As filed with the Securities and Exchange Commission on April 28, 2004
Registration No. 333-113209
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , DC 20549
AMENDMENT No. 2 TO FORM S-3 ON FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
PACIFICNET INC.
---------------
(Name of Small Business Issuer in its Charter)
DELAWARE 92-2118007
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
UNIT 2710, HONG KONG PLAZA
188 CONNAUGHT ROAD WEST
HONG KONG
011-852-2876-2900
--------------------------------
(Address and Telephone Number of
Principal Executive Offices)
TONY TONG, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PACIFICNET INC.
UNIT 2710, HONG KONG PLAZA
188 CONNAUGHT ROAD WEST
HONG KONG
011-852-2876-2900
--------------------------------
(Name, Address and Telephone Number
of Agent for Service)
Copies of all communications to:
Mitchell S. Nussbaum, Esq.
Loeb & Loeb, LLP
345 Park Avenue
New York, NY 10154
Telephone: (212) 407-4159 Facsimile No. (212) 407-4990
Approximate Date of Proposed Sale to the Public: As soon as possible after the
registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED APRIL __, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
PACIFICNET INC.
771,605 Shares of Common Stock
This prospectus relates to the resale of up to 771,605 shares of our
common stock being offered by the selling stockholders. Of the shares covered by
this prospectus, 617,285 shares have been issued to the selling stockholders and
154,320 shares are issuable upon the exercise of warrants by the selling
stockholders. We will not receive any proceeds from the sale of the shares of
common stock by the selling stockholders. Assuming that all of the warrants held
by the selling stockholders are exercised, we will realize proceeds of
approximately $1,103,400.
Our shares of common stock are traded on The Nasdaq Small Cap Market
under the symbol "PACT." On April 16, 2004, the closing price of our common
stock was $4.35.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN
INVESTMENT IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [_____], 2004.
TABLE OF CONTENTS
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PAGE
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SUMMARY....................................................................... 2
FORWARD LOOKING STATEMENTS.................................................... 3
RISK FACTORS.................................................................. 4
USE OF PROCEEDS............................................................... 8
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.................... 9
DESCRIPTION OF BUSINESS.......................................................13
RECENT DEVELOPMENTS...........................................................18
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................19
EXECUTIVE COMPENSATION........................................................22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............24
SELLING STOCKHOLDERS..........................................................25
DESCRIPTION OF SECURITIES.....................................................26
PLAN OF DISTRIBUTION..........................................................27
FINANCIAL STATEMENTS..........................................................30
INDEMNIFICATION OF OFFICERS AND DIRECTORS.....................................54
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION...................................54
RECENT SALES OF UNREGISTERED SECURITIES.......................................55
EXHIBITS......................................................................56
UNDERTAKINGS..................................................................57
1
SUMMARY
We were incorporated in Delaware in 1999. Through our subsidiaries, we
invest in, operate and provide value-added telecom services (VAS) in greater
China, which includes the People's Republic of China, or mainland China, Hong
Kong, Macau and Taiwan. Our VAS include operating call centers, providing
telemarketing services, customer relationship management (CRM) services,
interactive voice response (IVR) systems, short messaging services (SMS),
multimedia messaging services (MMS), voice over internet protocol (VoIP)
services, mobile applications and calling cards. In addition, we sell and
distribute telecom services. We intend to continue to grow our business by
acquiring and managing growing technology and network communications businesses
with established products and customers in Asia. Our goal is to take a leading
role in providing information technology services and network communications,
which are rapidly expanding business sectors in Asia. Our clients include
leading telecom operators, banks, insurance, travel and marketing services
companies and telecom consumers in greater China, such as China Telecom (NYSE:
CHA), China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), PCCW (NYSE: PCW),
Hutchison Telecom, Sunday (Nasdaq: SDAY), Sony, Swire Travel and The Hong Kong
Housing Authority.
SERVICES
We provide various services for our customers. Such services include:
CUSTOMER RELATIONSHIP MANAGEMENT. We provide both outsourcing
and consulting experience in call center operations and
management.
VOICE AND IP RELATED SERVICES. We provide system integration
experience in voice and IP related products in the value-added
industry and plan to expand to more data-oriented services for
mobile users. For example, we provide telecommunications
services that can be transmitted over the Internet, which
help users avoid the toll charged by long distance carriers.
CONSULTING SERVICES. We provide a range of consulting services
based on our client's needs. A primary focus of these services
includes consulting with clients that are establishing online
e-business environments. For clients who require our services
in this area we assist in identifying specific content,
user-friendly interface, overall web themes and designs,
target user groups, web advertising and integrated online
solutions.
TRAINING SERVICES. We offer comprehensive operational and
managerial training programs for call center management
professionals at all levels.
EXECUTIVE OFFICES
Our corporate headquarters and development center is located at Unit
2710, Hong Kong Plaza, 188 Connaught Road West, Hong Kong. The telephone number
at our corporate headquarters in Hong Kong is 011-852-2876-2900. We also have a
corporate office in the United States located at 860 Blue Gentian Road, Suite
360, Eagan, MN 55121. The telephone number at our corporate office in the United
States is 1-651-209-3100.
2
FORWARD-LOOKING STATEMENTS
Statements in this prospectus that are not descriptions of historical
facts are forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Reference is
made in particular to the description of our plans and objectives for future
operations, assumptions underlying such plans and objectives and other
forward-looking terminology such as "may," "expects," "believes," "anticipates,"
"intends," "expects," "projects," or similar terms, variations of such terms or
the negative of such terms. Forward-looking statements are based on management's
current expectations. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
under "Risk Factors."
3
RISK FACTORS
Investing in our securities involves a great deal of risk. You should
carefully consider the following factors as well as other information included
or incorporated by reference in this prospectus before deciding to purchase our
common stock.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE
CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A
STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY. We were founded and commenced operations in
July 1999. Our operating history may be insufficient for you to evaluate our
business and future prospects.
WE HAVE A HISTORY OF LOSSES AND MAY NEVER BE PROFITABLE. As of December 31,
2003, we had incurred losses aggregating $29,850,000. To date, our working
capital has primarily been generated through financing activities consisting of
the sale of shares of our common stock. If we are not successful in executing
our business plan, we may never generate revenues or achieve profitability.
OUR GROWTH STRATEGY MAY NOT BE SUCCESSFUL. Our growth strategy is to attempt to
acquire companies and identify and acquire assets and technologies from
businesses in greater China that have services, products, technologies, industry
specializations or geographic coverage that extend or complement our existing
business. We may be unable to successfully identify, acquire on favorable terms
or integrate such companies. Furthermore, any acquisitions we pursue may be
subject to approval by the relevant Chinese government authorities, which
approval we may not obtain. As part of our growth strategy we may also pursue
opportunities to undertake strategic alliances in the form of joint ventures,
which involve many of the same risks as acquisitions.
THE ACQUISITION OF NEW BUSINESSES IS COSTLY AND SUCH ACQUISITIONS MAY NOT
ENHANCE OUR FINANCIAL CONDITION. The resources expended in identifying and
consummating acquisition and joint ventures may be significant. We recently
acquired controlling interests in Epro Telecom Holdings Limited (Epro), Beijing
Linkhead Technologies Co., Ltd. (Linkhead) and Guangzhou YueShen TaiYang
Technology Limited (YueShen). We expect these acquisitions to strengthen our
position as a provider of outsourced call center, telemarketing, CRM and VAS.
However, we may not achieve the anticipated benefits of these acquisitions.
WE MAY FACE DIFFICULTIES AND BE UNSUCCESSFUL IN INTEGRATING NEW BUSINESSES. Any
future acquisitions will be subject to a number of challenges in integrating new
operations into our existing operations, including:
o the diversion of management time and resources;
o the difficulty of assimilating the operations and personnel of
the acquired companies;
o the potential disruption of our ongoing business;
o the difficulty of incorporating acquired technology and rights
into our products and services;
o unanticipated expenses related to technology integration;
o difficulties in maintaining uniform standards, controls,
procedures and policies;
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o the impairment of relationships with employees and customers
as a result of any integration of new management personnel;
and
o potential unknown liabilities associated with acquired
business.
OUR CUSTOMERS ARE CONCENTRATED IN A LIMITED NUMBER OF INDUSTRIES. Our clients
are concentrated primarily in the telecommunications, telemarketing and
technology industries, and to a lesser extent, the insurance and financial
services industries, where the current trend is to outsource certain customer
care services. Our ability to generate revenue depends on the demand for our
services in these industries. An economic downturn, or a slowdown or reversal of
the trend in any of these industries could have a material adverse effect on our
business, results of operations or financial condition.
THE MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE AND FRAGMENTED. We expect
competition to persist and intensify in the future. Our competitors are mainly
leaders in the CRM services market, such as PCCW Teleservices (Hong Kong)
Limited, China Motion Telecom International Limited and TeleTech (Hong Kong)
Limited. Our competitors also include small firms offering specific
applications, divisions of large entities and other large independent firms. A
number of competitors have or may develop greater capabilities and resources
than ours. We also face the risk that new competitors with greater resources
than ours will enter our market. Furthermore, increasing competition in CRM and
VAS services in greater China has led to a reduction in the telecommunication
services fee. Such profit margin decreases could adversely affect the Company's
profitability. Competitive pressures from current or future competitors could
cause our services to lose market acceptance or require a significant reduction
in the price of our services.
WE DO NOT HAVE AN INTERNAL MARKETING TEAM. To generate new customers, we rely on
referrals from customers who were introduced to us by our executive management
and business unit leaders. Our management team is primarily responsible for
managing our day to day business operations and may unable to devote significant
time to marketing our business to potential new customers. Without a dedicated
marketing team we may be unable to generate new customers.
KEY EMPLOYEES ARE ESSENTIAL TO BUILDING OUR CUSTOMER RELATIONSHIPS. We are
highly dependent on key employees. Tony Tong, our Chairman and Chief Executive
Officer and Victor Tong, our President, are essential to our ability to
establish and maintain relationships with our customers. Competition in our
industry for executive-level personnel is strong and we can make no assurance
that we will be able to hire, motivate and retain highly effective executive
employees.
OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED ADDITIONAL
FINANCING. Since inception, our investments and operations have been financed
through sales of our common stock. We currently have an available bank line of
$110,000 out of a total credit line of $1,309,000. As of December 31, 2003, we
had $3,823,000 in cash and cash equivalents. Subsequent to December 31, 2003, we
completed a private placement of our common stock in which we received
approximately $3,000,000 of gross proceeds. In the future, we may need to raise
additional funds through public or private financing, which may include the sale
of equity securities. The issuance of these equity securities could result in
dilution to our stockholders. If we are unable to raise capital when needed, our
business growth strategy may slow, which could severely limit our ability to
generate revenue.
THE ESTABLISHMENT AND EXPANSION OF INTERNATIONAL OPERATIONS REQUIRES SIGNIFICANT
MANAGEMENT ATTENTION. All of our current, as well as any anticipated future
revenues, are or are expected to be derived from Asia. Our international
operations are subject to risks, including the following, which, if not planned
and managed properly, could materially adversely affect our business, financial
condition and operating results:
o language barriers and other difficulties in staffing and
managing foreign operations;
o legal uncertainties or unanticipated changes regarding
regulatory requirements, liability, export and import
restrictions, tariffs and other trade barriers;
o longer customer payment cycles and greater difficulties in
collecting accounts receivable;
5
o uncertainties of laws and enforcement relating to the
protection of intellectual property;
o seasonal reductions in business activity; and
o potentially uncertain or adverse tax consequences.
FLUCTUATIONS IN THE VALUE OF THE HONG KONG DOLLAR OR RMB RELATIVE TO FOREIGN
CURRENCIES COULD AFFECT OUR OPERATING RESULTS. We have historically conducted
transactions with customers outside the United States in United States dollars.
Payroll and other costs of foreign operations are payable in foreign currencies,
primarily Hong Kong dollars and Chinese Renminbi. To the extent future revenue
is denominated in foreign currencies, we would be subject to increased risks
relating to foreign currency exchange rate fluctuations that could have a
material adverse affect on our business, financial condition and operating
results. To date, we have not engaged in any hedging transactions in connection
with our international operations.
RISKS ASSOCIATED WITH DOING BUSINESS IN GREATER CHINA
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH DOING BUSINESS IN GREATER CHINA, AS
SET FORTH IN THE FOLLOWING RISK FACTORS.
OUR OPERATIONS AND ASSETS IN GREATER CHINA ARE SUBJECT TO SIGNIFICANT POLITICAL
AND ECONOMIC UNCERTAINTIES. Changes in laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has been
pursuing economic reform policies that encourage private economic activity and
greater economic decentralization. There is no assurance, however, that the
Chinese government will continue to pursue these policies, or that it will not
significantly alter these policies from time to time without notice.
WE ARE REQUIRED TO OBTAIN LICENSES TO EXPAND OUR BUSINESS INTO MAINLAND CHINA.
Our activities must be reviewed and approved by various national and local
agencies of the Chinese government before they will issue business licenses to
us. There can be no assurance that the current Chinese government, or
successors, will continue to approve and renew our licenses. If we are unable to
obtain licenses or renewals we will not be able to continue our business
operations in mainland China which would have a material adverse effect on our
business, financial condition and results of operations.
WE MAY HAVE LIMITED LEGAL RECOURSE UNDER CHINESE LAW IF DISPUTES ARISE UNDER OUR
CONTRACTS WITH THIRD PARTIES. The Chinese government has enacted some laws and
regulations dealing with matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. However, their experience in
implementing, interpreting and enforcing these laws and regulations is limited,
and our ability to enforce commercial claims or to resolve commercial disputes
is unpredictable. If our new business ventures are unsuccessful, or other
adverse circumstances arise from these transactions, we face the risk that the
parties to these ventures may seek ways to terminate the transactions, or, may
hinder or prevent us from accessing important information regarding the
financial and business operations of these companies. The resolution of these
matters may be subject to the exercise of considerable discretion by agencies of
the Chinese government, and forces unrelated to the legal merits of a particular
matter or dispute may influence their determination. Any rights we may have to
specific performance, or to seek an injunction under Chinese law, in either of
these cases, are severely limited, and without a means of recourse by virtue of
the Chinese legal system, we may be unable to prevent these situations from
occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of operations.
WE HAVE IMPLEMENTED SAFEGUARDS IN ORDER TO COMPLY WITH THE FOREIGN CORRUPT
PRACTICES ACT. We are subject to the United States Foreign Corrupt Practices
Act, which generally prohibits United States companies from engaging in bribery
or other prohibited payments to foreign officials for the purpose of obtaining
or retaining business. Foreign companies, including some that may compete with
us, are not subject to these prohibitions. Corruption, extortion, bribery,
pay-offs, theft and other fraudulent practices occur from time-to-time in
mainland China. We have attempted to implement safeguards to
6
prevent and discourage such practices by our employees and agents. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties.
RISKS RELATED TO OUR TECHNOLOGY AND EQUIPMENT
WE MAY SUFFER LOSSES IF OUR OPERATIONS ARE INTERRUPTED. Our operations depend on
our ability to protect our call centers, data centers, computer and
telecommunications equipment and software systems against damage from fire,
power loss, telecommunications interruption or failure, hacker attacks, natural
disaster and other similar events. In the event we experience a temporary or
permanent interruption at one or more of our call centers, through casualty,
operating malfunction or otherwise, our business could be materially adversely
affected and we may be required to pay contractual damages to some clients or
allow some clients to terminate or renegotiate their contracts with us. While we
maintain certain property and business interruption insurance, such insurance
may not adequately compensate us for all losses that we may incur.
WE MUST RESPOND QUICKLY AND EFFECTIVELY TO NEW TECHNOLOGICAL DEVELOPMENTS. Our
business is highly dependent on our computer and telecommunications equipment
and software systems. Our failure to maintain the superiority of our
technological capabilities or to respond effectively to technological changes
could adversely effect our business, results of operations or financial
condition. Our future success also depends on our ability to enhance existing
services and introduce new services or products to respond to changing
technological developments. If we are unable to successfully develop and bring
to market new services or products in a timely manner, our competitors'
technologies or services may render our products or services noncompetitive or
obsolete.
RISKS SPECIFIC TO THIS OFFERING
THE PRICE OF OUR STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO DO SO. Our
stock price has fluctuated dramatically. There is a significant risk that the
market price of the common stock will decrease in the future in response to any
of the following factors, some of which are beyond our control:
o variations in our quarterly operating results;
o announcements that our revenue or income are below analysts'
expectations;
o general economic slowdowns;
o changes in market valuations of similar companies;
o sales of large blocks of our common stock;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
The price in this offering will fluctuate based on the prevailing market price
of our common stock on The Nasdaq Small Cap Market. Accordingly, the price you
pay in this offering may be higher or lower than the prices paid by other people
participating in this offering.
YOU MAY SUFFER DILUTION UPON THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS.
As of December 31, 2003, we had stock options outstanding to purchase 925,600
shares of common stock and warrants to purchase 800,000 shares of common stock,
some of which have exercise prices at or below the price of our shares of common
stock on the public market. To the extent such options or warrants are
exercised, there will be further dilution. In addition, in the event that any
future financing should be in the form of securities convertible into, or
exchangeable for, equity securities, investors may experience additional
dilution upon the conversion or exchange of such securities.
7
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders. Assuming that all of the warrants held by
selling stockholders are exercised, we will realize proceeds of approximately
$1,103,400. We would use these funds for general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on The Nasdaq SmallCap Market under the
symbol "PACT". The following table sets forth the range of high and low bid
prices reported by Nasdaq in each fiscal quarter from January 1, 2002 to
December 31, 2003. We have adjusted the high and low bid prices reported by
Nasdaq to give effect to the 5-for-1 reverse split on January 6, 2003. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
High Low
---- ---
FISCAL 2002
Quarter Ended March 31, 2002 $1.50 $0.85
Quarter Ended June 30, 2002 $2.25 $0.70
Quarter Ended September 30, 2002 $1.05 $0.40
Quarter Ended December 31, 2002 $1.95 $0.50
FISCAL 2003
Quarter Ended March 31, 2003 $3.65 $0.30
Quarter Ended June 30, 2003 $3.09 $2.30
Quarter Ended September 30, 2003 $10.29 $2.18
Quarter Ended December 31, 2003 $6.41 $4.10
FISCAL 2004
Quarter Ended March 31, 2004 $7.00 $4.98
April 1, 2004 through April 16, 2004* $5.65 $4.33
* Reflects partial period
As of April 16, 2004, there were approximately 3,000 record holders of
the common stock. We have not paid any cash dividends on our common stock, and
we currently intend to retain any future earnings to fund the development and
growth of our business.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS. This registration statement contains forward-looking
statements within the meaning of the federal securities laws. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "we believe," "management believes" and similar
language. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Description of Business," including the "Risk
Factors" described in that section, and "Management's Discussion and Analysis or
Plan of Operation." Our actual results may differ materially from results
anticipated in these forward-looking statements.
CRITICAL ACCOUNTING POLICIES. 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 bad debts,
inventories, intangible assets, income taxes and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe 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.
Management believes the following critical accounting policies reflect the most
significant estimates and assumptions used in the preparation of its
consolidated financial statements.
RESEARCH AND DEVELOPMENT
We evaluate research and development costs to identify any research and
development activities that could be objectively measured and recognized as an
asset for accounting purposes at the time they are acquired or at the time they
have developed future economic benefits. Some costs and expenses are recognized
as costs and expenses incurred during the period, provided that (a) there are no
discernible future benefits, (b) costs recorded as assets in prior periods no
longer provide discernible benefits, and (c) allocating costs either on the
basis of association with revenue or among several accounting periods is
considered to serve no useful purposes.
VALUATION OF LONG-LIVED ASSETS INCLUDING GOODWILL AND PURCHASED INTANGIBLE
ASSETS
We review property, plant and equipment, goodwill and purchased intangible
assets for impairment 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.
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
9
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.
TAXES ON EARNINGS
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, the mix of earnings in the
jurisdictions in which we operate and prudent and feasible tax planning
strategies in determining the need for a valuation allowance. In the event we
determine that we would not be able to realize all or part of our net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to earnings in the period such determination is made. Likewise, if we
later determine that it is more likely than not that the net deferred tax assets
would be realized, the previously provided valuation allowance would be
reversed.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data, and their
respective percentages of revenues for the periods indicated.
SELECTED STATEMENT OF SELECTED STATEMENT PERCENTAGE OF
OPERATIONS DATA PERCENTAGE OF REVENUES OF OPERATIONS DATA REVENUES
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2002
---------------- ----------------- ----------------- -----------------
Revenues $ 1,217,000 100.0% $ 2,319,000 100.0%
Cost of Revenues (698,000) (57.4) (1,787,000) (77.1)
GROSS MARGIN 519,000 42.6 532,000 22.9
Selling, general and
administrative expense (2,758,000) (226.6) (2,912,000) (125.6)
Depreciation and amortization (76,000) (6.2) (264,000) (11.4)
Provision for written off fixed
assets (208,000) (17.1) - -
OPERATING LOSS (2,523,000) (207.3) (2,644,000) (114.1)
Interest income, net 27,000 2.2 33,000 1.4
Sundry income 54,000 4.4 - -
Provision for impairment of
affiliated companies - - (97,000) (4.2)
Provision for income taxes (32,000) (2.6) - -
Minority interest 596,000 49.0 (106,000) (4.6)
Discontinued operations - - (107,000) (4.6)
NET LOSS ($1,878,000) (154)% ($2,921,000) (126)%
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUES, COST OF REVENUES AND GROSS MARGIN. The decrease in revenues and cost
of revenues from 2002 to 2003 is the result of a reduction of operation in IT
Systems Integration. The decrease in gross margin for 2003 as compared to 2002,
resulted from a reduction of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in selling, general
and administrative expenses is the result of reducing the size of our
operations, which resulted in decreased premises costs and staff costs.
INTEREST INCOME. The decrease in interest income is due to a lower interest rate
in 2003 compared to 2002.
WRITTEN-OFF TANGIBLE AND INTANGIBLE ASSETS. As of balance sheet date, we review
the carrying amounts of our tangible and intangible assets to determine whether
there is any indication that those assets have to make provision for the
impairment loss. We wrote off tangible assets of $208,000, and intangible assets
of $761,000, which mainly included research and development. Costs and expenses
are recognized as incurred during the period, provided that there are no
discernible future benefits.
10
PROVISION FOR IMPAIRMENT LOSS OF AFFILIATED COMPANIES. Our provision for
impairment loss of affiliated companies totaling $97,000 in 2002 related to our
investments in Xmedia ($95,000) and in PacSo ($2,000).
DISCONTINUED OPERATIONS. Discontinued operations represents the net loss
resulting from downsizing of our operations in Laptizen during the fourth
quarter of 2001. Revenues were $15,000 and net loss was $107,000 for 2002.
INCOME TAXES. Income tax was recognized for our only subsidiary that the
generated operating profits in 2003. The lack of operating profits by all of our
subsidiaries resulted in no income tax recognition in 2002.
MINORITY INTERESTS. Minority interests, representing the interests of minority
holders in losses of our subsidiaries that are not wholly-owned, for 2003,
included a $25,000 interest in our subsidiary PacSo owned at the beginning of
the 2003 fiscal year, and interests in our new subsidiaries Epro and Linkhead,
acquired in 2003, of $380,000 and $191,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had cash and cash equivalents of $3,823,000 and
working capital of $1,442,000 as compared to $3,694,000 and $3,081,000,
respectively, at December 31, 2002.
Net cash used in operating activities was $905,000 for the year ended December
31, 2003 as compared to net cash used in operating activities of $2,172,000 for
the year ended December 31, 2002. Net cash provided by operating activities in
the year ended December 31, 2003 was primarily due to a net loss of $1,878,000,
increased by noncash items and changes in operating assets totaling $595,000 and
$378,000, respectively. Net cash used in operating activities of $2,172,000 for
the year ended December 31, 2002 was primarily due to a net loss of $2,921,000,
increased by noncash items totaling $1,036,000 and decreased by changes in
operating assets totaling $287,000.
Net cash used in investing activities for the year ended December 31, 2003 was
$311,000 as compared to cash used in investing activities for the year ended
December 31, 2002 of $36,000. The cash used in investing activities in the year
ended December 31, 2003 was primarily due to the acquisition of subsidiary
companies of $211,000. The cash used in investing activities in the year ended
December 31, 2002 was primarily from purchases of property and equipment of
$14,000 and purchase of affiliate company interests of $22,000.
Net cash provided by financing activities for the year ended December 31, 2003
was $1,345,000 as compared to net cash provided by financing activities of
$4,560,000, for the year ended December 31, 2002. The cash provided by financing
activities for the year ended December 31, 2003, resulted from advances under
bank line credit of $634,000, proceeds from new bank loans and financing leases
totaling $766,000 and proceeds from exercise of stock options and warrants of
$410,000, and reduced by repayments of bank loans of $465,000. The net cash
provided by financing activities of $4,560,000 for the year ended December 31,
2002, resulted primarily from $4,000,000 received in connection with the sale of
2,725,000 shares of common stock, and advances under bank line credit of
$565,000.
WORKING CAPITAL. Our working capital decreased by $1,639,000 to $1,442,000 at
December 31, 2003, as compared to $3,081,000 at December 31, 2002. When compared
to balances at December 31, 2002, the decrease in working capital at December
31, 2003 reflects an increase in current liabilities of $3,915,000, compared to
an increase in current assets of $2,276,000.
PROPERTY AND EQUIPMENT ADDITIONS. For the year ended December 31, 2003,
additions to property and equipment aggregated $29,000 for the expansion of the
CRM and call center business in Hong Kong. We also wrote off computer equipment
and furniture and fixtures of $208,000 considered to have no future economic
benefit.
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ISSUANCE OF COMMON STOCK. For the year ended December 31, 2003, we issued (i)
16,725 shares with cash consideration of $27,000 to settle expenses, (ii)
200,000 shares as a result of providing compensation for the Chief Executive
Officer according to his employment contract, and (iii) 240,000 shares as a
result of the exercise of share options and warrants with cash consideration of
$410,000.
CASH NEEDS FOR THE FORESEEABLE FUTURE. As of December 31, 2003, we had
approximately $4 million of cash and cash equivalents. We believe we have
sufficient cash to satisfy cash requirements for at least the next twelve months
of operations, however, we expect that our cash needs for the foreseeable future
will arise primarily from working capital requirements, technology development
and capital expenditures. In the event that additional credit facilities are
required, we believe that they can be negotiated at market rates currently in
effect. We believe that these sources will be adequate to meet anticipated cash
requirements for the next twelve months.
CURRENCY EXCHANGE FLUCTUATIONS. All of our revenues are denominated either in
United States dollars or Hong Kong dollars, while our expenses are denominated
primarily in Hong Kong dollars and Renminbi ("RMB"), the currency of the
People's Republic of China. There can be no assurance that RMB-to-United States
dollar or Hong Kong dollar-to-United States dollar exchange rates will remain
stable. Although a devaluation of the Hong Kong dollar or RMB relative to the
United States dollar would likely reduce our 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 our expenses, and could
have a material adverse effect on our business, financial condition and results
of operations. We have never engaged in currency hedging operations and have no
present intention to do so.
SEASONALITY AND QUARTERLY FLUCTUATIONS. We have not experienced fluctuations in
quarterly revenues from our e-commerce solutions business since inception. We
believe that our business is not subject to seasonal and quarterly fluctuations.
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DESCRIPTION OF BUSINESS
OVERVIEW
We were incorporated in the state of Delaware in 1999. Through our
subsidiaries, we invest in, operate and provide value-added telecom services
(VAS) in greater China, which includes the People's Republic of China or
mainland China, Hong Kong, Macau and Taiwan. Our VAS include operating call
centers, providing telemarketing services, customer relationship management
(CRM) services, interactive voice response (IVR) systems, short messaging
services (SMS), multimedia messaging services (MMS), voice over internet
protocol (VoIP) services, mobile applications and calling cards. In addition, we
sell and distribute telecom services. We intend to continue to grow by acquiring
and managing growing technology and network communications businesses with
established products and customers in Asia.
Our goal is to take a leading role in providing information technology
services and network communications, which are rapidly expanding business
sectors in Asia. Our business can be classified into the following operating
units:
o PacificNet Solutions Ltd. (PacSo), is a subsidiary that
specializes in systems integration, software application, and
e-business solution services in greater China. The scope of
PacSo's products and services includes smart card solutions,
web based user applications, including Kiosk and IVR, and web
based connections to remote or fixed database servers, which
are also referred to as back-end enterprise planning systems.
o PacificNet Communications Ltd. (PacComm), a subsidiary, is a
leading provider of VAS, including call centers, CRM,
telemarketing, data-mining services, mobile data services,
such as SMS, MMS, unified messaging services (UMS),
location-based service (LBS), wireless application protocol
(WAP), binary runtime environment for wireless (BREW) based
CDMA applications, mobile commerce, roaming, paging, wireless
internet, virtual private network (VPN) and VoIP services in
greater China. In December 2003, PacComm acquired a 50%
controlling interest in Epro Telecom Holdings Limited (Epro),
one of the largest providers of VAS, IVR, mobile chatting, and
voice-portal services in greater China with over 500
employees, and 1,000 call center seats, processing over
100,000 calls daily.
o PacificNet Limited (PNL), a subsidiary, is a distributor and
reseller of telecommunication, networking and computer
equipment complementing our telecommunication services. PNL
sells PABX telephone systems, basic switches and router
equipment to commercial customers, and mobile phone
accessories targeted for retail customers.
o PacificNet Tech (SZ) Limited (SZ) is a subsidiary located in
Shenzhen, China. SZ was established to expand our research,
development, marketing and distribution opportunities in
mainland China.
o PacificNet Strategic Investment Holdings Limited (PSI), is a
subsidiary that in December 2003, acquired 51% of the shares
of a private mainland China company, Beijing Linkhead
Technologies Co., Limited (Linkhead). Linkhead is a leading
provider in Greater China of VAS, IVR, mobile chatting, or
text messaging, and voice-portal services, which provide
telephone users with a natural language interface to access
and retrieve web content and to access virtual personal
assistants and Web-based unified messaging applications.
o In April 2004, PSI acquired a 51% controlling interest in
Guangzhou Yueshen TaiYang Technology Limited (Yueshen).
Yueshen is a distributor of telecom services in mainland
China.
o Also in April 2004, PSI acquired a 30% interest in Cheer Era
Limited (Cheer Era). Cheer Era is in the business of
designing, developing and manufacturing multimedia
entertainment and communication kiosk products.
o Epro is engaged in the business of providing VAS, such as call
center and CRM services, mobile marketing and promotion
services, call center training, management and consulting
services, call center software, IVR systems, mobile payment
and mobile point of sale (POS) solutions, internet e-commerce
and mobile commerce, mobile applications based on SMS, MMS,
outsourced telemarketing and customer support services, and
other mobile VAS for Hong Kong and mainland China's telecom
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operators, banks, insurance, and other financial services
companies in mainland China. Epro's clients include major
telecom operators, banks, insurance and financial services
companies in greater China, such as China Telecom (NYSE: CHA),
China Unicom (NYSE: CHU), PCCW (NYSE: PCW), CSL, SmarTone
Telecom, Sunday Communications (Nasdaq: SDAY), Hutchison
Whampoa Limited (HKSE:0013.HK), Swire Travel, Coca-Cola,
Samsung, Dun & Bradstreet, DBS, Dao Heng Insurance, Shenzhen
Development Bank, Hong Kong Government Housing Authority and
Hongkong Post.
o Linkhead is engaged in the business of providing VAS, IVR
system development and integration, voice internet portals,
computer telephony integration (CTI), VoIP, internet and
mobile application development, CRM services for China's
telecom operators, telecom related management and consulting
services, mobile consumer analytics, mobile data-mining,
internet e-commerce and mobile commerce, mobile applications
based on WAP, K-Java, BREW, EMS, SMS, MMS, outsourced software
development, and other mobile VAS in greater China. Linkhead's
major clients and profit-sharing partners include some of the
leading telecom operators such as China Telecom (NYSE: CHA),
China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), UTStarcom
(Nasdaq: UTSI). Linkhead is also a channel partner, or a
master reseller, of NMS Communications (Nasdaq: NMSS), a
leading provider of communications technologies and solutions.
o Yueshen is a distributor of telecom services, including
calling cards, mobile SIM cards, prepaid stored-value cards,
VoIP and IDD calling cards, bundled insurance cards and
customer loyalty membership cards in mainland China.
o Cheer Era is engaged in the business of designing, developing
and manufacturing multimedia entertainment and communication
kiosk products, including photo and video entertainment
kiosks, digital camera photo development stations, MMS,
ring-tone and mobile content download, payment and delivery
stations for mobile phones, and other coin-operated kiosks and
kiosk consumables.
PRINCIPAL CUSTOMERS
Our customers are located in Hong Kong, mainland China and other
regions of Asia. A brief description of our customers is as follows
CHINA TELECOM - China Telecom Corporation Limited provides wireline telephone,
data, Internet and leased line services in Shanghai Municipality, Guangdong
Province, Jiangsu Province and Zhejiang Province of the People's Republic of
China. China Telecom offers a range of telecommunications services to
residential and business customers, including local, domestic long distance and
international long distance telephone services, Internet and managed data,
leased line and other related services. We provide CRM and voice and IP related
services to China Telecom.
CHINA MOBILE - China Mobile (Hong Kong) Limited provides a full range of mobile
telecommunications services in 21 service regions in mainland China, consisting
of 16 provinces (Guangdong, Zhejiang, Jiangsu, Fujian, Henan, Hainan, Hebei,
Liaoning, Shandong, Anhui, Jiangxi, Sichuan, Hubei, Hunan, Shaanxi and Shanxi),
four municipalities (Beijing, Shanghai, Tianjin and Chongqing) and one
autonomous region (Guangxi Zhuang Autonomous Region). China Mobile offers mobile
telecommunications services principally using the global system for mobile
communications (GSM) standard. Its GSM networks reach all cities and counties
and major roads and highways within its service regions. We provide CRM and
voice and IP related services to China Mobile.
14
CHINA UNICOM - China Unicom Limited is an integrated telecommunications operator
in mainland China and Hong Kong, offering a wide range of telecommunications
services, including cellular, international and domestic long-distance, data,
Internet and paging services. The controlling shareholder, Unicom Group,
possesses the exclusive license to offer code division multiple access (CDMA)
cellular services in mainland China and Hong Kong. It has constructed CDMA
networks nationwide. It completed construction of the initial phase of its CDMA
network at the end of 2001. China Unicom has leased capacity on Unicom's Group
network and operates the CDMA network in the cellular service areas. We provide
CRM and voice and IP related services to China Unicom.
PCCW - PCCW Limited is a telecommunications service provider in Hong Kong. PCCW
is comprised of segments such as Telecommunications Services (TSS). In the TSS
segment, PCCW provides fixed-line telecommunications services which include
Internet access and multimedia content, and Business eSolutions through which
PCCW offers systems integration, applications development, network integration
and application-management services, information technology (IT) solutions,
business broadband Internet access, hosting and facilities management services
and Internet data centers within Hong Kong and greater China. We provide CRM
services to PCCW.
HUTCHISON TELECOM - Hutchison Telecom, a subsidiary of Hutchison Whampoa Ltd
(HWL, www.hutchison-whampoa.com) (HKSE:0013.HK), is one of the world's leading
owners and operators of telecommunications, offering a wide range of
communication services in Hong Kong and around the globe including mobile
telephony (voice and multimedia), paging, trunked radio, fixed-line services,
Internet services, fiber optic broadband networks and radio broadcasting.
Hutchinson's Hong Kong mobile operations currently has a subscriber base of
about 1.8 million, representing the largest share of the local mobile market.
Hutchison 3G HK Limited (www.three.com.hk), a joint venture with NTT DoCoMo and
NEC, was the first operator in Hong Kong to roll out 3G video mobile services in
January 2004. We provide CRM services to Hutchison.
SUNDAY - SUNDAY Communications Limited is a developer and provider of wireless
communications and data services, including the sales of mobile phones and
wireless data services in Hong Kong. It offers its services under the brand name
SUNDAY. SUNDAY offers its mobile subscribers basic airtime services, and
value-added services, such as SMS, wireless data services, roaming services and
international long distance calling services, and sells accessories. In 2000,
SUNDAY started launching various wireless data services through which its
subscribers can utilize ring tone or logo downloads, quiz games, message
dedication or participate in mobile community chat by the use of short messaging
services or media messaging services. SUNDAY was granted a mobile carrier
license in Hong Kong in October 2001 to construct and operate a 3G
(third-generation) wireless network. We provide CRM services to SUNDAY.
SONY (SO-NET) - So-net, Hong Kong, is a wholly-owned subsidiary of Sony
Corporation of Hong Kong Limited. So-net was granted a sub-license from Sony
Communication Network Corporation (SCN) to create a broadband service under the
So-net brand. Since its establishment in 1996, So-net has become the third
largest Internet Service Provider in Japan with a subscriber base of 1.7
million. We provide CRM and consulting services to So-net.
SWIRE TRAVEL - Swire Travel is a travel management company with over half a
century of experience servicing Hong Kong's most elite companies. Swire Travel's
main expertise is the management of corporate travel in which a wide range of
services is available to meet the needs of its business clients. We provide CRM
and consulting services to Swire.
THE HONG KONG HOUSING AUTHORITY (HA) - The Hong Kong Housing Authority is a
department of the Hong Kong Special Administrative Region of the People's
Republic of China (HKSAR). HA determines and implements public housing programs
within the government's overall housing policy framework. Apart from planning
and building public housing, HA manages public rental housing estates, interim
housing estates, transit centers, flatted factories and ancillary commercial and
non-domestic facilities such as shopping centers, market stalls and carparks. In
addition, it acts as the government's agent for clearing land, preventing
squatting and implementing improvements in squatter areas. HA also assists
low-income families to become homeowners. We provide CRM services to HA.
15
SERVICES
We provide various services to our customers including:
CUSTOMER RELATIONSHIP MANAGEMENT. We provide outsourcing and
consulting experience in call center operations and
management.
VOICE AND IP RELATED SERVICES. We provide system integration
experience in voice and IP related products in the value-added
industry and plan to expand to more data-oriented services for
mobile users. For example, we provide telecommunication
services that can be transmitted over the Internet, which
help users avoid the toll charged from long distance
carriers.
CONSULTING SERVICES. We provide a range of consulting services
based on our client's needs. A primary focus of these services
include consulting with clients establishing online e-business
environments. For clients who require our services in this
area we assist in identifying specific content, user-friendly
interface, overall web themes and designs, target user groups,
web advertising and integrated online solutions.
TRAINING SERVICES. We offer comprehensive operational and
managerial training programs for call center management
professionals at all levels.
Our subsidiary, Epro, is a leading provider of outsourced call center,
telemarketing, CRM, SMS, and other VAS and IVR services with over 13 years of
field experience in greater China. Epro's business consists of the following
three major categories:
OUTSOURCED CALL CENTER SERVICES. Epro's ISO 9001 certified outsourcing
contact center hosts over 1,000 workstations and 500 agents, and
provides multi-lingual inbound and outbound services. Epro permits its
clients to recruit and hire their own personnel to work in its call
center. Epro provides them with managerial services, call center seats
and equipment.
TRAINING AND CONSULTING SERVICES. The Epro Call Center Training
Institute (ECCTI) is a leading provider of Contact Center Management
Consulting and Training services, which helps clients maximize the
return on investment of their CRM operations.
CALL CENTER MANAGEMENT SOFTWARE PRODUCTS AND SOLUTIONS. Epro's software
products include: WISE-xb Call Center agent performance management and
reporting software, and Automatic Call Distribution (ACD) System,
Unified Messaging System (UMS), SMS, and VAS.
SALES AND MARKETING
We do not engage in any significant marketing activities and rely on
our reputation for quality and efficiency among our customers and leveraging our
strategic investors to obtain new business.
COMPETITION
We expect competition to persist and intensify in the future. Our
competitors include small firms offering specific applications, divisions of
large entities, large independent firms. A number of competitors have or may
develop greater capabilities and resources than ours. We also face the risk that
new competitors with greater resources than ours will enter our market. Our
competitors are mainly leaders in the CRM and VAS services market. Competitive
pressures from current or future competitors could cause our services to lose
market acceptance or require a significant reduction in the price of our
services.
RESEARCH AND DEVELOPMENT
We place great emphasis on the continued enhancement of our existing
products and solutions, including designing, development and supporting a
portfolio of converged voice and data enhanced services, products and solutions
to help wireless, wire-line and Internet service providers offer unprecedented
access to communications, information and commerce. We have ongoing research and
development activities with respect to the following products and solutions:
o color ringback tone systems;
o value-added services for mobile users;
16
o multi-media information on demand systems, which integrates
the dynamics of the Internet with voice based communication
applications, including text-to-speech and voice recognition
capabilities;
o web-based multimedia call center/ customer relationship
management for service providers and corporations;
o voice mail systems; and
o Wise-xb, which is a Call Center agent performance management
and reporting software. It provides intelligent routing,
comprehensive ACD/ PBX capabilities, Email, IVR, Voice Mail,
Messaging, Conference, Recording, Coaching/ Supervising,
Reporting and Interface.
EMPLOYEES
As of December 31, 2003, we, together with our subsidiaries, had 650
employees and contractors. We have not experienced any labor stoppages. None of
our employees are covered by collective bargaining agreements.
EXECUTIVE OFFICES
Our executive offices are located at Unit 2710, Hong Kong Plaza, 188
Connaught Road West, Hong Kong. Our telephone number is 011-852-2876-2900.
DESCRIPTION OF PROPERTY
A description of our property is as follows:
HONG KONG - We maintain our corporate headquarters and development center in
Hong Kong located at Unit 2710, Hong Kong Plaza, 188 Connaught Road West, Hong
Kong, where we lease approximately 1,000 square feet for a monthly rental fee of
$650. Substantially all of our operations are run from this facility. We lease
this space from a shareholder.
Our Call Center is located at Units 601-603 New Bright Building, 11 Sheung Yuet
Road, Kowloon Bay, Kowloon where we lease approximately 17,739 square feet for a
monthly fee of $16,365 and our branch office is located at Units 2-3, 17th
Floor, Nan Fung Commercial Centre, 19 Lam Lok Street, Kowloon Bay, Hong Kong
where we lease approximately 2,359 square feet for a monthly rental fee of
$1,815.
UNITED STATES - Our current U.S. corporate office is located at 860 Blue Gentian
Road, Suite 360, Eagan, Minnesota 55121, where we sublease space for a monthly
rental fee of $1,000.
CHINA -Our current Chinese corporate office is located at Room 1708, Tower B,
Stars Plaza, Hongli Road, FuTian District, Shenzhen, China where we lease
approximately 1,000 square feet for a monthly rental fee of $449. We lease space
from a shareholder. Our offices are located in Beijing, Shanghai and Shenzhen.
Details are as follows:-
Locations Area (Square Feet)
------------------------------------------------------------------------------------- ------------------
1601, 26 Building, 3 Block,Anzhenxili,ChaoYang District,Beijing 4,306
1407, 2# Building, Hengji Plaza, 547 Tianmuxilu,Shanghai 2,153
901,Tower A, Tian An High-Tech Plaza, Tian An Cyber Park, Fu Tian District, Shenzhen 1,076
We believe that our offices are adequate for our current operations.
LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings that
involve us.
17
RECENT DEVELOPMENTS
In December 2003, we acquired a 50% ownership interest in Epro for
$500,000 in cash and 600,000 shares of our common stock. 500,000 of the shares
are being held by an Escrow Agent and will be released in specified amounts
based on Epro's achievement of certain earnings criteria. Additionally, we have
agreed to issue a maximum of 300,000 bonus shares of common stock per year for
achieving net income in excess of $1,000,000 in 2004 and 2005. Epro will be
required to return a portion of the shares equivalent to the dollar amount of
the shortfall of net income in years 2004 and 2005.
In December 2003, we acquired a 51% ownership interest in Linkhead for
$222,500 in cash and 950,000 in shares of our common stock. 600,000 of the
shares are being held by an Escrow Agent and will be released in specified
amounts based on Linkhead's achievement of certain earnings criteria.
Additionally, we have agreed to issue a maximum of 600,000 bonus shares of
common stock for achieving net income in excess of $1,500,000.
On April 12, 2004, we acquired a 51% controlling interest in Yueshen
for $579,948 in cash, 106,240 shares of our common stock and a warrant to
purchase up to 50,000 shares of common stock. All of the shares of common stock
are held by an Escrow Agent and will be released in specified amounts based on
Yueshen's achievement of certain earnings criteria. In the event of a shortfall
in net income in years 2004 and 2005, a portion of the shares equivalent to the
dollar amount of such shortfall divided by $5.80 shall be returned to us.
On April 7, 2004, we acquired a 30% interest in Cheer Era for $385,604
in cash, 149,459 shares of common stock and a warrant to purchase up to 80,000
shares of our common stock. All of the shares of common stock are held by an
Escrow Agent and will be released in specified amounts based on Cheer Era's
achievement of certain earnings criteria. In the event of a shortfall in net
income in years 2004 and 2005, a portion of the shares equivalent to the dollar
amount of the shortfall divided by $6.00 shall be returned to us.
18
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of the directors, executive officers and
key employees of the Company as of April 16, 2004:
Name Age Title
------------------------ ------------ ----------------------------------------------------------
Tony Tong 36 Chairman, Chief Executive Officer, and Director
Victor Tong 33 President, Secretary, and Director
ShaoJian (Sean) Wang 39 Chief Financial Officer, Vice President, and Director
Richard C.H. Lo 36 Director
David Fisher 54 Director
Peter Wang 49 Director
Michael Ha 33 Director
Our executive officers are appointed at the discretion of our board of
directors with no fixed term. There are no family relationships between or among
any of our executive officers or our directors other than the relationship
between Mr. Tony Tong and Mr. Victor Tong.
The following is a brief description of each director's and executive
officer's business experience:
Mr. Tony Tong, age 36, is our Chairman, CEO, founder and a Director.
Mr. Tong has served on our board of directors since 1999. From 1995 to 1997, Mr.
Tong served as the Chief Information Officer of DDS Inc., a leading SAP-ERP
consulting company in the USA, which was later acquired by CIBER, Inc. From 1993
to 1994, Mr. Tong worked for Information Advantage, Inc. (IACO), a leading
business intelligence, Data-Mining and CRM technology provider serving Fortune
500 clients. IACO consummated an IPO on Nasdaq in 1997 and was later acquired by
Sterling Software and Computer Associates. From 1992 to 1993, Mr. Tong worked as
a Business Process Re-engineering Consultant at Andersen Consulting (now
Accenture). From 1990 to 1991, Mr. Tong worked for ADC Telecommunications, a
global supplier of telecom equipment. Mr. Tong's R&D achievements include being
the inventor and patent holder of US Patent Number 6,012,066 (granted by US
Patent and Trademark Office) titled "Computerized Work Flow System, an
Internet-based workflow management system for automated web creation and process
management." Mr. Tong also serves on the board of advisors of Fortune Telecom
(listed on Hong Kong Stock Exchange), a leading distributor of mobile phones,
PDAs, telecom services, and accessories in China and Hong Kong. Mr. Tong is a
frequent speaker on technology investment in China, and was invited to present
at the Fourth APEC International Finance & Technology Summit in 2001. Mr. Tong
graduated with a Bachelor of Mechanical/Industrial Engineering Degree from the
University of Minnesota. Mr. Tong served on the Computer Engineering Department
Advisory Board and was an Adjunct Professor at the University of Minnesota, USA.
Mr. Tong is the brother of Victor Tong.
Mr. Victor Tong, age 33, is our President, Secretary, and a Director.
Mr. Victor Tong has served on our board of directors since 2002. Mr. Victor Tong
was formerly the President of KeyTech, a leading information technology
consulting company based in Minneapolis, Minnesota. In 1994, Victor and Tony
Tong co-founded Talent Information Management ("TIM"), an IT services and
consulting company in Minnesota, our parent company. Mr. Victor Tong gained his
consulting, systems integration, and technical expertise through his experience
at Andersen Consulting (now Accenture), American Express, 3M, and the
Superconductivity Center at the University of Minnesota. In 1999, he was
recognized in "CityBusiness 40 Under 40" as one of the 40 people under the age
of 40 who is the next generation of Twin Cities' business and community leaders.
Mr. Tong is also the vice president and co-founder of the Chinese American
Business Association of Minnesota, a non-profit membership organization serving
the Chinese business community in the improvement of the economic and social
status of its members and other Chinese American entrepreneurs in Minnesota. Mr.
Tong graduated with honors and received the Bachelor of Science in Physics from
the University of Minnesota, USA. Mr. Tong is the brother of Tony Tong.
19
Mr. ShaoJian (Sean) Wang, age 39, is the Chief Financial Officer, Vice
President of International Business and is one of our Directors. Mr. Wang has
served on our board of directors since 2002. Mr. Wang is also a Director of
Thian Bing Investments Pte Ltd - a Singapore based investment holding company, a
Director on the board of Alliance PKU Co. Ltd - a company owned and controlled
by Guanghua School of Management, Peking University, a Director of the board of
Portcullis International Group - a Singapore based investment consulting
company, and a Director and Partner of the Overseas Chinese Scholar Fund, a
leading venture capital firm headquartered in Zhongguancun Beijing and
Guangzhou, China. Mr. Wang started his professional career as a Market/Financial
analyst with Ecolab Inc. in 1987, where he moved quickly to become Territory
Manager and Marketing Manager. In 1990, Mr. Wang was posted to Ecolab's Asia
Pacific regional headquarters as its Business Development Manager. In 1992, Mr.
Wang was appointed as Country Manager of Ecolab for Indonesia. Mr. Wang is an
investor and Director in Alliance PKU Co. Ltd., which owns two premier companies
in China. Alliance PKU Consulting is a leading management consulting firm in
China, and Beidabiz & E-learning Co. (a venture of Peking University) is a
well-known online education provider. Mr. Wang also advises some local
governments in China. The Municipal government of Yantai appointed him as the
city's representative for investment. He worked with the Wei Fang government on
setting up the Agricultural Development Park. Mr. Wang attended Peking
University and received his MBA degree at the Carlson School of Management,
University of Minnesota, and a B.S. in Economics at Hemline University.
Mr. Richard Chi Ho Lo, age 36, is a Director. Mr. Lo has served on our
board of directors since 2002. Mr. Lo is the Chief Executive Officer of
Fulldiamond Limited, an investment and consulting firm in financial, real estate
and venture advisory work. He is currently director of several start-up
companies in Hong Kong and the United States. Mr. Lo is the former Managing
Director of Associated Capital Limited and former Executive Director of two
publicly listed companies in Hong Kong. Mr. Lo holds a B.A. degree from the
University of California, Los Angeles (UCLA) and obtained his MBA in Finance and
Investment from the University of Hull in England.
Mr. David F. Fisher, age 54, is a Director. Mr. Fisher has served on
our board of directors since 2002. From 1999 to 2003, Mr. Fisher served as
Commissioner of Administration and Office of Technology for the State of
Minnesota, and chief technical advisor to Governor Jesse Ventura. Mr. Fisher
also served on the Minnesota Secretary of State Executive Council, as a member
of the Minnesota Governor's Cabinet, and was responsible for the general
management and operations of the Minnesota state government, overseeing 1,000
full time employees with an annual budget of $250 million. He is responsible for
establishing and executing statewide policy and operations for government
telecommunications and information technology. From 1994 to 1999, Mr. Fisher
served as Vice President, General Counsel and Corporate Secretary of ADC
Telecommunications, Inc., a multinational telecommunications equipment
manufacturer and distributor. While at ADCT, Mr. Fisher managed a legal,
contract and regulatory staff of twenty-seven and managed more than two dozen
complex acquisition transactions, which included negotiating business joint
ventures, alliances and contract relationships. From 1980 to 1994, Mr. Fisher
served as Vice President, International and Associate General Counsel for the
Pillsbury Company, a multinational consumer foods producer and distributor based
in Minneapolis, Minnesota, USA. Prior to that, Mr. Fisher was a trial attorney
with Henson & Efron, P.A., and engaged in general legal practice, which included
corporate commercial transactions, acquisitions and divestitures, litigation,
securities and employment law, contract drafting and negotiation, and antitrust
compliance. Mr. Fisher has served on the board of directors of Minnesota
Technology, Inc., and on the International and Public Policy Committees of the
Telecommunications Industry Association. Mr. Fisher is an adjunct professor of
law at the Hamline University School of Law. Mr. Fisher received his Juris
Doctor, Magna Cum Laude, Valedictorian, at the Washburn University School of
Law, and Bachelor of Arts at the University of Minnesota. Mr. Fisher was a Bush
Foundation Fellow and studied public policy at Kennedy School of Government,
Harvard University.
Mr. Peter Wang, age 49, is a Director. Mr. Wang has served on our board
of directors since 2003. Mr. Wang serves as Chief Executive Officer of China
Quatum Communications Ltd., a privately-held company. Mr. Wang was a founder of
Unitech Telecom (now named UTStarcom, NASDAQ: UTSI). Under his management,
UTStarcom created the first digital loop carrier system and installed the first
PHS (Personal Handyphone System) system in China. As an entrepreneur, he has
20
successfully co-founded and built other ventures in the US, including World
Communication Group and World PCS, Inc. Before forming his own companies, he
worked at AT&T Bell Labs and Racal-Milgo Information System. With AT&T Bell
Labs, he worked on Network Evolution Planning and representing AT&T Network
System Division served on Network Management Protocol Forum. With Racal-Milgo,
he worked on network management system architecture as a senior engineer. As
part of the technologically trained community in China, he was elected Deputy
Chairman of the Association of Privately Owned High-tech Enterprises in China.
He has been elected president of the first Chinese PACS User and Providers Forum
that promotes the international PCS standard worldwide. He also served on the
boards of directors of many U.S. and Chinese companies, specifically Joray
Enterprises Inc., Phoenix Tech Ltd. and World Communication Group. Mr. Wang has
a BS in Computer Science and a MS in Electrical Engineering from University of
Illinois, as well as an MBA in Marketing from Southeast-Nova University.
Mr. Michael Chun Ha, aged 33, is a Director. Mr. Ha has served on our
board of directors since 2003. Mr. Ha graduated from the Faculty of Law,
University of Hong Kong in 1994 with a bachelor degree in law and was admitted
as a solicitor of the High Court of the Hong Kong Special Administrative Region
in 1997 and a solicitor of the Supreme Court of England and Wales in 1998. From
1995 to 2002, Mr. Ha worked as a lawyer in a number of prestigious international
and Hong Kong law firms, specializing in the areas of corporate finance,
securities offerings, takeovers, cross-border mergers and acquisitions, venture
capital, corporate restructuring, regulatory and compliance issues, project
finance, and general commercial transactions and services in Hong Kong and the
People's Republic of Hong Kong. In 2002, Mr. Ha commenced his own practice in
the trade name of "Ha and Ho Solicitors". Mr. Ha specializes in the areas of
general commercial transactions, corporate finance and civil and criminal
litigation. Mr. Ha has been the company secretary of Shanxi Central
Pharmaceutical International Company Limited, a Hong Kong main board listed
company, and since 2003 Mr. Ha has been a director of a private investment
company, Metro Concord Investment Limited.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The board of directors has established a separately designated stand
alone audit committee established in accordance with Section 3(a)(58)A of the
Exchange Act, which is currently comprised of Messrs. Richard Chi Ho Lo, David
F. Fisher and Michael Chun Ha. They are all considered "independent" under the
Nasdaq listing standards currently in effect. The audit committee recommends to
the board of directors the annual engagement of a firm of independent
accountants and reviews with the independent accountants the scope and results
of audits, our internal accounting controls and audit practices and professional
services rendered to us by our independent accountants.
The board of directors has determined that all members of the audit
committee are financial experts and independent members of the board of
directors.
21
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid
by us, as well as certain other compensation paid or accrued, during each of our
last three fiscal years to each named executive officer.
Annual Compensation Long Term Compensation Awards
------------------------------------ -----------------------------
Name/Principal Fiscal Restricted Stock All Other
Position Year Salary ($) Bonus ($) Other ($) Stock Award ($) Options Comp. ($)
-------- ---- ---------- --------- --------- --------------- ------- ---------
Tony Tong, CEO 2003 $100,000 - - - 120,000
2002 $110,000 - - $57,900 206,000 -
2001 $106,226 - $15,384 50,000 $53,333 (1)
--------------------
(1) Represents amounts received for life and health insurance coverage.
OPTION GRANTS DURING 2003 FISCAL YEAR
(INDIVIDUAL GRANTS)
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE OR
NAME GRANTED YEAR BASE PRICE EXPIRATION DATE
---- ------- ---- ---------- ---------------
Tony Tong, CEO 70,000 64% $2.20 June 23, 2006
50,000 36% $4.25 November 26, 2006
AGGREGATED OPTION EXERCISES DURING 2003 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NO. OF SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE MONEY OPTIONS AT FISCAL
YEAR END 12/31/03 YEAR END 12/31/03
(#) ($)
----------------------------- -------------------------------
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- --------- ----------- ------------- ----------- -------------
Tony Tong, CEO 200,000 $494,000 6,000 120,000 $10,950 $366,500
COMPENSATION OF DIRECTORS
Each director is paid a sign-on bonus of 10,000 shares of our common
stock. Each director is also paid an annual retainer fee of US$10,000 in the
form of shares of our common stock or stock options for shares of our common
stock. Such retainer fee is paid in semi-annual installments. The number of
shares of common stock issued is based on the average closing market price over
the ten trading days prior to the end of the six month period that the retainer
fee is due.
Directors are also entitled to US$500 for each board meeting that such
director attends in person, by conference call, or by committee action and
US$200 for each committee meeting, payable by cash, shares of our common stock
or stock options for shares of our common stock, at our option. All of our
directors are reimbursed for out-of-pocket expenses relating to attendance at
meetings
22
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
On December 30, 2002, we entered into an Executive Employment Contract
with Tony Tong. Mr. Tong currently serves as our Chief Executive Officer. The
employment agreement provides for Mr. Tong to earn an annual base salary of
$100,000 in cash, plus $60,000 in stock compensation annually until April 1,
2005. Mr. Tong is also eligible for an annual bonus for each fiscal year during
the term of his contract based on performance standards as the Board or
compensation committee designates. Mr. Tong is entitled to receive a monthly
housing allowance of $2,500, monthly automobile allowance of $500, tax
preparation expenses of $2,000 per year, and cash bonus based on our net profit.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 28 2002, we completed a $3,480,000 private placement by
issuing 2,400,000 shares of restricted common stock at a price of $1.45 per
share to Sino Mart Management Limited ("Sino Mart"), whose executive director is
the father of our chairman and CEO. In addition, we issued Sino Mart a warrant
to purchase up to an additional 600,000 shares of restricted common stock at
$1.45 per share. The fully exercisable warrant expires on April 5, 2005. The
$3,480,000 private placement transaction was approved at a special stockholder
meeting held on March 25, 2002.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
23
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 16, 2004, the number of
shares of our common stock beneficially owned by (i) each person who is known by
us to be the beneficial owner of more than five percent of the Company's common
stock; (ii) each director; (iii) each of the named executive officers in the
Summary Compensation Table; and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the stockholders listed in the table have
sole voting and investment power with respect to the shares indicated.
NUMBER OF SHARES % OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER** BENEFICIALLY OWNED BENEFICIALLY OWNED
-------------------------------------- ------------------ ------------------
Kin Shing Li (1) 1,750,000 27.6%
Flat A & B, 15/F, Block T42 Wisteria Mansion, 4
Taikoo Wan Road, Taikooshing, Hong Kong
Sino Mart Management Ltd. (2) 1,000,000 15.8%
c/o ChoSam Tong
Unit 3813, Hong Kong Plaza
188 Connaught Road West, Hong Kong
ChoSam Tong (3) 1,030,000 16.2%
Tony Tong (4) 225,391 3.6%
ShaoJian (Sean) Wang (5) 80,400 1.3%
Victor Tong (6) 71,200 1.1%
Richard Chi Ho Lo (7) 40,000 *
David Fisher (8) 23,000 *
Peter Wang - -
Michael Chun Ha (9) 5,000 *
All directors and officers as a group (7 persons) 474,991 7.5%
* Less than one percent.
** The address for each beneficial owner not otherwise specified is: c/o
PacificNet Inc. Unit 2710, Hong Kong Plaza, 188 Connaught Road West, Hong Kong.
(1) Information obtained from the Schedule 13D/A (Amendment No.1) filed by Mr.
Kin Shing Li on October 14, 2003.
(2) Sino Mart Management Ltd. is owned by Mr. ChoSam Tong, the father of Messrs.
Tony Tong and Victor Tong.
(3) Includes shares of common stock of Sino Mart Management Ltd., which is owned
by Mr. ChoSamTong and currently exercisable stock options to acquire 23,000
shares of common stock.
(4) Includes currently exercisable stock options to acquire 41,000 shares of
common stock. Excludes 1,000,000 shares owned by Sino Mart Management Ltd., as
to which shares Mr. Tony Tong disclaims beneficial ownership.
(5) Includes currently exercisable stock options to acquire 41,000 shares of
common stock.
(6) Includes currently exercisable stock options to acquire 36,000 shares of
common stock. Excludes 1,000,000 shares owned by Sino Mart Management Ltd., as
to which shares Mr. Victor Tong disclaims beneficial ownership.
(7) Includes currently exercisable stock options to acquire 21,000 shares of
common stock.
(8) Includes currently exercisable stock options to acquire 18,000 shares of
common stock.
(9) Includes currently exercisable stock options to acquire 5,000 shares of
common stock.
24
SELLING STOCKHOLDERS
On January 15, 2004, we completed a private placement in which we sold
an aggregate of 617,285 shares of common stock and issued warrants to purchase
up to an aggregate of 154,320 shares of common stock to the selling stockholders
listed in the table below. We are filing this registration statement pursuant to
the terms of a registration rights agreement between each investor and us. We
also agreed to bear expenses in connection with the registration and sale of the
shares. See "Plan of Distribution."
The following table sets forth as of April 16, 2004, information
regarding the current beneficial ownership of our common stock by the selling
stockholders and their beneficial ownership assuming sale of all of the shares
of common stock offered hereby. Information as to current ownership is based
upon information provided to us by the selling stockholders, which we have not
independently verified. The selling stockholders are not making any
representation that the shares covered by this prospectus will be offered for
sale.
No selling stockholder has held any position nor had any material
relationship with the Company or its affiliates during the past three years.
Number of Shares
Shares Maximum Number Beneficially Percentage
Name of Beneficially Owned of Shares Owned Ownership After
Selling Stockholder Prior to Offering to be Sold After Offering Offering
------------------- ----------------- ---------- -------------- --------
Whalehaven Fund Limited(1) 25,720 25,720 0 0
Bluegrass Growth Fund(2) 128,601 128,601 0 0
Omicron Master Fund(3) 128,601 128,601 0 0
Greenwich Growth Fund Limited(4) 25,720 25,720 0 0
Excalibur Limited Partnership(5) 77,160 77,160 0 0
Vertical Ventures LLC(6) 128,601 128,601 0 0
Stonestreet LP(7) 128,601 128,601 0 0
Alpha Capital AG(8) 128,601 128,601 0 0
(1) Includes 5,144 shares of common stock issuable upon exercise
of a warrant.
(2) Includes 25,720 shares of common stock issuable upon exercise
of a warrant.
(3) Includes 25,720 shares of common stock issuable upon exercise
of a warrant.
(4) Includes 5,144 shares of common stock issuable upon exercise
of a warrant.
(5) Includes 15,432 shares of common stock issuable upon exercise
of a warrant.
(6) Includes 25,720 shares of common stock issuable upon exercise
of a warrant.
(7) Includes 25,720 shares of common stock issuable upon exercise
of a warrant.
(8) Includes 25,720 shares of common stock issuable upon exercise
of a warrant.
25
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 125,000,000 shares of
common stock, par value $.0001 per share, of which 7,260,262 shares were issued
and outstanding as of April 16, 2004, and 5,000,000 shares of preferred stock,
par value $.0001 per share, none of which were issued and outstanding as of
April 16, 2004.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. The holders of
common stock are entitled to receive dividends ratably when, as and if declared
by the board of directors out of funds legally available therefore. In the event
of our liquidation, dissolution or winding up, the holders of common stock are
entitled to share equally and ratably in all assets remaining available for
distribution after payment of liabilities and after provision is made for each
class of stock, if any, having preference over the common stock.
The holders of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are validly
issued, fully-paid and nonassessable.
PREFERRED STOCK
Under our Restated Certificate of Incorporation, as amended, the Board
of Directors is authorized, subject to any limitations prescribed by the laws of
the State of Delaware, but without any further action by our stockholders, to
provide for the issuance of up to 5,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in such series, to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The board of directors may authorize
and issue preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock.
26
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling
stockholders. The selling stockholders are offering shares of common stock that
they received in connection with the private placement. As used in this
prospectus, the term "selling stockholders" includes pledgees, transferees or
other successors-in-interest selling shares received from the selling
stockholders as pledgors, assignees, borrowers or in connection with other
non-sale-related transfers after the date of this prospectus. This prospectus
may also be used by transferees of the selling stockholders, including
broker-dealers or other transferees who borrow or purchase the shares to settle
or close out short sales of shares of common stock. The selling stockholders
will act independently of us in making decisions with respect to the timing,
manner and size of each sale or non-sale related transfer. We will not receive
any of the proceeds of such sales by the selling stockholders.
The selling stockholders may sell their shares of common stock directly
to purchasers from time to time. Alternatively, they may from time to time offer
the common stock to or through underwriters, broker/dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
The common stock may be sold by the selling stockholders from time to
time in one or more transactions at or on any stock exchange, market or trading
facility on which shares are traded or in private transactions. The sales may be
made at fixed prices, at prevailing market prices at the time of sale, at
varying prices determined at the time of sale or at negotiated prices. The sale
of the common stock may be affected by means of one or more of the following
transactions (which may involve cross or block transactions):
o a block trade in which the broker-dealer so engaged will
attempt to sell such shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o transactions on any exchange or quotation service on which the
shares may be listed or quoted at the time of sale in
accordance with the rules of the applicable exchange;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o privately negotiated transactions;
o transactions through the settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o transactions through the writing or settlement of options or
other hedging transactions, whether through an options
exchange or otherwise; and
o any other method permitted pursuant to applicable law.
27
The selling stockholders may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus. To the extent
required, this prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may also enter into option or other
transactions with broker-dealer's, or other financial institutions for the
creation of one or more derivative securities, which require the delivery to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction.)
In connection with the sale of the common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker/dealers of
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
shares to close out such short positions, or loan or pledge common stock to
broker/dealers that in turn may sell such securities.
The selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the common stock by the
selling stockholders. The foregoing may affect the marketability of such
securities.
Pursuant to the registration rights agreement with the selling
stockholders, all expenses of the registration of the common stock will be paid
by us, including, without limitation, SEC filing fees; provided, however, that
the selling stockholders will pay any broker or similar commissions, or, except
to the extent otherwise provided for, any legal fees or other costs of the
selling stockholders. The selling stockholders will be indemnified by us against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. We will be
indemnified by the selling stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
To comply with the securities laws of certain jurisdictions, if
applicable, the common stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law allows companies to
indemnify their directors and officers against expenses, judgments, fines and
amounts paid in settlement under the conditions and limitations described in the
law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant, pursuant to the foregoing provisions, or otherwise the Company has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for
us by Loeb & Loeb LLP, New York, New York.
28
EXPERTS
Our audited financial statements for the periods ended December 31,
2003 and 2002, have been included in this prospectus in reliance upon the report
of Clancy and Co., P.L.L.C. independent auditors, appearing in this registration
statement, and their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file all documents required to be filed pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act with the SEC through the Electronic Data
Gathering, Analysis and Retrieval system (EDGAR), and is publicly available
through the SEC's website located at http://www.sec.gov.. This Amendment on Form
SB-2, including all exhibits and schedules and amendments, has been filed with
the SEC through EDGAR. You may also inspect this Amendment on Form SB-2,
including all exhibits, without charge at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of these
materials from the SEC's Public Reference Room at 450 Fifth Street, N.W., Room
1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
29
FINANCIAL STATEMENTS
The consolidated financial statements and the reports and notes, which are
attached hereto are incorporated herein by reference.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants 31
Consolidated Balance Sheets - As of December 31, 2003 and 2002 32
Consolidated Statements of Operations - For the Years Ended
December 31, 2003 and December 31, 2002 33
Consolidated Statements of Changes in Stockholders'
Equity - For the Years Ended December 31, 2003 and December 31, 2002 34
Consolidated Statements of Cash Flows - For the Years
Ended December 31, 2003 and December 31, 2002 35
Notes to Consolidated Financial Statements 36-49
Pro Forma Financial Statements 50-52
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of PacificNet Inc.:
We have audited the accompanying consolidated balance sheets of PacificNet Inc.
(a Delaware Corporation) and Subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PacificNet Inc. and
Subsidiaries as of December 31, 2003 and 2002, and the results of their
consolidated operations and cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ CLANCY AND CO, P.L.L.C.
Phoenix, Arizona
March 30, 2004
31
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars, except par values and share numbers)
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,823 $ 3,694
Restricted cash - pledged bank deposit (Note 8) 212 --
Accounts Receivables (net of allowance for doubtful accounts of $0 as
of December 31, 2003 and $255 as of December 31, 2002) 1,890 220
Inventories (Note 3) 76 --
Other Current Assets 286 97
--------- ---------
Total Current Assets 6,287 4,011
Property and Equipment, net (Note 6) 466 284
Goodwill (Note 5) 420 19
--------- ---------
TOTAL ASSETS $ 7,173 $ 4,314
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit (Note 7) $ 1,199 $ 565
Bank Loans-current portion (Note 8) 1,405 --
Capital Lease Obligations - current portion (Note 9) 152 --
Accounts Payable 1,007 224
Accrued Expenses 360 141
Subscription Payable (Note 10) 722 --
--------- ---------
Total Current Liabilities 4,845 930
--------- ---------
Long-term liabilities:
Bank Loans - non current portion (Note 8) 377 --
Capital Lease Obligations - non current portion (Note 9) 149 --
--------- ---------
Total Long-Term Liabilities 526 --
--------- ---------
Total Liabilities 5,371 930
Minority Interest in Consolidated Subsidiary (110) 131
Commitments and Contingencies (Note 7)
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:
December 31, 2003 - 6,163,977 issued; 5,363,977 outstanding
December 31, 2002 - 4,907,252 shares 1 1
Treasury Stock, at cost (800,000 shares) (5) (5)
Additional Paid-In Capital 31,790 31,253
Cumulative Other Comprehensive Loss (24) (24)
Accumulated Deficit (29,850) (27,972)
--------- ---------
Total Stockholders' Equity 1,912 3,253
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,173 $ 4,314
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
32
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of United States dollars, except loss per share and share amounts)
YEAR ENDED DECEMBER 31: 2003 2002
------------ ------------
Revenues $ 1,217 $ 2,319
------------ ------------
Cost of Revenues (698) (1,787)
------------ ------------
Gross Margin 519 532
Selling, General and Administrative expenses (2,758) (2,912)
Depreciation and amortization (76) (264)
Provision for written off of fixed assets (208) --
------------ ------------
LOSS FROM OPERATIONS (2,523) (2,644)
Interest Income 27 33
Sundry income 54 --
------------ ------------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND DISCONTINUED OPERATIONS (2,442) (2,611)
Provision for income taxes (Note 12) (32) --
Provision for impairment loss of affiliated companies (Note 5) -- (97)
Minority Interests 596 (106)
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (1,878) (2,814)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (NOTE 2) -- (107)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ($ 1,878) ($ 2,921)
------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations ($ 0.36) ($ 0.67)
Loss from discontinued operations -- ($ 0.03)
------------ ------------
Net loss ($ 0.36) ($ 0.70)
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,234,744 4,191,816
The accompanying notes are an integral part of these consolidated financial statements.
33
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands of United States dollars, except loss per share and share amounts)
CUMULATIVE
ADDITIONAL OTHER TOTAL
PREFERRED COMMON PAID-IN COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL INCOME/(LOSS) DEFICIT STOCK EQUITY
----- ----- ------- ------------- ------- ----- ------
BALANCE AT DECEMBER 31, 2001
(1,634,628 SHARES) $ - $ - $ 26,755 $ (22) $(25,051) $ - $ 1,682
COMPREHENSIVE LOSS:
Net loss - - - - (2,921) - (2,921)
Change in Cumulative Effect of
Foreign Currency Translation - - - (2) - - (2)
---------
TOTAL COMPREHENSIVE LOSS (2,923)
---------
Issuance of common stock for services
(337,007 shares) - - 263 - - - 263
Issuance of common stock to acquire
fixed assets (155,058 shares) - - 186 - - - 186
Issuance of common stock to satisfy
liabilities (60,585 shares) - - 50 - - - 50
Issuance of common stock for cash
(2,725,000 shares) - 1 3,999 - - - 4,000
Treasury Stock acquired, at cost
(4,970 shares) - - - - - (5) (5)
Share adjustment (56 shares reduction) - - - - - - -
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002
(4,907,252 SHARES) - 1 31,253 (24) (27,972) (5) 3,253
COMPREHENSIVE LOSS:
Net loss - - - - (1,878) - (1,878)
---------
TOTAL COMPREHENSIVE LOSS (1,878)
---------
Shares returned to the treasury
(800,000 shares) - - - - - - -
Issuance of common stock to satisfy
services (16,725 shares) - - 27 - - - 27
Issuance of common stock for
officer's exercise of stock
options as part of employment
compensation (200,000 shares) - - 100 - - - 100
Exercise of stock options and
warrants for cash (240,000 shares) - - 410 - - - 410
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2003
(5,363,977 SHARES) $ - $ 1 31,790 $ (24) $(29,850) $ (5) $ 1,912
--------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
34
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars, except loss per share and share amounts)
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,878) ($2,921)
Adjustment to reconcile net loss to net cash used in operating
activities:
Expenses settled by issuance of common shares 127 313
Minority Interest (596) 98
Loss on disposal of fixed assets 208 142
Provision for impairment of software development costs 761 122
Provision for impairment of affiliated companies -- 97
Provision for write-off of goodwill 19 --
Depreciation 72 154
Amortization 4 110
Changes in:
Accounts receivable and other current assets 272 145
Inventories -- 93
Other payables and accrued expenses 106 (525)
-------- --------
Net cash used in operating activities (905) (2,172)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Increase in restricted cash-pledged bank deposits (52) --
Acquisition of property and equipment (29) (14)
Acquisition of intangible assets (19) --
Acquisition of subsidiaries (211) --
Acquisition of affiliate company interests -- (22)
-------- --------
Net cash used in investing activities (311) (36)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Advances under bank line of credit 634 565
Proceeds from sale of common stock -- 4,000
Proceeds from exercise of stock options and warrants 410 --
Repayment of amount borrowed (465) --
New bank loans 717 --
New finance lease 49 --
Purchases of treasury stock -- (5)
-------- --------
Net cash provided by financing activities 1,345 4,560
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (2)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 129 2,350
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,694 1,344
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,823 $ 3,694
-------- --------
CASH PAID FOR:
Interest 54 8
Income taxes -- --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Investment in subsidiary acquired through issuance of subscriptions
payable $ 722 $ --
Common stock issued to satisfy certain liabilities and to settle
expenses $ 127 $ 313
Common stock issued to acquire fixed assets $ -- $ 186
The accompanying notes are an integral part of these consolidated financial statements.
35
PACIFICNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. NATURE OF OPERATIONS
PacificNet Inc. (referred to herein as "PacificNet" or the "Company")
was originally incorporated in the State of Delaware on April 8, 1987.
PacificNet is an Asian information technology solutions provider that
develops and implements full service information technology ("IT")
solutions. In fiscal year 2002, the Company reduced the
business-to-business electronic commerce initiatives to focus on IT
consulting services and the licensing of proprietary software
technologies. The Company provides telecommunication voice and data
network communications products and services. The Company's business
strategy is to expand its role in the rapidly growing business sector,
namely the IT solution provision and network communication businesses,
in the Asian market, particularly the greater PRC region.
Operating Risks - The Company's business is characterized by rapid
technological change, new product and service development and evolving
industry standards. Inherent in the Company's business are various
risks and uncertainties, including limited operating history, uncertain
profitability, history of losses and risks associated with the
Internet, e-commerce and the ability to raise additional capital.
2. BUSINESS DISPOSITIONS AND RESCINDED TRANSACTIONS
Business Disposition - In September 2001, the Board of Directors of the
Company approved a plan not to further invest in Laptizen.com Limited
("Laptizen") subsidiary. Laptizen is a Hong Kong value added reseller
of computer systems. As of December 31, 2001 all activities related to
Laptizen had significantly reduced and the Company planned to liquidate
Laptizen. During the year ended December 31, 2001, the Company
wrote-off associated Laptizen goodwill of $89,000. Revenue and net loss
information related to Laptizen operations is as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
-------- --------
Revenues $ - $ 15
Net loss $ - $ (107)
Rescinded transaction - The Company has ceased its participation with
International Elite Limited (IEL) in the joint venture company,
PacificNet Communications Limited - Macao Commercial Offshore (the
"Joint Venture"). Pursuant to the terms of the Equity Joint Venture
Agreement, signed on December 21, 2002, the Company was required to
obtain the requisite regulatory and shareholder approval to issue 34
million shares of the Company's common stock in connection with the
Joint Venture transaction. The Company still has not received the
necessary regulatory and shareholder approval to issue the shares.
Since the Company was unable to obtain shareholder approval, the board
of directors of the Company determined that it was in the best interest
of the Company to terminate its interest in the Joint Venture. Since
the Company has not obtained regulatory and shareholder approval of the
joint venture transaction and the Company does not control the
operating and financing decisions of the joint venture, the Company
does not consolidate the assets, liabilities, revenues and expenses of
the joint venture. The Company will no longer seek approval to issue
the 34 million shares to the Joint Venture and the original 800,000
deposit shares held in escrow were canceled and returned to the
Company's treasury. The termination agreement was signed on March 30,
2004. (See Note 15).
36
The following 2003 unaudited quarterly interim information has been
restated to present the results of operations for the Company as a
result of the joint venture termination (in thousands):
March 31 June 30 September 30
-------- ------- ------------
Revenues $ 92 $ 220 $ 344
Net loss $ (614) $ (846) $(1,032)
Basic and diluted loss per share $ (0.12) $ (0.15) $ (0.20)
The net effect of the restatement for the 2003 quarterly interim
information was as follows:
March 31 - overstatement of revenues of $1,175,000, understatement of
net loss of $337,000, and understatement of loss per share of $0.06 per
share.
June 30 - overstatement of revenues of $2,334,000, understatement of
net loss of $694,000, and understatement of loss per share of $0.12 per
share.
September 30 - overstatement of revenues of $3,510,000, understatement
of net loss of $1,033,000, and understatement of loss per share of
$0.20.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation and Presentation
--------------------------------------------
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles in
the United States of America and present the financial
statements of the Company and its wholly owned and
majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
b. Investments in Affiliated Companies
-----------------------------------
Investments in the Company's subsidiaries or joint venture are
fully consolidated in accordance with SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries," because
the voting power authorizing all major operating and financing
decisions for the subsidiaries or joint venture rests with the
board of directors of the Company.
c. Revenue Recognition
-------------------
Revenues from services rendered consist primarily of license
and support revenue from consulting, implementation and
training services. Revenue from license agreements is
recognized when:
(i) a signed non-cancelable software license exists,
(ii) delivery has occurred,
(iii) the Company's fee is fixed or determinable, and
(iv) collectibility is probable at the date of sale.
Revenue from support services is recognized when (i) the
services are performed, (ii) collectibility is probable and
(iii) such revenues are contractually nonrefundable. Revenues
from the sale of products and systems is recognized when the
product and system is completed, shipped, and risks and
rewards of ownership have transferred.
d. Allowance for Doubtful Accounts
-------------------------------
The Company presents accounts receivable, net of allowances
for doubtful accounts and returns. The allowances are
calculated based on a detailed review of certain individual
customer accounts, historical rates and an estimate of the
overall economic conditions affecting the Company's customer
base. The Company reviews a customer's credit history before
extending credit. If the financial condition of its customers
37
were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be
required. The Company also records 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.
e. Estimates and Assumptions
-------------------------
The preparation of financial statements in accordance with
generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
f. Property and Equipment
----------------------
Property and equipment is stated at cost and depreciated using
the straight-line method over the shorter of the estimated
useful life of the asset or the lease term, ranging from three
to five years.
g. Inventories
-----------
Inventories consist of finished goods and are stated at the
lower of cost or market value. Cost is computed using the
first-in, first-out method and includes all costs of purchase
and other costs incurred in bringing the inventories to their
present location and condition. Market value is determined by
reference to the sales proceeds of items sold in the ordinary
course of business after the balance sheet date or management
estimates based on prevailing market conditions.
h. Foreign Currency Translation
----------------------------
The functional currency of the Company is United States
dollars (US$) and the financial records are maintained and the
financial statements prepared in US$. The functional currency
of the Company's subsidiaries is Hong Kong dollars (HK$) and
the financial records of the subsidiaries are maintained and
the financial statements are prepared in HK$.
The translation of the financial statements into US$ is
performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet date and for
revenue and expense accounts using an average exchange rate
during each reporting period. The resulting foreign currency
translation gain or loss is included in Cumulative Other
Comprehensive Loss, which is shown separately from retained
earnings in the equity section of the balance sheet.
i. Income taxes
------------
The Company and its subsidiaries account for income taxes
using the liability method, which requires an entity to
recognize deferred tax liabilities and assets. Deferred income
taxes are recognized based on the differences between the tax
bases of assets and liabilities and their reported amounts in
the financial statements, which will result in taxable or
deductible amounts in future years. Further, the effects of
enacted tax laws or rate changes are included as part of
deferred tax expenses or benefits in the year that covers the
enactment in the near-future date. A valuation allowance will
be provided when there is an uncertainty that a deferred tax
benefit will be realized.
j. Goodwill and Purchased Intangible Assets
----------------------------------------
Goodwill and purchased intangible assets determined to have
indefinite useful lives related to acquisitions after June 30,
2001 are not amortized, in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) SFAS No.
142, "Goodwill and Other Intangible Assets."
38
k. Impairment of Long-Lived Assets
-------------------------------
The Company periodically assesses the need to record
impairment losses on long-lived assets, such as property,
plant and equipment, goodwill and purchased intangible assets,
used in operations and its investments when indicators of
impairment are present indicating the carrying value may not
be recoverable. 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. When an impairment is identified, the
carrying amount of the asset is reduced to its estimated fair
value. All goodwill will no longer be amortized and potential
impairment of goodwill and purchased intangible assets with
indefinite useful lives will be evaluated using the specific
guidance provided by SFAS No. 142 and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets." This impairment analysis will be performed at least
annually. For investments in affiliated companies that are not
majority-owned or controlled, indicators or value generally
include revenue growth, operating results, cash flows and
other measures. Management then determines whether there has
been a permanent impairment of value based upon events and
circumstances that have occurred since acquisition. It is
reasonably possible that the impairment factors evaluated by
management will change in subsequent periods, given that the
Company operates in a volatile environment. This could result
in material impairment charges in future periods.
l. Research and Development Costs and Capitalized Software Costs
-------------------------------------------------------------
Expenditures related to the research and development of new
products and processes, including significant improvements and
refinements to existing products are expensed as incurred,
unless they are required to be capitalized.
Software development costs are required to be capitalized when
a product's technological feasibility has been established by
completion of a detailed program design or working model of
the product, and ending when a product is available for
release to customers. For the year ended December 31, 2003,
the Company did not capitalize (2002: $0) any costs related
to the purchase of software and related technologies and
content, which provide new functionality for the Company's
existing software products and the Company wrote off all the
costs and expenses incurred of $761,000 during the year (2002:
$93,545). The Company amortized capitalized software
development costs of $106,837 in 2002.
m. Loss per share
--------------
Basic and diluted earnings or loss per share amounts in the
financial statements are computed in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings or loss per share is
based on the weighted average number of common shares
outstanding. Diluted earnings or loss per share is based on
the weighted average number of common shares outstanding and
dilutive common stock equivalents. Basic earnings/loss per
share is computed by dividing net income/loss available to
common stockholders (numerator) by the weighted average number
of common shares outstanding (denominator) during the period
and excludes the dilutive effect of stock options and warrants
because to do so would be antidilutive. All per share and per
share information are adjusted retroactively to reflect stock
splits and changes in par value.
n. Stock-Based Compensation Plans
------------------------------
The Company has adopted SFAS No. 123, "Accounting for Stock
Based Compensation". As permitted by SFAS No. 123, the Company
measures compensation cost in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Compensation
39
cost for stock options, if any, is measured as the excess of
the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the
stock. Accordingly, no accounting recognition is given to
stock options granted at fair market value until they are
exercised. Upon exercise, net proceeds including tax benefits
realized, are credited to equity. The pro forma disclosure
requirements of SFAS No. 123 are included in Note 11.
o. Other Comprehensive Income
--------------------------
Comprehensive income includes net earnings as well as
additional other comprehensive income, such as translation
adjustments, in the financial statements and displays the
accumulated balance of other comprehensive income separately
from retained earnings in the equity section of the balance
sheet.
p. Advertising Costs
-----------------
Advertising costs are expensed as incurred and amounted to
$9,114 in 2003 (2002: $4,954).
q. Cash Equivalents
----------------
Highly liquid investments with maturity of three months or
less at the time of acquisition are considered cash
equivalents.
r. Related Party Transactions
--------------------------
A related party is generally defined as (i) any person that
holds 10% or more of the Company's securities including such
person's immediate families, (ii) the Company's management,
(iii) someone that directly or indirectly controls, is
controlled by or is under common control with the Company, or
(iv) anyone who can significantly influence the financial and
operating decisions of the Company. A transaction is
considered to be a related party transaction when there is a
transfer of resources or obligations between related parties.
(See Note 13).
s. Reclassification
----------------
Certain prior period amounts have been reclassified to conform
to the current year presentation. These changes had no effect
on previously reported results of operations or total
stockholders' equity.
t. Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, bank lines of
credit, accounts payable and accrued liabilities, the carrying
amounts approximate fair value due to their short maturities.
4. RECENT ACCOUNTING PRONOUNCEMENTS
New pronouncements by the Financial Accounting Standards Board (FASB)
that have recently become effective or are yet to be effective are SFAS
No. 145 through SFAS No. 150 and Interpretations No. 45 and No. 46,
none of which are expected to have a significant affect on the
Company's financial statements:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other provisions, SFAS No. 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
Accordingly, gains or losses from extinguishment of debt shall not be
reported as extraordinary items unless the extinguishment qualifies as
40
an extraordinary item under the criteria of Accounting Principles Board
("APB") Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." Gains or
losses from extinguishment of debt that do not meet the criteria of APB
No. 30 should be reclassified to income from continuing operations in
all prior periods presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides
guidance related to accounting for costs associated with disposal
activities covered by SFAS No. 144 or with exit or restructuring
activities previously covered by Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 supercedes EITF Issue No.
94-3 in its entirety. SFAS No. 146 requires that costs related to
exiting an activity or to a restructuring not be recognized until the
liability is incurred. SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" was issued in July 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement and
reporting of costs that are associated with exit and disposal
activities, including restructuring activities, including (1) costs to
terminate contracts that are not capital leases; (2) costs to
consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under
the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract.
The provisions of this Statement will be effective for exit or disposal
activities initiated after December 31, 2002.
In October 2002, the FASB issued SFAS No. 147, "ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENTS NO. 72 AND 144
AND FASB INTERPRETATION NO. 9," which applies to the acquisition of all
or part of a financial institution, except for a transaction between
two or more mutual enterprises. SFAS No. 147 removes the requirement in
SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any
excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141,
"BUSINESS COMBINATIONS," and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." In addition, this statement amends SFAS No. 144,
"ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," to
include certain financial institution-related intangible assets. This
statement is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002, and is not applicable to
the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires
disclosures about the guarantees that an entity has issued, including a
rollforward of the entity's product warranty liabilities. Initial
recognition and measurement provisions of the Interpretation are
applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December
15, 2002. As of December 31, 2002, the company did not have any
outstanding guarantees.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure," an amendment to
SFAS 123, "Accounting for Stock-Based Compensation," SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for
stock-based employee compensation be displayed more prominently and in
a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and
annual disclosure requirements of SFAS No. 148 are effective for fiscal
year ending after December 31, 2002. The Company has elected to
continue using the intrinsic value method of accounting for stock-based
compensation. Therefore, the amendment to SFAS 123 will not have any
effect on the companies' financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
41
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003.
In April 2003, the FASB issued SFAS No. 149, "Accounting for Amendment
of Statement 133 on Derivative Instruments and Hedging Activities,"
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is generally effective for contracts entered
into or modified after June 30, 2003, and all provisions should be
applied prospectively. This statement does not affect the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created
before the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. Restatement is not
permitted. This statement does not affect the Company.
5. GOODWILL AND INVESTMENTS IN AFFILIATED COMPANIES
Goodwill consists of the following as of December 31, 2003 (in
thousands):
PURCHASE PRICE / OWNERSHIP % AND BUSINESS
DESCRIPTION AMOUNT DESCRIPTION
------------------------------------ ----------------------- -----------------------------------------
GOODWILL:
PacificNet Solutions Limited $ 19 60% ownership; IT solution and system
integration that specializes in systems
integration, software application, and
e-business solutions services in Hong Kong
and Greater China.
Epro Telecom Holdings Limited $ 567 $3,500,000 payable in cash and common stock;
50% ownership; Value-added telecom services
(VAS), call center and customer relationship
management (CRM) services in Hong Kong and
Greater China. (See Note 10)
Beijing Linkhead Technologies Co., Ltd $ (147) $4,973,000 payable in cash and common
stock;51% ownership; Value-added services
(VAS), interactive voice response (IVR)
system development and integration, voice
internet portals, computer telephony
integration (CTI), VoIP, internet and mobile
application development, telecom customer
relationship management (CRM) services in
Greater China. (See Note 10)
Less: Goodwill written off (19)
---------
$ 420
42
Investments in affiliated companies and goodwill consist of the following as of
December 31, 2002 (in thousands):
COLLATERAL/OWNERSHIP % AND
DESCRIPTION AMOUNT BUSINESS DESCRIPTION
------------------------------------ ----------------------- -----------------------------------------
INVESTMENTS IN AFFILIATED COMPANIES:
Xmedia Holdings Inc 95 25% ownership; provides new media business
development and marketing to advertisers.
Less: Provision for Impairment (95)
---------
$ -
---------
GOODWILL:
PacificNet Solutions Limited $ 21 60% ownership; IT solution and system
integration that specializes in systems
integration, software application, and
e-business solutions services in Hong Kong
and Greater China.
Less: Provision for Amortization (2)
---------
19
----------
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of December 31 (in
thousands):
2003 2002
--------- ---------
Office furniture, fixtures and leasehold improvements $ 4 $ 47
Computers and office equipment 4,938 463
Motor Vehicles - 16
Less: Accumulated depreciation (4,476) (242)
--------- ---------
Net Property and Equipment $ 466 $ 284
========= =========
Depreciation charged to expense during the years ended December 31,
2003 and 2002 was $72,000 and $154,000
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases warehouse and office space under
operating leases for two years with fixed monthly rentals. None of the
leases included contingent rentals. Lease expense charged to operations
for 2003 amounted to $109,000 (2002: $231,000). Future minimum lease
payments under non-cancelable operating leases at December 31:
2004 $ 215
2005 82
---------
$ 297
=========
BANK LINE OF CREDIT - The Company has an overdraft banking facility
from our major bankers, DBS Bank (Hong Kong) Limited and Citibank NA
Hong Kong, in the amount of $1,309,000 (HK $10,200,000), which is
secured by a pledge of the Company's fixed deposits in the amount of
$923,000 (HK$7,000,000) pursuant to the following terms: interest will
be charged at the Hong Kong Prime Rate per annum and payable at the end
of each calendar month or the date of settlement, which ever is
earlier. As of December 31, 2003, the Company utilized US$1,199,000 of
the above-mentioned banking facility.
43
(2002): The Company has an overdraft banking facility from our major
banker DBS Bank (Hong Kong) Limited, in the amount of $1,026,000 (HK
$8,000,000), which is secured by a pledge of the Company's fixed
deposits, in the amount of $923,000 (HK $7,000,000), pursuant to the
following terms: interest will be charged at Hong Kong Prime Rate per
annum and payable at the end of each calendar month or the date of
settlement, whichever is earlier. As of December 31, 2002, the Company
utilized US $565,000 of the above mentioned bnaking facility.
COMMON STOCK (CONTINGENT SHARES) - See details in Note 10.
CONTINGENCIES - From time to time the Company is subject to certain
asserted and unasserted claims encountered in the normal course of
business. It is the Company's belief that the resolution of these
matters will not have a material adverse effect on its financial
position or results of operations, however, the Company cannot provide
assurance that damages that result in a material adverse effect to its
financial position or results of operations will not be imposed in
these matters. The Company accounts for contingent liabilities when it
is probable that future expenditures will be made and such expenditures
can be reasonably estimated.
8. BANK LOANS
Bank loans represent the following at December 31:
2003 2002
--------- ---------
Secured [1] $ 1,776 $ -
Unsecured 6 -
Less: current portion (1,405) -
--------- ---------
Non current portion $ 377 $ -
========= =========
[1] The loans were secured by the following: joint and several personal
guarantees executed by certain directors of the subsidiary of the
Company; corporate guarantee executed by a subsidiary of the Company;
second legal charge over a property owned by a subsidiary of the
Company; charge over certain trade receivables of a subsidiary of the
Company; and pledged bank deposits of a subsidiary of the Company in
the amount of $212,000 (2002: $0).
Aggregate future maturities of borrowing for the next five years are as
follows: (2004: $1,405,000; 2005: $302,000; 2006: $75,000; 2007: $0;
and 2008: $0)
The Company has established lines of credit with quality financial
institutions of approximately $1,540,000 (HKD$12,000,000) to finance
general working capital requirements and trade transactions. Interest
is charged at the bank's prime lending rate plus 0.5%-2% per annum
depending on the reason for the utilization of the line, i.e. overdraft
protection, receivable financing, etc. At December 31, 2003, the
Company had available unused lines of credit of approximately $557,000.
9. CAPITAL LEASE OBLIGATIONS
The Company leases various equipment under capital leases expiring in
various years through 2005. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are
depreciated over the lesser of their related lease terms or their
estimated productive lives and are secured by the assets themselves.
Depreciation of assets under capital leases is included in depreciation
expense for 2003 and 2002.
Aggregate minimum future lease payments under capital leases as of
December 31, 2003 for each of the next five years are as follows:
(2004: $173,000; 2005: $85,000; 2006: $70,000; 2007: $0; and 2008: $0)
44
Capital lease obligations represent the following at December 31:
2003 2002
--------- ---------
Total minimum lease payments $ 328 $ -
Interest expense relating to future periods (27) -
--------- ---------
Present value of the minimum lease payments 301
Less: current portion (152) -
--------- ---------
Non current portion $ 149 $ -
========= =========
Following is a summary of fixed assets held under capital leases at
December 31:
2003 2002
--------- ---------
Computers and office equipment $ 268 $ -
Less: accumulated depreciation (205) -
--------- ---------
$ 63 $ -
========= =========
10. BUSINESS ACQUISITIONS AND SUBSCRIPTION PAYABLE
In December 2003, the Company executed agreements and acquired
controlling interests in two subsidiaries. The purchase price was
payable in cash and shares of common stock as follows:
Epro Telecom Holdings Limited [1] $500,000
Beijing Linkhead Technologies Co., Limited [2] $222,500
--------
$722,500
========
[1] Epro Telecom Holdings Limited - On December 1, 2003, the Company
completed an agreement to acquire a 50% ownership interest for total
consideration of $3,500,000 payable in cash ($500,000) and the issuance
of common stock $3,000,000 (600,000 shares valued at $5.00 per share).
Within 90 days of signing the agreement, the Company is required to pay
$500,000 and within 30 days the Company is required to deliver 100,000
shares ("deposit shares") of common stock to Epro as a refundable
deposit. As of the date of issuance of these financial statements, the
Company has paid the $500,000 and issued the 100,000 deposit shares of
common stock to Epro. The remaining 500,000 shares of common stock are
to be held by an Escrow Agent and released in specified amounts based
on the achievement of certain earnings criteria. Additionally, the
Company has agreed to issue a maximum of 300,000 bonus shares of common
stock per year for achieving net income in excess of $1,000,000 in 2004
and 2005. Epro is also required to return a portion of the shares
equivalent to the dollar amount of the shortfall of net income in years
2004 and 2005.
[2] Beijing Linkhead Technologies Co., Limited - On December 15, 2003,
the Company completed an agreement to acquire a 51% ownership interest
for total consideration of $4,972,500 payable in cash ($222,500) and
the issuance of common stock $4,750,000 (950,000 shares valued at $5.00
per share). Within 30 days of signing the agreement, the Company is
required to pay $222,500 and to deliver 350,000 shares ("deposit
shares") of common stock as a refundable deposit. As of the date of
issuance of these financial statements, the Company has paid the
$222,500 and issued the 350,000 deposit shares of common stock to
Linkhead. The remaining 600,000 shares of common stock are to be held
by an Escrow Agent and released in specified amounts based on the
achievement of certain earnings criteria. Additionally, the Company has
agreed to issue a maximum of 600,000 bonus shares of common stock for
achieving net income in excess of $1,500,000.
The Company has consolidated the financial results of the
above-mentioned companies at December 31, 2003, because concurrent with
signing the agreements, the Company obtained a controlling financial
interest and the normal attributes of ownership expected with an
acquisition such as effective control and ownership of the assets
acquired, liabilities assumed, and the operating and financing
decisions of the acquired companies transferred on that date. Further,
the Company obtained the benefits derived and/or detriments incurred
with respect to the acquired companies. Therefore, since the Company
has a controlling financial interest and controls the operating and
financing decisions of the acquired companies, the Company fully
consolidates their assets, liabilities, revenues and expenses.
45
The following unaudited pro forma information is based on the
assumption that the acquisitions took place as of the beginning of the
period, with comparative information for the immediately preceding
period as though the acquisitions had been completed at the beginning
of the period. The financial information for Linkhead has not been
included for 2002 because it was not in existence.
2003 2002
-------- --------
Net revenues $ 6,825 $ 8,252
======== ========
Net loss $ 1,793 $ 3,396
======== ========
Basic and diluted loss per share $ 0.32 $ 0.80
======== ========
11. STOCKHOLDERS' EQUITY
a. Allotment and repurchase of common stock
COMMON STOCK.
For the year ended December 31, 2003, the Company issued (i) 16,725
shares for cash consideration of $27,000 to settle expenses, (ii)
200,000 shares as a result of providing compensation for the officer
according to the employment contract of $100,000, and (iii) 240,000
shares as a result of exercise of stock options and warrants for cash
consideration of $410,000.
For the year ended December 31, 2002, the Company issued (i) 155,058
shares with a market value of $186,000 to acquire fixed assets, (ii)
60,585 shares with a market value of $50,000 to satisfy certain current
liabilities, (iii) 337,007 shares with a market value of $263,000 to
settle the expenses, and (iv) 2,725,000 shares for private placement of
$4,000,000. The private placements were as follows:
(a) $520,000 Private Placement -- In January 2002, the Company
completed a $520,000 private placement by issuing 325,000 shares of
restricted common stock at a price of $1.60 per share. The issuance of
shares represented 19.9% of the number of shares issued and outstanding
prior to the closing of transaction in January 2002.
(b) $3,480,000 Private Placement -- On March 28 2002, the Company
completed a $3,480,000 private placement by issuing 2,400,000 shares of
restricted common stock at a price of $1.45 per share to Sino Mart
Management Limited ("Sino Mart"), whose executive director 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 restricted common stock at $1.45 per share. The warrant is
fully exercisable beginning on April 1, 2002. The $3,480,000 private
placement transaction was approved at a special stockholder meeting
held on March 25, 2002.
TREASURY STOCK.
For the year ended December 31, 2003, the Company returned to treasury
800,000 shares issued as a deposit for a business acquisition that was
terminated. (See Note 2 for details)
For the year ended December 31, 2002, the Company repurchased 4,970
shares of common stock for a total of $5,000.
b. STOCK OPTION PLAN
On December 23, 2003, stockholders of the Company adopted an amendment
to the Stock Option Plan (the "Plan") to increase the number of shares
reserved under the Plan from 1,666,667 to 2,000,000. The purpose of the
Plan is to attract and retain the best available personnel for
positions of responsibility and to provide incentives to such personnel
to promote the success of the business.
46
The Plan provides for the grant to directors, officers, employees and
consultants of the Company (including its subsidiaries) of options to
purchase shares of common stock. Options granted under the Plan may be
"incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified
options. To date, all options granted have been nonqualified options.
The exercise price of incentive stock options may not be less than 100%
of the fair market value of the common stock as of the date of grant.
The number of options outstanding and the exercise price thereof are
subject to adjustment in the case of certain transactions such as
mergers, recapitalizations, stock splits or stock dividends. Options
granted under the Plan fully vest through June 2005..
The status of the Stock Option Plan as of December 31, 2003, is as
follows:
OPTIONS EXERCISE PRICE
------- --------------
Outstanding, December 31, 2001 123,400 $4.15-$9.375
Granted 221,933 $0.50-$9.375
Canceled (32,733) $0.50-$9.375
----------
Options outstanding, December 31, 2002 312,600 $0.50-$9.375
Granted 963,000 $1.75-$4.25
Exercised (350,000) $0.50-$1.90
Canceled - $0.50-$9.375
Options outstanding, December 31, 2003 925,600 $0.50-$9.375
========== ============
Options exercisable, end of year 145,600 $0.50-$9.375
========== ============
ADDITIONAL INFORMATION ON OPTIONS OUTSTANDING AND EXERCISABLE AS OF
DECEMBER 31, 2003 IS AS FOLLOWS:
WEIGHTED
WEIGHTED AVERAGE AVERAGE REMAINING
EXERCISE PRICE OPTIONS CONTRACTUAL LIFE
-------------- ------- ----------------
Options outstanding $3.02 925,600 2.38 years
Options exercisable $1.73 145,600 1.47 years
The fair value of options granted during 2003 and 2002, respectively,
was approximately $2.17 and $1.55 per option based on the Black-Scholes
option pricing model using valuation assumptions of: a) average
remaining contractual life of three years; b) expected volatility of
129.8% and 183.6%, c) dividend yield of 0%; and d) a risk free interest
rate of 2.5 % and 4.00%.
The Company's net loss and net loss per common share would have
increased to the pro forma amounts indicated below if compensation cost
for the Company's stock option had been determined based on fair value
at the grant date for awards in accordance with SFAS No. 123, (in
thousands, except per share amounts):
2003 2002
--------- ---------
Net loss
As reported $ (1,878) $ (2,921)
Pro forma (3,968) (3,097)
Net loss per share
As reported $ (0.36) $ (0.70)
Pro forma (0.76) (0.74)
c. WARRANTS
Fiscal Year 2003: For the year ended December 31, 2003, 100,000
warrants at an exercise price of $1.75 have been exercised.
47
Fiscal Year 2002: On March 25, 2002, the Company issued warrants to
purchase up to 600,000 shares of common stock of the Company at an
exercise price of $1.45 per share. The warrants are exercisable through
April 5, 2005. (See Note 13.)
On December 30, 2002, the Company issued warrants to purchase up to
300,000 shares of common stock of the Company at an exercise price of
$1.74 per share. The warrants are exercisable through December 30,
2005.
12. INCOME TAXES
Hong Kong profits tax has been provided at a rate of 17.5% (2002: 16%)
on the estimated assessable profits arising in Hong Kong for each of
the years ended December 31, 2003 and 2002. Provision for Hong Kong
profits tax for 2003 was $32,000 (2002: $0.) There is no provision for
U.S. federal income tax due to the Company's loss position.
Deferred tax asset represents the tax benefit of U.S. net operating
loss carryforwards as follows:
2003 2002
--------- ---------
Non current deferred tax asset $ 1,146 $ 884
Valuation allowance (1,146) (884)
Net deferred tax asset $ - $ -
========= =========
The Company and its subsidiaries are subject to income taxes on an
equity basis on income arising in or derived from the tax jurisdictions
in which they operate. The Company is subject to United States federal
income tax at a rate of 34%. The Hong Kong subsidiaries are subject to
Hong Kong profits tax at a rate of 17.5% (2002: 16%)%. The
reconciliation of the United States federal income tax rate to the
effective income tax rate based on the loss before income taxes in the
consolidated statements of operations is as follows (in thousands):
ENTITY 2003 2002
------------------------------------------ --------- ---------
Company, including discontinued operations $ (771) $ (1,357)
Hong Kong subsidiaries (1,107) (1,564)
--------- ---------
Total $ (1,878) $ (2,921)
========= =========
No tax benefits have been recorded related to the loss generated by the
Company or any of its subsidiaries. The reconciliation of the United
States federal income tax rate to the effective income tax rate based
on the loss before income taxes in the consolidated statements of
operations is as follows:
2003 2002
-------- --------
United States federal income tax rate $ (34.0%) $ (34.0%)
Tax losses not recognized 9.7 9.6
Effect of different tax rates in foreign jurisdictions 24.3 24.4
-------- --------
Effective income tax rate -% -%
-------- --------
The valuation allowance increased by $456 and $712 at December 31, 2003
and 2002, respectively. The Company has net operating loss
carryforwards of approximately $3,300 available to offset future
income, which expire through 2022. Pursuant to the Tax Reform Act of
1986, annual utilization of the Company's net operating loss
carryforwards may be limited if a cumulative change in ownership of
more than 50% is deemed to occur within any three-year period.
48
13. RELATED PARTY TRANSACTIONS
Employment Agreement - The Company has an employment agreement with its
President and Chief Executive Officer. The employment agreement
provides for $100,000 cash compensation plus $60,000 annual share
compensation until April 1, 2005. The officer who is also eligible for
an annual bonus for each fiscal year of the Company during the term
based on performance standards as the Board or compensation committee
designates. The CEO is entitled to receive a monthly housing allowance
of $2,500, monthly automobile allowance of $500, Tax Preparation
expenses of $2,000 per year, and Cash Bonus based on net profit of the
Company. Under the Company's stock option plan, the President and CEO
was granted an option to acquire 200,000 shares at an exercise price
per share of $0.50, which has been exercised during the year.
Fiscal Year 2002: On March 28, 2002, the Company completed a $3,480,000
private placement by issuing 2,400,000 shares of restricted common
stock at a price of $1.45 per share to Sino Mart Management Limited
("Sino Mart"), whose executive director 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 restricted
common stock at $1.45 per share. The warrant is fully exercisable
beginning on April 1, 2002. The $3,480,000 private placement
transaction was approved at a special stockholder meeting held on March
25, 2002.
The Company's issuance of restricted shares and warrant to Sino Mart
represents approximately 62% of the number of shares of the Company's
common stock outstanding after the private placement based on
beneficial ownership on a fully-diluted basis, making Sino Mart the
largest shareholder of the Company.
The Company received $105,450 from Webplus Inc in which one of the
directors of the Company also served as a director of Webplus Inc.
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table set forth selected quarterly financial information
for the fiscal 2003 quarters ended December 31, 2003 and for the fiscal
2002 quarters ended December 31, 2002. The operating results for any
given quarter are not necessarily indicative of results for any future
periods (in thousands).
Fiscal 2003 Quarter Ended Fiscal 2002 Quarter Ended
---------------------------------------- ----------------------------------------
31-Mar 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec
------ ------ ------ ------ ------ ------ ------ ------
Revenue $92 $128 $124 $873 $1,396 $723 $187 $13
Gross margin/(Loss) 56 82 28 353 298 (256) 99 (121)
Loss from operations (450) (248) (243) (1,582) (303) (340) (483) (1,518)
Other items, net (164) 16 57 736 22 21 5 (15)
Provision for impairment of
affiliated companies - - - - (7) (7) (8) (75)
Loss from discontinued operations - - - - - - - (107)
------- ------- ------- ------- ------- ------- -------- -------
Net loss $(614) $(232) $(186) $(846) $(365) $(376) $(1,251) $(929)
------- ------- ------- ------- ------- ------- -------- -------
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $(0.09) $(0.04) $(0.05) $(0.26) $(0.11) $(0.09) $(0.12) $(0.36)
Other items, net (0.03) - 0.01 0.12 0.01 0.01 - -
Provision for impairment losses
of affiliated companies - - - - - - - (0.02)
Net losses from discontinued
operations - - - - - - 0.01 (0.03)
------- ------- ------- ------- ------- ------- -------- -------
Net losses $(0.12) $(0.04) $(0.04) $(0.14) $(0.14) $(0.10) $(0.32) $(0.22)
------- ------- ------- ------- ------- ------- -------- -------
15. EVENTS SUBSEQUENT TO DECEMBER 31, 2003
Private placement of Common Stock - In January, 2004, the Company
closed a $3 million equity private placement in which an aggregate of
617,285 common shares of the Company were issued and warrants to
purchase up to an aggregate of 154,320 common shares of the Company
were issued to a group of institutional investors.
Termination of joint venture - See details in Note 2.
[END OF AUDITED FINANCIAL STATEMENTS]
49
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS FOR PACIFICNET INC. GIVING
EFFECT TO THE ACQUISITION OF EPRO TELECOM HOLDINGS LTD., BEIJING
LINKHEAD TECHNOLOGIES CO., LIMITED, GUANGZHOU YUESHEN TAIYANG
TECHNOLGOY LIMITED AND CHEER ERA LIMITED.
In December, 2003, we executed and completed the following agreements:
Epro Telecom Holdings Limited (Epro) - to acquire a 50%
controlling interest. The total purchase price paid was approximately
$3.5 million paid in cash ($500,000) and 600,000 shares of our common
stock.
Beijing Linkhead Technologies Co., Limited (Linkhead) - to
acquire a 51% ownership interest. The total purchase price paid was
approximately $5 million paid in cash ($222,500) and 950,000 shares of
our common stock.
In April, 2004, we executed and completed the following agreements:
Guangzhou YueShen TaiYang Technology Limited (Yueshen) - to
acquire a 51% controlling interest. The total purchase price paid was
approximately $1.2 million paid in cash ($580,000), 106,240 shares of
our common stock and a warrant to purchase up to 50,000 shares of our
common stock.
Cheer Era Limited (Cheer Era) - to acquire a 30% ownership
interest. The total purchase price paid was approximately $1.15 million
paid in cash ($386,000) in cash, 149,459 shares of our common stock and
a warrant to purchase up to 80,000 shares of our common stock.
The pro forma financial information presents the historical balance
sheet of PacificNet Inc. at December 31, 2003 giving effect to the acquisitions
above and the pro forma historical statements of operations for the years ended
December 31, 2003 and 2002 giving effect to the results of operations on a
consolidated basis as if the transactions had occurred at the beginning of
January 1, 2002. The results of operations represent those of Epro and Linkhead
only as Cheer Era and YueShen were both newly formed in 2004. Accordingly, there
is no activity for 2002 for Cheer Era and Yueshen, or for Linkhead because it
was formed in late 2003.
PACIFICNET INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands of United States dollars, except par values and share numbers)
DECEMBER 31, 2003
--------------------------------------------------
PRO-FORMA PRO-FORMA
HISTORICAL ADJUSTMENT RESULT
---------- ---------- ------
Cash and cash equivalents $3,823 (1,688)(c) $2,135
Restricted cash - pledged bank deposit 212 - 212
Accounts Receivables (net of allowance for doubtful
accounts of $0 as of December 31, 2003) 1,890 - 1,890
Inventories 76 - 76
Other Current Assets 286 - 286
------- ------- -------
Total Current Assets 6,287 (1,688) 4,599
Property and Equipment, net 466 - 466
Goodwill 420 4,598 (a) 5,018
------- ------- -------
TOTAL ASSETS $7,173 $2,910 $10,083
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $1,199 - $1,199
Bank Loan 1,405 - 1,405
Obligations under finance lease 152 - 152
Accounts Payable 1,007 - 1,007
Accrued Expenses 360 - 360
Subscription Payable 722 (722) -
------- ------- -------
50
DECEMBER 31, 2003
--------------------------------------------------
PRO-FORMA PRO-FORMA
HISTORICAL ADJUSTMENT RESULT
---------- ---------- ------
Total Current Liabilities 4,845 (722) 4,123
------- ------- -------
Long-term liabilities:
Bank Loans - non current portion 377 - 377
Capital lease obligations - non current portion 149 - 149
------- ------- -------
Total Long-Term Liabilities 526 - 526
------- ------- -------
Minority Interest in Consolidated Subsidiary (110) - (110)
------- ------- -------
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:
December 31, 2003 - 6,864,288 shares issued
and 6,064,288 shares outstanding 1 - 1
Treasury Stock, at cost (800,000) (5) - (5)
Additional Paid-In Capital 31,790 3,543 (b) 35,333
Cumulative Other Comprehensive Loss (24) - (24)
Accumulated Deficit (29,850) 89 (29,761)
------- ------- -------
Total Stockholders' Equity 1,912 3,632 5,544
======= ======= =======
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,173 $2,910 $10,083
======= ======= ========
(a) Goodwill represents the Epro acquisition of $1,087,000, the Linkhead
acquisition of $1,752,000, the Cheer Era acquisition of $1,025,000 and
the Yueshen acquisition of $734,000.
(b) Adjustment gives effect to additional paid-in capital resulting from
issuance of shares to Epro (200,000 shares), Linkhead (350,000 shares),
Cheer Era (123,751 shares) and Yueshen (26,560 shares) of $1,000,000,
$1,750,000, $639,000 and $154,000, respectively.
(c) Adjustment gives effect to cash paid for acquisition of Epro, Linkhead,
Cheer Era and Yueshen of $500,000, $222,000, $386,000 and $580,000,
respectively.
51
PACIFICNET INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands of United States dollars, except loss per share and share amounts)
YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
------------------------------------------ ------------------------------------------
PRO-FORMA PRO-FORMA PRO-FORMA PRO-FORMA
HISTORICAL ADJUSTMENT RESULT HISTORICAL ADJUSTMENT RESULT
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ 1,217 $ 5,608 $ 6,825 $ 2,319 $ 5,933 $ 8,252
------------ ------------ ------------ ------------ ------------ ------------
Cost of Revenues (698) (3,797) (4,495) (1,787) (4,932) (6,719)
------------ ------------ ------------ ------------ ------------ ------------
Gross Margin 519 1,811 2,330 532 1,001 1,533
Selling, General and
Administrative expenses (2,758) (1,337) (4,095) (2,912) (1,299) (4,211)
Depreciation and amortization (76) (316) (392) (264) (442) (706)
Provision for written off of
fixed assets (208) -- (208) -- (268) (268)
------------ ------------ ------------ ------------ ------------ ------------
PROFIT /(LOSS) FROM OPERATIONS (2,523) 158 (2,365) (2,644) (1,008) (3,652)
Interest Income 27 -- 27 33 2 35
Sundry income 54 37 91 -- -- --
PROFIT / (LOSS) BEFORE INCOME
TAXES, MINORITY INTEREST AND
DISCONTINUED OPERATIONS (2,442) 195 (2,247) (2,611) (1,006) (3,617)
------------ ------------ ------------ ------------ ------------ ------------
Provision for income taxes (32) (51) (83) -- (64) (64)
Provision for impairment loss
of affiliated companies -- -- -- (97) -- (97)
Minority Interests 596 (59) 537 (106) 488 382
------------ ------------ ------------ ------------ ------------ ------------
PROFIT/(LOSS) $ (1,878) $ 85 $ (1,793) (2,814) (582) (3,396)
------------ ------------ ------------ ------------ ------------ ------------
BASIC AND DILUTED LOSS PER
COMMON SHARE:
Profit/(Loss) from continuing
operations $ (0.36) $ (0.31) $ (0.67) $ (0.80)
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF SHARES
OUTSTANDING 5,234,744 700,311(d) 5,759,977 4,191,816 100,000 4,266,816
(d) The increase resulted from the issuance of 200,000 shares, 350,000
shares. 123,751 shares and 26,560 shares to Epro, Linkhead, Cheer Era
and Yueshen, respectively, and assumes the shares were outstanding as
of the first day of the period presented, for 2003.
52
771,605 SHARES OF COMMON STOCK
PACIFICNET INC.
PROSPECTUS
APRIL ____, 2004
UNTIL _________, 2004 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law allows companies to
indemnify their directors and officers against expenses, judgments, fines and
amounts paid in settlement under the conditions and limitations described in the
law.
The Certificate of Incorporation and By-Laws of the Registrant provide
that the Registrant shall indemnify any person to the full extent permitted by
the Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL,
relating to indemnification, is hereby incorporated herein by reference.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
SEC Registration Fee......................................... $559.30
Printing and Engraving Expenses.............................. $2,000.00
Legal Fees and Expenses...................................... $25,000.00
Accounting Fees and Expenses................................. $25,000.00
----------
Total................................................... $52,559.30
==========
54
RECENT SALES OF UNREGISTERED SECURITIES
The following private placements of the Company's securities were made in
reliance upon the exemption from registration under Section 4(2) and/or of Rule
506 of Regulation D under the Securities Act. The Company did not use
underwriters in any of the following private placements.
In January 2004, the Company closed a $3 million equity private placement in
which an aggregate of 617,285 shares of common stock and warrants to purchase up
to an aggregate of 154,320 shares of common stock of the Company were issued to
a group of institutional investors. The warrants are exercisable until January
15, 2009 at an exercise price of $7.15 per share.
On March 28 2002, the Company completed a $3,480,000 private placement by
issuing 2,400,000 shares of restricted common stock at a price of $1.45 per
share to Sino Mart Management Limited ("Sino Mart"), whose executive director 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
restricted common stock at $1.45 per share. The warrant is exercisable until
April 5, 2005.
In January 2002, the Company completed a $520,000 private placement by issuing
325,000 shares of restricted common stock at a price of $1.60 per share to an
individual investor, Mr. Shu Jen.
55
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation**
3.2 By-laws**
4.1 Securities Purchase Agreement, dated as of January 15, 2004,
among PacificNet Inc. and the purchasers identified therein*
4.2 Form of Common Stock Purchase Warrant issued to each of the
purchasers*
5.1 Opinion of Loeb & Loeb LLP regarding legality of securities*
10.1 Agreement for the Sale and Purchase of Shares in Shanghai Classic
Group Limited**
10.2 Agreement for the Sale and Purchase of Shares in Cheer Era
Limited**
23.1 Consent of Clancy and Co. P.L.L.C. ***
23.3 Consent of Loeb & Loeb LLP (included in the opinion filed as
Exhibit 5) *
24.1 Power of Attorney (included on signature page to Registration
Statement) *
----------------
* Previously filed with Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on March 2, 2004.
** Previously filed with Amendment to Registration Statement on Form
S-3 on Form SB-2 filed with the Securities and Exchange Commission on April 21,
2004.
*** Filed herewith.
56
UNDERTAKINGS
Undertaking Required by Item 512 of Regulation S-B.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) include any additional or changed material information
on the plan of distribution.
(2) That, for determining liability under the Securities Act, the
undersigned small business issuer shall treat each post-effective amendment as a
new registration statement of the securities offered, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer,
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
57
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Amendment No. 2 to Form S-3 on Form SB-2 and
has authorized this Amendment No. 2 to Form S-3 to be signed on its behalf by
the undersigned in the City of Hong Kong, on April 28, 2004.
PACIFICNET INC.
By: /s/ Tony Tong
------------------------------------
Tony Tong,
Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 has been signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
--------- ----- ----
/s/Tony Tong Chairman and Chief Executive April 28, 2004
-------------------- Officer
Tony Tong
/s/ Victor Tong President and Director April 28, 2004
--------------------
Victor Tong
/s/ Shaojian Wang Chief Financial Officer (Principal April 28, 2004
-------------------- Accounting Officer), Vice President
Shaojian Wang of International Business and Director
* Director April 28, 2004
--------------------
Richard C.H. Lo
* Director April 28, 2004
--------------------
David Fisher
* Director April 28, 2004
--------------------
Peter Wang
* Director April 28, 2004
--------------------
Michael Ha
*By: /s/ Tony Tong
--------------------
Tony Tong
Attorney-in-fact
58