the 15% interest in Intac Purun in June 2004 from Putian.  A total of 15% of the outstanding shares of Intac Purun, representing the 15% ownership, were pledged as collateral for these loans from INTAC and all operating, economic, voting and other rights were assigned to INTAC by Chengtai.  As further described in the Company’s accounting policies, the results of Intac Purun operations have been included in the consolidated financial statements since the incorporation of Intac Purun.  This additional 15% interest increases INTAC’s total ownership in Intac Purun to 60%, for which the Company has paid $3.8 million.  Intac Purun is incorporated and domiciled in PRC.

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition of the 15% incremental ownership in Intac Purun.

 

Current assets		$		256,290
Non-current assets		145,420
Total assets acquired		401,710
Current liabilities assumed		(73,016			)
Net assets acquired		328,694
Purchase price		1,500,000
Excess purchase price		$	1,171,306

 

The excess of the purchase price over the fair value of the net assets acquired represents goodwill.  The allocation of goodwill was based on preliminary estimates and may be revised at a later date, although management does not expect such adjustments to be material in nature.  The final allocation of the purchase price will be based on the valuation of the Intac Purun Internet portal database gateway that will be performed in the fourth quarter of the year.

 

 

4.             SALE OF NEW TECH

 

On September 1, 2004, Holdings sold all of the outstanding shares of New Tech Handels GmbH (“New Tech”). The results of operations of New Tech have been included in the consolidated financial statements through the date of disposal. The aggregate sales price of $365,370 (300,000 Euros) was received in the form of a short-term note receivable due in February 2005.

 

The following table summarizes the investment in New Tech as of the date of sale and the gain on disposal.

 

 

Current assets		$		850,644
Property and equipment		57,589
Total assets		908,233
Total liabilities		(557,918			)
Investment in New Tech		350,315
Consideration		365,370
Gain on sale (included in other income)		$	15,055

 

 

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On September 1, 2004, the Company formed a new subsidiary, INTAC Deutschland GmbH, a German corporation, for the continuation of similar operations in Germany.   INTAC Deutschland GmbH will now act as the Company’s primary purchasing agent and distributor of mobile handsets from Europe into the Asia-Pacific Rim similar to New Tech.  The formation of INTAC Deutschland GmbH was to take advantage of additional opportunities based on the business strategy of the Company.

 

5.               OTHER ASSETS

 

As of September 30, 2004 and December 31, 2003, other assets consisted of the following:

 

		2004			2003
Deposit for software development costs		$	218,926		$	218,926
Deposits and memberships		217,259			167,988
Miscellaneous		106,077			112,768
		$	542,262		$	499,682

 

6.             INCOME TAXES

 

For the three and nine months ended September 30, 2004, income tax expense totaled $201,701 and $330,646, respectively, and related to taxable income.  For the three and nine months ended September 30 2003, there was minimal income tax expense of $36,678 due to net operating losses in each of the tax jurisdictions and the availability of previous net operating losses to offset future taxable income.  A deferred tax asset related to the net operating losses available in certain tax jurisdictions has not been recorded as the ability of the Company to generate taxable income to utilize these losses is uncertain.

7.                                      ADVANCES FROM SHAREHOLDER

As of September 30, 2004, Mr. Zhou (President, CEO and Director of the Company) had made net advances of $145,757 to the Company.   Mr. Zhou made net advances of $46,673 to the Company during the nine months ended September 30, 2004.

 

8.                                      STOCKHOLDERS’ EQUITY

(a)           Common Stock

In May 2004, the Company sold 800,000 shares of its unregistered, restricted common stock to an accredited investor in a private placement transaction for proceeds of $12.0 million.  This transaction was exempt from the registration requirements of the Securities Act under Rule 506 of Regulation D promulgated thereunder.  In May 2004, the Company filed a registration statement with the Securities and Exchange Commission, registering the resale by the selling shareholder of these shares plus 1,000,000 shares by a different selling shareholder from the private placement completed in September 2003.  The registration statement also registered an additional 2,000,000 shares for possible future issuance by the Company.  The registration statement became effective on July 29, 2004.

 

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(b)           Stock Options

On March 2, 2004 and March 11, 2004, the Company completed a stock option grant to four of its Directors to purchase 50,000 shares of the Company’s common stock (an aggregate of 200,000 shares) at an exercise price of $15.75 per share for three of the Directors and $14.72 per share for the remaining Director, representing the market values on the date of each grant.  These stock options vest in three equal annual installments on the first three anniversary dates of the date of grant.  The per share fair value of the stock options granted on March 2, 2004 and March 11, 2004, estimated on the date of grant using the Black-Scholes options pricing model, was $6.44 and $6.02, respectively.  The fair value of the option grant was estimated on the date of grant using the following assumptions: no dividend yield; expected volatility of 59%; risk-free interest rate of 2.0%; and expected life of three years.  For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting periods.

On November 3, 2003, the Company made a stock option grant to one of its Directors to purchase 50,000 shares of the Company’s common stock at an exercise price of $9.89 per share representing the market value on the date of grant.  This stock option vests in three equal annual installments on the first three anniversary dates of the date of grant.  The per share fair value of the stock options granted in 2003, estimated on the date of grant using the Black-Scholes options pricing model, was $3.85.  The fair value of the option grant was estimated on the date of grant using the following assumptions: no dividend yield; expected volatility of 66%; risk-free interest rate of 2.1%; and expected life of three years.  For purposes of pro forma disclosure, the estimated fair value of the option is amortized to expense over the option’s vesting period.

 

On July 29, 2002, the Company made the following stock option grant and restricted stock award to its Senior Vice President and Chief Financial Officer:  (i) a stock option to purchase 300,000 shares of the Company’s common stock at an exercise price of $3.50 per share representing the market value on the date of grant and (ii) a restricted stock award of 200,000 shares of the Company’s common stock.  This stock option and restricted stock award vest in three equal annual installments on the first three anniversary dates of the date of grant.  As a result of the restricted stock award, a non-cash compensation charge of $58,322 and $174,966 was recorded in the statements of operations for the three and nine months ended September 30, 2004 and 2003, respectively. In July 2004, the restrictions lapsed with respect to 132,000 shares of common stock issued to the Senior Vice President and Chief Financial Officer under the restricted stock award.  The per share fair value of the stock options granted in 2002, estimated on the date of grant using the Black-Scholes options pricing model, was $2.01.  The fair value of the option grant is estimated on the date of grant using the following assumptions: no dividend yield; expected volatility of 86%; risk-free interest rate of 4.7%; and expected life of three years.  For purposes of pro forma disclosure, the estimated fair value of the option is amortized to expense over the option’s vesting period.

 

(c)           Earnings Per Share

The Company has 100,000,000 common shares authorized. The Company has granted options to purchase common shares to employees and directors of the Company. Certain options have a dilutive effect on the calculation of earnings per share. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.

 

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(c)           Earnings Per Share (continued)

 

		Three months ended September 30,										Nine months ended September 30,
		2004						2003				2004				2003
Basic earnings per share:
Net income (loss)		$			619,838			$	174,835			$	974,329			$		(93,221	)
Weighted average shares outstanding		21,077,455						19,339,455				20,574,344				19,239,455
Basic earnings (loss) per share		$				0.03		$		0.01		$	0.05			$		(0.00	)
Diluted earnings per share:
Net income (loss)		$	619,838					$		174,835		$		974,329		$	(93,221		)
Weighted average shares outstanding		21,077,455						19,339,455				20,574,344				19,239,455
Dilutive stock options and restricted stock award		245,622						328,431				295,712				306,630
Total common shares and dilutive securities		21,323,077						19,667,886				20,870,056				19,546,085
Diluted earnings (loss) per share		$		0.03				$		0.01		$		0.05		$	(0.00		)

 

For the nine months ended September 30, 2003, shares attributable to outstanding stock options and the restricted stock award were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.

 

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9.             SEGMENT REPORTING

The Company has historically been considered to be comprised of three reportable segments:  (i) career development services through the Company’s Internet portal, (ii) distribution of wireless handsets and (iii) distribution of automobiles.  In June 2004, the Company made the decision to phase-out the automobile distribution segment in order to devote more time and resources to the Internet portal business.  The Company believes that the phase-out will not have a material adverse impact on the results of operations of the Company.  The segment assets will be redeployed to the other reporting segments.  The Company measures segment profit (loss) as operating profit (loss) before depreciation.  The reportable segments are components of the Company which offer different products or services and are separately managed, with separate financial information available that is separately evaluated regularly by the Company in determining the performance of the business.  Information regarding operating segments as of and for the three and nine months ended September 30, 2004 and 2003, is presented in the following tables:

		Revenues				Segment income (loss)
Three months ended September 30, 2004
Wireless handset distribution segment		$	33,219,898			$			1,195,937
Automobile distribution segment		—				(31					)
Internet portal segment		39,416				(505,134					)
Total		$	33,259,314			$			690,772
Three months ended September 30, 2003
Wireless handset distribution segment		$	31,123,097			$				243,685
Automobile distribution segment		1,156,463				(11,187					)
Internet portal segment		—				—
Total		$	32,279,560			$		232,498
		Revenues				Segment income (loss)
Nine months ended September 30, 2004
Wireless handset distribution segment		$	64,226,152			$		2,228,987
Automobile distribution segment		180,256				(60,540					)
Internet portal segment		58,975				(1,211,034					)
Total		$	64,465,383			$	957,413
Nine months ended September 30, 2003
Wireless handset distribution segment		$		63,564,455		$	119,184
Automobile distribution segment		2,890,557				(129,904					)
Internet portal segment		—				—
Total		$		66,455,012		$	(10,720				)

 

 

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A reconciliation from the segment information to the net income (loss) for the three and nine months ended September 30, 2004 and 2003, is as follows:

		Three months ended September 30, 2004			Three months ended September 30, 2003
Segment income		$	690,772		$	232,498
Depreciation		(67,197		)	(19,512		)
		623,575			212,986
Other income (expense)		128,947			(912		)
Minority interest		48,412			—
Interest income (expense), net		20,605			(561		)
Income taxes		(201,701		)	(36,678		)
Net income		$	619,838		$	174,835

 

		Nine months ended September 30, 2004			Nine months ended September 30, 2003
Segment income (loss)		$	957,413		$	(10,720	)
Depreciation		(169,243		)	(62,667		)
		788,170			(73,387		)
Other income		138,164			24,709
Minority interest		366,715			—
Interest income (expense), net		11,926			(7,865		)
Income taxes		(330,646		)	(36,678		)
Net income (loss)		$	974,329		$	(93,221	)

 

Total assets for the operating segments at September 30, 2004 and December 31, 2003, are as follows:

 

		2004			2003
Wireless handset distribution segment		$	30,223,246		$	5,880,004
Automobile distribution segment		408,879			852,243
Internet portal segment		2,605,108			5,789,451
Total		$	33,237,233		$	12,521,698

 

Total assets based on their geographic location at September 30, 2004 and December 31, 2003, are as follows:

 

		2004			2003
Europe		$	380,351		$	537,660
Asia		32,769,936			11,933,000
United States		86,946			51,038
Total		$	33,237,233		$	12,521,698

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements.  These statements include, without limitation, the following:

•                  our ability to effectively execute the business plan;

•                  our status as an early-stage company with an evolving, unproven and unpredictable business model;

•                  our ability to continue to raise additional working capital, the lack of which would likely have a significant negative impact on our long-term business plan and our ability to take advantage of our strategic alliances and to successfully execute our expansion plan;

•                  statements made concerning the revenues or operating performance expected for the year ending December 31, 2004;

•                  the increased expense structure assumed by us as a U.S. public company;

•                  our plans for future expansion;

•                  our ability to achieve satisfactory operating performance;

•                  the viability of our business model;

•                  our expansion into other businesses and pursuit of other business opportunities;

•                  the results of our intended diversification into other industries and geographic regions;

•                  the impact of the SARS virus on the economic environment;

•                  the PRC government which may prevent us from conducting business in China;

•                  political and economic events and conditions in China and other geographic markets in which we operate;

•                  the anticipated benefits of our industry contacts and strategic relationships;

•                  our ability to establish and take advantage of contacts and strategic relationships;

•                  our ability to offset increased operating expenses by increasing revenues and operating efficiencies;

•                  our ability to react to market opportunities;

•                  the advent of new technology;

•                  complex regulations that apply to us as an operating company in China and elsewhere;

•                  changes in interest rates, foreign currency fluctuations and capital market conditions, particularly those that may affect the availability of credit for our products and services;

•                  statements that contain the words “may,” “will,” “expect,” “believe,” “plan,” “intend,” “anticipate,” “estimate,” “continue,” and similar expressions; and

 

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•                  other factors including those detailed under the heading “Business Risk Factors” in this report and in our Annual Report on Form 10-KSB for the year ended December 31, 2003.

You should also be aware that those “forward-looking” statements in regards to our Internet portal business are subject to a number of further risks, assumptions and uncertainties, such as:

•                  our ability to capitalize on the Internet portal business joint venture;

•                  our lack of prior experience with the Internet portal business and our ability to develop and execute an effective business plan;

•                  our ability to develop the fee-based services of the Internet portal business, including assembling an experienced management team;

•                  the high cost of Internet access that may limit the growth of the Internet in China and impede our growth;

•                  e-commerce customers that have only limited experience using the Internet for advertising or commerce purposes;

•                  the acceptance of the Internet as a commerce platform in China which depends in part on the resolution of problems relating to fulfillment and electronic payment;

•                  concerns about security of e-commerce transactions and confidentiality of information on the Internet that may increase our costs, reduce the use of our portal and impede our growth;

•                  our network operations that may be vulnerable to hacking, viruses and other disruptions, which may make our products and services less attractive and reliable;

•                  PRC Internet laws and regulations that are unclear and will likely change in the near future;

•                  restrictions on foreign investment in the PRC Internet sector that are imposed by the PRC government;

•                  regulation and censorship of information distribution in China which may adversely affect our business;

•                  statements that contain the words “may,” “will,” “expect,” “believe,” “plan,” “intend,” “anticipate,” “estimate,” “continue,” and similar expressions; and

•                  other factors including those detailed under the heading “Business Risk Factors” in this report and in our Annual Report on Form 10-KSB for the year ended December 31, 2003.

You should also be aware that those “forward-looking” statements in regards to our distribution business are subject to a number of further risks, assumptions and uncertainties, such as:

•                  the low-margin nature of our distribution businesses;

•                  changes in general business conditions or distribution channels in the wireless handset or automobile industries, and our ability to react to these changes;

•                  the impact of competition in the wireless handset distribution and automobile distribution industries, as well as in industries that we may operate in the future;

•                  our ability to continue to sell products outside of traditional distribution channels;

 

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•                  our ability to continue to purchase sufficient inventory on terms favorable to us;

•                  our small number of current suppliers and customers;

•                  our lack of supply contracts with our vendors or distribution contracts with our customers;

•                  the concentration of a significant portion of our wireless handset distribution business with a few large customers;

•                  the highly competitive and constantly changing nature of the international wireless and automobile distribution industries;

•                  statements that contain the words “may,” “will,” “expect,” “believe,” “plan,” “intend,” “anticipate,” “estimate,” “continue,” and similar expressions; and

•                  other factors including those detailed under the heading “Business Risk Factors” in this report and in our Annual Report on Form 10-KSB for the year ended December 31, 2003.

This list is only an example of some of the risks that may affect these forward-looking statements.  If any of these risks or uncertainties materialize (of if they fail to materialize), or if the underlying assumptions are incorrect, then actual results may differ materially from those projected in the forward-looking statements. Readers of this report should recognize that an investment in INTAC is particularly risky.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this filing. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this filing or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the forward-looking statements set forth in this report.

Overview

You should read the following discussion with our consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003.

On January 15, 2004, we announced the redirection of our business plan from the traditional distribution of premium brand wireless handsets to our new Internet joint venture, Beijing Intac Purun Educational Development Ltd. (“Intac Purun”).  Intac Purun was formed in October 2003 with China Putian Corporation (“Putian”) and the Ministry of Education in The People’s Republic of China (“PRC”).  At the time of formation, the Internet joint venture was owned 45% by INTAC, 15% by Putian, 30% by a private investor group and 10% by the Ministry of Education.  The Company is in the process of transferring the 45% indirect ownership to be owned directly by the Company.  This process involves coordination with the PRC.  The Company expects this process to be completed by Dec 31, 2004.

 

In June 2004, INTAC purchased an additional 15% interest in Intac Purun from Putian for $1.5 million. There are ownership requirements under PRC law which restrict or prohibit foreign investors from operating in certain industries such as Internet content provider, online stock trading and Internet access.  In order to meet these requirements, in June 2004 the Company made loans of $1.5 million to Mr. Zou Jingchen and Ms. Tian Jinmei.  Mr. Jingchen and Ms. Jinmei are the equity investors of Tianjin Chengtai International Trading Limited (“Chengtai”), a company incorporated in the PRC.  These loans were made to finance Mr. Jingchen and Ms. Jinmei, on behalf of the Company, for the purpose of establishing Chengtai which purchased the 15% interest in Intac Purun in June 2004 from Putian.  A total of 15% of the outstanding shares of Intac Purun, representing the 15% ownership, were pledged as collateral for these loans from INTAC and all operating, economic, voting and other rights were assigned to INTAC by Chengtai.  As further described in the Company’s accounting policies, the results of Intac Purun operations have been included in the consolidated financial statements since the incorporation of Intac Purun.  This additional 15% interest increases INTAC’s total indirect ownership in Intac Purun to 60% with $3.8 million of invested cash.  Intac Purun is incorporated and domiciled in the PRC.

 

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Our initial objective in 2002 was to focus on our wireless handset distribution business and establish customer relationships and supply channels in China and the Asia-Pacific Rim.  Our objective in 2003 was to continue to expand our distribution business and improve gross profit margins.  Also in 2003, our strategy was to establish relationships with Chinese telecommunications enterprises and Chinese Government entities which might lead to opportunities in other fields of interest.

 

Our objective in 2004 is to further enhance the business prospects and opportunities afforded by the unique database of graduate students available to Intac Purun.  The Company is developing an array of premium products and services which will be made available through our Internet portal business.  The portal is being tailored to meet the growing student demand for these types of products and services.

 

Intac Purun has been exclusively selected by the Education Management Information Center (“EMIC”), a department under China’s Education Ministry, to establish and operate the “Career Service Centers” for Chinese students.  These Career Service Centers will provide Chinese students exclusively with a full-range of career development services, which will assist these students in finding jobs and managing their careers.

 

Although we will de-emphasize the wireless handset distribution business, a significant portion of short-term revenues will be generated by this business.  In June 2004, the Company made the decision to phase-out the automobile distribution segment in order to devote more time and resources to the Internet portal business.  The phase-out will not have a material adverse impact on the results of operations.  The segment assets will be redeployed to the other reporting segments.

 

At the present time, we are focusing on generating revenues from Intac Purun through the development of new products and services, continuing to assemble an experienced management team for Intac Purun in order to execute an effective business plan and seeking to ensure that the joint venture has adequate capital to accomplish its goals.  We have currently entered into several contracts to provide career guidance and development services.  USGAAP dictates that revenues from these contracts must be deferred and recognized over the life of the contract which is generally from one to two years.  As of September 30, 2004, $406,000 of revenue related to these contracts has been deferred and will be recognized over the contract life.

 

The emphasis for the remainder of 2004 and beyond will be on the comprehensive career development services provided through Intac Purun’s Internet portals, joyba.com (www.joyba.com) and phrbank.com (www.phrbank.com), which integrates recruiting and professional training services in China for large companies with their increasing demands for new employees, and the student guidance through its Career Service Centers.

 

We were incorporated under the name “Commodore Minerals, Inc.” under the laws of the State of Nevada on September 20, 2000, as a development stage corporation. Our initial business operations concentrated on mineral exploration. Although we never conducted any mineral exploration activities directly, we partnered with others in mineral exploration activities.

 

On September 28, 2001, Mr. Zhou acquired a controlling interest in us by purchasing 7,000,000 shares of our stock in a private transaction with one of the organizers of Commodore Minerals, Inc. (“Commodore”). On October 13, 2001, we entered into a Reorganization Agreement with INTAC International Holdings Limited (“Holdings”) and the shareholders of Holdings, including Mr. Zhou, pursuant to which Mr. Zhou and the other shareholders of Holdings conveyed their stock in Holdings to us in exchange for the issuance of an aggregate of 5,000,000 shares of our common stock (the “Reorganization”). Pursuant to that transaction, Holdings became our wholly owned subsidiary and New Tech, previously a subsidiary of Holdings, became our indirect subsidiary. For more detailed information on the Reorganization, please see our Current Report on Form 8-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on October 15, 2001.  For accounting purposes, the Reorganization was treated as a recapitalization of Holdings, with the effect that our historical financial statements reflect the business operations of Holdings.

 

We operate through nine direct and indirect wholly-owned subsidiaries, including:

 

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•                  INTAC International Holdings Limited, a Hong Kong corporation formed on January 3, 2001, which acts as our primary distributor of telecommunications products into the Asia-Pacific Rim;

•                  INTAC Holdco Corp., a Delaware corporation formed on October 10, 2001, which holds certain of the shares of INTAC International Holdings Limited;

•                  FUTAC Group Limited, a British Virgin Islands corporation formed on January 2, 2002, which imports automobiles for distribution into mainland China;

•                  Global Creative International Limited, a Hong Kong corporation formed on March 15, 2002, which acts as a distributor of refurbished telecommunications products into the Asia-Pacific Rim;

•                  INTAC Telecommunications Limited, a Hong Kong corporation formed on March 8, 2002, which acts as a distributor of telecommunications products into the Asia-Pacific Rim;

•                  Intac (Tianjin) International Trading Co., formerly “Intac Auto Mobile Trading Company Limited”, a China corporation formed on April 9, 2002, which imports automobiles for distribution into mainland China;

•                  INTAC Deutschland GmbH, a German corporation formed on September 1, 2004, which acts as our primary purchasing agent and distributor of products from Europe into the Asia-Pacific Rim;

•                  Beijing Intac Media Advertising Company Limited, a China corporation formed on September 15, 2004, which provides advertising services through Intac Purun; and

•                  Beijing Intac Meidi Technology Development Company Limited, a China corporation formed on September 21, 2004, which provides value added services through Intac Purun.

We also operate through a 60% owned subsidiary:

•                  Beijing Intac Purun Educational Development Limited, a China corporation formed in October 2003, which provides comprehensive employment information over its Internet portal to facilitate graduates’ employment search and future career development.

In May 2004, we sold 800,000 shares of our unregistered, restricted common stock to an accredited investor in a private placement transaction for proceeds of $12.0 million.  This transaction was exempt from the registration requirements of the Securities Act under Rule 506 of Regulation D. Proceeds from the $12.0 million private placement will be used to expand Intac Purun’s Internet portal business, for strategic acquisitions or business alliances and for general working capital purposes.  In May 2004, we filed a registration statement with the Securities and Exchange Commission, registering the resale of these shares plus 1,000,000 shares from the private placement to a different shareholder completed in September 2003.  Also, the registration statement registered an additional 2,000,000 shares for possible future issuance by us.  The registration statement became effective on July 29, 2004.

We believe that we currently have adequate capital for at least the next twelve months; however, longer-term plans may require us to obtain additional financing through the issuance of debt, equity, other securities or a combination thereof in order to take advantage of our strategic agreements and business alliances.  Growing our business requires additional working capital.  Our inventory purchases of wireless handsets generally require full payment for the products prior to delivery.  Also in some cases, we will give credit terms to proven customers for the balance outstanding, if they have an established and good payment history with us.  In addition, we must absorb the losses of our Internet portal business until such time as its revenue levels allow it to reach and sustain a breakeven point.  Total losses of the Internet portal business were approximately $682,000 and $1.3 million for the three and nine months ended September 30, 2004.  Our inability to obtain additional acceptable financing would likely have a significant negative impact on our longer-term growth plans.

 

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In addition, we may seek to obtain a working capital or other traditional loan facility from a bank or other lending source.  Unless we are able to continue to improve our operating performance, additional outside financing required to execute our longer-term business plan would be difficult to obtain on acceptable terms, if at all.  As of the date of this Report, we do not have any financing arrangements, nor do we have any commitments to obtain such an arrangement with any bank or other third party.  If we raise capital by issuing equity or convertible debt securities, the percentage ownership of our stockholders will be reduced.  Any new securities may have rights, preferences or privileges senior to those of our common shareholders.  There can be no assurances that we will be able to obtain additional financing on terms which are acceptable to us.

 

In addition to our current obligations, we continue to negotiate other strategic agreements and business alliances, many of which will be dependent upon our obtaining additional working capital, or whose value will be materially less to us if we do not have the financial resources to fully exploit such opportunities.

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations under our current plan of operation is a forward-looking statement that is subject to risks and uncertainties, and we may be required to raise additional capital prior to that time and subsequently.

 

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

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Results of Operations for the Three and Nine Months Ended September 30, 2004 and 2003

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenues		$	33,259,314		$	32,279,560		$	64,465,383		$	66,455,012
Cost of goods sold		30,897,597			31,042,270			59,415,086			63,892,330
Gross profit		2,361,717			1,237,290			5,050,297			2,562,682
Operating expenses
Distribution expenses		244,382			386,015			647,594			636,743
Selling, general and administrative expenses		1,493,780			638,289			3,614,553			1,999,326
Total expenses		1,738,162			1,024,304			4,262,147			2,636,069
Income (loss) from operations		623,555			212,986			788,150			(73,387		)
Other income (expenses)
Foreign currency exchange gain (loss)		112,536			(3,747		)	113,438			(616		)
Interest income (expense), net		20,605			(561		)	11,926			(7,865		)
Minority interest in loss of consolidated joint venture		48,412			—			366,715			—
Other income, net		16,431			2,835			24,746			25,325
Total other income		197,984			(1,473		)	516,825			16,844
Income (loss) before income taxes		821,539			211,513			1,304,975			(56,543		)
Income taxes		(201,701		)	(36,678		)	(330,646		)	(36,678		)
Net income (loss)		$	619,838		$	174,835		$	974,329		$	(93,221	)
Net income (loss) per share — basic		$	0.03		$	0.01		$	0.05		$	0.00
Net income (loss) per share — diluted		$	0.03		$	0.01		$	0.05		$	0.00
Weighted average number of shares outstanding — basic		21,077,455			19,339,455			20,574,344			19,239,455
Weighted average number of shares outstanding — diluted		21,323,077			19,667,886			20,870,056			19,546,085

 

Results of Operations for the Three and Nine Months Ended September 30, 2004, Compared to the Three and Nine Months Ended September 30, 2003

Revenue:  Revenue increased by $1.0 million, or 3.0%, to $33.3 million for the three months ended September 30, 2004, from $32.3 million for the same quarter in 2003. The increase in revenue is due to an increase in average sales prices offset by a decrease in volume. Revenue decreased by $2.0 million, or 3.0%, to $64.5 million for the nine months ended September 30, 2004 from $66.5 million for the same period in 2003.  The decrease in revenue is due to a decrease in sales volume offset by an increase in average sales prices.  We concentrated on higher priced and higher margin wireless handset products for profitability as opposed to sales volume during the three months ended September 30, 2004.  The 2004 revenue was comprised of the distribution of wireless handsets ($33.2 million and $64.2 million, respectively, for the three and nine months ended September 30, 2004), the Internet portal business ($39,416 and $58,975, respectively, for the three and nine months ended September 30, 2004) and the distribution of automobiles ($0 for the three months ended September 30, 2004 and $180,256 for the nine months ended September 30, 2004).  As of September 30, 2004, $406,000 of revenue related to the Internet portal business has been deferred and will be recognized over generally from one to two years.  The 2003 revenue was comprised of the distribution of wireless handsets ($31.1 million and $63.6 million, respectively, for the three and nine months ended September 30,

 

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2003) and the distribution of automobiles ($1.2 million and $2.9 million, respectively, for the three and nine months ended September 30, 2003).  The first quarter is typically negatively affected by seasonality issues associated with the wireless handset market in China. Based upon the prior year and our projections, we anticipate that revenues will increase for the remainder of the year as compared to the same period in 2003.

 

Gross Profit: Gross profit increased by $1.1 million to $2.4 million for the three months ended September 30, 2004 from $1.3 million for the same quarter in 2003. Gross profit increased by $2.5 million to $5.1 million for the nine months ended September 30, 2004 from $2.6 million for the same period in 2003.  The gross margin increased by 3.3% to 7.1% for the three months ended September 30, 2004 from 3.8% for the same quarter in 2003.  The gross margin increased by 3.9% to 7.8% for the nine months ended September 30, 2004 from 3.9% for the same period in 2003.  The increase is due to the focus on higher margin wireless handset products as opposed to sales volume during the three and nine months ended September 30, 2004.  We expect margins for the remainder of the year to be comparable to those in the third quarter.

Operating Expenses:  Distribution expenses decreased by $141,633 to $244,382 for the three months ended September 30, 2004 from $386,015 for the same quarter in 2003, and as a percentage of revenue, decreased to 0.7% in 2004 from 1.2% in 2003.  These costs decreased due to overall price decreases from common carriers.  Distribution expenses increased by $10,851 to $647,594 for the nine months ended September 30, 2004 from $636,743 for the same period in 2003, and as a percentage of revenue, remained constant at 1.0% for both 2004 and 2003.

Selling, general and administrative expenses increased by $855,491 to $1.5 million for the three months ended September 30, 2004 from $638,289 for the same quarter in 2003, and as a percentage of revenue, increased to 4.5% in 2004 from 2.0% in 2003.  Selling, general and administrative expenses increased by $1.6 million to $3.6 million for the nine months ended September 30, 2004 from $2.0 million for the same period in 2003, and as a percentage of revenue, increased to 5.6% in 2004 from 3.0% in 2003.  This overall increase in total expense has been primarily due to the formation of our new Internet joint venture, Intac Purun, in October 2003.  The overall impact of increased costs from Intac Purun in the three and nine months ended September 30, 2004 was $682,000 and $1.3 million, respectively.  Specifically, for the nine months ended September 30, 2004, the significant components of the overall cost increase are $501,000 that relates to increased salary and staff costs, $311,000 that relates to increased promotion and business development costs, $354,000 that relates to increased equipment costs, $222,000 that relates to increased rents and occupancy costs, and $172,000 that relates to increased professional and banking services.

Income (loss) from operations:  Income from operations for the three months ended September 30, 2004 was $623,555 as compared to $212,986 for the three months ended September 30, 2003.  The income from operations for the nine months ended September 30, 2004 was $788,150 as compared to the loss of ($73,387) for the nine months ended September 30, 2003.  The improvement in income (loss) from operations is primarily due to the improved gross profit margins partially offset by the increased costs from our new Internet joint venture, Intac Purun, in 2004.

Other income (expenses): Foreign currency exchange for the three and nine months ended September 30, 2004 was a gain of $112,536 and $113,438, respectively, as compared to a loss of ($3,747) and ($616) for the same periods in 2003.  The gain in the three and nine months ended September 30, 2004 was due to the realization of the translation gain on the settlement of an intercompany account with the subsidiary which was sold during the three months ended September 30, 2004.  Previously, the unrealized translation gains and losses were recorded to comprehensive income (loss) in stockholders’ equity.

 

Interest income (expense), net was income of $20,605 and $11,926 for the three and nine months ended September 30, 2004 and an expense of ($561) and ($7,865) for the same periods in 2003. This increased income was due to the increase in invested cash as a result of the recent private placements.

 

Minority interest in the loss of the consolidated joint venture was $48,412 and $366,715 for the three and nine months ended September 30, 2004, as compared to $0 for the both periods in 2003. This relates to Intac Purun and represents the portion of Purun’s loss attributable to the other joint venture partners.

 

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