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 SEPTEMBER 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 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 3813, 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 6,162,977 shares of the Company's common stock outstanding on October
23, 2003.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
1. Condensed Consolidated Balance Sheets - as of September 30, 2003
(unaudited) and December 31, 2002 (audited) 3
2. Unaudited Condensed Consolidated Statements of Operations - for each
of the three and nine months ended September 30, 2003 and 2002 4
3. Unaudited Condensed Consolidated Statements of Cash Flows - for each
of the three and nine months ended September 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)
SEPTEMBER 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 4,791 $ 3,694
Accounts Receivables (net of allowance for doubtful accounts of $Nil as of 843 220
September 30, 2003 and $255 as of December 31, 2002)
Other Current Assets 213 97
------------ ------------
Total Current Assets 5,847 4,011
Property and Equipment, net 8 284
Goodwill 17 19
------------ ------------
TOTAL ASSETS $ 5,872 $ 4,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 932 $ 565
Accounts Payable 102 224
Accrued Expenses 132 141
------------ ------------
Total Current Liabilities 1,166 930
------------ ------------
Minority Interest in Consolidated Subsidiary 977 131
------------ ------------
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:
September 30, 2003 - 6,162,977 shares
December 31, 2002 - 4,907,252 shares 1 1
Additional Paid-In Capital 32,246 31,248
Escrowed shares (800,000 shares of common stock pending approval
of joint venture agreement) (480) --
Unearned Compensation (58) --
Warrants 15 --
Cumulative Other Comprehensive Loss (24) (24)
Accumulated Deficit (27,971) (27,972)
------------ ------------
Total Stockholders' Equity 3,729 3,253
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,872 $ 4,314
============ ============
See condensed notes to 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 1,300 $ 79 $ 3,854 $ 2,168
Cost of Revenues (542) (86) (1,491) (1,651)
------------ ------------ ------------ ------------
Gross Margin/ (Loss) 758 (7) 2,363 517
------------ ------------ ------------ ------------
Selling, General and Administrative Expenses (342) (293) (1,149) (1,112)
Depreciation and Amortization (1) (69) (4) (203)
Provision for Written Off Fixed Assets -- -- (91) --
------------ ------------ ------------ ------------
PROFIT/(LOSS) FROM OPERATIONS 415 (369) 1,119 (798)
Other Income 53 5 69 48
------------ ------------ ------------ ------------
PROFIT/(LOSS) BEFORE INCOME TAXES, MINORITY INTEREST 468 (364) 1,188 (750)
AND DISCONTINUED OPERATIONS
Provision for Income Taxes -- -- -- --
Provision for Impairment Loss of Affiliated Companies -- (8) -- (24)
Minority Interests (315) 49 (1,002) (84)
------------ ------------ ------------ ------------
PROFIT/(LOSS) BEFORE DISCONTINUED OPERATIONS 153 (323) 186 (858)
LOSS FROM DISCONTINUED OPERATIONS -- (15) (185) (221)
------------ ------------ ------------ ------------
NET PROFIT/(LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 153 $ (338) $ 1 $ (1,079)
============ ============ ============ ============
BASIC AND DILUTED INCOME/ (LOSS) PER COMMON SHARE:
Profit/(Loss) from Continuing Operations $ 0.03 ($ 0.07) $ 0.04 ($ 0.21)
Profit/(Loss) from Discontinued Operations -- -- ($ 0.04) ($ 0.06)
------------ ------------ ------------ ------------
Net Profit/(loss) $ 0.03 ($ 0.07) -- ($ 0.27)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 5,348,572 4,660,965 5,170,079 3,971,361
See condensed notes to 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)
NINE MONTHS ENDED SEPTEMBER 30
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit/ (loss) $ 1 $ (1,079)
Adjustments:
Expenses settled by Issuance of Common Stock 42 136
Expenses settled by Issuance of Warrants 15 --
Provision for Impairment of Losses in Affiliated Companies -- 24
Loss from discontinued operations 185 --
Loss on disposal of fixed assets 91 --
Minority Interests 846 76
Depreciation 2 106
Amortization 2 96
Changes in:
Receivables and Other Current Assets (739) (853)
Accounts Payable and Accrued Expenses (131) (176)
------------ ------------
Net cash provided by (used in) operating activities 314 (1,670)
------------ ------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of Property and Equipment (2) (34)
Acquisition of Affiliated Company Interests -- (20)
Acquisition of Joint Venture -- (255)
Acquisition of Other Investments -- (32)
------------ ------------
Net cash used in investing activities (2) (341)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Advances under Bank Line of Credit 367 --
Proceeds from Exercise of Stock Options 418 --
Proceeds from Issuance of Common Stock -- 4,133
------------ ------------
Net cash provided by financing activities 785 4,133
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,097 2,122
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,694 1,344
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,791 $ 3,466
============ ============
See condensed notes to 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 nine months ended September 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 for the periods presented. Diluted earnings
or loss per share is based on the weighted average number of shares of common
stock outstanding and dilutive common stock equivalents for the periods
presented. All earnings per share amounts in these financial statements are
basic earnings (loss) per share as defined by FASB 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 Nine Months Nine Months
DOLLARS, EXCEPT WEIGHTED SHARES AND Ended Ended Ended Ended
PER SHARE AMOUNTS) September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator-net profit/(loss) $ 153 $ (338) $ 1 $ (1,079)
Denominator- number of shares of
common stock outstanding 5,348,572 4,660,965 5,170,079 3,971,361
Basic and diluted profit/(loss) per share $ 0.03 ($ 0.07) $ -- ($ 0.27)
------------ ------------ ------------ ------------
6
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 September 30, 2003, all activities have
significantly reduced due to the economic slowdown in the U.S. During the nine
months ended September 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 nine months For the nine months
ended ended ended ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenues -- $108 $4 $138
Net Loss -- $(15) $(185) $(221)
Total net assets of the Customer Service Support Center were comprised primarily
of property equipment.
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 next special meeting of stockholders in
2004, the majority stockholders have preliminarily approved the transaction.
Therefore the results for the three months ended and for the nine months ended
September 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 nine
months ended months ended
September 30, September 30,
2003 2003
------------- --------------
Revenues $124 $344
Cost of Revenues 96 178
Gross Margin 28 166
Operating Loss (243) (941)
Other income 53 69
Minority Interests 4 25
Loss from Discontinued Operations - (185)
Net loss ($186) ($1,032)
Basic and diluted loss per share: ($0.04) ($0.20)
======= =======
Continuing operations ($0.04) ($0.16)
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
shares of its 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 of common stock to the equity
joint venture, PacificNet Communications Limited - Macao Commercial Offshore,
which are being held in escrow. 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
5. PRIVATE PLACEMENT IN SINO MART MANAGEMENT LIMITED
On July 29, 2003, the Company's largest shareholder, Sino Mart Management
Limited completed a $4,600,000 private placement by transferring common shares
of 1,150,000 at a price of $4.00 per share to Mr. Kin-Shing Li. The shares
transferred represent approximately 19% of the number of shares of the Company's
common stock outstanding after the private placement, making Mr. Kin-Shing Li
the second largest shareholder of the Company.
Mr. Kin-Shing Li is also a shareholder of International Elite Limited ("IEL")
and a party to an Equity Joint Venture Contract dated December 20, 2002 with
PacificNet Management Limited, a wholly-owned subsidiary of the Company ("PML"),
to which agreement certain other shareholders of IEL are also parties. Under the
provisions of that agreement, which by its terms is subject to and conditioned
upon the approval of the Company's shareholders, the Company would issue
34,000,000 shares of its common stock to a joint venture entity, 50.1% of the
equity in which would be owned by PML.
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:
8
JOINT VENTURE OPERATIONS - The financial statements for the three months and
nine months ended September 30, 2003, include the consolidated results of
operations for the joint venture company. Although it is not anticipated that
formal stockholder approval will not be obtained until an upcoming special
meeting of stockholders, the majority stockholders have preliminarily approved
the transaction. Therefore the three months ended and the nine months ended
results for September 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
$1,176,000, understatement of net loss of $339,000, and understatement of loss
per share of $0.07 per share for the three months ended September 30, 2003 and
an overstatement of revenues of $3,510,000, understatement of net loss of
$1,033,000, and understatement of loss per share of $0.20 per share for the nine
months ended September 30, 2003.
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 September 30, 2003,
and for hedging relationships designated after September 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. (www.PacificNet.com) (referred to herein as "PacificNet" or the
"Company") is a leading technology investment and management company that
invests in customer relationship management (CRM) solutions, mobile
applications, value added services (VAS), and telecommunications in Asia. The
company grows by acquiring and managing growing businesses with established
products and customers in Asia. PacificNet, through its subsidiaries in Asia,
provides value-added telecom, SMS and outsourced CRM, data-mining, and
telemarketing services to some of the leading telecom, travel, insurance and
marketing companies in Hong Kong, Macao, Taiwan, and China. PacificNet is
headquartered in Minneapolis USA, with offices in Hong Kong, Shenzhen,
Guangzhou, Beijing, Macao.
The Company also engages in telecommunications, performs voice and data network
communications and value-added telecommunication products and services,
provision of customer relationship management (CRM) and value-added telecom
services (VAS) including call center, telemarketing, database management and
data-mining services, e-commerce, mobile applications, short messaging services
(SMS), multimedia messaging services (MMS), mobile commerce, VoIP, etc.
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 "PLTD") 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 product and services include smart card solutions, web
based front-end applications and web based connections to backend
enterprise planning systems.
- PacificNet Communications Ltd. (referred to herein as "PacComm") - PacComm
is a subsidiary of PacificNet Inc. 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 messaging 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 September 2001, the Company's management, with the Board of Director's
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
it is anticipated that formal stockholder approval will not be completed until
the Company's next special meeting of stockholders in 2004, the majority
stockholders have preliminarily approved the transaction.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES. Revenues for the three months ended September 30, 2003 were
$1,300,000, an increase of $1,221,000 from $79,000 for the three months ended
September 30, 2002. For the three months ended September 30, 2003, revenues
mainly consisted of $1,176,000 and $46,000 derived from services rendered
through its PacComm MOC subsidiary and PacSo subsidiary, respectively. During
the three months ended September 30, 2003, PacificNet's services revenue was
generated from customers in Greater China and Hong Kong. One of the customers
accounted for 80% 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 September 30, 2003
was $542,000, an increase of $456,000 from $86,000 for the three months ended
September 30, 2002. This increase was due to providing lower 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 three months ended September
30, 2003.
GROSS MARGIN. Gross margin for the three months ended September 30, 2003 was
$758,000, an increase of $765,000 from ($7,000) for the three months ended
September 30, 2002. This increase is due to an increase in revenues associated
with value-added telecom services rendered.
OPERATING EXPENSES. Operating expenses totaled $343,000 for the three months
ended September 30, 2003, a decrease of $19,000, from $362,000 for the three
months ended September 30, 2002. The decrease was primarily due to reductions in
the following: wage-related staff costs of $97,000 and non-cash expenses such as
depreciation and amortization of $68,000. These reductions were offset by
other operating expenses of $146,000.
OTHER INCOME. Other income was $53,000 for the three months ended September 30,
2003, as compared to $5,000 for the three months ended September 30, 2002.
INCOME TAXES. No tax provision has been recorded for the three months ended
September 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 estimates are subject to change as the year
progresses and more information becomes available.
MINORITY INTERESTS. The profit available to minority interests for the three
months ended September 30, 2003 totaled $315,000 compared with the loss of
$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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
REVENUES. Revenues for the nine months ended September 30, 2003 were $3,854,000,
an increase of $1,686,000 from $2,168,000 for the nine months ended September
30, 2002. For the nine months ended September 30, 2003, revenues mainly
consisted of $3,510,000 and $251,000 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 $3,510,000 for the nine months ended September 30,
2003. During the nine months ended September 30, 2003, PacificNet's services
revenue was generated from customers in Greater China and Hong Kong. One of the
customers has accounted for 80% of total revenue generated during these nine
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 nine months ended September 30, 2003
was $1,491,000, a decrease of $160,000 from $1,651,000 for the nine months ended
September 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 nine months ended September
30, 2003.
GROSS MARGIN. Gross margin for the nine months ended September 30, 2003 was
$2,363,000, an increase of $1,846,000 from $517,000 for the nine months ended
September 30, 2002 due to an increase in revenues and profit margins associated
with value-added telecom services rendered.
OPERATING EXPENSES. Operating expenses totaled $1,244,000 for the nine months
ended September 30, 2003, a decrease of $71,000, from $1,315,000 for the nine
months ended September 30, 2002, The decrease was primarily due to reductions in
the following: wage-related staff costs of $64,000, premises (rental) expense of
$53,000, insurance of $95,000, and non-cash expenses such as depreciation and
amortization of $199,000. The reductions were offset by fixed assets written off
of $91,000, an increase in professional fees of $102,000, and other operating
expenses of $147,000.
OTHER INCOME. Other income was $69,000 for the nine months ended September 30,
2003, as compared to $48,000 for the nine months ended September 30, 2002.
INCOME TAXES. No tax provision has been recorded for the nine months ended
September 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 estimates are subject to change as the year
progresses and more information becomes available.
MINORITY INTERESTS. Minority interests for the nine months ended September 30,
2003 totaled $1,002,000, compared with $84,000 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 September 30, 2003, the Company had cash and cash equivalents of
$4,791,000 and working capital of $4,681,000 as compared to $3,694,000 and
$3,081,000, respectively, at December 31, 2002.
Net cash provided by operating activities was $314,000 for the nine months ended
September 30, 2003 as compared to net cash used in operating activities of
$1,670,000 for the nine months ended September 30, 2002. Net cash provided by
operating activities in the nine months ended September 30, 2003 was primarily
due to a net profit of $1,000 increased by non-cash items such as expenses
settled by issuance of common stock of $42,000, loss on disposal of fixed assets
of $91,000, depreciation and amortization of $4,000, minority interests of
$846,000, loss from discontinued operations of $185,000, offset by an increase
in accounts receivable and other current assets of $739,000 and a decrease in
accounts payable and accrued expenses of $131,000. Net cash used in operating
activities for the same period in 2002 was primarily due to a net loss of
$1,079,000 increased by non-cash expenses such as expenses settled by issuance
of common stock of $136,000, minority interests of $76,000, depreciation and
amortization of $202,000, provision for impairment losses of affiliated
companies of $24,000, and offset by an increase in accounts receivable and other
assets of $853,000 and a decrease in accounts payable and accrued expenses of
$176,000.
Net cash used in investing activities for the nine months ended September 30,
2003 was $2,000 representing acquisition of fixed assets versus $341,000 for the
same period in 2002 primarily representing costs associated with the joint
venture in 2001.
Net cash provided by financing activities for the nine months ended September
30, 2003 was $785,000 representing advances under bank line of credit of
$367,000 and proceeds from exercise of stock options of $418,000. Net cash
provided by financing activities for the nine months ended September 30, 2002
was $4,133,000 representing proceeds from issuance of common stock.
12
CASH AND CASH EQUIVALENTS. The Company's cash balance increased by $1,097,000 to
$4,791,000 at September 30, 2003, as compared to $3,694,000 at December 31,
2002. The Company believes it has sufficient cash and cash equivalents for the
next twelve months of operations.
WORKING CAPITAL. The Company's working capital increased to $4,681,000 at
September 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
September 30, 2003 reflects mainly on higher levels of net accounts receivable
$623,000 and higher levels of other assets of $116,000 offset by higher levels
of bank line of credit of $367,000 and lower levels of accounts payable and
accrued expenses of $131,000. 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. As of the end of the period covered by 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 Control over Financial Reporting:
There were no changes in the Company's internal control over financial reporting
identified in connection with the Company evaluation of these controls as of the
end of the period covered by this report 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT DESCRIPTION
NUMBER
--------- --------------------------------------------------------------------
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.
------------------
(b) Reports on Form 8-K:
On August 8, 2003, the Company filed a Current Report on Form 8-K under Item 12.
14
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: November 10, 2003 By: /s/ TONY TONG
-----------------------------------
Tony Tong
Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2003 By: /s/ WANG SHAO JIAN
-----------------------------------
Wang Shao Jian
Chief Financial Officer
(Principal Financial Officer)
15