SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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PACIFICNET INC.
---------------
(Name of Registrant as Specified In Its Charter)
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PACIFICNET INC.
_____________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 30, 2003
_____________________
TO THE STOCKHOLDERS OF PACIFICNET INC:
The Annual Meeting of the Stockholders of PacificNet Inc., a Delaware
corporation (the "Company'), will be held on July 30, 2003, at 10:00 a.m. (Hong
Kong Time), at PacificNet, Unit 1702, Chinachem Century Tower, 178 Gloucester
Road, Wanchai, Hong Kong, for the following purposes:
1. To elect eight (8) directors to the Board of Directors of the
Company to serve until the next annual meeting of stockholders
and until their successors are duly elected and qualified;
2. To approve the issuance of shares of the Company's Common
Stock in excess of twenty percent (20%) of the Company's total
shares of Common Stock outstanding in connection with the
formation of the new joint venture company entitled
"PacificNet Communications Limited - Macao Commercial
Offshore";
3. To ratify previous issuances of shares of the Company's Common
Stock to directors and officers of the Company as compensation
for services provided to the Company;
4. To amend the Company's 1998 stock option plan (the "1998
Plan") to increase the number of shares that may be granted as
stock option awards under the 1998 Plan;
5. To ratify the appointment of Clancy and Co., P.L.L.C., as the
Company's independent auditors; and
6. To transact any other business as may properly be presented at
the Annual Meeting or any adjournment or postponement thereof.
Stockholders of record at the close of business on _____________, 2003
(the "Record Date") are entitled to notice of, and to vote at, the Annual
Meeting or any adjournment thereof.
Your attention is directed to the Proxy Statement accompanying this
Notice for a more complete statement of matters to be considered at the Annual
Meeting.
YOUR VOTE IS IMPORTANT. YOU ARE REQUESTED TO CAREFULLY READ THE PROXY STATEMENT.
PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors,
/s/ Victor Tong
---------------
Name: Victor Tong
Title: Secretary and Executive
Director of PacificNet Inc.
Hong Kong
Dated: June ___, 2003
2
PACIFICNET INC.
_____________________
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 2003
_____________________
INTRODUCTION
Your proxy is solicited by the Board of Directors of PacificNet Inc., a
Delaware corporation (the "Company"), for use at the Annual Meeting of
Stockholders to be held on July 30, 2003, at 10:00 a.m. (Hong Kong Time), at the
Company's executive offices located at PacificNet, Unit 1702, Chinachem Century
Tower, 178 Gloucester Road, Wanchai, Hong Kong, and at any adjournment thereof
(the "Annual Meeting"), for the following purposes:
1. To elect eight (8) directors to the Board of Directors of the
Company to serve until the next annual meeting of stockholders
and until their successors are duly elected and qualified;
2. To approve the issuance of shares of the Company's Common
Stock in excess of twenty percent (20%) of the Company's total
shares of Common Stock outstanding in connection with the
formation of the new joint venture company entitled
"PacificNet Communications Limited - Macao Commercial
Offshore";
3. To ratify previous issuances of shares of the Company's Common
Stock to directors and officers of the Company as compensation
for services provided to the Company;
4. To amend the Company's 1998 stock option plan (the "1998
Plan") to increase the number of shares that may be granted as
stock option awards under the 1998 Plan; and
5. To ratify the appointment of Clancy and Co., P.L.L.C., as the
Company's independent auditors; and
6. To transact any other business as may properly be presented at
the Annual Meeting or any adjournment or postponement thereof.
The Board of Directors has set __________, 2003 as the record date (the
"Record Date") to determine those holders of common stock, par value $0.0001 per
share (the "Common Stock"), who are entitled to notice of, and to vote at the
Annual Meeting. The Company expects that the Notice of Annual Meeting, Proxy
Statement and form of proxy will first be mailed to stockholders on or about
June ___, 2003.
GENERAL INFORMATION ABOUT VOTING
WHO CAN VOTE?
You can vote your shares of Common Stock if our records show that you
owned the shares on the Record Date. As of the close of business on the Record
Date, a total of ______________ shares of Common Stock are entitled to vote at
the Annual Meeting. Each share of Common Stock is entitled to one (1) vote on
matters presented at the Annual Meeting.
HOW DO I VOTE BY PROXY?
Follow the instructions on the enclosed proxy card to vote on each
proposal to be considered at the Annual Meeting. Sign and date the proxy card
and mail it back to us in the enclosed envelope.
3
The enclosed proxy, when properly signed and returned to the Company,
will be voted by the proxy holders at the Annual Meeting as directed by the
proxy. Proxies which are signed by stockholders but which lack any such
specification will be voted in favor of the proposals set forth in the Notice of
Annual Meeting.
WHAT IF OTHER MATTERS COME UP AT THE ANNUAL MEETING?
The matters described in this proxy statement are the only matters we
know of that will be voted on at the Annual Meeting. If other matters are
properly presented at the meeting, the proxy holders will vote your shares as
they see fit.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. A proxy card may be revoked by a stockholder at any time before
its exercise at the Annual Meeting by giving Victor Tong, our Secretary, a
written notice revoking your proxy card or a duly executed proxy bearing a later
date, or by attendance at the Annual Meeting and electing to vote in person.
CAN I VOTE IN PERSON AT THE ANNUAL MEETING RATHER THAN BY COMPLETING THE PROXY
CARD?
Although we encourage you to complete and return the proxy card to
ensure that your vote is counted, you can attend the Annual Meeting and vote
your shares in person.
HOW ARE VOTES COUNTED?
We will hold the Annual Meeting if holders of a majority of the shares
of Common Stock entitled to vote in person or by proxy either sign and return
their proxy cards or attend the meeting. If you sign and return your proxy card,
your shares will be counted to determine whether we have a quorum even if you
abstain or fail to vote on any of the proposals listed on the proxy card.
The election of directors under proposal 1 will be by the affirmative
vote of a plurality of the shares of Common Stock presented in person or
represented by proxy at the Annual Meeting. Proposals 2, 3 and 4 shall be
approved upon the affirmative vote of a majority of the shares of Common Stock
presented in person or represented by proxy at the Annual Meeting. Unless
otherwise stated, the enclosed proxy will be voted in accordance with the
instructions thereon.
Brokers holding shares of the Company's Common Stock in street name who
do not receive instructions are entitled to vote on the election of Directors.
Under applicable Delaware law, "broker non-votes" on any other non-routine
proposal, such as Proposals 2, 3, and 4 (where a broker submits a proxy but does
not have authority to vote a customer's shares on such proposal) would not be
considered entitled to vote on that proposal and will, therefore, have no legal
effect on the vote of that particular matter.
WHO PAYS FOR THIS PROXY SOLICITATION?
We do. In addition to sending you these materials, some of our
employees may contact you by telephone, by mail, by fax, by email, or in person.
None of these employees will receive any extra compensation for doing this.
GENERAL INFORMATION ABOUT THE PROPOSAL
WHAT PROPOSALS ARE STOCKHOLDERS BEING ASKED TO CONSIDER AT THE UPCOMING ANNUAL
MEETING?
In proposal 1, we are seeking the election of eight (8) directors to
serve on the board of directors of the Company until the next Annual Meeting of
Stockholders and until their successors are elected and qualified.
In proposal 2, we are seeking approval for the issuance of Common Stock
in excess of 20% of the total number of shares of Common Stock currently
outstanding in connection with the formation of a joint venture to be entitled
"PacificNet Communications Limited - Macao Commercial Offshore," with the
stockholders of International Elite Limited.
4
In proposal 3, we are seeking ratification of previous issuances of
shares of the Company's Common Stock to directors and officers of the Company as
compensation for services provided to the Company.
In proposal 4, we are seeking approval to amend the 1998 Plan to
increase the number of shares that may be granted as stock option awards under
the 1998 Plan.
In proposal 5, we are seeking ratification of the appointment of Clancy
and Co., P.L.L.C., as the Company's independent auditors.
WHY IS PACIFICNET SEEKING STOCKHOLDER APPROVAL FOR THESE PROPOSALS?
PROPOSAL NO. 1: The Delaware General Corporate Law requires
corporations to hold elections for directors each year.
PROPOSALS NO. 2 AND 3: The NASD Marketplace Rules require that we
obtain stockholder approval for proposals no. 2 and 3. We are subject to NASD
Marketplace Rules because our common stock is listed on the Nasdaq SmallCap
Market. NASD Marketplace Rule 4350(i)(1)(C) requires stockholder approval for
any issuance of stock where the amount being issued exceeds 20% or more of the
Company's total Common Stock outstanding. NASD Marketplace Rule 4350(i)(1)(A)
requires stockholder approval of any arrangement made pursuant to which stock
may be acquired by officers or directors.
PROPOSAL NO. 4: As a result of the issuance of greater than 20% of the
currently issued and outstanding shares of Common Stock, if such issuance is
approved by the stockholders, the percentage of shares of Common Stock available
for issuance in the total stock option pool will decrease. The Company desires
to maintain for issuance in its stock option pool, a number equal to at least
15% of the total number of shares of Common Stock issued and outstanding.
Accordingly, the Company is requesting approval of this proposal.
PROPOSAL NO. 5. The Company appointed Clancy and Co., P.L.L.C. to serve
as the Company's independent auditors during fiscal year 2002. The Company
elects to have its stockholders ratify such appointment.
5
OUTSTANDING SHARES AND VOTING RIGHTS
Stockholders entitled to notice of, and to vote at the Annual Meeting
and any adjournment thereof, are stockholders of record at the close of business
on the Record Date. Persons who are not stockholders of record on the Record
Date will not be allowed to vote at the Annual Meeting. At the close of business
on the Record Date there were ____________ shares of Common Stock issued and
outstanding. We have issued no other voting securities as of the Record Date.
Each share of Common Stock is entitled to one (1) vote on each matter to be
voted upon at the Annual Meeting. Holders of Common Stock are not entitled to
cumulate their votes for the election of directors.
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth as of June 13, 2003 the number of shares
of our Common Stock beneficially owned by (i) each person who is known by us to
be the beneficial owner of more than five percent of the Company's Common Stock;
(ii) each director and nominee for election to the Board of Directors; (iii)
each of the named executive officers in the Summary Compensation Table; and (iv)
all directors and executive officers as a group. Unless otherwise indicated, the
stockholders listed in the table have sole voting and investment power with
respect to the shares indicated.
------------------------------------------------------------------------------------- ---------------- ---------------
NUMBER OF % OF COMMON
SHARES STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNED(2)
------------------------------------------------------------------------------------- ---------------- ---------------
Sino Mart Management Ltd. (3) 3,000,000 42.12%
c/o ChoSam Tong, PacificNet, Unit 1702, 178 Gloucester Road, Wanchai, Hong Kong
------------------------------------------------------------------------------------- ---------------- ---------------
ChoSam Tong (4)
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong 3,070,000 42.22%
------------------------------------------------------------------------------------- ---------------- ---------------
PacificNet Communications Limited - Macao Commercial Offshore (5) 800,000 11.23%
Commercial Centre I Tak, Rua de Pequim No, 126, 6th Floor, Macau
------------------------------------------------------------------------------------- ---------------- ---------------
Tony Tong (6) 390,391 5.48%
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong
------------------------------------------------------------------------------------- ---------------- ---------------
ShaoJian (Sean) Wang (7) 39,400 *
PacificNet Inc., 860 Blue Gentian Road, Ste. 360, Eagan, MN 55121, USA
------------------------------------------------------------------------------------- ---------------- ---------------
Victor Tong (8) 35,200 *
PacificNet Inc., 860 Blue Gentian Road, Ste. 360, Eagan, MN 55121, USA
------------------------------------------------------------------------------------- ---------------- ---------------
Richard Chi Ho Lo (9) 19,000 *
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong
------------------------------------------------------------------------------------- ---------------- ---------------
Yue (Justin) Tang (10) 7,000 *
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong
------------------------------------------------------------------------------------- ---------------- ---------------
David Fisher (11) 5,000 *
PacificNet Inc., 860 Blue Gentian Road, Ste. 360, Eagan, MN 55121, USA
------------------------------------------------------------------------------------- ---------------- ---------------
Yongjun (Charles) Fu (12) 5,000 *
PacificNet Inc., 860 Blue Gentian Road, Ste. 360, Eagan, MN 55121, USA
------------------------------------------------------------------------------------- ---------------- ---------------
Emmy Lo (13) 17,000 *
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong
------------------------------------------------------------------------------------- ---------------- ---------------
Jin Yue (14)
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong 0 N/A
------------------------------------------------------------------------------------- ---------------- ---------------
Wing Kee Eng Lee (15)
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong 0 N/A
------------------------------------------------------------------------------------- ---------------- ---------------
Peter Wang (16)
PacificNet, Unit 1702, Chinachem Tower, 178 Gloucester Road, Wanchai, Hong Kong 0 N/A
------------------------------------------------------------------------------------- ---------------- ---------------
ALL DIRECTORS AND OFFICERS AS A GROUP (12 PERSONS) 3,524,991 49.5%
------------------------------------------------------------------------------------- ---------------- ---------------
* Indicates less than one percent.
6
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to the shares shown. Except as indicated by footnote and
subject to community property laws where applicable, to our knowledge, the
stockholders named in the table have sole voting and investment power with
respect to all common stock shares shown as beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options, warrants or
convertible securities (in any case, the "Currently Exercisable Options"). Each
beneficial owner's percentage ownership is determined by assuming that the
Currently Exercisable Options that are held by such person (but not those held
by any other person) have been exercised and converted.
(3) Sino Mart Management Ltd. is owned by Mr. ChoSam Tong, the father of Mr.
Tony Tong. Includes 600,000 shares of common stock issuable to Sino Mart
Management Ltd. upon exercise of a warrant.
(4) Mr. ChoSam Tong is currently President of China Operations and a director of
the Company. Includes shares of common stock of Sino Mart Management Ltd., which
is owned by Mr. ChoSamTong and 600,000 shares of common stock issuable to Sino
Mart Management Ltd. upon the exercise of a warrant.
(5) Information obtained from the Schedule 13D filed by PacificNet
Communications Limited - Macao Commercial Offshore on May 12, 2003.
(6) Mr. Tony Tong is currently the Chairman, CEO, and an executive director of
the Company. Includes 206,000 Incentive Stock Options currently exercisable
under the 1998 Stock Option Plan. Excludes 3,000,000 shares owned by Sino Mart
Management Ltd., as to which shares Mr. Tony Tong disclaims beneficial
ownership.
(7) Mr. Shao Jian (Sean) Wang is the Chief Financial Officer of the Company.
(8) Mr. Victor Tong is currently Vice President of the Company and an executive
director of the Company. He is the brother of Mr. Tony Tong. Excludes 3,000,000
shares owned by Sino Mart Management Ltd., as to which shares Mr. Victor Tong
disclaims beneficial ownership.
(9) Mr. Richard Chi Ho Lo is an independent director of the Company.
(10) Mr. Yue (Justin) Tang is an independent director of the Company.
(11) Mr. David Fisher is a director of the Company.
(12) Mr. Yong Jun (Charles) Fu is an independent director of the Company.
(13) Ms. Emmy Lo is a director nominee.
(14) Mr. Jin Yue is a director nominee
(15) Mr. Wing Kee Eng Lee is a director nominee.
(16) Mr. Peter Wang is a director nominee.
7
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth aggregate information regarding the
Company's equity compensation plans in effect as of December 31, 2002:
------------------------------------- ------------------------------ ----------------------------- ----------------------------
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
------------------------------------- ------------------------------ ----------------------------- ----------------------------
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS 312,600 $0.88 1,354,067
------------------------------------- ------------------------------ ----------------------------- ----------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS N/A N/A N/A
------------------------------------- ------------------------------ ----------------------------- ----------------------------
TOTAL 312,600 $0.88 1,354,067
------------------------------------- ------------------------------ ----------------------------- ----------------------------
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PROPOSAL 1
ELECTION OF DIRECTORS
Eight (8) director nominees are seeking to be elected at the Annual
Meeting, to hold office until the next Annual Meeting of stockholders and until
their successors are elected and qualified. Messrs. ChoSam Tong, Richard C.H.
Lo, Yongjun (Charles) Fu and David Fisher will not seek re-election for another
term as directors of the Company. Management expects that each of the nominees
will be available for election, but if any of them is not a candidate at the
time the election occurs, it is intended that such proxy will be voted for the
election of another nominee to be designated by the Board of Directors to fill
any such vacancy.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
Set forth below are the names of the directors, executive officers and
key employees of the Company as of March 31, 2003.
Name Age Title
----------------------- --- --------------------------------------------------------
Tony I. Tong 35 Chairman, Chief Executive Officer and President
Victor Tong 33 Vice President of N. America Operations, Secretary and
Director
ChoSam Tong 63 President of China Operations and Director
ShaoJian (Sean) Wang 38 Chief Financial Officer, Vice President of International
Business and Director
Richard C.H. Lo 36 Independent Director
Yue (Justin) Tang 32 Independent Director
Yongjun (Charles) Fu 40 Independent Director
David Fisher 53 Director
Emmy Lo 31 Accounting Manager and Director Nominee
Jin Yue 36 Independent Director Nominee
Wing Kee Eng Lee 50 Independent Director Nominee
Peter Wang 49 Independent Director Nominee
Executive officers of the Company are appointed at the discretion of
the Board of Directors with no fixed term. There are no family relationships
between or among any of the executive officers or directors of the Company other
than the relationship between Mr. Tony Tong, Mr. Victor Tong and Mr. ChoSam
Tong.
INFORMATION ABOUT DIRECTOR NOMINEES
Set forth below is certain information with respect to each director
nominee.
Mr. Tony Tong, age 35, is the Chairman, CEO, Executive Director, and
founder of PacificNet. From 1995 to 1997, Mr. Tong served as the Chief
Information Officer of DDS Inc., a leading SAP-ERP consulting company in the
USA, whichwas later acquired by CIBER, Inc. (NYSE: CBR). From 1993 to 1994, Mr.
Tong worked for Information Advantage, Inc. (Nasdaq:IACO), a leading business
intelligence, Data-Mining and CRM technology provider serving Fortune 500
clients. IACO consummated an IPO on Nasdaq in 1997 and was later acquired by
Sterling Software and Computer Associates (NYSE:CA). From 1992 to 1993, Mr. Tong
worked as a Business Process Re-engineering Consultant at Andersen Consulting
(now Accenture, NYSE:ACN). From 1990 to 1991, Mr. Tong worked for ADC
Telecommunications (Nasdaq:ADCT), a global supplier of telecom equipment. Mr.
Tong's R&D achievements include being the inventor and patent holder of US
Patent Number 6,012,066 (granted by US Patent and Trademark Office) titled
"Computerized Work Flow System, an Internet-based workflow management system for
automated web creation and process management." Mr. Tong also serves on the
board of advisors of Fortune Telecom (listed on Hong Kong Stock Exchange:
9
8040.HK), a leading distributor of mobile phones, PDAs, telecom services, and
accessories in China and Hong Kong. Mr. Tong is a frequent speaker on technology
investment in China, and was invited to present at the Fourth APEC International
Finance & Technology Summit in 2001. Mr. Tong graduated with Bachelor of
Mechanical/Industrial Engineering Degree from the University of Minnesota and
served on the Computer Engineering Department Advisory Board and was an Adjunct
Professor at the University of Minnesota, USA.
Mr. Victor Tong, age 33, currently is the Vice President of North
American Operations, Secretary and a Director of the Company. Mr. Victor Tong
was formerly the President of KeyTech, a leading information technology
consulting company based in Minneapolis, Minnesota. In 1994, Victor co-founded
Talent Information Management ("TIM"). The Company was originally founded as an
operating division of TIM. Mr. Victor Tong gained his consulting, systems
integration, and technical expertise in client/server systems through his
experience at Andersen Consulting, American Express Financial Advisors (IDS),
3M, and the Superconductivity Center at the University of Minnesota. He was
awarded as one of the "CityBusiness 40 Under 40" in 1999 as one of the 40 people
under 40 years of age who are the next generation of Twin Cities business and
community leaders. Mr. Tong graduated with honors with a Bachelor of Science in
Physics from the University of Minnesota, USA. Victor Tong is the brother of
Tony Tong
Mr. ShaoJian (Sean) Wang, age 38, is the Chief Financial Officer and
Vice President of International Business for the Company. Mr. Wang is also
Director of Thian Bing Investments Pte Ltd - a Singapore based investment
holding company, a Director on the board of Alliance PKU Co. Ltd - a company
owned and controlled by Guanghua School of Management, Peking University;
Director of the board of Portcullis International Group - a Singapore based
investment consulting company; and Director and Partner of the Overseas Chinese
Scholar Fund, a leading venture capital firm headquartered in Zhongguancun
Beijing and Guangzhou, China. Mr. Wang started his professional career as a
Market/Financial analyst with Ecolab Inc. (NYSE:ECL) in 1987, where he moved
quickly to become Territory Manager and Marketing Manager. In 1990, Mr. Wang was
posted to Ecolab's Asia Pacific regional headquarters as Business Development
Manager. In 1992, Mr. Wang was appointed to Country Manager of Ecolab for
Indonesia. Mr. Wang is an investor and Director in Alliance PKU Co. Ltd. which
owns two premier companies in China. Alliance PKU Consulting is a leading
management consulting firm in China, and Beidabiz & E-learning Co. (a venture of
Peking University) is a well-known online education provider. Mr. Wang also
advises some local governments in China. The Municipal government of Yantai
appointed him as the city's representative for investment. He worked with the
Wei Fang government on setting up the Agricultural Development Park. Mr. Wang
attended Peking University and received his MBA degree at the Carlson School of
Management, University of Minnesota, and the B.S. in Economics at Hemline
University.
Mr. Yue (Justin) Tang, age 32, is Chairman and Chief Executive Officer
of eLong, Inc. (www.eLong.com), a leading online travel service company in
China. From 2000 to 2001, Mr. Tang served as President and Executive Director of
Asia.com, a pan-Asian Internet and wireless company that Mr. Tang co-founded
through the merger with elong.com, Inc. and was a subsidiary of Mail.com (now
Easylink Service Corporation, Nasdaq:EASY), a NASDAQ listed company. In 1999,
Mr. Tang co-founded elong.com, a mainland China Internet portal, and served as
its Chairman and Chief Executive Officer. Prior to eLong.com, he was Vice
President at Oscar Gruss & Son Incorporated, a New York-based investment banking
firm, and was responsible for setting up an investment banking, research and
institutional sales operation specializing in advising emerging growth
companies. He also worked for Brookehill Partners, Inc., and Merrill Lynch &
Co., and has six years of experience in venture capital and investment banking.
Mr. Tang studied at Nanjing University in China and received his Bachelor of
Science degree from Concordia College, Minnesota.
Ms. Emmy Lo, age 31, is the Accounting Manager for the Company and is a
director nominee. Prior to joining the Company in 2000, Ms. Lo worked in
international accounting firms located in Hong Kong. Ms. Lo has been an
associate member of the Hong Kong Society of Accountants since 2001. Ms Lo has
over six years of experience in auditing, accounting and financial management.
Ms Lo is also a Director of Grandtop International Holdings Limited (HKSE:
2309.HK).
10
Mr. Jin Yue, age 36, is an independent director nominee. Mr. Yue served
as a Managing Director in charge of strategic alliances and investments for
Woncore Communications Co., Ltd., a leading telecommunication service provider
in China from 2002 to 2003. Previously, he co-founded China Cluster Ltd., a
network technology and equipment company. Prior to China Cluster, Mr. Jin was an
executive of the venture capital group, responsible for strategic investment in
China, under SCMP Holdings, a leading media company in Hong Kong. Mr. Jin
received his MBA from Yale University and BS degree from Tsinghua University in
Beijing.
Mr. Wing Kee Eng, Lee age 50, is an independent director nominee. Mr.
Lee joined Global Link Communications Holdings Limited (HKSE:8060.HK) in May
2002. Mr. Lee has over 20 years of experience in the telecommunications
industry. Mr. Lee pursued his career with Harris Corporation (NYSE:HRS) where he
had been a visiting engineer, senior engineer and the head of sales of the Pan
Asia Pacific region. During the period of 1996 to 1998, Mr. Lee was also the
vice president of the marketing department of Marin Telecommunications Corp., an
unlisted telecom operator.
Mr. Peter Wang, age 49, is an independent director nominee. Mr. Wang
served as a Chief Executive Officer in China Quatum Communications Ltd. Mr. Wang
has more than 20 years of experience in telecommunication and technology area
with strong background of R&D, operation, and corporate management. Having
already built a highly successful, multi-billion dollar telecom venture in
China, Unitech Telecom (now named UTStarcom, NASDAQ: UTSI), Mr. Wang is credited
with (i) investing innovative technology for the local access in China; (ii)
creating market access and brand recognition for a start-up business in China;
(iii) building management, engineering and sales teams to bring many products to
market. With his vision, UTStarcom successfully launched its digital access,
fiber access, and wireless access products. Under his management, UTStarcom made
the first digital loop carrier system and installed the first PHS (Personal
Handyphone System) system in China. As an entrepreneur, he has successfully
co-founded and built other ventures in the US, including World Communication
Group and World PCS, Inc. Before forming his own companies, he has worked at
AT&T Bell Labs and Racal-Milgo Information System. With AT&T Bell Labs, he
worked on Network Evolution Planning and representing AT&T Network System
Division served on Network Management Protocol Forum. With Racal-Milgo, he
worked on network management system architecture as a senior engineer. As part
of the technologically trained community in China, he was elected Deputy
Chairman of the Association of Privately Owned High-tech Enterprises in China.
He has been elected president of first Chinese PACS User and Providers Forum
that promotes the international PCS standard worldwide. He also served on the
boards of directors of many U.S. and Chinese companies, specifically Joray
Enterprises Inc., Phoenix Tech Ltd. and World Communication Group. Mr. Wang is
also well known throughout the Chinese government and regulatory agencies. He
participated on many technical conferences and symposiums as chairperson and
keynote speaker. His was also a co-chairman of Business Advisory Council of the
National Republican Congressional Committee. Mr. Wang has BS in Computer Science
and a MS in Electrical Engineering from University of Illinois, as well as an
MBA in Marketing from Southeast-Nova University.
The Board of Directors will vote the proxies "FOR" the election of all
of the above-named nominees unless you indicate that the proxy shall not be
voted for all or any one of the nominees. Nominees receiving a plurality of the
votes cast will be elected as directors. If for any reason any nominee should,
prior to the Annual Meeting, become unavailable for election as a director, the
proxies will be voted for such substitute nominee, if any, as may be recommended
by management. In no event, however, shall the proxies be voted for a greater
number of persons than the number of nominees named.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE EIGHT NOMINEES FOR DIRECTOR SET FORTH HEREIN.
11
COMPLIANCE WITH SECTION 16(a) OF EXCHANGE ACT
Based on the Company's review of copies of Forms 3, 4 and 5 filed with
the Securities and Exchange Commission (the "SEC") or written representations
from certain reporting persons, we believe that during fiscal year 2002, all
officers, directors, and greater than ten-percent beneficial owners timely
complied with the applicable filing requirements of Section 16(a) of the
Securities Exchange Act of 1934, except for Messrs. Tony Tong, Victor Tong,
ChoSam Tong, ShaoJian (Sean) Wang, Richard Chi Ho Lo, Yue (Justin) Tang, Yong
Jun (Charles) Fu and David Fisher, each of whom did not file their Form 3 on a
timely basis.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held six meetings during 2002. No director
attended less than 75% of the meetings of the Board and any committee of which
the director was a member.
The Board of Directors has designated two standing committees, the
Audit Committee and the Compensation Committee.
AUDIT COMMITTEE
The Board of Directors adopted a written charter for the Audit
Committee. The Audit Committee's charter states that the responsibilities of the
Audit Committee shall include: nominating the Company's independent auditors and
reviewing any matters that might impact the auditors' independence from the
Company; reviewing plans for audits and related services; reviewing audit
results and financial statements; reviewing with management the adequacy of the
Company's system of internal accounting controls, including obtaining from
independent auditors management letters or summaries on such internal accounting
controls; determining the necessity and overseeing the effectiveness of the
internal audit function; reviewing compliance with the U.S. Foreign Corrupt
Practices Act and the Company's internal policy prohibiting insider trading in
its Common Stock; reviewing compliance with the SEC requirements for financial
reporting and disclosure of auditors' services and audit committee members and
activities; reviewing related-party transactions for potential conflicts of
interest; and reviewing with corporate management and internal and independent
auditors the policies and procedures with respect to corporate officers' expense
accounts and perquisites, including their use of corporate assets. The Audit
Committee met one time during 2002.
The Audit Committee Members during fiscal 2002 consisted of David
Bussmann, Patrick Ko, Richard Lo, Max Tong and Shu Wang. As a result of the
election of directors at our 2002 Annual Meeting held on December 30, 2002, our
audit committee currently consists of Messrs. Yue (Justin) Tang, Richard Chi Ho
Lo and Yong Jun (Charles) Fu, who are all independent directors.
COMPENSATION COMMITTEE
The Compensation Committee's charter states that it is the
responsibility of the Compensation Committee to make recommendations to the
Board of Directors with respect to all forms of compensation paid to our
executive officers and to such other officers as directed by the Board and any
other compensation matters as from time to time directed by the Board. Our stock
option plan, however, is currently administered by the full Board of Directors.
The Compensation Committee met one time during 2002.
The Compensation Committee Members during fiscal 2002 consisted of
David Bussmann, Patrick Ko, Richard Lo, Max Tong and Shu Wang. As a result of
the election of directors at our 2002 Annual Meeting, our compensation committee
currently consists of Messrs. Yue (Justin) Tang, Richard Chi Ho Lo and Yong Jun
(Charles) Fu, who are all independent directors.
12
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid
by the Company, as well as certain other compensation paid or accrued, during
each of the Company's last three fiscal years to each named executive officer.
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted
Fiscal Stock Stock All Other
Name/Principal Position Year Salary ($) Bonus ($) Other ($) Award ($) Options LTIP ($) Comp. ($)
----------------------- ---- ---------- --------- --------- --------- ------- -------- ---------
Tony Tong, CEO (3) 2002 $110,000 - - $57,900 206,000 - -
2001 $106,226 - $15,384 (4) 50,000 $53,333(2)
2000 $41,666 $20,000 $12,650 (1) - - - $425 (2)
Charles Mueller, CFO (3) (5) 2002 $41,500 - - $15,000 - -
2001 $160,000 - - - 55,000 $8,280 (2)
2000 $51,981 $20,000 - - - - $1,500 (2)
--------------------
(1) Mr. Tony Tong received a housing/auto rental allowance of $2,530/month.
(2) Represents amounts received for life and health insurance coverage.
(3) Denotes executives and key employees of the Company subsequent to the
reverse merger transaction entered into by the Company on July 27, 2000.
Compensation amounts for the 2000 fiscal year are for the period subsequent to
the reverse merger transaction of the Company (July 28, 2000 through December
31, 2000).
(4) Effective October 19, 2001 through December 31, 2001, Mr. Tony Tong ceased
receiving compensation under an employment agreement and received non-salaried
compensation totaling $12,160. On December 30, 2002, the Company entered into a
new Executive Employment Contract with Tony Tong.
(5) Effective February 1, 2002, Mr. Mueller resigned as CFO of the Company and,
effective April 17, 2002, Mr. Mueller resigned as Secretary and Director of the
Company.
13
OPTION GRANTS DURING 2002 FISCAL YEAR
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date
---- ------- ----------- ---------- ----
Tony Tong 3,000 1.4% $1.90 May 14, 2005
Tony Tong 200,000 94.07% $0.50 October 30, 2005
Tony Tong 3,000 1.4% $1.75 December 30, 2005
OPTION EXERCISES DURING 2002 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There were no options exercised during the 2002 fiscal year.
COMPENSATION OF DIRECTORS
DIRECTORS' FEES. All of the Company's directors are reimbursed for
out-of-pocket expenses relating to attendance at meetings. Each director is also
entitled to US$500 for each board meeting that such director attends in person,
by conference call, or by committee action and US$200 for each committee
meeting.
ANNUAL RETAINER FEE. Each director is paid an annual retainer fee of
US$5,000. Such retainer fee is paid semi-annually in arrears.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
On December 30, 2002, the Company entered into an Executive Employment
Contract with Tony Tong to serve as President and Chief Executive Officer, which
was amended on April 1, 2003. The amended employment agreement provides for Mr.
Tong to earn an annual base salary of $100,000 in cash.
14
REPORT OF THE AUDIT COMMITTEE
The role of the Audit Committee is to assist the Board of Directors in its
oversight of the Company's financial reporting process. The Board of Directors,
in its business judgment, has determined that all members of the committee are
"independent" as required by applicable listing standards of the Nasdaq SmallCap
Market. The Committee operates pursuant to a Charter that was approved by the
Board in fiscal 2000. As set forth in the Charter, management of the Company is
responsible for the preparation, presentation and integrity of the Company's
financial statements, accounting and financial reporting principles and internal
controls and procedures designed to assure compliance with accounting standards
and applicable laws and regulations. The independent auditors are responsible
for auditing the Company's financial statements and expressing an opinion as to
their conformity with generally accepted accounting principles.
In the performance of this oversight function, the Committee has reviewed and
discussed the audited financial statements with management and the independent
auditors. The Committee has discussed with the independent auditors the matters
required to be discussed by Statement of Auditing Standards No. 61,
COMMUNICATION WITH AUDIT COMMITTEE, as currently in effect. Finally, the
Committee has received written disclosures and the letter from the independent
auditors required by Independence Standard Board Standard No. 1, INDEPENDENCE
DISCUSSIONS WITH AUDIT COMMITTEES, as currently in effect, and has considered
whether the provision of non-audit services by the independent auditors to the
Company is compatible with maintaining the auditor's independence and has
discussed with the auditors the auditors' independence.
The members of the Audit Committee are not professionally engaged in the
practice of auditing or accounting, are not experts in the fields of accounting
or auditing, including in respect of auditor independence. Members of the
Committee rely without independent verification on the information provided to
them and on the representations made by management and the independent
accountants. Accordingly, the Audit Committee's oversight does not provide an
independent basis to determine that management has maintained appropriate
accounting and financial reporting principles or appropriate internal control
and procedures designed to assure compliance with accounting standards and
applicable laws and regulations. Furthermore, the Audit Committee's
consideration and discussions referred to above do not assure that the audit of
the Company's financial statements has been carried out in accordance with
generally accepted accounting principles or that the Company's auditors are in
fact "independent".
Based upon the reports, review and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Charter, the Committee recommended to the Board
that the audited financial statements be included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission.
The Audit Committee
Yue (Justin) Tang
Richard C.H. Lo
Yongjun (Charles) Fu
Independent Directors, PacificNet Inc.
March 25, 2003
15
INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the General Corporation
Law of the State of Delaware. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by Delaware law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. The Company has entered into indemnification agreements with
its officers and directors containing provisions that may require the Company,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
16
PROPOSAL 2
APPROVAL OF ISSUANCE OF SHARES OF COMMON STOCK IN
EXCESS OF 20% OF THE COMPANY'S TOTAL SHARES OF COMMON STOCK OUTSTANDING
APPROVAL REQUIREMENT
On December 20, 2002, our wholly-owned subsidiary, PacificNet
Management Limited ("PML"), entered in an equity joint venture agreement with
the five shareholders of International Elite Limited, a provider of value-added
telecom services in Greater China. Pursuant to the joint venture agreement, and
provided that our stockholders approve this proposal, PML will own 50.1% of the
outstanding equity interests of "PacificNet Communications Limited-Macao
Commercial Offshore," a newly formed joint venture registered in the Macao
Annual Administrative Region (SAR) of China. A copy of the joint venture
agreement is attached hereto as Annex 1. The scope of the business of the joint
venture is to extend the following of our existing value added telecom services
in the Greater China region: call center, telemarketing, CRM, database and
data-mining services, wireless communications, mobile applications, paging,
roaming, short messaging services (SMS), multimedia messaging services (MMS),
mobile commerce, and VoIP.
Each joint venture partner agreed in the joint venture agreement to
make specified contributions to the joint venture. The shareholders of
International Elite Limited agreed to cause International Elite Limited to
contribute a number of telecom customer service contracts valued at US$21.3
million by HLB Hodgson Impey Cheng (CPA) according to a fairness opinion by
Turner, Stone & Company, LLP attached hereto as Annex 2. The Contracts are
principally represented by agreements with three customers to provide call
center service. The customers are Dun & Bradstreet (HK) Ltd., Marketing Decision
Research (Pacific) Limited and Telecom Digital Data Limited. Prior to assigning
the Contracts, International Elite Limited maintained contracts with Dun &
Bradstrete (HK) Ltd. for approximately 8 years, with Marketing Decision Research
(Pacific) Limited for approximately 2 years and with Telecom Digital Data
Limited for approximately 1 1/2 years. The Contracts expire in 2004 but are
renewable subject to the mutual agreement of the parties. Each contract provides
that the customer will pay per month for the services to be performed. We have
agreed, subject to stockholder approval of this proposal, to contribute up to
34,000,000 shares of restricted common stock to the joint venture. Our Board of
Directors believes that the operations of the joint venture will be accretive to
our revenues, profits, and earnings per share in 2003. The Board of Directors
believes that China is the largest and fastest growing telecom market in the
world, and that the formation of the joint venture is a strategic move to
increase its customer base, revenue and profit fundamentals, while improving
shareholder value by capturing part of the growing value-added telecom, SMS, and
CRM services market in Greater China. Accordingly, the Board of Directors
believe that its contribution to the joint venture is critical to its growth in
this market. Furthermore, there are no specific financial requirements to
operate the joint venture. The Company believes that it can absorb expenses as a
result of the revenues generated from the contracts assigned, as well as from
its prospective customers. The number of shares to be issued to the joint
venture was based on a calculation which included dividing $US 21.3 million (the
valuation of the service contracts) by the closing bid price of our common stock
on the date of execution of the joint venture agreement, which was $0.12 (post
1-for-5 reverse split effected on January 6, 2003 the closing bid price was
$0.60). Although this calculation would have resulted in the issuance of
35,500,000 shares, the joint venture partners agreed that only 34,000,000 shares
of restricted common stock would be contributed to the joint venture. As of the
date hereof, these shares, when issued, would represent approximately 70.2% of
the Company's total shares of common stock outstanding. The issuance of
approximately 70.2% of shares of our total shares outstanding will significantly
dilute the equity percentage interests of our existing shareholders. However,
these shares are being issued directly to the joint venture, of which the
Company is the controlling person. The joint venture agreement provides that the
Board of Directors of the joint venture will consist of five members of which
three will be designated by us and two will be designated by the shareholders of
International Elite Limited. Accordingly, the voting and dispositive powers
associated with the shares being issued to the joint venture will be vested in
the Board of Directors of the joint venture. We do not currently have any plans
or proposals to cause the joint venture to dispose of, or use these shares in
any manner.
The shares of common stock will be held by an agreed upon escrow agent
in an escrow account pending the accomplishment by the joint venture of certain
agreed upon milestones. These milestones required the joint venture to achieve
targeted net income at the end of each quarter of 2003. A specified number of
17
shares will be disbursed in tranches from the escrow account to the joint
venture only after an auditor has certified that the joint venture has achieved
the targeted net income milestones. In the event the joint venture produces only
a portion of the net income milestones, the number of shares released will be
proportionately reduced. The following sets forth the release dates, the number
of shares to be disbursed from the escrow account and the net income milestones
to be achieved, as it was contemplated in the joint venture agreement, which
anticipated a closing date of March 31, 2003:
---------------------------------------- -------------------------------------- --------------------------------------
RELEASE DATE NUMBER OF SHARES TO BE RELEASED NET INCOME MILESTONE
---------------------------------------- -------------------------------------- --------------------------------------
After the first quarter of 2003 5,400,000 (pre reverse split) Net Income for the three months
ending March 31, 2003 of not less
1,080,000 (post reverse split) than USD$550,000
---------------------------------------- -------------------------------------- --------------------------------------
After the second quarter of 2003 13,600,000 (pre reverse split) Net Income for the six months ending
on June 30, 2003 of not less than
2,720,000 (post reverse split) USD$1,200,000
---------------------------------------- -------------------------------------- --------------------------------------
After the third quarter of 2003 22,600,000 (pre reverse split) Net Income for the nine months
ending on September 30, 2003 of not
4,520,000 (post reverse split) less than USD$2,000,000
---------------------------------------- -------------------------------------- --------------------------------------
After the fourth quarter of 2003 34,000,000 (pre reverse split) Net income for the 12 months ending
on December 31, 2003 of not less
6,800,000 (post reverse split) than USD$3,000,000
---------------------------------------- -------------------------------------- --------------------------------------
At the end of the 2003 fiscal year all of the escrowed shares will be
released to the joint venture provided, that, the joint venture generated a
minimum of US $3,000,000 net income for the fiscal year ended December 31, 2003
according to United States Generally Accepted Accounting Principles,
consistently applied. In the event that the joint venture fails to generate a
minimum of US$3,000,000 net income for the fiscal year ended December 31, 2003,
the shareholders of International Elite Limited are obligated to make a cash
payment to us in the amount of the net income shortfall before the escrowed
shares will be released to the joint venture. Pursuant to the terms of the joint
venture agreement on April 27, 2003, we issued 800,000 shares of Common Stock,
which at the time of issuance, represented approximately 13.3% of our issued and
outstanding Common Stock to "PacificNet Communications Limited-Macao Commercial
Offshore" to be held in escrow until the attainment of certain net income
milestones agreed to in the joint venture agreement. In the event the joint
venture fails to obtain certain regulatory approval or stockholder approval of
this proposal is not obtained, the 800,000 shares will be cancelled and the
joint venture agreement will terminate. These shares were issued as
consideration for the issuance of 50.1% of the outstanding equity interests of
the joint venture.
The Board of Directors of the joint venture may terminate the joint
venture agreement at any time if (i) the joint venture is unable to continue
operations due to the failure of one of the parties to perform its obligations
under the joint venture agreement; (ii) the joint venture is unable to continue
operations due to potential or actual heavy losses caused by force majeure;
(iii) the joint venture is unable to achieve its intended objectives and there
is no reasonable prospect for favorable development in this regard; or (iv) any
other circumstances as deemed appropriate by the Board of Directors of the joint
venture.
The Company engaged Turner, Stone & Company, L.L.P. ("TSC") to render
its opinion as to the fairness, from a financial perspective, to the
stockholders of the joint venture. TSC is a Dallas based CPA firm serving
clients generally in the central southwest but also in Arizona, Colorado,
Louisiana and California. TSC is a full service public accounting firm providing
auditing and accounting services, tax related services and general business
consulting services. TSC provides auditing services to about 40 clients, six of
which are public clients.
Turner Stone is not affiliated or associated in any way with the
Company, the joint venture, International Elite Limited or the shareholders of
International Elite Limited. Turner Stone has not in the past provided any
services to any of the parties.
18
The number of shares to be issued by the Company to the joint venture
was determined by the Company and was based upon (i) an independent business
appraisal of the contracts prepared by a certified public accounting firm
qualified to provide such valuation, and (ii) a $0.60 per share value. Turner
Stone did not make, obtain or assume any responsibility for making the
independent evaluation or appraisal of the Contracts.
In reaching its determination, at the Company's direction, Turner Stone
(a) assumed that the definitive joint venture transaction documents when
executed would not materially differ from the terms and conditions in the
Contract attached as an exhibit to the Company's Schedule 14A filed with the
Securities and Exchange Commission; (b) relied, without independent
verification, on the accuracy of all of the financial and other information that
was publicly available or furnished to Turner Stone by the Company or its
independent auditors; and (c) reviewed the historical stock prices for the
Company, which Turner Stone determined to be comparable to the Company. The
fairness opinion assumes the renewal of each contract through the year 2011.
However, there can be no assurance that any of the customers will agree to renew
these contracts with the Joint Venture.
Based upon the assumptions made, the information received from the
Company and the fair value of the contracts as estimated in an independent
business appraisal, Turner Stone is of the opinion that the transaction is fair
to the stockholders of the Company from a financial perspective.
The description of the joint venture agreement and the fairness opinion
are qualified in their entirety by reference to the full text of the joint
venture agreement and the fairness opinion attached hereto as Annex 1 and Annex
2, respectively.
We are seeking approval of this proposal based on the NASD Marketplace
Rules, which require stockholder approval for any issuance of stock where the
amount of stock being issued may exceed 20% or more of the common stock
outstanding before the issuance. We have obtained written advice from NASDAQ
that this transaction will not be considered a "reverse merger" as provided in
NASD Marketplace Rule 4350. Therefore, an initial listing application will not
be required. In the event this proposal is approved, we will commence our
obligations under the joint venture agreement. In the event this proposal is not
approved, the conditions of the joint venture agreement will not be met, the
agreement will terminate and any stock issued will be rescinded. The Board of
Directors believes that the joint venture represents a strategic move to capture
a portion of the rapidly growing value-added telecom, SMS and CRM services
market in Greater China and, as structured, should be accretive to net income
commencing our fiscal year ended December 31, 2003. Therefore, the Board of
Directors considers the formation of the joint venture and, consequently, our
required capital contribution of our common stock to be in the best interests of
the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
19
PROPOSAL 3
RATIFICATION OF PREVIOUS ISSUANCES, AND FUTURE ISSUANCES
OF SHARES OF COMMON STOCK TO DIRECTORS AND OFFICERS
During the fiscal year ended December 31, 2002, the Company issued
shares of Common Stock to its directors as compensation for their services. The
number of shares issued to each of the directors (post 1-for-5 reverse split,
dated January 6, 2003) is as follows:
----------------------------------- -----------------------------------
DIRECTOR NUMBER OF SHARES
----------------------------------- -----------------------------------
Tony Tong 68,007
----------------------------------- -----------------------------------
Victor Tong 18,200
----------------------------------- -----------------------------------
ChoSam Tong 4,000
----------------------------------- -----------------------------------
ShaoJian (Sean) Wang 23,400
----------------------------------- -----------------------------------
Richard C. H. Lo 13,000
----------------------------------- -----------------------------------
Yue (Justin) Tang 4,000
----------------------------------- -----------------------------------
Yongjun (Charles) Fu 2,000
----------------------------------- -----------------------------------
David Fisher 2,000
----------------------------------- -----------------------------------
The board of directors previously approved the payment of fees to each
director for his participation on the board. At the time the directors received
these shares, the Company maintained a director compensation policy pursuant to
which each director of the Company is paid an annual retainer fee of $10,000 in
the form of shares of Common Stock. The annual retainer fee is paid
semi-annually in arrears. The number of shares of common stock that was issued
was based on the average closing market price over the ten trading days prior to
the end of the six month period that the retainer fee is due. The average
closing price used to calculate the number of shares issued on November 7, 2002
was $0.15
Pursuant to NASD Marketplace Rule 4350(i)(1)(A), the Company must
obtain approval of its stockholders to establish any arrangement pursuant to
which stock may be acquired by officers and directors. As a Nasdaq SmallCap
company, the Company is required to obtain such approval to issue Common Stock
to its directors for the payment of the annual retainer fee. Accordingly, the
Company seeks ratification of the issuance of these shares to the directors, and
approval for the future issuance of shares of Common Stock to the directors for
the annual retainer fee.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
20
PROPOSAL 4
PROPOSAL TO AMEND THE COMPANY'S 1998 STOCK OPTION PLAN
TO INCREASE THE NUMBER OF SHARES THAT MAY BE
GRANTED AS STOCK OPTION AWARDS
In September 1998, the Company's Board of Directors unanimously
approved the Company's 1998 Stock Option Plan (the "1998 Plan") and in December
1998, the Company's stockholders approved the 1998 Plan. The purpose of the 1998
Plan is to enable the Company to attract and retain top-quality employees,
officers, directors and consultants and to provide such employees, officers,
directors and consultants with an incentive to promote the success of the
Company. The Company is seeking approval to amend the 1998 Plan to increase the
number of shares of Common Stock that may be granted as stock option awards
under the 1998 Plan from 1,666,667 to 6,000,000.
DESCRIPTION OF THE 1998 PLAN
The following summary of the 1998 Plan, assuming stockholder approval
of the amendment to the 1998 Plan, is qualified in its entirety by reference to
the Company's full text of the amended 1998 Plan as it appears as Annex III to
this Proxy Statement. The 1998 Plan would provide for the grant to directors,
officers, employees and consultants of the Company (including its subsidiaries)
of options to purchase up to an aggregate of 6,000,000 shares of Common Stock.
The 1998 Plan may be administered by the Board of Directors or a committee of
the Board of Directors (in either case, the "Committee"), which has complete
discretion to select the optionees and to establish the terms and conditions of
each option, subject to the provisions of the 1998 Plan. Options granted under
the 1998 Plan may be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or 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 (110% of
the fair market value if the grant is to an employee who owns more than 10% of
the total combined voting power of all classes of capital stock of the Company).
The Code currently limits to $100,000 the aggregate value of Common Stock that
may be acquired in any one year pursuant to incentive stock options under the
1998 Plan or any other option plan adopted by the Company. Nonqualified options
may be granted under the 1998 Plan at an exercise price of not less than 100% of
the fair market value of the Common Stock on the date of grant (110% of the fair
market value if the grant is to a director, officer or employee who owns more
than 10% of the voting power of all classes of stock of the Company or any
Parent or subsidiary). Nonqualified options also may be granted without regard
to any restriction on the amount of Common Stock that may be acquired pursuant
to such options in any one year.
Subject to the limitations contained in the 1998 Plan, options granted
under the 1998 Plan will become exercisable at such times and in such
installments (but not less than 20% per year) as the Committee shall provide in
the terms of each individual stock option agreement. The Committee must also
provide in the terms of each stock option agreement when the option expires and
becomes unexercisable, and may also provide the option expires immediately upon
termination of employment for any reason. No option held by directors, executive
officers or other persons subject to Section 16 of the Securities Exchange Act
of 1934, as amended, may be exercised during the first six months after such
option is granted.
Unless otherwise provided in the applicable stock option agreement,
upon the termination of employment of an employee, all options that were then
vested shall remain exercisable until the expiration of the term of the option
set forth in the stock option agreement. If no time period is specified in the
stock option agreement then the option shall remain exercisable for twelve (12)
months following termination of employment. Any options which were not
exercisable on the date of such termination would immediately terminate
concurrently with the termination of employment.
21
Unless otherwise provided in the applicable stock option agreement,
upon the death or disability of an optionee, all options that were then vested
shall remain exercisable until such period of time as is specified in the stock
option agreement, but in no event later than the expiration of the term of such
option as set forth in the stock option agreement. If no time period is
specified in the stock option agreement then the option shall remain exercisable
for twelve (12) months following the optionee's death or disability.
The Board of Directors may at any time amend, alter, suspend or
terminate the Plan. No amendment, alteration, suspension or termination of the
Plan will impair the rights of any optionee, unless mutually agreed otherwise
between the optionee and the Committee, which agreement must be in writing and
signed by the optionee and the Company. Termination of the Plan will not affect
the Committee's ability to exercise the powers granted to it hereunder with
respect to options granted under the Plan prior to the date of such termination.
Options granted under the 1998 Plan may not be exercised more than ten
years after the grant (five years after the grant if the grant is an incentive
stock option to an employee who owns more than 10% of the total combined voting
power of all classes of capital stock of the Company). Options granted under the
1998 Plan are not transferable and may be exercised only by the respective
grantees during their lifetime or by their heirs, executors or administrators in
the event of death. Under the 1998 Plan, shares subject to cancelled or
terminated options are reserved for subsequently granted options. 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. The 1998 Plan is effective for ten years, unless
sooner terminated or suspended.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Incentive stock options granted under the 1998 Plan will be afforded
favorable federal income tax treatment under the Code. If an option is treated
as an incentive stock option, the optionee will recognize no income upon grant
or exercise of the option unless the alternative minimum tax rules apply. Upon
an optionee's sale of the shares (assuming that the sale occurs at least two
years after grant of the option and at least one year after exercise of the
option), any gain will be taxed to the optionee as long-term capital gain. If
the optionee disposes of the shares prior to the expiration of the above holding
periods, then the optionee will recognize ordinary income in an amount generally
measured as the difference between the exercise price and the lower of the fair
market value of the shares at the exercise date or the sale price of the shares.
Any gain or loss recognized on such a premature sale of the shares in excess of
the amount treated as ordinary income will be characterized as capital gain or
loss.
All other options granted under the 1998 Plan will be nonstatutory
stock options and will not qualify for any Annual tax benefits to the optionee.
An optionee will not recognize any taxable income at the time he or she is
granted a nonstatutory stock option. However, upon exercise of the nonstatutory
stock option, the optionee will recognize ordinary income for federal income tax
purposes in an amount generally measured as the excess of the then fair market
value of each share over its exercise price. Upon an optionee's resale of such
shares, any difference between the sale price and the fair market value of such
shares on the date of exercise will be treated as capital gain or loss and will
generally qualify for long-term capital gain or loss treatment if the shares
have been held for more than one year. Recently enacted legislation provides for
reduced tax rates for long-term capital gains based on the taxpayer's income and
the length of the taxpayer's holding period.
The foregoing does not purport to be a complete summary of the federal
income tax considerations that may be relevant to holders of options or to the
Company. It also does not reflect provisions of the income tax laws of any
municipality, state or foreign country in which an optionee may reside, nor does
it reflect the tax consequences of an optionee's death.
The 1998 Plan may be amended, altered, suspended or terminated by the
Board at any time; provided however, that the Board shall obtain stockholder
approval of any amendment to the 1998 Plan to the extent necessary and desirable
to comply with U.S. state corporate laws, U.S. federal and state securities
laws, the Internal Revenue Code of 1986, as amended, the Nasdaq SmallCap Market
or any other market in which the Company's Common Stock may be traded, and the
applicable laws of any other country or jurisdiction where options are granted
under the Plan. No amendment, alteration, suspension or termination of the Plan
shall impair the rights of any optionee, unless mutually agreed otherwise
between the optionee and the Board.
22
PRINCIPAL DIFFERENCES
The 1998 Plan is amended to increase the number of shares that may be
granted as stock option awards to 6,000,000 as compared to 1,666,667 under the
current 1998
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND
THE COMPANY'S 1998 PLAN TO INCREASE THE NUMBER OF SHARES THAT MAY BE GRANTED AS
STOCK OPTION AWARDS.
23
PROPOSAL 5
RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Clancy and Co., P.L.L.C. has served as our independent
auditors since 2001. The Board of Directors has appointed Clancy and Co.,
P.L.L.C. to continue as our independent auditors for the fiscal year ending
December 31, 2003. A representative of Clancy and Co., P.L.L.C.'s Hong Kong
cooperation partner, HLB Hodgson Impey Cheng, is expected to be present at the
Annual Meeting to respond to appropriate questions from stockholders and to make
a statement if such representative desires to do so.
AUDIT FEES
Audit fees billed to the Company by Clancy and Co., P.L.L.C. for its
audit of the Company's annual financial statements for the fiscal year ended
December 31, 2002 and for its review of the financial statements included in the
Company's Quarterly Reports on Form 10-QSB filed with the Securities and
Exchange Commission for that fiscal year totaled approximately $50,000. Audit
fees billed to the Company by Arthur Andersen, Deloitte Touche Tohmatsu and
Clancy and Co., P.L.L.C., for the audit of the Company's annual financial
statements for the fiscal year ended December 31, 2001 and for its review of the
financial statements included in the Company's Quarterly Reports on Form 10-QSB
filed with the Securities and Exchange Commission for that fiscal year totaled
approximately $57,000.
AUDIT-RELATED FEES
There are no audit-related fees to disclose.
TAX FEES
HLB Hodgson Impey Cheng's tax fee for the fiscal year ended December
31, 2001 was $3,500. The Company has not yet been billed for tax fees for the
fiscal year ended December 31, 2002.
ALL OTHER FEES
There are no other fees to disclose.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
24
MISCELLANEOUS
2004 STOCKHOLDER PROPOSALS
Rule 14a-4 of the SEC proxy rules allows the Company to use
discretionary voting authority to vote on matters coming before an annual
meeting of stockholders if the Company does not have notice of the matter at
least 45 days before the date corresponding to the date on which the Company
first mailed its proxy materials for the prior year's annual meeting of
stockholders or the date specified by an overriding advance notice provision in
the Company's By-Laws. The Company's By-Laws do not contain such an advance
notice provision. For the Company's 2004 Annual Meeting of Stockholders,
stockholders must submit such written notice to the Secretary of the Company on
or before ___________, 2004. Stockholders of the Company wishing to include
proposals in the proxy material for the 2004 Annual Meeting of Stockholders must
submit the same in writing so as to be received by Victor Tong, the Secretary of
the Company on or before ___________, 2004. Such proposals must also meet the
other requirements of the rules of the SEC relating to stockholder proposals.
OTHER BUSINESS
Management is not aware of any matters to be presented for action at
the Annual Meeting, except matters discussed in the Proxy Statement. If any
other matters properly come before the meeting, it is intended that the shares
represented by proxies will be voted in accordance with the judgment of the
persons voting the proxies.
WHERE YOU CAN FIND MORE INFORMATION
We file annual and quarterly reports, proxy statements and other
information with the SEC. Stockholders may read and copy any reports, statements
or other information that we file at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference rooms. Our
public filings are also available from commercial document retrieval services
and at the Internet Web site maintained by the SEC at http://www.sec.gov. The
Company's annual report on Form 10-KSB was mailed along with this proxy
statement.
STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE THEIR SHARES AT THE
ANNUAL MEETING. NO ONE HAS BEEN AUTHORIZED TO PROVIDE ANY INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT
IS DATED JUNE ___, 2003. STOCKHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE.
By Order of the Board of Directors
/s/ Victor Tong
---------------
Name: Victor Tong
Title: Secretary and Executive
Director
June ___, 2003
25
PACIFICNET INC. PROXY
FOR ANNUAL MEETING TO BE HELD JULY 30, 2003
The undersigned stockholder of PacificNet Inc., a Delaware corporation (the
"Company"), hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement and hereby appoints Tony Tong, Victor Tong and
ShaoJian (Sean) Wang, or any of them, proxies and attorneys-in-fact, with full
power to each of substitution and revocation, on behalf and in the name of the
undersigned, to represent the undersigned at the 2003 Annual Meeting of
Stockholders of the Company to be held at 10:00 a.m. (Hong Kong Time) at
PacificNet, Unit 1702, Chinachem Century Tower, 178 Gloucester Road, Wanchai,
Hong Kong, on Wednesday, July 30, 2003, or at any adjournment or postponement
thereof, and to vote, as designated below, all shares of common stock of the
Company which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth below.
The Board of Directors recommends that you vote "FOR" each proposal.
--------------------------------------------------------------------
1.
Elect eight (8) 1. Tony Tong 2. Victor Tong 3. ShaoJian (Sean) Wang
Directors 4. Yue (Justin) Tang 5. Emmy Lo 6. Jin Yue
7. Wing Kee Eng Lee 8. Peter Wang
|_| FOR all nominees listed above (except those |_| WITHHOLD AUTHORITY to vote for all nominees
whose names or numbers have been written on listed above.
the line below)
---------------------------------------------------
2. Proposal to approve the issuance of shares of the Company's Common
Stock in excess of twenty percent (20%) of the Company's total shares
of Common Stock outstanding in connection with the formation of
"PacificNet Communications Limited-Macao Commercial Offshore"
|_| FOR |_| AGAINST |_| ABSTAIN
3. Proposal to ratify the previous issuance of shares of the Company's
common stock to directors and officers of the Company as compensation
for services provided to the Company.
|_| FOR |_| AGAINST |_| ABSTAIN
4. Proposal to amend the Company's 1998 stock option plan to increase the
number of shares that may be granted as stock option awards under the
1998 Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
5. Proposal to ratify the appointment of Clancy and Co., P.L.L.C., as the
Company's independent auditors.
|_| FOR |_| AGAINST |_| ABSTAIN
6. To transact any other business as may properly be presented at the
Annual Meeting or any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED "FOR" EACH PROPOSAL SPECIFICALLY IDENTIFIED ABOVE.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
Date: _____________, 2003 ____________________________________
____________________________________
PLEASE DATE AND SIGN ABOVE exactly
as name appears at the left,
indicating, where proper, official
position or representative capacity.
For stock held in joint tenancy,
each joint owner should sign.
26
ANNEX I
-------
COPY OF JOINT VENTURE AGREEMENT
================================================================================
EQUITY JOINT VENTURE CONTRACT
FOR
PACIFICNET COMMUNICATIONS LIMITED - MACAO COMMERCIAL OFFSHORE
Pacificonet Comunicacoes Limitada - Comercial Offshore de Macau
(Portuguese Name)
THIS AGREEMENT is made the 20th day of December 2002.
CHAPTER 1: GENERAL PRINCIPLES AND INTERPRETATIONS
PacificNet Management Limited, a company existing under the laws of the British
Virgin Islands and a wholly owned subsidiary of PacificNet Inc., and
Shareholders of International Elite Limited, pursuant to the Law of the Macao
Special Administrative Region (SAR) of the People's Republic of China (the
"PRC"), the Regulations for the Implementation of the Law of the Macao SAR on
Macao Offshore Company, and other relevant laws and regulations of the Macao
SAR, based on the principle of equality and mutual benefit, through friendly
consultations, have agreed to jointly invest in and establish an equity joint
venture, and therefore enter into this contract (hereinafter, this "Contract").
1. INTERPRETATION
1.1 The Recitals and Schedules form part of this Agreement and shall have the
same force and effect as if expressly set out in the body of this Agreement and
any reference to this Agreement shall include the Recitals and Schedules.
1.2 In this Agreement except where the context otherwise requires the following
words and expressions shall have the following meanings:
"Completion" completion of the JV registration in accordance with
Clause 5 of this Agreement;
"Completion Date" 31st March 2003 (or such later date as the parties
shall agree in writing);
"Conditions" the conditions contained or referred to in Clause 5;
"Consideration" the consideration payable for the investment of PACT
Shares to the JV pursuant to Clause 3;
"Hong Kong" Hong Kong Special Administrative Region of the PRC;
HK$ Hong Kong dollars
"JV AGREEMENT" means equity joint venture agreement and the related Memorandum
of Association and Articles of Association to be entered into between Party A
and Party B in the agreed terms as set out in this Contract, including its
variation, modification and supplement necessitated by the requirements of the
Macao SAR approving authority;
"Macao" or "Macau" Macao Special Administrative Region of the PRC;
"MOP" Macao Pataca: * Note: Currency Exchange Ratio as
of December 18, 2002:
1 US Dollar (USD) = 8.28180 Macao Pataca (MOP)
1 Macao Pataca (MOP) = 0.12075 US Dollar (USD)
27
"NET INCOME" means, for any period, all revenues, income, earnings or cash flow
of any kind or description received during such period by the Joint Venture
minus all costs, expenses and taxes paid (whether income, corporate, sales or
otherwise to the relevant tax authorities) paid or incurred during such period
by the Joint Venture in the ordinary course of its business, together with
amounts used to replenish and fund the Reserves (if any);
"PACT" means PacificNet Inc. a company incorporated under the laws of the State
of Delaware in the United States of America whose principal office is situate at
860 Blue Gentian Road, Suite 360, Eagan, MN 55121, the United States of America,
the shares of which are listed on the NASDAQ stock exchange in the United States
of America and is the holding company of the PacificNet Management Limited.
"PACT Shares" ordinary shares of USD$0.0001 each in the capital of
PACT;
"PRC" People's Republic of China;
"RELEASE CRITERIA" means the basis and conditions by which the Escrow Agent
shall release the relevant portion of Consideration shares to the Joint Venture
on the Release Date pursuant to the schedule in Clause 4;
"RELEASE DATE" means the relevant date by which the Escrow Agent, pursuant to
the Escrow Agreement, shall release such portion of Consideration Shares to the
Joint Venture in accordance with the schedule in Clause 4 and upon the Release
Criteria being satisfied;
"Tax" and "Taxation" includes all forms of tax, levy, duty, charge, fee,
contribution, impost or withholding of any nature now or hereafter imposed,
levied, collected, withheld or assessed by a local, municipal, governmental,
state, federal or other body or authority in Macao SAR or elsewhere (including
any fine, penalty, surcharge or interest in relation thereto);
"USD$" or "US$" United States dollars;
"United States" United States of America;
"Warranties" the representations, warranties and undertakings
contained or referred to in Clause 4.8, Clause 8 and Schedule 5.
1.3 Words and phrases (not otherwise defined in this Agreement) the definitions
of which are contained or referred to in the Companies Ordinance (Cap. 32) shall
be construed as having the meanings thereby attributed to them.
1.4 References in this Agreement to ordinances and to statutory provisions shall
be construed as references to those ordinances or statutory provisions as
respectively as modified (on or before the date hereof) or re-enacted (whether
before or after the date hereof) from time to time and to any orders,
regulations, instruments or subordinate legislation made under the relevant
ordinances or provisions thereof and shall include references to any repealed
ordinance or provisions thereof which has been so re-enacted (with or without
modifications).
1.5 The headings are for convenience only and shall not affect the construction
of this Agreement.
1.6 All representations, undertakings, warranties, indemnities, covenants,
agreements and obligations given or entered into by more than one person are
given or entered into jointly and severally.
1.7 Any document referred to herein as being "in the agreed terms" shall be in a
form already agreed between the Legal Counsels acting for the parties hereto.
28
1.8 Except where the context otherwise requires words denoting the singular
include the plural and vice versa; words denoting any one gender include all
genders; words denoting persons include incorporations and firms and vice versa.
1.9 Reference to clauses, sub-clauses, paragraphs and schedules are (unless the
context requires otherwise) to clauses, sub-clauses, paragraphs and schedules of
this Agreement.
1.11 The expressions "Party A", "Party B", PACT, and the Joint Venture shall
unless the context requires otherwise include their successors, personal
representatives and permitted assigns.
1.13 The schedules and appendices form part of this Agreement.
CHAPTER 2: PARTIES TO THE JOINT VENTURE
2.1 The Parties to this Contract are as follows:
(1) PacificNet Management Limited, a company existing under the laws of the
British Virgin Islands whose principal place of business is at Unit 1702,
ChinaChem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong (hereafter
referred as "Party A"). PacificNet Management Limited is a wholly owned
subsidiary of PacificNet Inc. ("PACT"), a company incorporated under the laws of
the State of Delaware in the United States of America whose principal office is
situate at 860 Blue Gentian Road, Suite 360, Eagan, MN 55121-1575, the United
States of America, the shares of which are listed on the NASDAQ stock exchange
in the United States of America under the trading symbol of "PACT".
Party A's Representative:
Name: Tony Tong
Position: Chairman and CEO of PacificNet Inc.
Citizenship: USA
(2) Shareholders of International Elite Limited: Mr. LI Kin Shing, Ms. KWOK King
Wa, Mr. Li Wang, Mr. Li Yin, and Mr. Li Yi Sheng (hereinafter jointly referred
as "Party B"). International Elite Limited is a company existing under the laws
of the Cayman Islands whose principal place of business is at Room 3813-3815,
Hong Kong Plaza, 188 Connaught Road West, Hong Kong (the "IEL");
Party B's Representative:
Name: Li Kin Shing
Position: Chairman of International Elite Limited
Citizenship: Hong Kong, SAR of China
Party B members:
Party B1: Mr. LI Kin Shing (permanent resident of Hong Kong SAR);
Party B2: Ms. KWOK King Wa (permanent resident of Hong Kong SAR);
Party B3: Li Wang (permanent resident of Hong Kong SAR);
Party B4: Li Yin (permanent resident of Hong Kong SAR);
Party B5: Li Yi Sheng (permanent resident of Hong Kong SAR);
2.2 Pursuant to the Law of the Macao SAR, Party A and Party B agree to establish
in Macao SAR an equity joint venture company, namely "PacificNet Communications
Limited - Macao Commercial Offshore" and the Portuguese Name as "Pacificonet
Comunicacoes Limitada - Comercial Offshore de Macau" (hereinafter, "Joint
Venture")
2.3 Each Party represents and warrants to the other that: (i) it is a duly
organized and validly existing corporation with independent legal person status
in its home country and has the full power and right to conduct its business in
accordance with its business license, articles of association or similar
29
corporate organizational documents; (ii) it possesses full power and authority
necessary to enter into this Contract and to perform its obligations hereunder;
(iii) the above designated representative of it or its authorized representative
has been fully authorized to execute this Contract and to bind such respective
Party thereby; and (iv) upon the effective date of this Contract, the provisions
of this Contract will constitute its legal, valid and binding obligations. Each
Party shall defend, hold harmless and indemnify the other against any and all
direct and foreseeable losses, damages, expenses or liability arising from its
breach of any of the foregoing representations and warranties.
2.4 Each of Party A and Party B shall have the right to change its Board of
Directors representatives, provided that it promptly notifies the other Party
hereto in writing of such change and the name, position and nationality of its
new Board of Directors representatives.
CHAPTER 3: THE JOINT VENTURE'S NAME, ADDRESS AND SCOPE OF BUSINESS
3.1 The name of the Joint Venture shall be "PacificNet Communications Limited -
Macao Commercial Offshore" and the Portuguese Name as " Pacificonet Comunicacoes
Limitada - Comercial Offshore de Macau".
3.2 The Joint Venture shall be registered with the Administration for Commerce
of Macao SAR. The Joint Venture may change its legal address in light of its
operational needs.
3.3 The Joint Venture shall have the legal status in the Macao SAR. All
activities of the Joint Venture shall be in compliance with Macao SAR laws and
regulations.
3.4 The organizational form of the Joint Venture shall be a limited liability
company. The liability of each Party shall be limited to its contribution to the
registered capital of the Joint Venture. In other words, except as otherwise
provided herein, once a Party has completed in full its contribution to the
Joint Venture as required by the provisions of this Contract, it shall not be
required to provide any further funds to the Joint Venture by way of capital
contribution, loan, advance, guarantee or otherwise. Creditors of the Joint
Venture shall have recourse only to the assets of the Joint Venture and shall
not seek repayment of any nature from any of the Parties. The Joint Venture
shall indemnify and hold the Parties harmless against any and all losses,
damages, or liabilities suffered by the Parties in respect of any third party
claims arising out of the operation of the Joint Venture. Subject to the above,
the profits, risks and losses, and remaining assets after liquidation of the
Joint Venture shall be dealt with in strict accordance with the provisions of
this Contract.
3.5 The purpose of the Joint Venture shall be: based on the Parties' desire to
enhance economic cooperation and technical exchange, and by adopting advanced
and appropriate technologies and scientific methods of operation and management,
to provide high-level technical and logistics services, develop new products
within its scope of business, gain a competitive edge in the international
market in terms of quality, price and so on, improve economic efficiency, and
earn a profit and return satisfactory to each Party.
3.6 The scope of business of the Joint Venture shall be:
o provision of telecom and related communications services in the Greater
China Region and Asia, including but not limited to Hong Kong, Macao,
Taiwan, China, Singapore;
o provision of value added telecom services including Call Center,
telemarketing, wireless communications, mobile applications, paging,
roaming, short messaging services (SMS), multi-media messaging services
(MMS), Voice Over IP (VoIP) in the abovementioned regions;
o provision of outsourcing services including customer support, loyalty
program, customer care services, telemarketing, data-entry, data
processing, secretarial, call answering services in the abovementioned
regions;
o provision of e-commerce and mobile commerce (m-commerce) in the
abovementioned regions;
o reseller, distributor, value added reseller (VAR), and service agents
for telecom services in the abovementioned regions;
o database marketing, data mining related services;
o research and development of software applications, hardware systems,
and solutions related to telecom and CRM services,
o provision of all relevant technical consultancy and services,
(collectively, "Joint Venture Businesses").
30
CHAPTER 4: TOTAL INITIAL REGISTERED CAPITAL, TOTAL INVESTMENT, FORM AND
SCHEDULES OF INVESTMENT
4.1 The total Registered Share Capital of the Joint Venture is MOP 100,000.
* Note: Currency Exchange Ratio as of December 18, 2002:
1 US Dollar (USD) = 8.28180 Macao Pataca (MOP)
1 Macao Pataca (MOP) = 0.12075 US Dollar (USD)
4.2 The contributions by Party A and Party B to the registered capital of the
Joint Venture are as follows:
Party A shall contribute MOP 50,100, representing 50.1% of the Joint Venture
registered capital, in a single payment in the form of cash, within 10 days of
the registration of the JV.
Party B shall contribute MOP 49,900, representing 49.9% of the Joint Venture's
registered capital, in a single payment in the form of cash, within 10 days of
the registration of the JV.
The total Registered Share Capital will be MOP 100,000 divided into 100,000
shares of MOP1.00 each. Party A: 50,100 shares allotted to PacificNet Management
Limited Party B:
Party B1: 22,500 shares allotted to Li Kin Shing
Party B2: 22,500 shares allotted to Kwok King Wa
Party B3: 1,700 shares allotted to Li Wang
Party B4: 1,700 shares allotted to Li Yin
Party B5: 1,500 shares allotted to Li Yi Sheng
All the issued shares will be allotted in cash.
4.3 Party A and Party B shall make their capital contributions in full to Joint
Venture within ten (10) working days after the Joint Venture receives its
business license.
4.4 INVESTMENT SCHEDULE: JV INVESTMENT SCHEDULE
4.4.1 JOINT VENTURE INVESTMENT BY PARTY B: CUSTOMER SERVICE CONTRACTS:
Subject to the terms of this Agreement, PARTY B agrees to transfer a number of
Customer Service Contracts to the JV. The contracts will be valued at not less
than USD$20,400,000. PARTY B agrees to provide an independent business appraisal
valuation of the business operation, profit model, discounted cash flow
projection performed by an independent auditor or valuation appraiser showing
that the Valuation of the contracts to be transferred to the JV is not less than
USD$20,400,000; (** See Exhibit 1: Valuation Report on various contracts offered
to PacificNet Communications Limited - Macao Commercial Offshore, and prepared
by HLB Hodgson Impey Cheng )
4.4.2 Joint Venture Investment by Party A: 170,000,000 (* equivalent to
34,000,000 shares after the 5-for-1 reverse stock split dated Jan 6, 2003) PACT
shares
4.4.2.1 To match PARTY B's investment of Customer Contracts valuing at
USD$20,400,000, PACT agrees to invest into the JV the amount of 170,000,000 (*
equivalent to 34,000,000 shares after the 5-for-1 reverse stock split dated Jan
6, 2003) restricted shares of PACT (** WHICH IS EQUIVALENT TO APPROX.
USD$20,480,000 BASED ON A VALUATION OF USD$0.12 PER PACT SHARE, THE CLOSING
SHARE PRICE ON DECEMBER 19, 2002, THE DAY BEFORE THE SIGNING OF THIS CONTRACT)
according to the following issuance schedule.
4.4.2.1.1 Within 30 days of the completion of the registration of the Joint
Venture in the Macao SAR, PACT shall deliver to the JV the sum of 4,000,000 (*
equivalent to 800,000 shares after the 5-for-1 reverse stock split dated Jan 6,
2003) PACT Shares (the "REFUNDABLE DEPOSIT"), being a refundable deposit and
part payment of the investment consideration for the JV;
31
4.4.2.1.2 In the event that: JV fails to receive the regulatory approvals by the
SEC, NASDAQ, or fails to receive the approval of the Shareholders of PACT; or
the conditions set out in Clause [5.1] shall not have been fulfilled by the date
referred to in Clause 4.4 or such other date as the parties hereto may agree in
writing; the JV shall refund to the PACT the Refundable Deposit within thirty
(30) days following the date on which PACT rescinds this Agreement.
4.4.2.2 In case of any stock split or reverse stock split by PACT, the number of
PACT shares to be issued will be adjusted according to the stock split ratio.
4.4.3 ESCROW ARRANGEMENT FOR INVESTMENT SHARES ANDS ADJUSTMENT
4.4.3.1 Party B warrants, represents and undertakes that:
(i) the total Net Income of JV for the period from 1st January 2003 to 31st
December 2003 ("First Fiscal Year") will not be less than USD$3,000,000.
(ii) Party B hereby agrees and acknowledges that the total investment by PACT is
based on Party B's warranty in respect of the Net Income of PARTY B as described
above. In this regard PARTY B hereby agrees to let the JV appoint the Escrow
Agent upon the terms of the Escrow Agreement in the agreed terms to hold all the
Investment shares to be issued in accordance with this Agreement on Completion
and the JV undertakes with PACT that it shall not either sell, transfer, charge,
encumber, grant options over or otherwise dispose of, or of any legal or
beneficial interest in any of the Investment shares until such part of the
Investment shares are released to by the Escrow Agent to the JV in accordance
with the following schedule:
------------------------------------------------------- --------------------------- ---------------------------------
ACCUMULATED
NUMBER OF SHARES TO BE RELEASE CRITERIA BASED ON
RELEASE DATE RELEASED ACCUMULATED NET INCOME
------------------------------------------------------- --------------------------- ---------------------------------
0. Within 30 days of the completion of the 4,000,000 Refundable Deposit:
registration of the Joint Venture in the Macao SAR, PACT Shares (* equivalent Within 30 days of the
PACT shall deliver to the JV the sum of 4,000,000 (* to 800,000 shares after completion of the registration
equivalent to 800,000 shares after the 5-for-1 the 5-for-1 reverse stock of the Joint Venture in the
reverse stock split dated Jan 6, 2003) (the split dated Jan 6, 2003) Macao SAR.
"Refundable Deposit"), being a refundable deposit and
part payment of the investment consideration for the
JV;
------------------------------------------------------- --------------------------- ---------------------------------
1. After Q1 of 2003, within 30 days of the 27,000,000 JV has achieved:
Auditors certification that the auditor's PACT Shares (* equivalent Net Income for the 3 months
review relating to JV and its business is to 5,400,000 shares after ending on March 31 (Q1) of
acceptable and can be consolidated into the 5-for-1 reverse stock 2003 of not less than
PACT's audited accounts, balance sheet and split dated Jan 6, 2003) USD$550,000
financial statements, in accordance with the
US GAAP.
------------------------------------------------------- --------------------------- ---------------------------------
2. After Q2 of 2003, within 30 days of the 68,000,000 JV has achieved:
Auditors certification that the auditor's PACT Shares (* equivalent Net Income for the 6
review relating to JV and its business is to 13,600,000 shares after months ending on June 30
acceptable and can be consolidated into the 5-for-1 reverse stock (Q1+Q2) of 2003 of not
PACT's audited accounts, balance sheet and split dated Jan 6, 2003) less than USD$1,200,000
financial statements, in accordance with the
US GAAP.
------------------------------------------------------- --------------------------- ---------------------------------
3. After Q3 of 2003, within 30 days of the 113,000,000 JV has achieved:
Auditors certification that the auditor's PACT Shares (* equivalent Net Income for the 9
review relating to JV and its business is to 22,600,000 shares after months ending on September
acceptable and can be consolidated into the 5-for-1 reverse stock 30 (Q1+Q2+Q3) of 2003 of
PACT's audited accounts, balance sheet and split dated Jan 6, 2003) not less than
financial statements, in accordance with the USD$2,000,000
US GAAP.
------------------------------------------------------- --------------------------- ---------------------------------
4. After Q4 of 2003, within 30 days of the 170,000,000 JV has achieved:
Auditors certification that the auditor's PACT Shares (* equivalent Net Income for the 12
review relating to JV and its business is to 34,000,000 shares after months ending on December
acceptable and can be consolidated into the 5-for-1 reverse stock 31 (Q1+Q2+Q3+Q4) of 2003
PACT's audited accounts, balance sheet and split dated Jan 6, 2003) of not less than
financial statements, in accordance with the USD$3,000,000
US GAAP.
------------------------------------------------------- --------------------------- ---------------------------------
TOTAL PACT SHARES TO BE RELEASED IN 2003 170,000,000 JV has achieved:
PACT Shares (* equivalent Minimum Net Income for 2003 of
to 34,000,000 shares not less than USD$3,000,000
after the 5-for-1 reverse
stock split dated Jan 6,
2003)
------------------------------------------------------- --------------------------- ---------------------------------
32
The JV agrees and undertakes not to dismiss nor withdraw its instructions to the
Escrow Agent pursuant to the Escrow Agreement unless the Escrow Agent has
voluntarily resigned or ceased to act as escrow agent in accordance with the
Escrow Agreement, in which case the JV agrees and undertakes to appoint an
escrow agent (as is agreeable to PACT) in its place to act as escrow agent on
the same terms and conditions of the Escrow Agreement.
The JV agrees that on the relevant release date (as referred to in the above
schedule) JV will collect the relevant portion of the Investment shares from the
Escrow Agent (if the Release Criteria has been met).
4.4.3.2 In the event that the JV produces only a portion of the quarterly Net
Income Release Criteria, the Escrow Agent shall release PACT shares
with a deduction in proportion to the shortfall of the Net Income.
4.4.3.3 NET INCOME GUARANTEE BY PARTY B AND CASH COMPENSATION BY PARTY B IN
CASE OF SHORTFALL OF NET INCOME BELOW USD$3,000,000: In the event that
the Net Income at the end of 2003 as warranted by PARTY B is not
fulfilled (i.e. USD$3,000,000 Net Income), then PARTY B shall pay to
PACT an amount in the form of cash in USD representing the shortfall in
Net Income, and the Escrow Agent shall release the remaining shares.
CHAPTER 5. CONDITIONS
5.1 This Agreement is conditional upon:
5.1.1 an independent business appraisal valuation of the business operation,
profit model, discounted cash flow projection of the Joint Venture and the
Subsidiaries having been performed to the reasonable satisfaction of Party A by
an independent auditor or valuation appraiser showing that such the Valuation of
the Joint Venture and the Subsidiaries as at the time of completion of such
valuation is not less than USD$20,400,000;
5.1.2 Party A being satisfied with the results of a legal and financial due
diligence review to be conducted by Party A on the Joint Venture covering such
matters as are relevant to the transactions contemplated under this Agreement
and as Party A may reasonably request);
5.1.3 if required, permission from the relevant stock exchange, government and
securities authority and regulator in the United States having been obtained in
respect of the issue and transferability of any PACT Shares which may fall to be
issued herein;
5.1.4 if required, a resolution at a meeting of the Directors of PACT approving
this Agreement, creating and giving authority for the issue of the JV Investment
Shares, the implementation of the transactions contemplated hereunder and all
other matters incidental hereto in accordance with the provisions of PACT's
articles of association bye-laws and such rules, regulations and laws in force
from time to time in the United States and which apply to PACT;
5.1.5 if required, the shareholders of PACT at a meeting of members approving
this Agreement, creating and giving authority for the issue of the JV Investment
Shares, the implementation of the transactions contemplated hereunder and all
other matters incidental hereto in accordance with the provisions of PACT's
articles of association, bye-laws and such rules, regulations and laws in force
from time to time in the United States and which apply to PACT;
5.1.6 all other matters as may be required or may be deemed necessary by Party A
in order to complete all of the transactions contemplated herein this Agreement.
5.2 Party A, Party B, and the JV shall use their respective best endeavors to
ensure that the conditions set out in Clause 5.1 shall be fulfilled by the date
set out in Clause 5.4.
5.3 If the conditions set out in Clause 5.1 shall not have been fulfilled, or as
the case may be, waived by Party A, on or before March 31, 2003 or such later
date as the parties may agree, this Agreement shall lapse and be of no further
effect whereupon a sum equal to the Deposit shall be refunded to Party A in
accordance with Clause [4.4.2] and no party to this Agreement shall have any
claim against or liability to the other party save in respect of any antecedent
breaches of this Agreement, including any breaches of this Clause 5.
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5.4 From the date of this Agreement until Completion, except for the
transactions described herein or otherwise with the prior written consent of
Party A:
(a) Party B warrants and undertakes that they will:
(i) keep records in which true and correct entries will be made of all material
transactions by and with the Joint Venture and the Subsidiaries;
(ii) duly observe all material requirements of governmental authorities unless
contested in good faith by appropriate proceedings with the consent of Party A;
(iii) promptly pay and discharge, or cause to be paid and discharged, when due
and payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, property or business of the Joint Venture and
the Subsidiaries unless contested in good faith by appropriate proceedings with
the consent of Party A;
(iv) at all times comply with the provisions of all contracts, agreements and
leases to which the Joint Venture and the Subsidiaries is a party, unless
contested in good faith by appropriate proceedings with the consent of Party A;
5.5 Party B warrants, represents and undertakes that there shall have been no
Material Adverse Change in the customer contracts or the business, prospects,
financial condition or results of operations of the Customer Service Contracts.
5.6 Party A shall be entitled to rescind this Agreement by notice in writing to
Party B and the Joint Venture if prior to Completion it appears that any of the
Warranties is not or was not true and accurate in all respects or if any act or
event occurs which, had it occurred on or before the date of this Agreement,
would have constituted a breach of any of the Warranties or if there is any
material non-fulfillment of any of the Warranties which (being capable of
remedy) is not remedied prior to Completion.
CHAPTER 6. COMPLETION
6.1 Subject to the terms of this Agreement, Completion shall take place pursuant
to this clause at the offices of Party A's Legal Counsel on the Completion Date.
6.2 Upon Completion of the JV, Party B shall deliver to the JV:
6.2.1 executed the transfer and assignment of the Customer Service Contracts
from Party B to the JV;
6.2.2 certified true copies of the minutes of meetings of the Party B's board of
directors and shareholders approving the transfer and assignment of the Customer
Service Contracts to the JV;
6.2.3 certified true copies of the minutes of Party B's board of directors and
shareholders approving this Agreement and all matters herein contemplated and
the transfer and assignment of its Customer Sales Contracts to the JV;
6.2.4 written confirmation that none of Party B are aware of any matter or thing
which is in breach of or inconsistent with any of the representations,
warranties and undertakings herein contained;
6.2.5 such other papers and documents as Party A reasonably require;
6.2.6 approve and authorize the execution of such documents and/or deeds as
Party A may reasonably request in order to facilitate the transactions
contemplated herein or necessary to complete the transactions herein;
CHAPTER 7: TRANSFER, INCREASE OR DECREASE OF THE REGISTERED CAPITAL
Right of first refusal:
7.1 No shareholder in the JV shall transfer all or part of its shares to a third
party without the other shareholder's consent. Any such transfer shall be
subject to the following procedures:
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(A) In the event that one shareholder intends to sell or transfer its
contribution to the registered capital of the Joint Venture to a third party, it
shall first notify the other shareholders and offer to sell on the same terms
and conditions as are offered to the third party, which terms and conditions
shall be set forth in writing, and the other shareholders shall have the right
to acquire and purchase such contribution to the registered capital on such
terms and conditions in proportion to their share ownership percentage.
(B) In the event that the other shareholders shall have failed to accept such
offer within fifteen (15) days after its receipt of the written offer, the
offering shareholder shall be free to transfer the contribution to the said
third party on the terms and conditions originally offered.
(C) If no such transfer is made within ninety (90) days after expiry of the
foregoing fifteen (15) day period, then the procedures set forth in this Clause
must be complied with again before any transfer to a third party (including the
above-said third party to which the offer was previously made) may be made.
Any transfer or assignment made by one shareholder in violation of the above
procedures shall be deemed null and void.
Any transfer by a shareholder of all or part of its contribution to the
registered capital of the Joint Venture to a third party consistent with the
foregoing procedures shall further require the unanimous approval of the Board
of Directors and the approval of the examination and approval authorities of the
Joint Venture. Such transfer shall only become effective on the date when the
examination and approval authorities grant the approval thereof.
Notwithstanding the procedures set forth above, if one shareholder wishes to
transfer its shares of the Joint Venture to its affiliate, the other
shareholders shall promptly give consent to such proposed transfer and waive the
right of first refusal. "Affiliate" shall mean any company which, through
ownership of voting stock or otherwise, is controlled by, under common control
with, or in control of, a Party; "control" shall mean ownership, directly or
indirectly, of more than fifty percent (50%) of the securities having the right
to vote for the election of directors in the case of a corporation, and more
than fifty percent (50%) of the beneficial interests in the capital in the case
of a business entity other than a corporation.
For any transfer that is consistent with the foregoing provisions, all
shareholders shall immediately and jointly cause the Board of Directors and the
directors appointed by them respectively to approve such transfer and sign any
and all documents and take any and all actions that are necessary to effect such
transfer.
7.2 Any increase or decrease of the registered capital, or change of the share
ownership percentage, shall be approved by the Board of Directors.
[CHAPTER 8: RESPONSIBILITIES OF THE PARTIES
8.1 Both Parties shall use their best endeavors to support and assist the Joint
Venture in achieving its business objectives.
8.2 PARTY A SHALL ASSUME THE FOLLOWING RESPONSIBILITIES AND OBLIGATIONS FOR THE
JOINT VENTURE:
(1) continually introducing advanced e-business and CRM software technologies to
the Joint Venture, solving technical quality problems, providing technical
consulting, in an effort to make the Joint Venture's technologies being advanced
in the international market;
[(2) providing technical training and guidance to the managerial and technical
personnel of the Joint Venture;
[(3) assisting the Joint Venture in its marketing and public relations endeavors
in the North America, and in developing the trans-Pacific market and promoting
the business development of the Joint Venture;]
(4) handling other matters reasonably delegated to it by the Joint Venture.
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The Parties agree that the specific terms and conditions, on which Party A shall
provide to the Joint Venture technologies, technical consultancy, research and
development services and technical training under Items (1), (2) and (3) above,
including without limitation the methods for provision of technologies, the
ownership of the technologies and the fees for use of technologies and services
and training, shall be based on the principle of fairness and reasonableness.
8.3 Party B shall assume the following responsibilities and obligations for the
Joint Venture:
(1) handling applications to the relevant government authorities for the
approval and registration of the Joint Venture, and securing the business
license and permits, as required for the establishment of the Joint Venture and
for the future expansion of the JV in the following regions: including but not
limited to Hong Kong, Macao, Taiwan, China, Singapore;
(2) providing assistance to the Joint Venture in purchasing or leasing office
space, equipment, articles for office use, vehicles, communications apparatus
and so on in China;
(3) assisting the Joint Venture in its marketing and public relations endeavors
in the Greater China Region, and in developing the Chinese market and promoting
the business development of the Joint Venture;
(4) handling other matters reasonably delegated to it by the Joint Venture.
CHAPTER 9: BOARD OF DIRECTORS, OPERATION AND MANAGEMENT
9.1 The Board of Directors shall be the highest authority of the Joint Venture
and shall determine all major issues of the Joint Venture.
9.2 The Board of Directors shall be deemed as established on the date when the
Joint Venture is duly registered, and shall hold its first meeting within thirty
(30) days thereafter.
9.3 The Board of Directors shall be composed of five (5) directors, of which
three (3) shall be appointed by Party A and two (2) by Party B. The Directors
shall each serve a term of one (1) year and may serve additional term or terms
if reappointed by the Party who appointed him. If a Party is to replace a
director before the expiry of his term of office, it shall notify the other
Party and the Joint Venture in writing fifteen days in advance, failing which
the replacement shall not become effective.
9.4 A Board meeting shall require a quorum of at least three (3) directors. A
director who is not able to attend at a Board meeting shall give a proxy in
writing to another person, who shall attend and vote on his behalf. A director
who has been notified of a Board meeting but failed to attend the meeting in
person or by proxy shall be deemed to have attended the Board meeting and
consented to all the resolutions adopted by the Board meeting; all resolutions
adopted by a Board meeting accordingly shall be deemed valid and effective. A
Board meeting may be held by telephone or video-conferencing.
9.5 The Board of Directors shall meet at least once every quarter. A Board
meeting may be called by any director.
9.6 Board resolutions concerning the following major issues shall require the
unanimous vote of all the directors or their proxies present at the Board
meeting:
(1) any amendment to the Articles of Association of the Joint Venture;
(2) separation, merger, dissolution or liquidation of the Joint Venture;
(3) any increase, decrease or transfer of the registered capital of the Joint
Venture;
(4) any business transaction between the Joint Venture and any of its
shareholders, directors or senior management personnel;
(5) deciding the employment, the duties and powers and the compensation of the
General Manager and the Vice General Manager;
36
(6) the annual business plans, labor and compensation plans, and financial
budget for revenues and expenditures, of the Joint Venture ;
(7) the annual profit distribution plans;
(8) development plans of the Joint Venture and investment plans involving more
than USD$300,000;
(9) other matters for which the unanimous vote of the Board of Directors shall
be required. Board resolutions concerning any issues other than those major
issues enumerated in this Clause 9.6 shall require a simple majority vote of all
the directors or their proxies present at the Board meeting.
9.7 The Joint Venture shall establish an operation and management structure to
be responsible for the daily operation and management of the Joint Venture. Such
structure shall include one (1) General Manager, recommended by Party A, and one
(1) Vice General Manager, recommended by Party B. Both the General Manager and
the Vice General Manager shall be appointed by the Board of Directors, and shall
serve a term of one (1) year. The General Manager and Vice General Manager may
be removed and replaced by the Board of Directors at any time with a resolution.
Other managerial personnel shall be appointed by the General Manager.
9.8 The task of the General Manager shall be to carry out the various
resolutions of the Board of Directors and organize and direct the daily
operation and management of the Joint Venture. The Vice General Manager shall
assist the General Manager in his work, and shall serve as the acting General
Manager should the General Manager be unable to exercise his responsibilities.
The General Manger shall consult with, and obtain the consent of, the Vice
General Manager before making decisions on all major business matters of the
Joint Venture. The operation and management structure may consist of certain
departments, the managers for which shall be responsible for the work of the
relevant departments, handle matters delegated by the General Manager and the
Vice General Manager, and report to the General Manager and the Vice General
Manager.
9.9 In the event of graft or serious dereliction of duty, the General Manager
and the Vice General Manager may be removed and replaced by the Board of
Directors with a resolution at any time.
CHAPTER 10: LABOR MANAGEMENT
10.1 The General Manager shall prepare plans for the employment, dismissal,
wages, labor protection, welfare, rewards and punishments and other matters of
the employees of the Joint Venture in accordance with the Labor Law of the Macao
SAR and other relevant regulations, and shall implement such plans as approved
by the Board of Directors.
10.2 Labor contracts entered into between the Joint Venture and its employees
shall be filed with the local labor management authorities for record.
10.3 The employment, wages and compensation, social insurance, welfare, travel
and lodging expenses and other matters of senior managerial personnel
recommended by Party A and Party B shall be discussed and determined by the
Board of Directors.
CHAPTER 11: TAXES, FINANCIAL MATTERS AND AUDITING
11.1 The Joint Venture shall pay taxes and be entitled to various tax reductions
and exemptions in accordance with the relevant laws and regulations of the Macao
SAR.
11.2 The fiscal year of the Joint Venture shall commence on January 1, and end
on December 31, of each year.
11.3 Within thirty (30) days after the end of each quarter of a year, the Joint
Venture shall provide the balance sheet for such quarter to each of Parties and
each director. Each of the Parties and each director shall also have the right
to make inquiries to the Joint Venture from time to time as to the operational
and financial status, and shall be entitled to receive written replies thereto
from the Joint Venture.
37
11.4 A Macao registered accountant shall be engaged to audit the financial
matters of the Joint Venture and shall provide a report of such audit to the
Board of Directors and the General Manager. If either party deems it necessary
to engage an accounting institution or CPA licensed in the USA to audit the
financial matters of the Joint Venture, the Joint Venture shall consent to such
audit.
11.5 All foreign exchange matters shall be dealt with in accordance with the
Regulations of the Macao SAR and relevant regulations.
CHAPTER 12: SHARING OF PROFITS AND LOSSES
12.1 The profits of the Joint Venture remaining thereafter shall be distributed
to the Parties in proportion to the ratio of their contributions to the
registered capital of the Joint Venture.
12.2 Party A and Party B agree that, in order to support the development of the
Joint Venture, no profits of the Joint Ventures shall be distributed within two
(2) years after the establishment of the Joint Venture.
CHAPTER 13: AMENDMENT TO AND TERMINATION OF THIS CONTRACT
13.1 No amendment to this Contract, including its Appendices, shall be effective
unless a written agreement or an appendix hereto has been approved by the board
of directors of the JV.
13.2 The Joint Venture may be terminated under any of the following
circumstances, subject to the approval of the examination and approval
authorities:
(A) The Board may decide to terminate the Joint Venture at any time if:
(i) the Joint Venture is unable to continue operations due to the failure of
one of the Parties to perform its obligations under this Contract;
(ii) the Joint Venture is unable to continue operations due to potential or
actual heavy losses caused by Force Majeure;
(iii) the Joint Venture is unable to achieve its intended objectives and there
is no reasonable prospect for favorable development in this regard; or
(iv) any other circumstances as deemed appropriate by the Board.
(B) The Board may pass a resolution to terminate the Joint Venture upon the
agreement of both Parties.
13.3 Either Party shall have the right to terminate this Contract upon giving
written notice to the other Party in the event that any of the followings shall
have occurred:
(i) the other Party shall have been in material breach of its obligations under
this Contract and shall have failed to cure such breach within sixty (60) days
after its receipt of written notice of such breach from the terminating Party;
(ii) performance by the other Party of its obligations under this Contract shall
have been prevented for a period in excess of six (6) months by reason of an
event or circumstance of Force Majeure;
(iii) the Joint Venture shall have become insolvent, or a petition or
proceedings of any kind as to its bankruptcy shall have been filed or commenced,
or any proceedings shall have been commenced for its dissolution or winding up;
(iv) any applicable law or government authority requires any term or condition
of this Contract to be revised in such a manner so as to cause significant
adverse consequences to the operation of the Joint Venture; or
(v) any approval, license or permit applied for by the Joint Venture, and which
is of fundamental importance to the operation of the Joint Venture, is not
granted by the relevant government authority, or having been granted, is
subsequently revoked or canceled.
13.4 The early termination of this Contract by either Party in accordance with
this foregoing provisions shall be without prejudice to the accrued rights and
liabilities of either Party on the date of such termination, and any other
rights or remedies under this Contract or under law, except any such rights
which shall have been waived in writing by the respective Parties.
13.5 Upon dissolution of the Joint Venture, the Board of Directors shall work
out procedures and principles for the liquidation, nominate candidates for the
liquidation committee, and supervise the liquidation.
38
13.6 Upon completion of liquidation pursuant to relevant Macao SAR regulations,
the liquidation committee shall submit a liquidation report to the Board of
Directors for approval, submit the same to the original examination and approval
authorities for approval, go through the formalities for canceling its
registration with the original registration authorities, and return its business
license for cancellation.
13.7 The properties of the Joint Venture remaining after its liquidation shall
be distributed in proportion to the ratio the Parties' respective contributions
to the registered capital of the Joint Venture.
13.8 After the dissolution of the Joint Venture, its account books and various
documents shall be retained by Party A.
CHAPTER 14: FORCE MAJEURE
14.1 "Force Majeure" shall mean any event, not existing as of the date of this
Contract and not reasonably foreseeable or within the control of the Parties as
of such date, which prevents, in whole or part, the performance by one of the
Parties of its obligations hereunder or makes the performance of such
obligations commercially unreasonable, including, without limitation, acts of
state or governmental action, crisis, war, and natural catastrophe.
14.2 If due to any event or circumstance of Force Majeure, either Party is
unable to fulfill any or all of its obligations under this Contract, such Party
shall not be considered to be in default under this Contract, but shall continue
to fulfill its other obligations hereunder that are not affected by the event or
circumstance of Force Majeure. The period allowed for the performance of the
obligations affected by the event or circumstance of Force Majeure shall
automatically be extended for a period equal to the period during which the
Force Majeure continues.
14.3 Either Party shall promptly inform the other Party of the event or
circumstance constituting Force Majeure and, within thirty (30) days thereof,
shall provide all relevant details and appropriate proof of the occurrence and
duration of such event.
14.4 The Party claiming Force Majeure shall use all reasonable efforts to
overcome the delay caused by the event or circumstance of Force Majeure. Subject
to the provisions of Clause 13.2 (A), the Board shall meet and decide, based on
the extent and nature of the effect such event or circumstance may be expected
to have on the performance of the Contract, whether or not the Contract should
be terminated and, if not, whether other performance under the Contract which is
not directly affected by the event or circumstance of Force Majeure should be
postponed.
CHAPTER 15: SETTLEMENT OF DISPUTES
15.1 The formation of this Contract and its Appendices and related agreements,
and the validity, interpretation, performance and settlement of disputes thereof
shall be governed by the laws of the Macao SAR and the laws of Delaware USA.
15.2 Any disputes arising out of or in connection with this Contract shall be
resolved through friendly consultations by the Parties; if no agreement can be
reached through consultations within thirty (30) days after the occurrence of
such dispute, either Party shall have the right to submit such dispute to the
International Economic and Trade Arbitration Commission Hong Kong Branch for
arbitration in Hong Kong in accordance with its procedures of arbitration. The
arbitral award shall be final and binding upon both Parties.
CHAPTER 16: CONFIDENTIALITY
16.1 Each Party may have received from the other Party prior to the conclusion
of this Contract, and may from time to time during the term of this Contract
receive from the other Party or the Joint Venture, information which is
confidential or proprietary ("Confidential Information") to the disclosing Party
or to the Joint Venture.
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CHAPTER 17: EFFECTIVENESS AND MISCELLANEOUS PROVISIONS
17.1 Any appendix hereto that is signed based on the various principles set
forth in this Contract, including the Joint Venture Articles of Association and
related agreements, shall constitute an integral part of this Contract. If there
is any conflict between any appendix hereto and the provisions of this Contract,
this Contract shall prevail.
17.2 Any notice from one Party to the other shall be sent in writing or by
e-mail or facsimile. The legal residence of each Party set forth herein or
another address designated by such Party shall be the address for such Party to
receive a notice. In the event that the legal residence of a Party is changed, a
notice thereof must be sent to the Joint Venture, failing which such Party shall
be liable for any miscommunications caused thereby.
17.3 This Contract shall have seven (7) original copies in English. Copies of
this Contract shall be submitted to the examination and approval authorities
according to their requirements. If this Contract is translated into Chinese,
Portuguese, or other languages, the English language version should be
interpreted as the official contract.
17.4 This Contract is subject to final approval by the Board of Directors of
PACT.
17.5 This Contract is subject to final approval by the shareholders of PACT at a
shareholders meeting.
17.6 This Contract is signed in Hong Kong SAR, China by the authorized
representatives of the Parties on December 20, 2002.
(Signature page)
PARTY A:
PACIFICNET MANAGEMENT LIMITED. (CORPORATE CHOP)
Tony Tong, Chairman & CEO Signature: /s/ Tony Tong
----------------
PARTY B:
SHAREHOLDERS OF INTERNATIONAL ELITE LIMITED:
Party B1: Mr. LI Kin Shing: Signature: /s/ LI Kin Shing
----------------
Party B2: Ms. KWOK King Wa Signature: /s/ KWOK King Wa
----------------
Party B3: Mr. LI Wang Signature: /s/ LI Wang
-----------
Party B4: Ms. LI Yin Signature: /s/ LI Yin
----------
Party B5: Mr. LI Yi Sheng Signature: /s/ LI Yi Sheng
---------------
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ANNEX II
FAIRNESS OPINION
[Letterhead of Turner, Stone, & Company, L.L.P.]
TO: Board of Directors, PacificNet Inc.
FROM: Turner, Stone, & Company, L.L.P.
Dear PacificNet Board of Directors,
You have requested that we render our opinion as to the fairness, from a
financial perspective, to the stockholders of PacificNet Inc. (PACT), a Delaware
corporation (the Company), of a proposed joint venture between PacificNet
Management Limited (PML), a British Virgin Islands company and a wholly owned
subsidiary of PACT, and the stockholders of International Elite Limited (IEL), a
Cayman Islands company not otherwise related to PACT or its stockholders,
directors or officers. The transaction will be effected pursuant to the terms
and conditions of the Equity Joint Venture Contract dated December 20, 2002
(Contract).
The transaction will be structured as a joint venture between PML and IEL with
the resulting entity, PacificNet Communications Limited - Macao Commercial
Offshore (PCL-MCO), being a limited liability company that will be registered in
the Macao Special Administration Region (SAR) of China. Generally, the business
purpose of PCL-MCO will be to market PACT's existing services in the greater
China region. The functional currency of PCL-MCO will be the Macao Pataca, which
has a current exchange rate with the U.S. dollar of 1 U.S. dollar equals 8.28180
Macao Pataca (MOP).
Under the terms and conditions of the Contract, PACT will initially contribute
to the joint venture MOP 50,100 ($6,049USD) and receive a 50.1% interest in the
registered capital of the joint venture and IEL will initially contribute MOP
49,900 ($6,025USD) and receive a 49.9% interest in the registered capital of the
joint venture. These initial contributions will constitute the total initial
registered share capital of the joint venture.
Additionally, IEL will transfer to the joint venture a number of Customer
Service Contracts with a fair value of not less than $20,400,000 USD. The fair
value of the Customer Service Contracts is to be supported by an independent
business appraisal provided by IEL by an individual qualified to provide such
valuations. Also, to match IEL's investment of Customer Service Contracts, PML
will contribute to the joint venture 34,000,000 PACT common stock shares
(approximately equivalent to the above fair value based on a valuation of
$0.60USD per PACT share).
Within 30 days of the formation of the joint venture, PACT is obligated to
transfer to the joint venture 800,000 of its shares of common stock. However,
the shares are to be returned to PACT if the joint venture does not obtain the
regulatory approval, fails to receive the approval of its stockholders to enter
into this transaction or the joint venture is otherwise rescinded as provided
for in the joint venture agreement.
The remaining 33,200,000 PACT common stock shares will be held in escrow subject
to the terms of an Escrow Agreement. The actual number of shares that will be
transferred to the joint venture will be determined on a quarterly basis over
the first four operating quarters based on achieved levels of net income as
stated in the Joint Venture Contract. As each net income level is achieved, the
Escrow Agent will release the stipulated number of common stock shares from
escrow to be transferred into the joint venture.
In this regard, IEL represents, warrants and undertakes that the net income of
the joint venture for the first year of operations will not be less than
$3,000,000USD. IEL further acknowledges and agrees that the total investment by
PACT is based on IEL's warranty with respect to the net income. In the event
that the above net income is not achieved during the first year, IEL will pay
directly to PACT the shortfall in net income less than $3,000,000 USD. Upon the
payment of this shortfall, if any, the above PACT shares will be transferred to
the joint venture.
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In our review, we have assumed, at your direction, that the definitive documents
to be prepared, used and signed by the parties to formally effect the
transaction will not, when executed, contain any terms or conditions that differ
materially from the terms and conditions contained in the Contract which was
attached as an exhibit to your Schedule 14a Proxy Statement and filed with the
U.S. Securities and Exchange Commission.
In connection with our opinion, among other things, and at the direction of PACT
management, we have (i) held several discussions with PACT management and PACT's
independent auditors however, took no steps to independently verify the
substance of such discussions, (ii) reviewed an unexecuted copy of the Contract,
(iii) reviewed certain public information made available to us by PACT and
relating to PACT although we took no steps to independently verify the substance
of such public information and (iv) reviewed the historical stock prices for
PACT which we have determined to be comparable to PACT.
We have not been requested to, and did not, communicate in any way with IEL or
any of its stockholders, directors or officers regarding the Contract, any of
its terms and conditions or any other aspects of the transaction. Additionally,
we have not been asked to consider, and our opinion does not address, the
relative merits of the transaction as compared to any alternative business
strategy that might exist for PACT. Furthermore, we have not negotiated the
Contract, provided any legal advice or otherwise advised you or been involved in
any aspect of the transaction.
In rendering this opinion, we have been directed to rely, without independent
verification, on the accuracy of all of the financial and other information that
was publicly available or furnished to us by PACT or their independent auditors.
We have further relied upon the assurances of PACT's management that they are
not aware of any facts that would make any of the foregoing information
inaccurate or misleading. We have not made or obtained or assumed any
responsibility for making or obtaining any independent evaluations or appraisals
of the Customer Service Contracts or other PACT or IEL assets nor have we been
furnished with any such evaluations.
Our opinion is based upon our analysis of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist
and as evaluated by us as of the date hereof.
Other than our engagement to analyze this transaction and render our opinion as
to the fairness of this transaction as it applies to the stockholders of PACT,
our firm is not affiliated with or associated with in any way to any of the
parties to this transaction or any of their major stockholders, directors,
officers or other members of management. Furthermore, our firm has not in the
past provided any services to any of the parties to this transaction nor is it
contemplated at this time that we will provide any additional services to any of
the parties to this transaction. In addition, PACT has agreed to indemnify us
against certain liabilities arising out of our engagement.
This opinion is intended for the benefit and use of PACT's board of directors in
considering this transaction and does not constitute a recommendation to any
individual stockholder or group of stockholders as to how such stockholder
should vote on any matter relating to the transaction. This opinion may not be
used by PACT for any other purpose or published, reproduced, disseminated,
quoted or referred to by PACT at any time, in any manner or for any purpose,
without our prior written consent, except that this opinion may be reproduced in
full in, and references to the opinion and to us (in each case in such form as
we shall approve) may be included in, the solicitation/recommendation statement
that PACT distributes to stockholders in connection with the transaction and any
proxy/information statement filed with the Securities and Exchange Commission in
connection with the transaction.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the transaction is fair to the PACT stockholders from a financial
perspective.
Very truly yours,
/s/ Turner, Stone, & Company, L.L.P.
------------------------------------
Turner, Stone, & Company, L.L.P.
42
ANNEX III
AMENDED 1998 STOCK OPTION PLAN
------------------------------
PACIFICNET INC. STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The purpose of this Stock Option Plan (the "Plan")
is to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees,
Directors and Consultants and to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company
(g) "Company" means PacificNet Inc., a Delaware corporation.
(h) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the
Company.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider (defined below) shall not cease to be an Employee in the case of (i)
any leave of absence approved by the Company or (ii) transfers between locations
of the Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may exceed
ninety days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option. Neither service as a Director nor payment of a director's fee by
the Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
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i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
(r) "Option Grant" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Grant is subject to the terms and conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding Options
are exchanged for Option with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option.
(u) "Optionee" means the holder of an outstanding Option granted under
the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this PacificNet Inc. Stock Option Plan.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
(z) "Share" means a share of the Common Stock, as adjusted in accordance
with Section 11 below.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 6,000,000 shares. The Shares may be authorized but
unissued, or reacquired Common Stock. If an Option expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of an Option, shall not be returned to the Plan and shall not
become available for future distribution under the Plan.
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4. ADMINISTRATION OF THE PLAN.
(a) Administrator. The Plan shall be administered by the Board or a
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options may from time to
time be granted hereunder;
(iii) to determine the number of Shares to be covered by each such
award granted hereunder;
(iv) to approve forms of Option Grants for use under the Plan;
(v) to determine the terms and conditions, of any Option granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options may be exercised (which may be
based on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option may
be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by such
Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option that number of Shares having a Fair Market Value equal to the
amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by Optionees to have Shares withheld for this
purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable;
(xi) to construe and interpret the terms of the Plan and awards
granted and pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees.
(b) Each Option shall be designated in the Option Grant as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
45
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5(b),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option shall confer upon any Optionee any
right with respect to continuing the Optionee's relationship as a Service
Provider with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate such relationship at any time, with or
without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be stated in the Option
Grant; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant or such shorter term as may be provided in the
Option Grant.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
(B) granted to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of(l) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
46
9. EXERCISE OF OPTION.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms hereof at such times and
under such conditions as determined by the Administrator and set forth in the
Option Grant. Except in the case of Options granted to Officers, Directors and
Consultants, Options shall become exercisable at a rate of no less than 20% per
year over five (5) years from the date the Options are granted. Unless the
Administrator provides otherwise, vesting of Options granted hereunder shall be
tolled during any unpaid leave of absence. An Option may not be exercised for a
fraction of a Share. An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Grant) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Grant and the Plan. Shares issued upon
exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 11 of the Plan. Exercise of an Option in any manner shall
result in a decrease in the number of Shares thereafter available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Grant (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Grant). In the absence of a specified time in the
Option Grant, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Grant (of
at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Grant). In the absence of a specified time in
the Option Grant, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as is specified in the Option
Grant (or at least six (6) months) to the extent that the Option is vested on
the date of death (but in no event later than the expiration of the term of such
Option as set forth in the Option Grant) by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance. In the
absence of a specified time in the Option Grant, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to the entire Option, the
Shares covered by the unvested portion of the Option shall immediately revert to
the Plan. If the Option is not so exercised within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
47
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS. The Options may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully exercisable
for a period of fifteen (15) days from the date of such notice, and the Option
shall terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
48
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee to whom an Option is
so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
14. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option unless the exercise of such Option and the issuance and delivery of
such Shares shall comply with Applicable Laws and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
15. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
16. RESERVATION OF SHARES. The Company, during the term of this Plan, shall
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
17. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
18. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options outstanding, and, in the case of an individual who
acquires Shares pursuant to the Plan, during the period such individual owns
such Shares, copies of annual financial statements. The Company shall not be
required to provide such statements to key employees whose duties in connection
with the Company assure their access to equivalent information.