U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER: 000-24985
PACIFICNET INC.
(Exact name of small business issuer in its charter)
DELAWARE 91-2118007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UNIT 1702, CHINACHEM CENTURY TOWER, 178 GLOUCESTER ROAD,
WANCHAI, HONG KONG N/A
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: 011-852-2876-2900
PACIFICNET.COM INC., 7808 CREEKRIDGE CIRCLE, SUITE101 BLOOMINGTON, MN 55439
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(Former Name and Address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES /X/ NO / /
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and will not be contained, to the best of the
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. / /
Issuer's revenues for its most recent fiscal year: $2,319,000. The aggregate
market value of the common stock held by non-affiliates of the registrant as of
March 24, 2003 was approximately $8,084,614, based upon the closing sale price
of $2.95 per share as reported by The Nasdaq Small Cap Market on such date.
There were 4,980,452 shares of the Company's common stock outstanding on March
24, 2003.
Transitional Small Business Disclosure Format (check one): YES / / NO /X/
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission within 120
days after the close of the Registrant's fiscal year, are incorporated herein by
reference in Part III of this Report.
TABLE OF CONTENTS
PART I
1. Description of Business 3
2. Description of Property 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Common Equity and Related Stockholder Matters 11
6. Management's Discussion and Analysis or Plan of Operation 11
7. Financial Statements 15
8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 30
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
10. Executive Compensation 31
11. Security Ownership of Certain Beneficial Owners and Management 31
12. Certain Relationships and Related Transactions 31
13. Controls and Procedures 31
14. Exhibits and Reports on Form 8-K 32
This annual report 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,"
"the Company believes," "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. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
PacificNet Inc. (referred to herein as "PacificNet" or the "Company") is a
leading technology investment and management company that invests in systems
integration, network communications, customer relationship management (CRM)
solutions, information technology solutions, and telecommunications in Asia. The
company intends to continue to grow by acquiring and managing growing technology
and network communications businesses with established products and customers in
Asia.
The Company also engages in telecommunications, performs voice and data network
communications and value-added telecommunication products and services. The
Company's business strategy is to take a leading role into a rapidly expanding
business sector, namely the IT solution provision and network communication
businesses, in Asian and the greater PRC region. The business of PacificNet can
be classified into three main operating units:
- PacificNet Solutions Ltd. (referred to herein as "PacSo") - PacSo is a
subsidiary of PacificNet that specializes in systems integration, software
application, and e-business solutions services in Hong Kong and Greater
China. The scope of product and services include smart card solutions, web
based front-end applications and web based connections to backend
enterprise planning systems.
- PacificNet Communications Ltd. (referred to herein as "PacComm") - PacComm
is a subsidiary of PacificNet Inc. and a leading provider of value-added
telecom services including call center, customer relationship management
(CRM), telemarketing, and data-mining services, and mobile data services
such as short message service (SMS), multi-media message service (MMS),
unified messaging service (UMS), location-based service (LBS), WAP, and
BREW-based CDMA applications, mobile commerce, roaming, paging, wireless
internet, virtual private network (VPN) and voice over internet protocol
(VoIP) services in the Greater China Region.
- PacificNet Limited - PacificNet Limited is a distributor and reseller of
telecommunication, networking and computer equipment. In conjunction with
the Company's business of providing telecommunication services, PacificNet
Limited is also engaged in telecommunication product distributions, which
includes the resale of PABX telephone systems, basic switches and router
equipments and mobile phone accessories targeted for retail customers.
In June 2001, the Company's management, with the Board of Directors' approval,
decided to expand its business strategy to the Greater China Region.
Subsequently, in February 2002, the Company established a subsidiary office
(registered as a Wholly Owned Foreign Enterprise, "WOFE") in Shenzhen, the
People's Republic of China ("PRC"), to expand its research, development,
marketing and distribution in the PRC.
In March 2003, the Company announced that it had completed the company
registration and received government approval from the Macao Special
Administrative Region of China, for the formation of the joint venture named
"PacificNet Communications Limited -- Macao Commercial Offshore." The Company
owns 50.1% of the joint venture while International Elite Limited (IEL)
shareholders own 49.9%. The formation of the joint venture is intended to expand
the Company's products and services in the Greater China Region.
PRINCIPAL CUSTOMERS
The Company's customers for its products and services are located in Hong Kong,
mainland China and other regions of Asia. For the year ended December 31, 2002,
the Company's major customers included Chinachem Group, Sony, Swire Travel Ltd,
Chevalier (HK) Ltd, The HSBC Group, McDonald's Restaurants (Hong Kong) Limited,
Marketing Decision Research (Pacific) Ltd, Dun & Bradstreet (HK) Ltd and Telecom
Digital Data Ltd. These customers accounted for approximately 19% of the
Company's services revenue and 50% of total revenue for the year ended December
31, 2002. Although the Company does not have any long-term agreements with any
of its clients, it believes that its relationships with its customers are
excellent. A brief description of these customers is as follows:
CHINACHEM GROUP - ChinaChem Group is one of the largest privately held property
developers located in Hong Kong and includes ChinaChem Entertainment Ltd, one of
the largest privately held entertainment companies in Hong Kong involved in the
cinema, game center and karaoke businesses.
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SONY (SO-NET) - So-net, Hong Kong, a wholly-owned subsidiary of Sony Corporation
of Hong Kong Limited, 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
Providers in Japan with a subscriber base of 1.7 million.
SWIRE TRAVEL - 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.
CHEVALIER - Chevalier is engaged in the marketing, installation and maintenance
of lifts, escalators, air-conditioning systems, electrical and mechanical
systems, power and industrial equipment, environmental engineering, supply and
installation of building materials and equipment, sale servicing and leasing of
automobiles, property development and investment; a wide range of voice and data
communication equipment and services, system integrated IT solutions; sale and
servicing of business machines and household products.
THE HSBC GROUP - The HSBC Group is one of the world's largest banking and
financial services organizations. Today, the HSBC Group has some 8,400 offices
in 81 countries and territories in Europe, the Asia-Pacific region, the
Americas, the Middle East and Africa. At the Group's core around the world are
domestic commercial banking and financial services, which fund themselves
locally and do business locally. Highly efficient technology links these
operations to deliver a wide range of international products and services,
adapted to the needs of local customers.
MCDONALD'S RESTAURANTS (HONG KONG) LIMITED (MCDONALD'S) - McDonald's was
established in 1975. Today, there are over 200 McDonald's restaurants in Hong
Kong, and more than 10,000 McDonald's staff. In addition to the McDonald's
restaurants, McDonald's also opened McCafe and Grab'n Go Sandwiches outlets in
Hong Kong, in a bid to meet the needs of different customers.
MARKETING DECISION RESEARCH (PACIFIC) LTD (MDR) - MDR is a professional full
service research agency with offices in Hong Kong, Taiwan (Taipei and
Kaohsiung), China (Beijing, Shanghai, Guangzhou, Chengdu and Shenzhen) and a
comprehensive network of strategic partners covering all major cities throughout
China which has a qualified team of Chinese professionals in most local markets.
DUN & BRADSTREET (HK) LTD (D&B) -Dun & Bradstreet (HK) Ltd. (D&B) established in
1981, has developed into a full-fledged operation offering a wide spectrum of
risk management, sales & marketing, business education solutions and small
business solutions. Their solutions help businesses, large and small, to manage
credit exposure, improve cash flow, find profitable customers, analyze the
marketplace and manage databases efficiently. In Hong Kong, D&B employs
approximately 100 dedicated associates, and maintains a databases with coverage
of 100% local Limited Companies, which links to their global data mart of over
70 million businesses, providing the largest information resource of its kind in
supporting critical business decisions, locally and internationally. D&B HK
serves as the head office for the Greater China Region.
TELECOM DIGITAL DATA LIMITED (TSL) - TSL is an integrated telecommunication
service provider in the field of paging, mobile phone and the Internet. TSL is
the leading company in the paging industry as well as one of the most
progressive mobile phone and internet service providers in the market today,
serving over 130,000 paging subscribers and over 150,000 mobile phone
subscribers in Hong Kong, Macau and China. As one of the Internet Service
Provider in the market, TSL has been providing gateway access to the Internet
for both their subscribers and the general public since 1997 and are
aggressively developing the integration of our services through e-commerce and
m-commerce.
SERVICES
The Company provides consulting services to engage in e-business and e-commerce
that are summarized as follows:
CONSULTING SERVICES. The Company consults with its customers to establish online
e-business environments. Consulting services include the identification of
specific content nature, user-friendly interface, overall web themes and
designs, target user groups, web advertising and integrated online solutions.
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ENVIRONMENT DESIGN SERVICES. The Company delivers creative and innovative
results in visual layout, interactive graphics, video and audio clips to
customize websites in order to present a certain theme, look-and-feel, or to
target specific industries or markets. The Company also offers web domain
registration services where customers can choose from a wide variety of
templates and themes, then fill in the blanks for company profile, contact
details, products and services information.
PROJECT MANAGEMENT AND IMPLEMENTATION SERVICES. PacificNet provides project
management and general information technology (IT) consulting services to its
customers. PacificNet has developed and uses a structured project management and
implementation methodology for customer projects. Our technical team provides
consulting services in the following areas:
- IT Procurement and Installation
- Unit and System Testing
SALES AND MARKETING
The Company historically has not engaged in any significant marketing activities
and has relied primarily on its reputation for quality and efficiency among its
customers and leveraging its strategic investors to obtain new business.
BACKLOG
There was no significant backlog of services to render to customers for PacComm,
PacificNet and PacSo as of December 31, 2002.
FACILITIES
The Company and its consolidated subsidiaries maintain the following facilities:
- Hong Kong - Corporate headquarters and development center located at
Unit 1702, Chinachem Century Tower, 178 Gloucester Road, Wanchai,
Hong Kong. Substantially all of the Company's activities are
operated from this location.
- United States - Corporate office located in an office facility at
860 Blue Gentian Road, Suite 360, Eagan, Minnesota 55121. Corporate
Investor Relations and Customer Service Support Center located in
416 Production Street, Aberdeen, SD 57401, USA.
- China - Room 2310, Tower A, Stars Plaza, Hongli Road, FuTian
District, Shenzhen, China
COMPETITION
The market for value-added telecom services, CRM call center services,
information technology solutions and network communications in Asia,
specifically in Hong Kong and the Greater China Region, is relatively new,
constantly evolving and competitive. Many of the Company's competitors are
companies with longer operating histories, greater name recognition and/or
significantly greater financial, technical and marketing resources than the
Company. The Company expects that competition will continue to grow in the near
future.
For PacSo, the competition for IT systems integration and consulting services
has relieved somewhat compared to the previous year. A number of smaller
competitors have discontinued their operations. PacSo believes that the market
will become steady and expects continued business growth in the IT systems
integration and services market. PacSo's competitors include other system
integrators and software application developers based in Hong Kong, such as
PCCW, Sunevision, ITE Holdings Ltd, Accenture, EDS, IBM Professional Services,
Legend, Digital China, Expert Systems, JOS, Automated/CSC, etc.
For PacComm, the market for value-added telecom services, outsource CRM call
centers, telemarketing, customer care, CRM database marketing, inbound and
outbound teleservices in Asia, specifically in Hong Kong and the Greater China
Region, is relatively new, constantly evolving and competitive. PacComm believes
that it competes primarily with the in-house teleservices and customer service
operations of its current and potential clients. PacComm also competes with
certain companies operating in the outsource call center and teleservices
industry, including PCCW Contact Center, TeleTech, China Motion Telecom, APAC
Customer Services, SITEL Corporation, EDS, 800 TeleServices, Teledirect Hong
Kong Ltd., 95Info, etc. The Company expects that competition will continue to
grow in the near future. PacComm competes primarily on the basis of quality and
scope of services provided, price-performance, speed and flexibility of
implementation and technological expertise. Although the teleservices industry
is relatively new in the Greater China Region, the market is very competitive
and highly fragmented with numerous small participants.
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GOVERNMENT REGULATION
The Company is not engaged in a regulated industry. However, our activities in
order to expand our business into mainland China will require business licenses.
This requires a review and approval of our activities by various national and
local agencies of Chinese government. There can be no assurance that the Chinese
government will continue to approve of our activities or grant or renew our
licenses.
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries had 24 employees and
contractors. The Company has not experienced any labor stoppages. None of the
Company's employees are covered by collective bargaining agreements.
RESEARCH AND DEVELOPMENT
No core technology research and development costs was conducted in 2002.
However, limited development work was performed when delivering products and
services to clients. The development work could be related to installations,
customizations, localization, technical support, documentation, training and
other IT services.
RISK FACTORS
In addition to the other information in this annual report, the following
factors should be considered carefully in evaluating the Company's business and
prospects. THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE
EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. 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.
PACIFICNET HAS A LIMITED OPERATING HISTORY. The Company has a limited operating
history on which investors can base evaluations of its business and prospects.
In addition, its prospects must be considered in light of the risks and
uncertainties inherent in and traditionally encountered by companies in an early
stage of development in new and rapidly evolving markets. PacificNet was founded
and commenced operations in July 1999. For the years ended December 31, 2002,
December 31, 2001, and December 31, 2000 and from inception through December 31,
1999, revenues were $2,319,000, $5,792,000, $4,699,000 and $49,000,
respectively. Since inception, the Company has incurred losses aggregating
$27,972,000.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. Our
quarterly operating results have varied in the past and will likely vary in the
future due to the Macao business and the project to project nature of the
business of PacSo. We believe that period-to-period results of the operations
may become more steady in the future as the maintenance portion of PacSo
services revenue increases.
ANY FUTURE ACQUISITIONS MAY DILUTE OUR EQUITY AND ADVERSELY EFFECT OUR FINANCIAL
POSITION. Any future acquisition in which the consideration consists of stock or
other securities may significantly dilute our equity.
ANY FUTURE ACQUISITIONS WILL BE SUBJECT TO A NUMBER OF RISKS. Any future
acquisitions will be subject to a number of risks, including:
- the diversion of management time and resources;
- the difficulty of assimilating the operations and personnel of the
acquired companies;
- the potential disruption of our ongoing businesses;
- the difficulty of incorporating acquired technology and rights into
our products and services;
- unanticipated expenses related to technology integration;
- difficulties in maintaining uniform standards, controls, procedures
and policies;
- the impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
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- potential unknown liabilities associated with acquired businesses.
OUR STOCK PRICE IS HIGHLY VOLATILE. 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:
- variations in our quarterly operating results;
- announcements that our revenue or income are below analysts'
expectations;
- general economic slowdowns;
- changes in market valuations of similar companies;
- sales of large blocks of our common stock;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally based companies
PACIFICNET'S CURRENT MARKETING ALLIANCES MAY NOT GENERATE THE EXPECTED NUMBER OF
NEW CONSULTING SERVICES CUSTOMERS. The Company relies primarily on relationships
established by its executive management and business unit leaders for the
generation of new consulting services customers. Significant relationships that
have been established include ChinaChem and Chevalier. If PacificNet is unable
to successfully maintain existing and generate new consulting services customers
in a cost-effective manner, PacificNet's business, financial condition and
operating results could be materially adversely affected.
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH PACIFICNET'S ASIAN OPERATIONS.
Establishment and expansion of international operations has required significant
management attention and resources since the founding of PacificNet. All of
PacificNet's current and anticipated future revenues are or are expected to be
derived from Asia. PacificNet's international operations are subject to
additional risks, including the following, which, if not planned and managed
properly, could materially adversely affect PacificNet's business, financial
condition and operating results:
- language barriers and other difficulties in staffing and managing
foreign operations;
- legal uncertainties or unanticipated changes regarding regulatory
requirements, liability, export and import restrictions, tariffs and
other trade - barriers;
- longer customer payment cycles and greater difficulties in
collecting accounts receivable;
- uncertainties of laws and enforcement relating to the protection of
intellectual property;
- seasonal reductions in business activity; and
- potentially uncertain or adverse tax consequences.
In addition, changes in the political and overall economic conditions of the
Asian region, which are outside the control of management, could have a material
adverse effect on PacificNet's business, operating results and financial
condition. PacificNet has 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, PacificNet would be subject to increased risks relating to
foreign currency exchange rate fluctuations that could have a material adverse
affect on its business, financial condition and operating results. To date,
PacificNet has not engaged in any hedging transactions in connection with its
international operations.
THE COMPANY MAY REQUIRE ADDITIONAL CAPITAL. Since inception, PacificNet's
investments and operating losses have been financed through sales of common
stock. PacificNet currently has an available bank line of $461,000 out of a
total credit line of $1,026,000. As of December 31, 2002, the Company had
$3,694,000 of cash. Subsequent to December 31, 2002, the Company completed the
incorporation of its joint venture subsidiary in Macao Special Administrative
Region. In the future, PacificNet may need to raise additional funds through
public or private financing. The inability to raise capital when needed may not
have a material adverse effect on PacificNet's business, financial condition and
operating results.
RELIANCE ON MAJOR CLIENTS. The Company has strategically focused its marketing
efforts on developing long-term relationships with major clients in targeted
industries in the Greater China Region. As a result, a substantial portion of
the Company's revenues is derived from relatively few clients. Collectively, the
Company's 9 largest clients in 2002 accounted for over 50% of the Company's
2002 revenues. There can be no assurance that the Company will be able to retain
its significant clients or that, if it were to lose one or more of its
significant clients, it would be able to replace such clients with clients that
generate a comparable amount of revenues. Consequently, the loss of one or more
of its significant clients could have a material adverse effect on the Company's
business, results of operations or financial condition.
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A significant number of the Company's arrangements with its clients generate
revenues based, in large part, on the amount of time which the Company's
personnel devote to such clients' customers. Consequently, and due to the
primarily inbound nature of the Company's business, the amount of revenues
generated from any particular client is generally dependent upon consumers'
interest in, and use of, the client's products and/or services. Furthermore, a
significant portion of the Company's expected revenues for 2003 relate to
recently-introduced, unproven product or service offerings for the Company's
clients. There can be no assurance as to the number of consumers who will be
attracted to the products and services of the Company's clients and who will
therefore need the Company's services, or that the Company's clients will
develop new products or services that will require the Company's services.
DEPENDENCE ON KEY PERSONNEL. Continued growth and profitability will depend upon
our ability to maintain our leadership infrastructure by recruiting and
retaining qualified, and experienced executive personnel. In December 2001, the
Company re-elected Tony Tong, founder and Chairman of our Board, as Chief
Executive Officer. In January 2002, the Company named Victor Tong as Vice
President and Executive Director of the Company. In February 2002, the Company
named Elaine Zee as Director of Marketing of the Company. In January 2002, the
Company named Desmond Ng as Chief Executive Officer of PacSo,a subsidiary of the
Company. In December 2002, we announced the formation of the PacificNet
Communications Limited - Macao Commercial Offshore (PacMOC), joint venture in
Macao Special Administrative Region, China, and the election of KinShing Li and
YiShen Li as Executive Directors of PacMOC. Competition in our industry for
executive-level personnel is strong and there can be no assurance that the
Company will be able to hire, motivate and retain highly effective executive
employees, or that the Company can run on that economically feasible terms.
DEPENDENCE ON KEY INDUSTRIES. The Company's clients are concentrated primarily
in the telecommunications, telemarketing, technology, travel, and transportation
industries and, to a lesser extent, the insurance and financial services
industries. The Company's business and growth is largely dependent on the
continued demand for the Company's services from these industries and current
trends in such industries to outsource certain customer care services. A general
economic downturn in any of these industries or a slowdown or reversal of the
trend in any of these industries to outsource certain customer care services
could have a material adverse effect on the Company's business, results of
operations or financial condition.
RISK OF BUSINESS INTERRUPTION. The Company's operations are dependent upon its
ability to protect its 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 the Company experiences a
temporary or permanent interruption at one or more of its call centers, through
casualty, operating malfunction or otherwise, the Company's business could be
materially adversely affected and the Company may be required to pay contractual
damages to some clients or allow some clients to terminate or renegotiate their
contracts with the Company. While the Company maintains certain property and
business interruption insurance, such insurance may not adequately compensate
the Company for all losses that it may incur.
RISKS ASSOCIATED WITH TECHNOLOGY. The Company's business is highly dependent on
its computer and telecommunications equipment and software systems. The
Company's failure to maintain the superiority of its technological capabilities
or to respond effectively to technological changes could have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company's future success also will be highly dependent upon its ability to
enhance existing services and introduce new services or products to respond to
changing technological developments. There can be no assurance that the Company
can successfully develop and bring to market any new services or products in a
timely manner, that such services or products will be commercially successful or
that competitors' technologies or services will not render the Company's
products or services noncompetitive or obsolete.
COMPETITION. The market in which the Company competes is highly competitive and
fragmented. The Company expects competition to persist and intensify in the
future. The Company's competitors include small firms offering specific
applications, divisions of large entities, large independent firms and, most
significantly, the in-house operations of clients or potential clients. A number
of competitors have or may develop greater capabilities and resources than those
of the Company. Similarly, there can be no assurance that additional competitors
with greater resources than the Company will not enter the Company's market.
Because the Company's primary competitors are the in-house operations of
existing or potential clients, the Company's performance and growth could be
negatively impacted if its existing clients decide to provide in-house customer
care services that currently are outsourced or if potential clients retain or
increase their in-house customer service and product support capabilities. In
addition, competitive pressures from current or future competitors could cause
the Company's services to lose market acceptance or result in significant price
erosion, with a material adverse effect upon the Company's business, results of
operations or financial condition.
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RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES. One component of the
Company's growth strategy is to pursue strategic acquisitions of companies that
have services, products, technologies, industry specializations or geographic
coverage that extend or complement the Company's existing business. There can be
no assurance that the Company will be able successfully to identify, acquire on
favorable terms or integrate such companies. If any acquisition or joint venture
is completed, there can be no assurance that such acquisition will enhance the
Company's business, results of operations or financial condition. The Company
may in the future face increased competition for acquisition and joint venture
opportunities, which may inhibit the Company's ability to consummate suitable
acquisitions or joint ventures on terms favorable to the Company. The Company
may require additional debt or equity financing for future acquisitions or joint
ventures, which financing may not be available on terms favorable to the
Company, if at all. As part of its growth strategy, the Company may also pursue
opportunities to undertake strategic alliances in the form of joint ventures.
Joint ventures involve many of the same risks as acquisitions, as well as
additional risks associated with possible lack of control of the joint ventures.
The Company recently entered into a joint venture with International Elite
Limited (IEL) to provide outsource CRM call center services and value-added
telecom services in the Greater China Region. The anticipated benefits of the
joint venture with IEL may not be achieved.
INTERNAL POLITICAL RISKS. Our operations and assets in 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.
NON-RENEWAL OF BUSINESS LICENSES. Our activities in order to expand our business
into mainland China will require business licenses. This requires a review and
approval of our activities by various national and local agencies of the Chinese
government. There can be no assurance that the Chinese government will continue
to approve of our activities or grant or renew our licenses. Our inability to
obtain needed approvals or licenses would have a material adverse effect on our
business, financial condition and results of operations.
LACK OF REMEDIES AND IMPARTIALITY UNDER CHINESE LEGAL SYSTEM. Unlike the United
States, China has a civil law system based on written statutes in which judicial
decisions have little precedence value. 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. 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.
FOREIGN CORRUPT PRACTICES ACT. The Company is 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 China. We have attempted to implement safeguards to
prevent losses from such practices and to discourage such practices by our
employees and agents. There is no assurance, however, that we will not suffer
such losses or that our employees or other agents will not engage in such
conduct for which we might be held responsible.
ITEM 2. DESCRIPTION OF PROPERTY.
A description of the Company's property follows:
HONG KONG - The Company maintains its corporate headquarters and development
center in Hong Kong located at Unit 1702, Chinachem Century Tower, 178
Gloucester Road, Wanchai, Hong Kong, where it leases approximating 2,146 square
feet floor for a combined monthly fee of approximately $4,400 under a lease that
expires in September 2004. Substantially all of the Company's operations are run
from this facility.
UNITED STATES - The Company's current corporate office is located at 860 Blue
Gentian Road, Suite 360, Eagan, Minnesota 55121, where it subleases space for a
monthly fee of $1,000. The Company's current Investor Relations and Customer
Service Support Center is located in 416 Production Street, Aberdeen, SD57401,
where it subleases space for a monthly fee of $200.
9
CHINA - The current corporate office is located at Room 2310, Tower A, Stars
Plaza, Hongli Road, FuTian District, Shenzhen, China where it leases
approximately 52.5 square feet for a monthly fee $353 under a lease that expires
June 2003.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its 2002 Annual Meeting of Stockholders at its Hong Kong
Corporate offices on December 30, 2002. At such meeting the following directors
were elected. Tony Tong, Victor Tong, ChoSam Tong, ShaoJian Wang, Richard C.H.
Lo, Yue Tang, David Fisher and Yongjun Fu.
The following proposals were also voted on at the meeting:
RATIFICATION OF THE APPOINTMENT OF CLANCY AND CO P.L.L.C., AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR FISCAL YEAR 2002:
FOR -15,880,613
WITHHELD - 0
ABSTAIN - 0
RATIFICATION AND APPROVAL OF THE STOCK COMPENSATION PLAN ISSUANCE OF UP TO
2,000,000 SHARES OF COMMON STOCK TO EMPLOYEES, DIRECTORS AND ADVISORS OF THE
COMPANY:
FOR - 15,664,566
WITHHELD -0
ABSTAIN - 0
RATIFICATION AND APPROVAL OF THE EXECUTIVE EMPLOYMENT CONTRACT FOR THE CHIEF
EXECUTIVE OFFICER, TONY TONG:
FOR - 15,664,566
WITHHELD - 0
ABSTAIN - 0
SUPPORT FOR THE EQUITY JOINT VENTURE CONTRACT WHICH WAS ANNOUNCED ON DECEMBER
22, 2002 BETWEEN PACIFICNET AND INTERNATIONAL ELITE LIMITED:
FOR -15,664,566
WITHHELD-0
ABSTAIN - 0
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock was previously quoted on The Nasdaq National Market
under the symbol "CMST." Beginning on July 28, 2000, the Company's common stock
was listed on The Nasdaq National Market under the symbol "PACT" through January
29, 2002. Effective January 30, 2002, the Company's securities were transferred
to The Nasdaq SmallCap Market under an exception granted by the Nasdaq Listing
Panel. As of the date of this filing, the Company believes that it has complied
with all terms and conditions of the Panel's exception for continued listing of
the Company securities on The Nasdaq SmallCap Market. On February 24, 2003, the
Panel determined to continue the listing of the Company's securities on The
Nasdaq SmallCap Market and the hearing file was closed.
The following table shows the range of high and low bid prices reported by
Nasdaq in each fiscal quarter from January 1, 2001 to December 31, 2002. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
HIGH LOW
---- ---
FISCAL 2001
Quarter Ended March 31, 2001 $15.95 $3.75
Quarter Ended June 30, 2001 $10.50 $4.20
Quarter Ended September 30, 2001 $11.50 $2.15
Quarter Ended December 31, 2001 $4.25 $1.05
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
January 1, 2003 - March 24, 2003 * $3.60 $1.40
* Reflects partial period
As of March 24, 2003, there were approximately 1,400 record holders of the
common stock. The Company has not paid any cash dividends on its common stock,
and it currently intends to retain any future earnings to fund the development
and growth of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS. This annual report 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," "the Company believes," "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. We base our forward-looking statements on information currently
available to us, and we assume no obligation to update them.
FACTORS THAT COULD AFFECT FUTURE RESULTS. Factors that might cause actual
results, performance or achievements to differ materially from those projected
or implied in such forward-looking statements include, among other things: (i)
the impact of competitive products; (ii) changes in laws and regulations; (iii)
adequacy and availability of insurance coverage; (iv) limitations on future
financing; (v) increases in the cost of borrowings and unavailability of debt or
11
equity capital; (v) the inability of the Company to gain and/or hold market
share; (vi) exposure to and expense of resolving and defending liability claims
and other litigation; (vii) consumer acceptance of the Company's products;
(viii) managing and maintaining growth; (ix) customer demands; (x) market and
industry conditions, (xi) the success of product development and new product
introductions into the marketplace; (xii) the departure of key members of
management, (xiii) the effect of the United States War on Terrorism and
activities in Afghanistan and Iraq, as well as other risks and uncertainties
that are described from time to time in the Company's filings with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES. Our discussion and analysis or plan of operations
are 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 are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies reflect its more
significant estimates and assumptions used in the preparation of its
consolidated financial statements.
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 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
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
were to 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.
12
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Revenues 100.0% 100.0%
Cost of Revenues (77.1) (83.6)
Gross Margin 22.9 16.4
Selling, general and administrative expense (125.6) (376.6)
Depreciation and amortization (11.4) (44.2)
OPERATING LOSS (114.0) (404.4)
Share of losses of affiliated companies - (3.5)
Interest income, net 1.4 19.5
Provision for impairment of affiliated companies (4.2) (113.7)
Minority interest (4.6) -
Discontinued operations (4.6) (18.6)
NET LOSS (126)% (520.8)%
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES, COST OF REVENUES AND GROSS MARGIN. Revenues for the year ended
December 31, 2002 were $2,319,000, an increase of $1,358,000 from $961,000 for
the year ended December 31, 2001. Cost of revenues for the year ended December
31, 2002 were $1,787,000, an increase of $984,000 from $803,000 for the year
ended December 31, 2001. Cost of revenues, as a percentage of revenues, was 77%
for the year ended December 31, 2002 compared with 84% for the year ended
December 30, 2001. Gross margin for the year ended December 31, 2002 was
$532,000, an increase of $374,000 from $158,000 for the year ended December 31,
2001, resulting from premium pricing received on consulting projects during the
year 2002 as compared to 2001 as well as cost reductions to complete fixed price
service contracts in 2002 compared to 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and
Administrative expenses totaled $2,912,000 for the year ended December 31, 2002,
a decrease of $707,000 from $3,619,000 for the year ended December 31, 2001. The
decrease in selling, general and administrative expenses is primarily due to
reducing the size of our operations, which resulted in decreased advertising and
publicity costs of $491,000, decreased premises costs of $123,000, decreased
legal and professional fees related to the Company's public filings and Nasdaq
listing issues of $116,000, decreased directors and officers insurance costs of
$41,000 in 2002 compared to 2001.
INTEREST INCOME. Interest income was $33,000 for the year ended December 31,
2002, as compared to $187,000 for the year ended December 31, 2002. The decrease
is due to the lower net cash balances of funds and lower interest rate in 2002
compared to 2001.
SHARE OF LOSSES OF AFFILIATED COMPANIES. There were no equity in losses of
affiliated companies with the Company for the year ended December 31, 2002, as
compared to $34,000 for the year ended December 31, 2001, related to the
Company's 40% equity in losses in PacificNet-NTSC.com Sdn.Bhd., a Malaysian
based consulting company due to downsizing of the office.
PROVISION FOR IMPAIRMENT LOSS OF AFFILIATED COMPANIES. The Company's provision
for impairment loss of affiliated companies totaled $97,000 for the year ended
December 31, 2002 related to the Company's investments in Xmedia ($95,000) and
in PacSo ($2,000). This compares to ($200,000) related to Company's investment
in APP China Group Limited, Cypress Rise ($536,000), ABCDEnet.com ($262,000) and
Xmedia ($95,000) for the year ended December 30, 2001.
Discontinued Operations. Discontinued operations represents the net loss
resulting from the Company's downsizing of its operations in Laptizen during the
fourth quarter of 2001. Revenues for 2002 and 2001, respectively, were $15,000
and $4,842,000, and net loss for those same periods were $107,000 and $179,000.
13
INCOME TAXES. No tax provision has been recorded for the year ended December 31,
2002, as the result of the cumulative operating loss generated by the Company.
MINORITY INTERESTS. Minority interests for the year ended December 31, 2002
totaled $106,000 from PacSo.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had cash, cash equivalents and investments
of $3,694,000 and working capital of $3,081,000 as compared to $1,344,000 and
$1,012,000, respectively at December 31, 2001.
Net cash used in operating activities was $2,172,000 for the year ended December
31, 2002 as compared to net cash used in operating activities of $2,678,000 for
the year ended December 31, 2001. Net cash used in operating activities in the
year ended December 31, 2002 was primarily due to a net loss of $2,921,000, a
decrease in accounts receivable of $145,000, a decrease in inventories of
$93,000 and a decrease in accounts payable and accrued expenses of $525,000 and
depreciation and amortization of $264,000. Net cash used in operating activities
in the year ended December 31, 2001 was primarily due to a net loss of
$5,005,000, a decrease in accounts receivable of $333,000, a decrease in
inventories of $272,000 and an increase in accounts payable and accrued expenses
of $324,000.
Net cash used in investing activities for the year ended December 31, 2002 was
$36,000 as compared to cash used in investing activities for the year ended
December 31, 2001 of $152,000. The cash used in investing activities in the year
ended December 31, 2002 was primarily from purchases of purchases of property
and equipment of $14,000 and purchase of affiliate company interests of $22,000.
The cash used in investing activities in the year ended December 31, 2001 was
primarily from purchases of purchases of property and equipment of $41,000 and
acquisition of capitalized software development costs of $111,000.
Net cash provided by financing activities for the year ended December 31, 2002
was $3,995,000 as compared to net cash provided in financing activities of
$15,000 for the year ended December 31, 2001. The net cash provided by financing
activities of $3,995,000 for the year ended December 31, 2002, resulted
primarily from $4,000,000 received in connection with the sale of 2,725,000
(13,625,000 pre 5-for-1 reverse stock split dated January 6, 2003) shares of
common stock, $5,000 from the sale of treasury stock. The net cash provided by
financing activities of $15,000 for the year ended December 31, 2001, resulted
from $15,000 from the sale of treasury stock.
The Company believes it has sufficient cash, cash equivalents and investments
for the next twelve months of operations.
The Company believes its operations have not been and, in the foreseeable
future, will not be materially adversely affected by inflation or changing
prices.
CASH AND BANK OVERDRAFT. The Company's cash balance increased by $1,785,000 to
$3,694,000 at December 31, 2002, as compared to $1,344,000 at December 31, 2001
due to cash balances of $4,000,000 received from the issuance of common stock
and operating activities used ($2,172,000) of cash for continuing operations due
to a newly implemented cost control policy. The Bank Overdraft `s balance
increased by $565,000 as compared to December 31, 2001.
WORKING CAPITAL. The Company's working capital increased by $2,069,000 to
$3,081,000 at December 31, 2002, as compared to $1,012,000 at December 31, 2001.
When compared to balances at December 31, 2001, the increase in working capital
at December 31, 2002 reflects an increase in cash of $2.4 million, an increase
in bank overdraft of $565,000, a decrease in inventories of $93,000, a decrease
in receivables and other current assets of $98,000 and an increase in current
liabilities of $90,000.
PROPERTY AND EQUIPMENT ADDITIONS. For the year ended December 31, 2002,
additions to property and equipment aggregated $14,000 for the expansion of the
CRM and call center business in United States. The Company also wrote off the
computer equipment of $142,000 considered to have no future economic benefit.
ISSUANCE OF COMMON STOCK. For the year ended December 31, 2002, the Company
issued (i) 155,058 shares of common stock with a market value of $186,000 to
acquire fixed assets, (ii) 60,585 shares of common stock with a market value of
$50,000 to satisfy certain current liabilities, (iii) 337,007 shares of common
stock with a market value of $263,000 to settle the services, and (iv) 2,725,000
shares of common stock for the private placement of $4,000,000.
14
INVESTMENTS IN AFFILIATED COMPANIES. As of December 31, 2002, there is nil
balance of investments in affiliated companies as compared to a net carrying
value of $95,000 as of December 31, 2001. The decrease of $95,000 comprised of a
full provision for impairment loss of affiliated company of Xmedia Holdings Inc.
CASH NEEDS FOR THE FORESEEABLE FUTURE. As of December 31, 2002, the Company had
approximately $3.6 million of cash. During the year of 2002, the Company
completed two separate private placements with accredited investors aggregating
$4,000,000. The Company expects that its cash needs for the foreseeable future
will arise primarily from working capital requirements, technology development
and capital expenditures. The Company expects that the principal sources of cash
will be cash on hand. In the event that additional credit facilities are
required, the Company believes that these additional credit facilities can be
negotiated at market rates currently in effect. The Company believes that these
sources will be adequate to meet anticipated cash requirements for the next
twelve months.
INFLATION. Inflation has not had a material impact on PacificNet's business in
recent years.
CURRENCY EXCHANGE FLUCTUATIONS. All of PacificNet's revenues are denominated
either in United States dollars or Hong Kong dollars, while its expenses are
denominated primarily in Hong Kong dollars and Renminbi ("RMB"), the currency of
the People's Republic of China. 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 PacificNet's expenses (as expressed
in United States dollars), any material increase in the value of the Hong Kong
dollar or RMB relative to the United States dollar would increase PacificNet's
expenses, and could have a material adverse effect on PacificNet's business,
financial condition and results of operations. PacificNet has never engaged in
currency hedging operations and has no present intention to do so.
SEASONALITY AND QUARTERLY FLUCTUATIONS. PacificNet has not experienced
fluctuations in quarterly revenues from its e-commerce solutions business since
inception. The Company believes that its business is not subject to seasonal and
quarterly fluctuations. However, since the Company, in its current form of
business operations as an Asian IT solutions and consulting company, has only
been in existence since July 1999, the Company does not have sufficient
operating history to determine whether seasonal and quarterly fluctuations exist
within its business lines.
RECENT FINANCING - PRIVATE PLACEMENT WITH SINO MART MANAGEMENT LIMITED. On March
27, 2002, the Company closed a private placement transaction with Sino Mart
Management Limited in the amount of $3,480,000. In connection with this private
placement, the company issued 2,400,000 shares of common stock (as adjusted for
a reverse split) and warrants exercisable to purchase 600,000 shares of common
stock (as adjusted for a reverse split). The company issued the securities in
the private placement in reliance of an exemption from registration under
Section 4(2) and/or Rule 506 of Regulation D under the Securities Act of 1933,
as amended.
ITEM 7. 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 16
Consolidated Balance Sheets - As of December 31, 2002 and 2001 17
Consolidated Statements of Operations - For the Years Ended
December 31, 2002 and December 31, 2001 18
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended December 31, 2002 and December 31, 2001 19
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2002 and December 31, 2001 20
Notes to Consolidated Financial Statements 21-30
15
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, 2002 and 2001, 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. 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, 2002 and 2001, and the results of their
operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
CLANCY AND CO, P.L.L.C.
Phoenix, Arizona
March 25, 2003
16
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars, except par values and share numbers)
DECEMBER 31, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,694 $ 1,344
Accounts Receivables (net of allowance for doubtful accounts of $255 as of
December 31, 2002 and $232 as of December 31, 2001) 220 199
Inventories (Note 3) - 93
Other Current Assets 97 216
--------- ---------
Total Current Assets 4,011 1,852
Property and Equipment, net (Note 6) 284 332
Capitalized Software Development Costs - 229
Other Assets - 47
Investments in Affiliated Companies & Subsidiaries (Note 5) - 95
Goodwill (Note 5) 19 -
--------- ---------
TOTAL ASSETS $ 4,314 $ 2,555
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft (Note 7) $ 565 $ -
Accounts Payable 224 244
Accrued Expenses 141 280
Subscription Payable (Note 8) - 316
--------- ---------
Total Current Liabilities 930 840
--------- ---------
Minority Interest in Consolidated Subsidiary 131 33
--------- ---------
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, 2002 - 4,907,252 shares
December 31, 2001 - 1,634,628 shares 1 -
Additional Paid-In Capital 31,248 26,755
Cumulative Other Comprehensive Loss (24) (22)
Accumulated Deficit (27,972) (25,051)
--------- ---------
Total Stockholders' Equity 3,253 1,682
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,314 $ 2,555
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
17
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: 2002 2001
------------ ------------
Revenues $ 2,319 $ 961
------------ ------------
Cost of Revenues (1,787) (803)
------------ ------------
Gross Margin 532 158
Selling, General and Administrative expenses (2,912) (3,619)
Depreciation and amortization (264) (425)
------------ ------------
LOSS FROM OPERATIONS (2,644) (3,886)
Share of losses of affiliated companies -- (34)
Interest Income 33 187
Provision for impairment loss of affiliated companies (Note 5) (97) (1,093)
------------ ------------
LOSS BEFORE INCOME TAXES , MINORITY INTEREST AND DISCONTINUED OPERATIONS (2,708) (4,826)
Provision for income taxes (Note 11) -- --
Minority Interests (106) --
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (2,814) (4,826)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS (NOTE2) (107) (179)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ($ 2,921) ($ 5,005)
------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations ($ 0.67) ($ 2.99)
Loss from discontinued operations ($ 0.03) ($ 0.11)
------------ ------------
Net loss ($ 0.70) ($ 3.10)
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,191,816 1,612,415
The accompanying notes are an integral part of these consolidated financial statements.
18
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
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
PREFERRED COMMON PAID-IN INCOME/ ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL (LOSS) DEFICIT EQUITY
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2000 (1,587,468 SHARES) $ -- $ -- $ 26,561 ($ 14) ($20,046) $ 6,501
COMPREHENSIVE LOSS:
Net loss -- -- -- -- (5,005) (5,005)
Change in Cumulative Effect of Foreign Currency Translation -- -- -- (8) -- (8)
--------
TOTAL COMPREHENSIVE LOSS (5,013)
--------
Issuance of common stock to satisfy liabilities (50,000 shares) -- -- 209 -- -- 209
Treasury Stock acquired, at cost (2,840 shares) -- -- (15) -- -- (15)
--------- --------- --------- --------- --------- ---------
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 $ 31,248 $ (24) $(27,972) $ 3,253
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
19
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of United States dollars, except loss per share and share amounts)
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,921) ($5,005)
Adjustment to reconcile net loss to net cash used in operating activities:
Expenses settled by issuance of common shares 313 209
Share of losses in affiliated companies -- 34
Minority Interest 98 (138)
Loss on disposal of fixed assets 142 111
Provision for write-off of software development costs 122 --
Provision for impairment of affiliated companies 97 1,093
Depreciation 154 193
Amortization 110 243
Changes in:
Accounts receivable and other current assets 145 333
Inventories 93 272
Accounts payable and accrued expenses (525) 324
-------- --------
Net cash used in continuing operations (2,172) (2,331)
Net cash used in discontinued operations -- (347)
-------- --------
Net cash used in operating activities (2,172) (2,678)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of property and equipment (14) (41)
Acquisition of capitalized software development costs -- (111)
Acquisition of Affiliate Company interests (22) --
-------- --------
Net cash used in investing activities (36) (152)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of common stock 4,000 --
Purchases of treasury stock (5) (15)
-------- --------
Net cash provided by (used in) financing activities 3,995 (15)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) (8)
-------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENT 1,785 (2,853)
CASH, BEGINNING OF YEAR 1,344 4,197
-------- --------
CASH, END OF YEAR $ 3,129 $ 1,344
-------- --------
CASH PAID FOR:
Interest 8 --
Income taxes -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year, the Company issued 155,058 (775,228 pre 5-for-1 reverse stock
split dated January 6, 2003) shares with a market value of $186 to acquire fixed
assets, 60,585 (302,924 pre 5-for-1 reverse stock split dated January 6, 2003)
shares with a market value of $50 to satisfy certain liabilities, 337,007
(1,685,037 pre 5-for-1 reverse stock split dated January 6, 2003) shares with a
market value of $263 to settle expenses. During the 2001, the Company issued
50,000 (250,000 pre 5-for-1 reverse stock split dated January 6, 2003)) shares
of common stock with a market value of $209 to satisfy the current liabilities.
The accompanying notes are an integral part of these consolidated financial statements.
20
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
In September 2001, the Board of Directors of the Company approved a plan
not to further invest to 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 (See Note 5). Revenue and net loss information related
to Laptizen operations is as follows (in thousands):
YEAR ENDED DECEMBER 31,
2002 2001
---------------- ----------------
REVENUES $ 15 $ 4,842
NET LOSS $ (107) $ (179)
Net assets of Lapitzen operations included in continuing operations in the
accompanying financial statements were $50,000 at December 31, 2001. Total
assets were comprised primarily of inventory, accounts receivable and
property and equipment. Total liabilities were comprised primarily of
trade payables and accrued expenses. Net assets of Laptizen operations
also include minority interest of $33,000 at December 31, 2001. There was
no income tax effect due as a result of the transaction due to the
Company's loss position.
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
The Company's investments in affiliated companies for which its ownership
exceeds 20% (PacificNet-NTSC.com Sdn, Bhd, Xmedia Holdings Inc.), but are
not majority-owned or controlled, are accounted for using the equity
method. The Company's investments in affiliated companies for which its
ownership is less than 20% (ABCDEnet.com and APP-China Group Limited), are
accounted for using the cost method. Under the equity method, the
Company's net excess investment over its equity in each affiliate's net
assets is included in "share of losses of affiliated companies" in the
consolidated statements of operations.
c. Revenue Recognition
Revenues from services rendered consist primarily of license and support
revenue from consulting, implementation and training. Revenue from license
agreements is recognized when:
21
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 as the services are performed,
collectibility is probable and such revenues are contractually
nonrefundable. Revenues from the sale of products and systems is
recognized when the product and system is completed and shipped.
d. Allowance for Doubtful Accounts
The Company presents accounts receivable, net of allowances for doubtful
accounts and returns. The allowances are calculated based on detail review
of certain individual customer accounts, historical rates and an
estimation 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 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 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
and 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 to 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$. The functional currency of its subsidiaries is Hong Kong dollars
(HK$) and the financial records are maintained and the financial
statements 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 liability
method, which requires an entity to recognize deferred tax liabilities and
assets. Deferred income taxes are recognized based in 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 related to acquisitions prior to July 1, 2001 and purchased
intangible assets with finite lives are amortized using the straight-line
method over the estimated economic lives of the 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."
22
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, including goodwill related to acquisitions prior
to July 1, 2001, 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,
2002, the Company did not capitalize (2001: $54,000) any costs related to
the purchase of software and related technologies and content that provide
new functionality for the Company's existing software products. The
Company amortizes capitalized software development costs over a 3-year
period, which approximates the periods to be benefited. Amortization of
such costs were $106,837 and $133,546 in 2002 and 2001 respectively and
during the year the Company wrote off the remaining balance of $93,345
since the Company considered that it will not be benefit to incur more
cost on this investment.
m. Concentration of Credit Risk
Concentration of credit risk includes cash and sales. The Company
maintains cash balances at a local financial institution in excess of
$100,000 and at financial institutions outside the United States in excess
of $3,000,000. The Company's customers for its products and services are
located in Hong Kong, mainland China and other regions of Asia. The
Company had approximately nine major customers that accounted for
approximately 19% and 71% of the Company's services revenue and 50% and 6%
of total revenue for the years ended December 31, 2002 and 2001,
respectively. The Company monitors credit risk through a credit-approval
process and the assignment and monitoring of credit limits.
n. 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.
o. 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 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 option granted at
fair market value until they are exercised. Upon exercise, net proceeds
including tax benefits realized, are credited to equity. The disclosure
requirements of SFAS No. 123 are included in Note 9.
p. 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.
q. Advertising Costs
Advertising costs are expensed as incurred and amounted to $4,954 in 2002
and $496,432 in 2001.
23
r. Cash Equivalents
Highly liquid investments with maturity of three months or less at the
time of acquisition are considered cash equivalents.
s. Related Party Transactions
A related party is generally defined as (i) any person that holds 10% or
more of the Company's securities and their 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 9).
t. 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.
u. Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, 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. 148 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 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
24
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 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.
5. INVESTMENTS IN AFFILIATED COMPANIES AND GOODWILL
Investments in affiliated companies and goodwill consist of the following
as of December 31, 2002 (in thousands):
DESCRIPTION AMOUNT COLLATERAL/OWNERSHIP % AND 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
-------------
Provision for impairment losses charged to operations for 2002 were $97.
Investments in affiliated companies and goodwill consist of the following
as of December 31, 2001 (in thousands):
DESCRIPTION AMOUNT COLLATERAL/OWNERSHIP % AND BUSINESS DESCRIPTION
----------- ------ -----------------------------------------------
Investments in Affiliated Companies:
APP China Group Limited $ 2,50033 4,225 shares of unregistered common stock of APP
China Group Limited.
Cypress Rise 535 60% ownership; an e-commerce consulting and solutions
business for the building materials industry in the PRC.
ABCDEnet.com 259 15% ownership; provides comprehensive online services to
the construction industry.
Xmedia Holdings Inc 190 25% ownership; provides new media business development
and marketing to advertisers.
PacificNet-NTSC.com Sdn.Bhd 57 40% ownership.
-------------
25
3,541
Less: Reserve for Impairment (3,446)
-------------
$ 95
Goodwill:
Laptizen $ 89 55% ownership; B2B computer system reseller, e-commerce
portal and value added reseller and service provides for
computer systems. (See Note 3)
Less: Written off (89)
-------------
-
-------------
Provision for impairment losses charged to operations for 2001 were
$1,093.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following as of December 31 (in
thousands):
2002 2001
---- ----
Office furniture, fixtures and leasehold improvements $ 47 $107
Computers and office equipment 463 449
Motor vehicles 16 -
Less: Accumulated depreciation (242) (224)
---------------------
Net Property and Equipment $284 $332
=====================
Depreciation charged to expense during the years ended December 31, 2002
and 2001 was $154,074 and $193,690.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - On September 16, 2002, the Company entered into a
non-cancelable operating lease expiring in September 2004 with a renew
option of one year. Future minimum lease payments excluding triple net
charges as of December 31, 2002 are as follows through September 2004 (in
thousands): (2003- $43; 2004-$29). Rental expense included in the
statement of operations for the years ended December 31, 2002 and 2001 was
approximately $231 and $594.
OVERDRAFT FACILITIES - The Company has an overdraft banking facility from
our major banker, Dao Heng Bank, 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 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, 2002, the Company
utilized US$565,000 of the above mentioned banking facility.
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 our financial position or
results of operations, however, we cannot provide assurance that damages
that result in a material adverse effect on our financial position or
results of operations will not be imposed in these matters. The Company
accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably
estimated.
8. SUBSCRIPTION PAYABLE
In December 2001, the Company entered into an investment intent to place
1,625,000 shares of restricted common stock at a price of $0.32 per share.
As of December 31 2001, subscription payable represents the Company's
receipt of $316,268 with regard to the above private placement. In January
2002, the Company completed the $520,000 private placement by issuing
325,000 (1,625,000 pre 5-for-1 reverse stock split dated January 6, 2003)
shares of restricted common stock at a price of $1.60 ($0.32 pre 5-for-1
reverse stock split dated January 6, 2003) per share. The issuance of
shares represented 19.9% of the number of share issued and outstanding
prior to the closing of transaction in January 2002.
26
9. RELATED PARTY TRANSACTIONS
FISCAL YEAR 2002: On March 28 2002, the Company completed a $3,480,000
private placement by issuing 2,400,000 (12,000,000 pre 5-for-1 reverse
stock split dated January 6, 2003) shares of restricted common stock at a
price of $1.45 (0.29 pre 5-for-1 reverse stock split dated January 6,
2003) 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 (3,000,000 pre split) shares of restricted common stock
at $1.45 (0.29 pre 5-for-1 reverse stock split dated January 6, 2003) 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 the
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 and resulting in a
change of control of the registrant. (See Note 10 a and c.)
During the year, 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.
Employment Agreement--The Company has an employment agreement with its
President and Chief Executive Officer. The employment agreement provides
for the officer to earn a $100,000 cash compensation plus $60,000 annual
stock compensation annually until April 1, 2005. The officer 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 (1,000,000 pre 5-for-1 reverse stock
split dated January 6, 2003) shares at an exercise price per share of
$0.50 ($0.10 pre 5-for-1 reverse stock split dated January 6, 2003) per
share, expiring in October 2005.
FISCAL YEAR 2001: The Company paid net consulting fees $18,000 to one of
the directors of the Company.
10. STOCKHOLDERS' EQUITY
a. ALLOTMENT AND REPURCHASE OF COMMON STOCK
Treasury Stock - During the years ended December 31, 2002 and 2001, the
Company repurchased 4,970 (24,850 pre 5-for-1 reverse stock split dated
January 6, 2003) shares of common stock for a total of $5,000 and 2,840
(14,200 pre 5-for-1 reverse stock split dated January 6, 2003) shares of
common stock for a total of $15,000.
Common Stock - For the year ended December 31, 2002, the Company issued
(i) 155,058 (775,288 pre 5-for-1 reverse stock split dated January 6,
2003) shares with a market value of $186,000 to acquire fixed assets, (ii)
60,585 (302,924 pre 5-for-1 reverse stock split dated January 6, 2003)
shares with a market value of $50,000 to satisfy certain current
liabilities, (iii) 337,007 (1,685,037 pre 5-for-1 reverse stock split
dated January 6, 2003) shares with a market value of $263,000 to settle
the expenses, and (iv) 2,725,000 (13,625,000 pre 5-for-1 reverse stock
split dated January 6, 2003) 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 (1,625,000 pre 5-for-1
reverse stock split dated January 6, 2003) shares of restricted common
stock at a price of $1.60 ($0.32 pre 5-for-1 reverse stock split dated
January 6, 2003) 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 (12,000,000
pre 5-for-1 reverse stock split dated January 6, 2003) shares of
restricted common stock at a price of $1.45 ($0.29 pre 5-for-1 reverse
stock split dated January 6, 2003) 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 (3,000,000 pre 5-for-1
reverse stock split dated January 6, 2003) shares of restricted common
stock at $1.45 ($0.29 pre 5-for-1 reverse stock split dated January 6,
2003) 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 the 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 and resulting in a change of control of the registrant. See Note
9.
For the year ended December 31, 2001, the Company issued 50,000 (250,000
pre 5-for-1 reverse stock split dated January 6, 2003) shares of common
stock with a market value of $209,000 to satisfy certain current
liabilities.
b. STOCK OPTION PLAN
On June 2, 2000 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 1,049,667 to 1,666,667. 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.
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. As such, options
outstanding for the periods presented have been retroactively restated to
reflect the reverse split on January 6, 2003. (See Note 13 a.) All options
granted under the Plan were fully vested as of December 31, 2002.
27
The status of the Plan as of December 31 was as follows:
2002 2001
---- ----
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
Options outstanding, beginning of year 123,400 $4.15-$9.375 --
Granted 221,933 $0.50-$9.375 328,640 $4.15-$9.375
Exercised -- --
Cancelled (32,733) $0.50-$9.375 (205,240) $4.15-$9.375
--------- ---------
Options outstanding, end of year 312,600 $0.50-$9.375 123,400 $4.15-$9.375
Options exercisable, end of year 312,600 $0.50-$9.375 100,900 $4.15-$9.375
Additional information on options outstanding as of December 31, 2002 is
as follows:
WEIGHTED AVERAGE AVERAGE REMAINING
EXERCISE PRICE CONTRACTUAL LIFE
---------------- ------------------
Options outstanding $ 0.88 3 years
Options exerciseable $ 0.71 3 years
The fair value of options outstanding of December 31, 2002 was
approximately $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 183.6%, c) dividend yield
of 0%; and d) a risk free interest rate of 4.00%.
The Company's net loss and net loss per common share would have been
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):
2002 2001
--------------- ---------------
Net loss
As reported $ (2,921) $ (5,005)
Pro forma (3,097) (5,050)
Net loss per share
As reported $ (0.70) $ (3.10)
Pro forma (0.74) (3.13)
c. WARRANTS
On March 25, 2002, the Company issued warrants to purchase up to 600,000
(3,000,000 pre 5-for-1 reverse stock split dated January 6, 2003) shares
of common stock of the Company at an exercise price of $1.45 ($0.29 pre
5-for-1 reverse stock split dated January 6, 2003) per share. The warrants
are exercisable through April 5, 2005. (See Note 9.)
On December 30, 2002, the Company issued warrants to purchase up to
300,000 (1,500,000 pre 5-for-1 reverse stock split dated January 6, 2003)
shares of common stock of the Company at an exercise price of $1.70 ($0.34
pre 5-for-1 reverse stock split dated January 6, 2003) per share. The
warrants are exercisable through December 30, 2005.
Prior to 2000, the Company issued warrants to purchase up to 8,333 (41,667
pre 5-for-1 reverse stock split dated January 6, 2003) shares of common
stock of the Company at an exercise price of $123.75 ($24.75 pre 5-for-1
reverse stock split dated January 6, 2003) per share. The warrants are
exercisable through December 24, 2003.
11. INCOME TAXES
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 16%. No tax benefits have been recorded related
to the loss generated by the Company or any or it 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 (in thousands):
28
Entity 2002 2001
------ -------- --------
Company, including discontinued operations $(1,357) $(1,018)
Hong Kong subsidiaries (1,564) (3,987)
-------- --------
Total $(2,921) $(5,005)
-------- --------
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:
2002 2001
-------- --------
United States federal income tax rate 34.0% 34.0%
Tax losses not recognized (9.60) (19.7)
Effect of different tax rates in foreign jurisdictions (24.4) (14.3)
-------- --------
Effective income tax rate -% -%
-------- --------
The valuation allowance increased by $712 and $984 at December31, 2002 and
2001, respectively. The Company has net operating loss carryforwards of
approximately $2,600 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.
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table set forth selected quarterly financial information for
the fiscal 2002 quarters ended December 31, 2002 and for the fiscal 2001
quarters ended December 31, 2001. The operating results for any given
quarter are not necessarily indicative of results for any future periods
(in thousands).
Fiscal 2002 Quarter Ended Fiscal 2001 Quarter Ended
------------------------- -------------------------
31-Mar 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec
------ ------ ------ ------ ------ ------ ------ ------
Revenue $ 1,396 $ 723 $ 187 $ 13 $ 195 $ 115 $ 415 $ 238
Gross margin 298 256 99 (121) (10) (43) 259 (46)
Loss from operations (303) (340) (483) (1,518) (1,158) (923) (977) (1,156)
Other items, net 22 21 5 (15) 77 76 84 65
Provision for impairment
of affiliated companies (7) (7) (8) (75) -- (1,093) --
Loss from discontinued
Operations -- -- -- (107) 14 64 10 91
---------------------------------------------- ---------------------------------------------
Net loss $ (365) $ (376) $(1,251) $ (929) $(1,081) $(1,582) $(1,251) $(1,091)
---------------------------------------------- ---------------------------------------------
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing
operations $ (0.11) $ (0.09) $ (0.12) $ (0.36) $ (0.73) $ (0.58) $ (0.61) $ (0.72)
Other items, net 0.01 0.01 -- -- 0.05 0.05 0.05 0.04
Provision for impairment
losses of affiliated
companies -- -- -- (0.02) -- -- (0.68) --
Net losses from
discontinued operations -- -- -- (0.03) 0.01 0.04 0.01 0.06
Net losses $ (0.14) $ (0.10) $ (0.32) $ (0.22) $ (0.68) $ (0.99) $ (0.78) $ (0.68)
============================================== ==============================================
29
13. EVENTS SUBSEQUENT TO DECEMBER 31, 2002
a. REVERSE STOCK SPLIT
Effective at the open of business on January 6,2003 (the "Effective
Date"), every five (5) shares of the Company's issued and outstanding
common stock shall be combined into one(1) share of fully paid and
non-assessable common stock of the Company (the "Reverse Split Ratio"). No
fractional shares of common stock of the Company shall be issued in
connection with the reverse split. A holder of common stock, who
immediately prior to the Effective Date owns a number of shares of common
stock of the Company which is not evenly divisible by the Reverse Split
Ratio shall, with respect to the fractional interest, be issued a number
of shares of new common stock of the Company rounded to the nearest whole
number." All per share and per share amounts have been adjusted
retroactively in these financial statements for the reverse split.
b. INCORPORATION OF JOINT VENTURE IN MACAO SPECIAL ADMINISTRATIVE
REGION
On December 20, 2002, PacificNet Inc. entered into an agreement with
International Elite Limited ("IEL"), a leading provider of value-added
telecom services in the Greater China region, to establish "PacificNet
Communications Limited - Macao Commercial Offshore," an equity joint
venture company ("PacMOC"), which will be registered in the Macao Special
Administrative Region (SAR) of China. The scope of the business to be
provided by PacMOC shall include, value-added telecom services including
call center, CRM, telemarketing, and data-mining services, and mobile data
services such as Short Message Service (SMS), Multimedia Message Service
(MMS), unified messaging service (UMS), location-based service (LBS),
Wireless application Protocol (WAP), and Binary Runtime Environment for
Wireless based Code Division Multiple Access (BREW-based CDMA)
applications, mobile commerce, roaming, paging, wireless internet, Virtual
Private Network (VPN) and Voice over IP (VoIP) services in the Greater
China Region. PacMOC will be owned 50.1% by PacificNet and 49.9% by the
shareholders of IEL. IEL will assign and contribute to PacMOC certain
telecom business contracts, which have been valued at $23.1 million, and
the Company will contribute to PacMOC as its capital contribution,
restricted shares of its common stock valued at its closing price on
December 20, 2002, which will be held by an escrow agent to be released in
tranches upon completion of certain agreed upon milestones of PacMOC.
Pursuant to the terms of the agreement, all of the restricted shares held
in escrow shall be released by the Escrow Agent provided, that, PacMOC
generates $3 million of net income for the fiscal year December 2003
according to U.S. generally accepted accounting principles, consistently
applied. In the event less than $3 million in net income is generated by
PacMOC, the shareholders of IEL have agreed to pay the Company an amount
in cash equal to the amount of the shortfall in net income.
On Febraury 24,2003, PacificNet received a letter from Nasdaq stating that
Nasdaq staff has determined that the transaction with IEL would not
trigger the application of Marketplace Rule 4330(f), in that it would not
constitute a "Reverse Merger". The Company plans to seek approval of the
joint venture at its next meeting of stockholders. PacificNet will provide
dates and additional disclosure within the Company's proxy statement
related to its upcoming stockholders' meeting.
c. Related Parties Transactions
The Company has an employment agreement with its Vice President, Executive
Director and Company Secretary. The employment agreement provides for the
officer to earn a $48,000 cash compensation plus $10,000 annual stock
compensation annually until March 26, 2006. The officer 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. Other benefits include monthly housing allowance of $2,000 and
monthly automobile allowance of $500.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company dismissed Deloitte Touche Tohmatsu as its independent accountant and
approved Clancy and Co., P.L.L.C. as its new independent accountants. The
decision to change accountants was recommended and approved by the audit
committee in response to the proposed change in control of the company. Deloitte
Touche Tohmatsu did not perform an audit of the Company's financial statements
for the year ended December 31, 2001.
There were no disagreements with Deloitte Touche Tohmatsu on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure for the three-month interim periods ended June 30, 2001,
September 30, 2001 and through March 12, 2002. Deloitte Touche Tohmatsu was not
engaged to perform an audit or review of the Company's financial statements for
any period prior to the three-month period ended June 30, 2001.
30
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is hereby incorporated by reference to the
Company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is hereby incorporated by reference to the
Company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is hereby incorporated by reference to the
Company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be hereby incorporated by reference
to the Company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission.
ITEM 13. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our chief executive officer and the chief financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, within 90 days of the filing date of this
report (the "Evaluation Date"). Based on this evaluation, our chief executive
officer and chief financial officer concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the material
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to Pacificnet, including our
consolidating subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.
Additionally, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the Evaluation Date. We have not identified any significant
deficiencies or material weaknesses in our internal controls, and therefore
there were no corrective actions taken.
31
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Share Exchange Agreement by and among Davin Enterprises, Inc.,
Carl Tong, Leo Kwok and Acma Strategic Holdings Limited dated
December 15, 1997. (1)
2.2 Share Exchange Agreement dated February 17, 2000, between
Registrant and holders of membership interests in
PacificNet.com LLC. (3)
2.3 Supplement to Share Exchange Agreement dated April 29, 2000,
between Registrant and holders of membership interests in
PacificNet.com LLC. (3)
2.4 Agreement dated September 30, 2000, among the Company and the
"Purchasers" named therein. (4)
2.5 Supplemental Agreement dated October 3, 2000, among the Company
and the "Purchasers" named therein. (4)
2.6 Deed of Waiver, dated October 3, 2000, by Creative Master
Limited in favor of the Company. (4)
3.1 Certificate of Incorporation, as amended.
Certificate of amendment of Certificate of Incorporation.
3.2 By Laws of the Company. (5)
3.3 Amendment to By Laws of the Company. (2)
4 Specimen Stock Certificate of the Company.
10.1 Form of Indemnification Agreement with officers and directors.
(1)
10.2 Amendment to 1998 Stock Option Plan.
10.3 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan. (3)
10.4 Amendment dated January 31, 2002 to the Subscription Agreement
by and between the Company and Sino Mart Management Ltd., dated
as of December 9, 2001 (6)
10.5 19.9% Private Placement Agreement and Amendments between Ho
Shu-Jen and PacificNet.com, Inc.
10.6 Sub-Lease Agreement dated August 30, 2002.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Subscription Agreement by and between the Company and Sino Mart
Management Ltd., dated as of December 9, 2001 (6)
-----------------------------
(1) Incorporated by reference to the Company's Form SB-2 filed on October 21,
1998.
(2) Incorporated by reference to the Company's Form 10-KSB filed on March 30,
1999.
(3) Incorporated by reference to the Company's Form 8-K filed on August 11,
2000.
(4) Incorporated by reference to the Company's Form 8-K filed on October 17,
2000.
(5) Incorporated by reference to the exhibits of the Company's registration
statement (file no. 33-14521-NY)
(6) Incorporated by reference to the Company's Form 8-K filed on March 20, 2002.
(7) Incorporated by reference to the Company's Form 8-K filed on March 28,2002.
(8) Incorporated by reference to the Company's Form 10-KSB filed on April 16,
2002.
(9) Incorporated by reference to the Company's Form 8-K filed on September
30,2002.
(10) Incorporated by reference to the Company's Form 8-K filed on December
24,2002.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on December 24, 2000, under Item 5 Other
Events and Required FD Disclosure.
32
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PACIFICNET INC.
---------------
Date: March 28, 2003 By: /s/ TONY I. TONG
Tony I. Tong
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2003 By: /s/ WANG SHAO JIAN
Wang Shao Jian
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ TONY I. TONG Director, Chairman and CEO March 28, 2003
------------------------
Tony I. Tong
/s/ VICTOR TONG Director, Vice-President and Secretary March 28, 2003
------------------------
Victor Tong
/s/ WANG SHAO JIAN Director and CFO March 28, 2003
------------------------
Wang Shao Jian
/s/ TONG CHO SAM Director March 28, 2003
------------------------
Tong Cho Sam
/s/ LO CHI HO RICHARD Director March 28, 2003
------------------------
Lo Chi Ho, Richard
/s/ TANG YUE Director March 28, 2003
------------------------
Tang Yue
/s/ FISHER DAVID Director March 28, 2003
------------------------
Fisher David
/s/ FU YONG JUN Director March 28, 2003
------------------------
Fu Yong Jun
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Share Exchange Agreement by and among Davin Enterprises, Inc.,
Carl Tong, Leo Kwok and Acma Strategic Holdings Limited dated
December 15, 1997. (1)
2.2 Share Exchange Agreement dated February 17, 2000, between
Registrant and holders of membership interests in
PacificNet.com LLC. (3)
2.3 Supplement to Share Exchange Agreement dated April 29, 2000,
between Registrant and holders of membership interests in
PacificNet.com LLC. (3)
2.4 Agreement dated September 30, 2000, among the Company and the
"Purchasers" named therein. (4)
2.5 Supplemental Agreement dated October 3, 2000, among the Company
and the "Purchasers" named therein. (4)
2.6 Deed of Waiver, dated October 3, 2000, by Creative Master
Limited in favor of the Company. (4)
3.1 Certificate of Incorporation, as amended.
Certificate of amendment of Certificate of Incorporation.
3.2 By Laws of the Company. (5)
3.3 Amendment to By Laws of the Company. (2)
4 Specimen Stock Certificate of the Company.
10.1 Form of Indemnification Agreement with officers and directors.
(1)
10.2 Amendment to 1998 Stock Option Plan.
10.3 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan. (3)
10.4 Amendment dated January 31, 2002 to the Subscription Agreement
by and between the Company and Sino Mart Management Ltd., dated
as of December 9, 2001 (6)
10.5 19.9% Private Placement Agreement and Amendments between Ho
Shu-Jen and PacificNet.com, Inc.
10.6 Sub-Lease Agreement dated August 30, 2002.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
992 Subscription Agreement by and between the Company and Sino Mart
Management Ltd., dated as of December 9, 2001 (6)
34
CERTIFICATION
I, Tony Tong, certify that:
1. I have reviewed this annual report on Form 10-KSB of Pacificnet,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalentfunctions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Tony Tong
----- -------------- -------------
Tony Tong, Chairman and Chief
Executive Officer (Principal
Executive Officer)
35
I, Wang Shao Jian, certify that:
1. I have reviewed this annual report on Form 10-KSB of Pacificnet,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalentfunctions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 /s/ Wang Shao Jian
----- -------------- -------------------
Wang Shao Jian, Chief Financial
Officer, (Principal Financial
Officer)
36