U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER: 000-24985
[PACIFICNET LOGO]
PACIFICNET INC.
(Exact name of small business issuer in its charter)
DELAWARE 91-2118007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UNIT 3714-15, HONG KONG PLAZA, N/A
188 CONNAUGHT ROAD WEST, HONG KONG (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: 011-852-2876-2900
PACIFICNET INC., UNIT 1702, CHINACHEM CENTURY TOWER, 178 GLOUCESTER ROAD,
WANCHAI, HONG KONG
--------------------------------------------------------------------------------
(Former Name and Address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES /X/ NO / /
There were 6,303,572 shares of the Company's common stock outstanding on July
22, 2003.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
1. Condensed Consolidated Balance Sheets - as of June 30, 2003 (unaudited)
and December 31, 2002 (audited) 3
2. Unaudited Condensed Consolidated Statements of Operations - for each
of the three and six months ended June 30, 2003 and 2002 4
3. Unaudited Condensed Consolidated Statements of Cash Flows - for each
of the three and six months ended June 30, 2003 and 2002 5
4. Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 13
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5 - OTHER INFORMATION 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16
2
PART I - FINANCIAL INFORMATION
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars, except par values and share numbers)
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 4,124 $ 3,694
Accounts Receivables (net of allowance for doubtful accounts
of $0 as of June 30, 2003 and $255 as of December 31, 2002) 998 220
Other Current Assets 161 97
------------ ------------
Total Current Assets 5,283 4,011
Property and Equipment, net 9 284
Investment in Joint Venture 480 --
Goodwill 17 19
------------ ------------
TOTAL ASSETS $ 5,789 $ 4,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 883 $ 565
Accounts Payable 211 224
Accrued Expenses 135 141
------------ ------------
Total Current Liabilities 1,229 930
------------ ------------
Minority Interest in Consolidated Subsidiary 825 131
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $0.0001, Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common Stock, par value $0.0001, Authorized - 125,000,000 shares
Issued and outstanding:
June 30, 2003 - 5,185,572 shares
December 31, 2002 - 4,907,252 shares 1 1
Additional Paid-In Capital 31,950 31,248
Escrowed shares (800,000 of common stock pending approval of joint
venture agreement) (480) --
Unearned Compensation (83) --
Warrants 15 --
Cumulative Other Comprehensive Loss (24) (24)
Accumulated Deficit (28,124) (27,972)
------------ ------------
Total Stockholders' Equity 3,735 3,253
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,789 $ 4,314
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In thousands of United States dollars, except loss per share and share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 1,287 $ 704 $ 2,554 $ 2,089
Cost of Revenues (477) (467) (949) (1,565)
------------ ------------ ------------ ------------
Gross Margin 810 237 1,605 524
Selling, General and Administrative Expenses (331) (385) (772) (819)
Depreciation and Amortization (2) (75) (38) (134)
Provision for Written Off Fixed Assets -- -- (91) --
------------ ------------ ------------ ------------
PROFIT/(LOSS) FROM OPERATIONS 477 (223) 704 (429)
Interest Income 9 21 16 43
------------ ------------ ------------ ------------
PROFIT/(LOSS) BEFORE INCOME TAXES, MINORITY INTEREST 486 (202) 720 (386)
AND DISCONTINUED OPERATIONS
Provision for Income Taxes -- -- -- --
Provision for Impairment Loss of Affiliated Companies -- (8) -- (16)
Minority Interests (350) (49) (687) (133)
------------ ------------ ------------ ------------
PROFIT/(LOSS) BEFORE DISCONTINUED OPERATIONS 136 (259) 33 (535)
LOSS FROM DISCONTINUED OPERATIONS -- (117) (185) (206)
------------ ------------ ------------ ------------
NET PROFIT/( LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 136 (376) (152) (741)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Profit/(Loss) from Continuing Operations $ 0.03 ($ 0.06) $ 0.01 ($ 0.17)
Profit/(Loss) from Discontinued Operations -- ($ 0.03) ($ 0.04) ($ 0.06)
------------ ------------ ------------ ------------
Net Profit/(loss) $ 0.03 ($ 0.09) ($ 0.03) ($ 0.23)
============ ============ ============ ============
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 5,161,396 4,418,462 5,058,093 3,221,429
The accompanying notes are an integral part of these consolidated financial statements.
4
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited. In thousands of United States dollars, except loss per share and share amounts)
SIX MONTHS ENDED JUNE 30,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 152) ($ 741)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Expenses settled by Issuance of Warrants 15 --
Expenses settled by Issuance of Common Shares 28 103
Provision for Written Off of Fixed Assets 241 --
Provision for Impairment of Losses in Affiliated Companies -- 16
Minority Interest 694 125
Depreciation 36 70
Amortization 1 64
Changes in:
Accounts Receivable (778) (935)
Other Current Assets (64) (157)
Accounts Payable and Accrued Expenses (19) 5
-------- --------
Net cash provided by (used in) operating activities 2 (1,450)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of Affiliated Company Interests -- (20)
Acquisition of Fixed Assets (1) --
Acquisition of Company Interests -- (255)
Acquisition of Other Investments -- (32)
-------- --------
Net cash used in investing activities (1) (307)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Advances under Bank line of Credit 318 --
Proceeds from Sale of Common Stock -- 4,000
Proceeds from Exercise of Stock Options 111 --
-------- --------
Net cash provided by financing activities 429 4,000
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 430 2,243
CASH, BEGINNING OF PERIOD 3,694 1,344
-------- --------
CASH, END OF PERIOD $ 4,124 $ 3,587
-------- --------
CASH PAID FOR:
Interest 19 --
Income taxes -- --
The accompanying notes are an integral part of these consolidated financial statements.
5
PACIFICNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
all periods presented have been made. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. Examples include provisions for
returns and impairment losses, accounting for income taxes, bad debts, and
property, plant and equipment lives for depreciation purposes. Actual results
may differ from these estimates. The results of operations for the three months
and six months ended June 30, 2003 are not necessarily indicative of the
operating results that may be expected for the entire year ending December 31,
2003. These financial statements should be read in conjunction with the
Management's Discussion and Analysis and financial statements and notes thereto
included in the Company's financial statements and accompanying notes thereto as
of and for the year ended December 31, 2002, filed with the Company's Annual
Report on Form 10-KSB.
2. EARNINGS PER SHARE
Basic earnings (loss) per share are based on the weighted average number of
shares of common stock outstanding. Diluted earnings or loss per share is based
on the weighted average number of shares of common stock outstanding and
dilutive common stock equivalents. All earnings per share amounts in these
financial statements are basic earnings (loss) per share as defined by SFAS No.
128, "Earnings Per Share." Diluted weighted average shares outstanding exclude
the potential issuances of common stock upon exercise of options and warrants
because to do so would be antidilutive.
The computation of basic and diluted loss per share is as follows:
(IN THOUSANDS OF UNITED STATES Three Months Three Months Six Months Six Months
DOLLARS, EXCEPT WEIGHTED SHARES AND Ended Ended Ended Ended
PER SHARE AMOUNTS) June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Numerator-net profit/(loss) $136 $(376) $(152) $(741)
Denominator- number of shares of
common stock outstanding 5,161,396 4,418,462 5,058,093 3,221,429
Basic and diluted Income/(Loss) per
share $0.03 ($0.09) ($0.03) ($0.23)
3. BUSINESS DISPOSITIONS
In March 2003, the Company decided not to further invest in the Customer Service
Support Center in the U.S. As of June 30, 2003, all activities have
significantly slowed down due to the economic slowdown in the U.S. During the
six months ended June 30, 2003, the Company wrote off property and equipment of
$150,000. Revenues and net loss information related to Customer Service Support
Center operations is as follows (in thousands):
For the three months For the three months For the six months For the six months
ended ended ended ended
June 30,2003 June 30, 2002 June 30,2003 June 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues - $19 $4 $30
Net Loss - $(117) $(185) $(206)
Total net assets of the Customer Service Support Center were comprised primarily
of property and equipment.
4
4. JOINT VENTURE OPERATIONS
The Company entered into an Equity Joint Venture Contract dated December 20,
2002, between PacificNet Management Limited (PML), a British Virgin Islands
company and a wholly owned subsidiary of the Company, and the stockholders of
International Elite Limited (IEL), a Cayman Islands company. PML owns 50.1% of
the joint venture while International Elite Limited (IEL) shareholders own
49.9%. The formation of the joint venture is intended to expand the Company's
products and services in the Greater China Region. The terms of the equity joint
venture contract are subject to stockholder approval. The business purpose of
the joint venture will be to market the Company's existing services in the
greater China region. The functional currency of the joint venture 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).
The Company's accounting treatment for the investment in the joint venture is
full consolidation in accordance with SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries," because the voting power authorizing all major
operating and financing decisions for the joint venture rests with the board of
directors. Further, the stockholders of IEL have agreed to grant the Company a
proxy to vote its shares of the joint venture. Although formal stockholder
approval will not be completed until the 2003 annual meeting of stockholders,
the majority stockholder has preliminarily approved the transaction, therefore
the results for the three months ended and for the six months ended June 30,
2003, of the Company include the operations of the joint venture. The Company
does not have any reason to believe formal shareholder approval will not be
obtained.
Results of operations for the Company assuming stockholder approval is not
obtained are as follows (in thousands):
For the three For the six
months ended months ended
June 30, 2003 June 30, 2003
------------- -------------
Revenues $ 128 $220
Cost of Revenues 46 82
Gross Margin 82 138
Operating Loss (248) (698)
Interest Income 9 16
Minority Interest 7 21
Loss from Discontinued Operations - (185)
Net loss ($232) ($846)
Basic and diluted loss per share: ($0.04) ($0.15)
Continuing operations (0.04) (0.13)
Discontinued Operations - (0.04)
In March 2003, the Company announced that it completed the company registration
and received government approval from the Macao Special Administrative Region of
China, for the formation of the joint venture named "PacificNet Communications
Limited -- Macao Commercial Offshore. Within 30 days of the formation of the
joint venture, the Company is obligated to transfer to the joint venture 800,000
of its shares of common stock. However, the shares are to be returned to Company
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.
On April 11, 2003, PACT issued 800,000 shares with a market value of $480,000
for investing into an Equity Joint Venture, PacificNet Communications Limited -
Macao Commercial Offshore. The 800,000 shares of common stock was accounted for
as a separate reduction of stockholders' equity as the shares are escrowed
pending shareholder and regulatory approval of the joint venture.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
CONTAINED IN THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
APPEARING ELSEWHERE HEREIN AND IN CONJUNCTION WITH THE MANAGEMENT'S DISCUSSION
AND ANALYSIS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 2002.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The
forward-looking statements are based on the Company's current expectations and
are subject to certain risks, uncertainties and assumptions. The Company's
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to accounts receivable reserves, provisions for
impairment losses of affiliated companies and other intangible assets, income
taxes and contingencies. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
JOINT VENTURE OPERATIONS - The financial statements for the three months and six
months ended June 30, 2003, include the consolidated results of operations for
the joint venture company. Although formal stockholder approval will not be
obtained until the 2003 annual meeting of stockholders, the majority stockholder
has preliminarily approved the transaction, therefore the three months ended and
the six months ended results for June 30, 2003, include the operations of the
joint venture. We do not have any reason to believe formal stockholder approval
will not be obtained. If for some reason the transaction was not consummated,
our results of operations, financial condition and prospects would be materially
affected. Actual results of operations excluding the consolidation of the
transaction subject to stockholder approval would be an overstatement of
revenues of $1,160,000, understatement of net loss of $368,000, and
understatement of loss per share of $0.06 per share for the three months ended
June 30, 2003 and an overstatement of revenues of $1,708,000, understatement of
net loss of $694,000, and understatement of loss per share of $0.13 per share
for the six months ended June 30, 2003.
8
INCOME TAXES - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have considered
future market growth, forecasted earnings, future taxable income, and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. We currently have recorded a full valuation allowance against net
deferred tax assets as we currently believe it is more likely than not that the
deferred tax assets will not be realized.
CONTINGENCIES - We may be subject to certain asserted and unasserted claims
encountered in the normal course of business. It is our belief that the
resolution of these matters will not have a material adverse effect on our
financial position or results of operations.
However, we cannot provide assurance that damages that result in a material
adverse effect on our financial position or results of operations will not be
imposed in these matters. We account for contingent liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" (FIN 46). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Management does not
anticipate that FIN 46 will have any effect on the Company.
In April 2003, FASB issued SFAS No.149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives ) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
prospectively for contracts entered into or modified after June 30, 2003, and
for hedging relationships designated after June 30, 2003. The expectation to
these requirements are the provisions of SFAS No. 149 related to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7(a) and 23 (a), which
relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. Management does not
anticipate that SFAS No. 149 will have any effect on the Company.
In May 2003, the Financial Accounting Standards Board issued Interpretation No.
150, " Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity", which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope, which may have previously been
reported as equity, as a liability or an asset in some circumstances. SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We do not expect a material impact on our
results of operations or financial condition as a result of the adoption of SFAS
No. 150.
9
NATURE OF THE OPERATIONS OF THE COMPANY
NATURE OF BUSINESS.
PacificNet Inc. (referred to herein as "PacificNet" or the "Company") is a
leading technology investment and management company that invests in systems
integration, network communications, customer relationship management (CRM)
solutions, information technology solutions, and telecommunications in Asia. The
Company intends to continue to grow by acquiring and managing growing technology
and network communications businesses with established products and customers in
Asia.
The Company also engages in telecommunications, performs voice and data network
communications and value-added telecommunication products and services. The
Company's business strategy is to take a leading role into a rapidly expanding
business sector, namely the IT solution provision and network communication
businesses, in Asia and the greater PRC region. The business of PacificNet can
be classified into four main operating units:
- PacificNet Limited (referred to herein as "PacSo") is a subsidiary of
PacificNet Inc. based in Hong Kong with operations in ShenZhen, Guangzhou,
and Beijing, China. PLTD specializes in the development of internet and
mobile communications software and solutions for the Greater China market.
PLTD's internet and mobile software applications include: the eMerchant2000
software product line, e-commerce and m-commerce systems, CRM software
solutions, software applications and games based on short message service
(SMS) and multi-media message service (MMS) , outsourced software
development and localization services for the China market, business
process outsourcing (BPO), software localization and translation services,
and systems integration services. PLTD's clients includes Sony, So-net,
Swire Travel, Chinachem Ltd, Chevalier, HSBC, McDonald's, Li & Fung, CTM,
and others..
- PacificNet Solutions Ltd. (referred to herein as "PacSo") - PacSo is a
subsidiary of PacificNet that specializes in systems integration, software
application, and e-business solutions services in Hong Kong and Greater
China. The scope of products and services include smart card solutions, web
based front-end applications and web based connections to backend
enterprise planning systems.
- PacificNet Communications Ltd. (referred to herein as "PacComm") - PacComm
is a subsidiary of PacificNet Inc. PacComm is engaged in telecommunication
product distributions, which includes the resale of telecommunication,
networking, and computer equipment such as PABX telephone systems, basic
switches and router equipments and mobile phone accessories targeted for
retail customers.
- PacificNet Communications Limited - Macao Commercial Offshore (referred to
herein as "PacComm MOC"), PacComm MOC is a subsidiary of PacificNet Inc.
and a provider of value-added telecom services including call center,
customer relationship management (CRM), telemarketing, and data-mining
services, and mobile data services such as short message service (SMS),
multi-media message service (MMS), unified messaging service (UMS),
location-based service (LBS), WAP, and BREW-based CDMA applications, mobile
commerce, roaming, paging, wireless internet, virtual private network (VPN)
and voice over internet protocol (VoIP) services in the Greater China
Region.
In June 2001, the Company's management, with Board of Director approval, decided
to expand its business strategy to the Greater China Region. Subsequently, in
February 2002, the Company established a subsidiary office (registered as a
Wholly Owned Foreign Enterprise, "WOFE") in Shenzhen, the People's Republic of
China ("PRC"), to expand its research, development, marketing and distribution
in the PRC.
In March 2003, the Company announced that it completed the company registration
and received government approval from the Macao Special Administrative Region of
China, for the formation of the joint venture named "PacificNet Communications
Limited -- Macao Commercial Offshore." The Company's wholly owned subsidiary PML
owns 50.1% of the joint venture while International Elite Limited (IEL)
shareholders own 49.9%. The formation of the joint venture is intended to expand
the Company's products and services in the Greater China Region. The terms of
the equity joint venture contract are subject to stockholder approval. Although
formal stockholder approval will not be completed until the 2003 annual meeting
of stockholders, the majority stockholder has preliminary approved the
transaction.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUES. Revenues for the three months ended June 30, 2003 were $1,287,000, an
increase of $583,000 from $704,000 for the three months ended June 30, 2002. For
the three months ended June 30, 2003, revenues mainly consisted of $1,160,000
and $113,000 derived from services rendered through its PacComm MOC subsidiary
and PacSo subsidiary, respectively. The increase in revenues is due to the
revenues associated with the operations of PacComm MOC, which generated revenue
of $1,160,000 for the three months ended June 30,2003. The significant decrease
in revenues from PacSo is due to consistent economic slowdown in Hong Kong.
During the three months ended June 30, 2003, PacificNet's services revenue was
generated from customers in Greater China and Hong Kong. One of the customers
has accounted for 85.4% of total revenue generated during this quarter and,
consequently, the Company has become dependent on this customer. The above
mentioned customer is an independent third party of the Company and is under
contract until late 2004.
COST OF REVENUES. Cost of revenues for the three months ended June 30, 2003 was
$477,000, an increase of $10,000 from $467,000 for the three months ended June
30, 2002. This increase was due to providing higher margin value-added telecom
services from PacComm MOC. Cost of revenues, as a percentage of revenues,
represented 40% of the services rendered through value-added telecom services in
the PacComm MOC joint venture for the three months ended June 30, 2003.
GROSS MARGIN. Gross margin for the three months ended June 30, 2003 was
$810,000, an increase of $573,000 from $237,000 for the three months ended June
30, 2002 due to an increase in revenues and profit margins associated with
value-added telecom services rendered.
OPERATING EXPENSES. Operating expenses totaled $333,000 for the three months
ended June 30, 2003, a decrease of $127,000, from $460,000 for the three months
ended June 30, 2002, primarily representing decrease in depreciation and
amortization of approximately $72,000 a decrease in staff costs of approximately
$20,000 and a decrease in premises costs of approximately $50,000.
INTEREST INCOME. Interest income was $9,000 for the three months ended June 30,
2003, as compared to $21,000 for the three months ended June 30, 2002. The
significant decrease is due to lower interest rates in 2003 than 2002.
INCOME TAXES. No tax provision has been recorded for the three months ended June
30, 2003, as the result of the cumulative operating loss generated by the
Company. Interim income tax provisions are based upon management's estimate of
taxable income and the resulting consolidated effective income tax rate for the
full year. As a result, such interim estimates are subject to change as the year
progresses and more information becomes available.
MINORITY INTERESTS. Minority interests for the three months ended June 30, 2003
totaled $350,000, compared with $49,000 for the same period in the prior year,
and consisted of minority interests in the earnings of PacComm MOC and PacSo
consolidated subsidiaries that commenced operations in January 2003 and December
2001, respectively.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUES. Revenues for the six months ended June 30, 2003 were $2,554,000, an
increase of $465,000 from $2,089,000 for the six months ended June 30, 2002. For
the six months ended June 30, 2003, revenues mainly consisted of $2,334,000 and
$132,000 derived from services rendered through its PacComm MOC subsidiary and
PacSo subsidiary, respectively. The increase in revenues is due to the revenues
associated with the operations of PacComm MOC, which generated revenue of
$2,334,000 for the six months ended June 30,2003. The significant decrease in
revenues from PacSo is due to consistent economic slowdown in Hong Kong. During
the six months ended June 30, 2003, PacificNet's services revenue was generated
from customers in Greater China and Hong Kong. One of the customers has
accounted for 85.6% of total revenue generated during these six months and
consequently, the Company has become economic dependent on this customer. The
above mentioned customer is an independent third party of PacificNet and is
under contract until late 2004.
11
COST OF REVENUES. Cost of revenues for the six months ended June 30, 2003 was
$949,000, a decrease of $616,000 from $1,565,000 for the six months ended June
30, 2002. This decrease was due to providing higher margin value-added telecom
services from PacComm MOC. Cost of revenues, as a percentage of revenues,
represented 37% of the services rendered through value-added telecom services in
the PacComm MOC joint venture for the six months ended June 30, 2003.
GROSS MARGIN. Gross margin for the six months ended June 30, 2003 was
$1,605,000, an increase of $1,081,000 from $524,000 for the six months ended
June 30, 2002 due to an increase in revenues and profit margins associated with
vaue-added telecom services rendered.
OPERATING EXPENSES. Operating expenses totaled $901,000 for the six months ended
June 30, 2003, a decrease of $52,000, from $953,000 for the six months ended
June 30, 2002, primarily representing a decrease in staffing costs of
approximately $100,000, a decrease in amortization of development costs of
approximately $64,000, a decrease in premises costs of approximately $106,000
offset by an increase in provision for fixed assets written off of $91,000 and
professional fees of $127,000.
INTEREST INCOME. Interest income was $16,000 for the six months ended June 30,
2003, as compared to $43,000 for the six months ended June 30, 2002. The
significant decrease is due to lower interest rates in 2003 than 2002.
INCOME TAXES. No tax provision has been recorded for the three months ended June
30, 2003, as the result of the cumulative operating loss generated by the
Company. Interim income tax provisions are based upon management's estimate of
taxable income and the resulting consolidated effective income tax rate for the
full year. As a result, such interim estimates are subject to change as the year
progresses and more information becomes available.
MINORITY INTERESTS. Minority interests for the six months ended June 30, 2003
totaled $687,000, compared with $133,000 for the same period in the prior year,
and consisted of minority interests in the earnings of PacComm MOC and PacSo
consolidated subsidiaries that commenced operations in January 2003 and December
2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Company had cash, cash equivalents and investments of
$4,124,000 and working capital of $4,054,000 as compared to $3,694,000 and
$3,081,000, respectively, at December 31, 2002.
Net cash provided by operating activities was $2,000 for the six months ended
June 30, 2003 as compared to net cash used in operating activities of $1,450,000
for the six months ended June 30, 2002. Net cash provided by operating
activities in the six months ended June 30, 2003 was primarily due to a net loss
of $152,000 increased by non-cash expenses such as stock based compensation in
lieu of cash payment of $28,000, provision for write off of fixed assets of
$241,000, depreciation and amortization of $37,000, minority interest of
$694,000, and offset by an increase in accounts receivable of $778,000, an
increase in other current assets of $64,000, a decrease in accounts payable and
accrued expenses of $19,000. Net cash used in operating activities for the same
period in 2002 was primarily due to a net loss of $741,000 increased by non-cash
expenses such as depreciation and amortization of $134,000 and minority interest
of $125,000, and offset by an increase in accounts receivable of $935,000 and
other assets of $157,000 and an increase in accounts payable and accrued
expenses of $5,000.
Net cash flows used in investing activities was $1,000 for the six months ended
June 30, 2003 versus $307,000 for the same period in 2002 primarily representing
cash paid for the acquisition of investments in other company's interests.
Net cash provided by financing activities for the six months ended June 30, 2003
was $318,000 representing advances under the company's bank line of credit and
proceeds from the exercise of stock options of $111,000. Net cash provided by
financing activities for the six months ended June 30, 2002 was $4,000,000
received in connection with the completion of two private placements of
2,725,000 shares of the Company's common stock.
12
CASH. The Company's cash balance increased by $430,000 to $4,124,000 at June 30,
2003, as compared to $3,694,000 at December 31, 2002. The Company believes it
has sufficient cash, cash equivalents and investments for the next twelve months
of operations.
WORKING CAPITAL. The Company's working capital increased to $4,054,000 at June
30, 2003, as compared to $3,081,000 at December 31, 2002. When compared to
balances at December 31, 2002, the increase in working capital at March 31, 2003
reflects mainly on higher levels of net accounts receivable $778,000 and higher
levels of other assets of $64,000 offset by higher levels of Bank Line of Credit
of $318,000 and lower levels of accounts payable and accrued expenses of
$19,000. The Company anticipates that as revenue and operating activity levels
increase, working capital financing requirements will also increase.
PROPERTY AND EQUIPMENT ADDITIONS. The Company does not anticipate material
expenditures for additions to property and equipment during fiscal year 2003.
CURRENCY EXCHANGE FLUCTUATIONS. All of the Company's revenues are denominated
either in United States dollars or Hong Kong dollars, while its expenses are
denominated primarily in Hong Kong dollars and Renminbi ("RMB"), the currency of
the People's Republic of China. There can be no assurance that RMB-to-United
States dollar or Hong Kong dollar-to-United States dollar exchange rates will
remain stable. Although a devaluation of the Hong Kong dollar or RMB relative to
the United States dollar would likely reduce the Company's expenses (as
expressed in United States dollars), any material increase in the value of the
Hong Kong dollar or RMB relative to the United States dollar would increase the
Company's expenses, and could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has never
engaged in currency hedging operations and has no present intention to do so.
ITEM 3. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported, within the time period
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in the reports filed under the Exchange Act
is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Within the 90 days prior to the filing of this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
b. Changes in Internal Controls:
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the evaluation referred to in the previous paragraph, including any correction
action with regard to significant deficiencies and material weakness.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a. RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal quarter ended June 30, 2003, the Company issued unregistered
shares of its common stock in the following transactions:
On April 11, 2003, the Company issued 800,000 shares of common stock to
PacificNet Communications Limited- Macao Commercial Offshore due to the
completion of the registration of the Joint Venture in the Macao Special
Administrative Region, valued at $480,000, or $0.60 per share (split-adjusted)
representing the fair market value of the common stock on the date the terms of
the joint venture agreement were agreed to and announced. These shares are being
held in escrow pending shareholder and regulatory approval of the joint venture
agreement. This issuance was made in reliance upon the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act").
On April 11, 2003, the Company issued 200,000 shares of common stock to Tony
Tong, Chief Executive Officer of the Company upon exercise of stock options as
compensation for services rendered between May 1, 2003 to May 31, 2004,
exercised at the price of $0.50 per share representing to the fair market value
of the common stock on grant date (measurement date) of the stock option. The
shares are presented as a separate reduction of stockholders' equity as the
shares have been issued, but the services have not been fully rendered.
The Company did not use underwriters in any of the foregoing issuances.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
a. SUBSEQUENT CHANGES IN SECURITIES
(1) On July 10, 2003, the Company issued 28,000 shares of common stock to
certain employees of the Company upon the exercise of a stock option,
exercised at the price of $1.75 per share resulting in net proceeds of
approximately $49,000.
(2) On July 16, 2003, the Company issued 300,000 shares of common stock to
Excel Harbour Limited upon the exercise of warrants, exercised at the price
of $1.75 per share resulting in net proceeds of approximately $525,000.
b. CHANGE OF TERMS OF EMPLOYMENT AGREEMENT
(1) The Company has an employment agreement with its President and Chief
Executive Officer(CEO). The employment agreement provides fan annual salary
in the amount of $100,000 until April 1, 2005. Mr. Tong was granted an
option to acquire 200,000 shares at an exercise price per share of $0.50
per share, expiring in October 2005. The option of 200,000 shares was
exercised on April 11, 2003, for the compensation from May 1, 2003 to May
31, 2004 which have been presented as a separate reduction of stockholders'
equity as not all of the services have been fully rendered.
(2) The Company has an employment agreement with its Vice President and Company
Secretary. The employment agreement provides an annual salary in the amount
of $48,000. Other benefits include monthly housing allowance of $2,000 and
monthly automobile allowance of $500.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT DESCRIPTION
NUMBER
------ --------------------------------------------------------------------
2.1 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December
15, 1997. (1)
2.2 Share Exchange Agreement dated February 17, 2000, between Registrant
and holders of membership interests in PacificNet.com LLC. (3)
2.3 Supplement to Share Exchange Agreement dated April 29, 2000, between
Registrant and holders of membership interests in PacificNet.com
LLC. (3)
2.4 Agreement dated September 30, 2000, among the Company and the
"Purchasers" named therein. (4)
2.5 Supplemental Agreement dated October 3, 2000, among the Company and
the "Purchasers" named therein. (4)
2.6 Deed of Waiver, dated October 3, 2000, by Creative Master Limited in
favor of the Company. (4)
3.1 Certificate of Incorporation, as amended. (7) Certificate of
amendment of Certificate of Incorporation.(7)
3.2 By Laws of the Company. (5)
3.3 Amendment to By Laws of the Company. (2)
4 Specimen Stock Certificate of the Company.
10.1 Form of Indemnification Agreement with officers and directors. (1)
10.2 Amendment to 1998 Stock Option Plan.
10.3 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan. (3)
10.4 Amendment dated January 31, 2002 to the Subscription Agreement by
and between the Company and Sino Mart Management Ltd., dated as of
December 9, 2001 (6)
10.5 19.9% Private Placement Agreement and Amendments between Ho Shu-Jen
and PacificNet.com, Inc.
10.6 Sub-Lease Agreement dated August 30, 2002.(8)
31.1/31.2 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 302 of the Sarbanes-Oxley Act of 2002.
32.1/32.2 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
---------------------------
(1) Incorporated by reference to the Company's Form SB-2 filed on October 21,
1998.
(2) Incorporated by reference to the Company's Form 10-KSB filed on March 30,
1999.
(3) Incorporated by reference to the Company's Form 8-K filed on August 11,
2000.
(4) Incorporated by reference to the Company's Form 8-K filed on October 17,
2000.
(5) Incorporated by reference to the exhibits of the Company's registration
statement (file no. 33-14521-NY)
(6) Incorporated by reference to the Company's Form 8-K filed on March 20, 2002.
(7) Incorporated by reference to the Company's Form 10-KSB filed on April 16,
2002.
(8) Incorporated by reference to the Company's Form 10-KSB filed on March
31,2003.
(9) Incorporated by reference to the Company's Form 10-QSB filed on November
14,2002.
(b) Reports on Form 8-K:
There was no report on Form 8-K during the quarter ended March 31,2003.
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PACIFICNET
INC.
Date: August 1, 2003 By: /s/ TONY TONG
---------------------------------
Tony Tong
Chief Executive Officer
(Principal Executive Officer)
Date: August 1, 2003 By: /s/ WANG SHAO JIAN
---------------------------------
Wang Shao Jian
Chief Financial Officer
(Principal Financial Officer)
16