Amendment No. 1
As
filed with the Securities and Exchange Commission on November 13,
2006
Registration
No. 333-134127
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 1 to
Form
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
PacificNet
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
3669
|
|
91-2118007
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
23/F,
Tower A, Timecourt, No.6 Shugang Xili
Chaoyang
District, Beijing, China 100028
(Address,
including zip code, and telephone number,
including
area code, of Registrant’s principal executive offices)
Tony
Tong
Chief
Executive Officer
PacificNet
Inc.
23/F,
Tower A, Timecourt, No.6 Shugang Xili
Chaoyang
District, Beijing, China 100028
0086-10-59225000
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
Approximate
date of commencement of proposed sale to the public:
From
time to time after this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. o
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to be registered
|
|
Amount
to be registered
|
|
Proposed
maximum offering price per share
|
|
Proposed
maximum aggregate offering price
|
|
Amount
of registration fee
|
|
Common
Stock, $.0001 par value per share
|
|
|
800,000
|
(1)(2)
|
$
|
10.00
(3
|
)
|
$
|
8,000,000
|
|
$
|
856.00
|
|
Common
Stock, $.0001 par value per share
|
|
|
416,000
|
(2)(4)
|
$
|
12.20
(5
|
)
|
$
|
5,075,200
|
|
$
|
543.05
|
|
Common
Stock, $.0001 par value per share
|
|
|
104,000
|
(6)
|
$
|
10.00
(7
|
)
|
$
|
1,040,000
|
|
$
|
111.28
|
|
Common
Stock, $.0001 par value per share
|
|
|
26,000
|
|
$
|
7.49
(8
|
)
|
$
|
194,740
|
|
$
|
20.84
|
|
Common
Stock, $.0001 par value per share
|
|
|
400,000
|
(9)
|
$
|
10.00
(3
|
)
|
$
|
4,000,000
|
|
$
|
428.00
|
|
Common
Stock, $.0001 par value per share
|
|
|
208,000
|
(9)
|
$
|
12.20
(5
|
)
|
$
|
2,537,600
|
|
$
|
271.52
|
|
Common
Stock, $.0001 par value per share
|
|
|
52,000
|
(9)
|
$
|
10.00
(3
|
)
|
$
|
520,000
|
|
$
|
55.64
|
|
TOTALS
|
|
|
2,006,000
|
|
|
|
|
$
|
21,367,540
|
|
$
|
2,286.33
|
(10) |
(1) Represents
the shares of our common stock issuable upon conversion of convertible
debentures due March 13, 2009.
(2) Pursuant
to Rule 416 of the Securities Act of 1933, as amended, the shares of common
stock offered hereby also include such presently indeterminate number of shares
of our common stock as shall be issued by us to the selling shareholders as
a
result of stock splits, stock dividends or similar transactions.
(3)
Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933, as amended, based
on the higher of (a) the conversion price of the convertible debentures, (b)
the
offering price of securities of the same class included in this Registration
Statement, or (c) the price of securities of the same class as determined using
the average of the high and low prices, as reported on The Nasdaq National
Market, within five business days of the filing of this Registration
Statement.
(4) Represents
shares of our common stock issuable upon the exercise of outstanding
warrants.
(5) Estimated
solely for purposes of calculating the registration fee in accordance with
Rule
457(g) under the Securities Act of 1933, as amended, based on the higher of
(a)
the exercise price of the warrants, (b) the offering price of securities of
the
same class included in this Registration Statement, or (c) the price of
securities of the same class as determined using the average of the high and
low
prices, as reported on The Nasdaq National Market, within five business days
of
the filing of this Registration Statement.
(6) Represents
shares of our common stock that may be issued in the form of the payment of
interest on the convertible debentures due March 13, 2009.
(7)
Assuming the debentures remain outstanding for three years and based upon the
higher of (a) the highest conversion price at which shares issuable as interest
on the convertible debentures will be issued, (b) the offering price of
securities of the same class included in this Registration Statement, or (c)
the
price of securities of the same class as determined using the average of the
high and low prices, as reported on The Nasdaq National Market, within five
business days of the filing of this Registration Statement.
(8)
Estimated solely for purposes of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended based on the
average of the high and low prices, as reported on The Nasdaq National Market,
within five business days of the filing of this Registration
Statement.
(9)
Under
the terms of the registration rights agreement, we are required to register
150%
of the shares of common stock issuable upon conversion of the debentures, the
warrants, and interest on the convertible debentures.
Pursuant
to Rule 429 under the Securities Act of 1933, the prospectus included in this
registration statement is a combined prospectus relating also to Registration
Statement No. 333-121792 previously filed by the registrant on Form SB-2 and
declared effective on February 4, 2005. This Registration Statement, upon
effectiveness, also constitutes Post-Effective Amendment No. 1 to Registration
Statement No. 333-121792, and such post-effective amendment shall hereafter
become effective concurrently with the effectiveness of this Registration
Statement and in accordance with Section 8(c) of the Securities Act of 1933.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING
AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED November __, 2006
PROSPECTUS
PACIFICNET
INC.
3,152,228
Shares of Common Stock
This
prospectus relates to the resale of up to 3,152,228 shares of our common stock
being offered by the selling stockholders. Of the shares covered by this
prospectus, 602,310 shares have been issued, 800,000 shares are issuable
upon the conversion of convertible debentures, 985,918 shares are issuable
upon the exercise of warrants, 104,000 shares may be issued for the payment
of
interest on the convertible debentures and 660,000 shares have been registered
pursuant to our obligation in our registration rights agreement to register
150%
of the shares of common stock issuable upon conversion of the debentures,
warrants and interest on the debentures. Of the shares of common stock
included in this prospectus, 1,152,228 of the shares were previously registered.
We will not receive any proceeds from the sale of the shares of common stock
by
the selling stockholders. Assuming that all of the warrants held by the selling
stockholders are exercised for cash, we will realize proceeds of approximately
$10,606,647.
Our
shares of common stock are traded on The Nasdaq Global Market under the symbol
“PACT.” The last reported sale price of our common stock on
November 7, 2006, was $5.76.
THIS
INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF
YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING
ON PAGE 5 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR
COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The
date
of this prospectus is November __, 2006.
TABLE
OF CONTENTS
Page
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1
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5
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13
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13
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16
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18
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19
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20
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35
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58
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60
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60
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60
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61
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62
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62
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62
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62
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F-1
|
This
summary highlights selected information appearing elsewhere in this prospectus.
While this summary highlights what we consider to be the most important
information about us, you should carefully read this prospectus and the
registration statement of which this prospectus is a part in their entirety
before investing in our common stock, especially the risks of investing in
our
common stock, which we discuss later in “Risk Factors,” and our financial
statements and related notes beginning on page F-1. Unless the context requires
otherwise, the words “we,” “us” and “our” refer to PacificNet Inc.
About
PacificNet Inc.
We
were
incorporated in the state of Delaware in 1987. Our business consists of four
groups, all of which operate within the outsourcing and telecommunications
industries in Asia, primarily Greater China, which includes the People’s
Republic of China (PRC), or mainland China, Hong Kong Special Administrative
Region (HKSAR), Macau Special Administrative Region, and Taiwan. Through our
subsidiaries we invest in and operate companies that provide outsourcing
services, value-added telecom services (VAS) and communication products
distribution services. Our business process outsourcing (BPO) services include
call centers, providing customer relationship management (CRM), and
telemarketing services, and our information technology outsourcing (ITO)
includes software programming and development. We are value-added resellers
and
providers of telecom VAS, which comprises interactive voice response (IVR)
systems, call center management systems and voice over internet protocol (VOIP),
as well as mobile phone VAS, such as short messaging services (SMS) and
multimedia messaging services (MMS). Our communication products distribution
services include the wholesale and retail sale and distribution of calling
cards
in China, multimedia interactive self-service kiosk distribution and online
mobile phone distribution. We also have a number of subsidiaries that we use
primarily for administration, internal control and acquisition purposes. We
intend to continue to grow our business by acquiring and managing growing
technology and network communications businesses with established products
and
customers in Asia.
Our
business process outsourcing services generate revenue from call center
services, call center management software sales, and training and consulting.
We
invoice our call center clients monthly at per seat monthly rates, a base price
plus commission per call, or a per hour charge rate, depending on the client’s
preference. Our call center software clients pay per license, for which there
is
usually a one-time charge on sale of the software and annual maintenance fees
for service. We charge per project for our consulting and training services
and
for our telecom VAS, which are invoiced throughout the project. Our telecom
VAS
often includes a post-sale service contract for systems integration and
consulting services for which we bill separately. Our communication products
such as calling cards, kiosks and cell phones are sold
cash-on-delivery.
Our
clients include the leading telecom operators, banks, insurance, travel,
marketing, and service companies, as well as telecom consumers, in Greater
China. Clients include China Telecom, China Netcom, China Mobile, China Unicom,
PCCW, Hutchison Telecom, CSL, SmarTone, Sunday, Swire Travel, Coca-Cola, SONY,
Samsung, Motorola, Nokia, TNT Express, Huawei, TCL, Dun & Bradstreet,
American Express, Bank of China, DBS, Hong Kong Government, and Hongkong Post.
PacificNet employs over 2,000 staff in our various subsidiaries in China with
offices in Hong Kong, Beijing, Shanghai, Shenzhen, and Guangzhou.
PacificNet’s
operations include the following four groups:
(1)
Outsourcing Services: including Business Process Outsourcing (BPO) call center,
IT Outsourcing (ITO) and software development services.
(2)
Value-Added Telecom Services (VAS): including Content Providing (CP),
Interactive Voice Response (IVR), Platform Providing (PP) and Service Providing
(SP).
(3)
Communication Products Distribution Services: including calling cards, GSM/
CDMA/ XiaoLingTong products, and multimedia self-service kiosks.
(4)
Other
Business Services: including internal administrative matters and other related
corporate items.
Private
Placement of Convertible Debentures and Warrants
On
March
13, 2006, we completed a private placement in which we sold $8,000,000 in
convertible debentures and issued warrants to purchase up to an aggregate of
400,000 shares of common stock. The debentures are convertible at any time
into
shares of our common stock at an initial fixed conversion price of $10.00 per
share, subject to adjustments for certain dilutive events. The debentures are
due March 13, 2009. The warrants are exercisable for a period of five years
at
an exercise price of $12.20 per share. At the closing of the private placement,
we prepaid the first year’s interest on debentures equal to 5% of the aggregate
principal amount of debentures. We will pay interest in cash or shares, provided
that certain conditions are met, at the rate of 6% for the second year the
debentures are outstanding and then 7% for the third. Beginning January 1,
2007,
we are obligated to redeem up to $320,000 every month, plus accrued, but unpaid
interest, liquidated damages and penalties. We also have the option to prepay
the debentures at any time, provided that certain conditions have been met,
after the 12 month anniversary of the effective date of the registration
statement of which this prospectus is part, some or all of the outstanding
debentures for cash in an amount equal to 120% of the principal amount
outstanding, plus accrued, but unpaid interest, liquidated damages and penalties
outstanding. At any time after the six month anniversary of the effective date,
we may force the holders to convert up to 50% of the then outstanding principal
amount of the debentures, subject to certain trading conditions being met.
If
any event of default occurs under the debentures or other related documents,
the
holders may elect to accelerate the payment of the outstanding principal amount
of the debenture, plus accrued, but unpaid interest, liquidated damages and
penalties, which shall become immediately due and payable.
Under
the
terms of the registration rights agreement, dated February 28, 2006, entered
into among the Company and the holders, we are obligated to register for resale
150% of the shares of common stock issuable upon conversion of the debentures
and the warrants, and interest on the convertible debentures. We are currently
in default under the private placement transaction documents for the untimely
filing of the registration statement, of which this prospectus is part, and
for
the failure to have the registration statement declared effective prior to
the
effectiveness date set forth in the registration rights agreement. As of
November 1, 2006, we could be liable for liquidated damages of approximately
$800,000 as a result of the foregoing.
As of
the date of this prospectus, the holders have not elected to accelerate the
payment of the outstanding principal and interest owing on the
debenture.
Also
in
connection with the private placement, Messrs. Tony Tong, Victor Tong and
Shaojian Wang and Sino Mart Management Ltd., and its sole officer and director,
Mr. Cho Sam Tong, entered into lock-up agreements restricting the disposition
of
shares of our common stock benefically owned by them until the earlier of 30
days from the effective date of the registration statement, or February 28,
2008.
Messrs.
Tony and Victor Tong, Wang and Sino Mart Management Ltd. each executed letter
agreements to the holders of the convertible debentures and warrants, in which
they each agreed to vote all of the shares of the Company over which they have
voting control in favor of any resolutions presented to the stockholders of
the
Company to approve the issuance, in the aggregate, of more than 19.999% of
the
number of shares of common stock of the Company outstanding on the closing
date
of the private placement. They executed each letter agreement in consideration
of, and as a condition to the consummation of the private
placement.
C.E.
Unterberg, Towbin L.L.C. acted as Placement Agent and received a cash fee in
the
amount of $449,500 and a warrant to purchase up to 16,000 shares. Maxim Group
also acted as Placement Agent and received a cash fee in the amount of
$50,000.
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following table summarizes the relevant financial data for our business and
should be read with our financial statements, which appear elsewhere in this
prospectus.
CONSOLIDATED
STATEMENT OF OPERATIONS DATA
|
|
|
Six
months ended
June
30,
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006(unaudited)
|
|
|
2005(unaudited)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Statement
of Operations Data:
|
|
|
|
Revenues
|
|
|
34,364
|
|
|
21,492
|
|
$
|
44,341
|
|
$
|
29,709
|
|
$
|
1,217
|
|
$
|
2,319
|
|
$
|
961
|
|
Cost
of revenues
|
|
|
(22,960
|
)
|
|
(17,127
|
)
|
|
(33,439
|
)
|
|
(24,074
|
)
|
|
(698
|
)
|
|
(1,787
|
)
|
|
(803
|
)
|
Gross
margin
|
|
|
11,404
|
|
|
4,365
|
|
|
10,902
|
|
|
5,635
|
|
|
519
|
|
|
532
|
|
|
158
|
|
Operating
expenses: selling, general and administrative
|
|
|
(7,719
|
)
|
|
(2,399
|
)
|
|
(6,104
|
)
|
|
(3,513
|
)
|
|
(1,856
|
)
|
|
(3,176
|
)
|
|
(4,044
|
)
|
Interest
expense
|
|
|
(456
|
)
|
|
-
|
|
|
(229
|
)
|
|
(185
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(Loss)
from operations
|
|
|
3,229
|
|
|
1,966
|
|
|
4,569
|
|
|
1,937
|
|
|
(1,337
|
)
|
|
(2,644
|
)
|
|
(3,886
|
)
|
Interest
income
|
|
|
81
|
|
|
|
|
|
246
|
|
|
79
|
|
|
27
|
|
|
33
|
|
|
187
|
|
Other
income
|
|
|
286
|
|
|
406
|
|
|
830
|
|
|
422
|
|
|
54
|
|
|
-
|
|
|
-
|
|
Changes
in fair value of derivatives
|
|
|
208
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Provision
for impairment losses in affiliated companies
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(97
|
)
|
|
(1,093
|
)
|
Earnings
before income tax, minority interests and discontinued operations
|
|
|
3,804
|
|
|
2,372
|
|
|
5,645
|
|
|
2,438
|
|
|
(1,256
|
)
|
|
(2,708
|
)
|
|
(4,792
|
)
|
Provision
for Income Tax
|
|
|
(200
|
)
|
|
(64
|
)
|
|
(222
|
)
|
|
(30
|
)
|
|
(32
|
)
|
|
-
|
|
|
-
|
|
Share
of earnings of associated company
|
|
|
49
|
|
|
4
|
|
|
(8
|
)
|
|
32
|
|
|
-
|
|
|
-
|
|
|
(34
|
)
|
Loss
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(43
|
)
|
|
-
|
|
|
(107
|
)
|
|
(179
|
)
|
Minority
Interests
|
|
|
(1,934
|
)
|
|
(1,304
|
)
|
|
(2,926
|
)
|
|
(1,623
|
)
|
|
7
|
|
|
(106
|
)
|
|
-
|
|
Net
earnings available to common stockholders
|
|
|
1,719
|
|
|
1,008
|
|
|
2,489
|
|
|
774
|
|
|
(1,281
|
)
|
|
(2,921
|
)
|
|
(5,005
|
)
|
Continuing
Operations:
Basic
earnings/(loss) per share
|
|
|
0.18
|
|
|
0.10
|
|
|
0.25
|
|
|
0.11
|
|
|
(0.24
|
)
|
|
(0.67
|
)
|
|
(2.99
|
)
|
Diluted
earnings/(loss) per share
|
|
|
0.16
|
|
|
0.10
|
|
|
0.23
|
|
|
0.09
|
|
|
(0.24
|
)
|
|
(0.67
|
)
|
|
(2.99
|
)
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
)
|
|
(0.11
|
)
|
Diluted
earnings/(loss) per share
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.03
|
)
|
|
(0.11
|
)
|
CONSOLIDATED
BALANCE SHEET DATA
|
|
As
of June 30, 2006
|
|
|
As
of December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,935
|
|
$
|
5,569
|
|
$
|
9,579
|
|
$
|
6,764
|
|
$
|
3,823
|
|
$
|
3,694
|
|
$
|
1,344
|
|
Accounts
receivable
|
|
|
16,112
|
|
|
8,307
|
|
|
5,998
|
|
|
5,644
|
|
|
1,890
|
|
|
220
|
|
|
199
|
|
Property
and equipment, net
|
|
|
8,361
|
|
|
4,477
|
|
|
4,300
|
|
|
1,118
|
|
|
466
|
|
|
284
|
|
|
332
|
|
Total
assets
|
|
|
66,457
|
|
|
43,017
|
|
|
51,203
|
|
|
33,250
|
|
|
7,770
|
|
|
4,314
|
|
|
2,555
|
|
Total
current liabilities
|
|
|
9,030
|
|
|
7,457
|
|
|
10,620
|
|
|
5,346
|
|
|
4,845
|
|
|
930
|
|
|
840
|
|
Total
liabilities
|
|
|
18,517
|
|
|
8,793
|
|
|
10,704
|
|
|
5,544
|
|
|
5,371
|
|
|
930
|
|
|
840
|
|
Minority
interest in consolidated subsidiaries
|
|
|
11,898
|
|
|
4,957
|
|
|
8,714
|
|
|
2,396
|
|
|
(110
|
)
|
|
131
|
|
|
33
|
|
Total
stockholders’ equity
|
|
|
36,042
|
|
|
29,267
|
|
|
31,785
|
|
|
25,310
|
|
|
2,509
|
|
|
3,253
|
|
|
1,682
|
|
Executive
Offices
Our
executive offices are located in Beijing, Hong Kong, , Shenzhen and, Guangzhou,
China at the following addresses:
PacificNet
Beijing Office: 23/F, Building A, TimeCourt, No.6 Shuguang Xili, Chaoyang
District, Beijing, China Postal Code: 100028. Tel:86-010-59225020, Fax:
86-010-59225001 and Email: [email protected].
PacificNet
Limited Hong Kong Office: 601 New Bright Building, 11 Sheung Yuet Road, Kowloon
Bay, Kowloon, Hong Kong. Tel: 011-852-2876-2900, Fax: 011-852-27930689 and
E-mail: [email protected]
PacificNet
Shenzhen Office: Room 901, Tower A, Tian An High-Tech Plaza, Tian An Cyber
Park,
Fu Tian District, Shenzhen, China Postal Code: 518040. Tel:011-86-7553360672,
Fax: 011-86-7553360675 and Email: [email protected].
PacificNet
Guangzhou Office: 15/F, Building A, Huajian Plaza, No. 233 Tianfu Road, Tianhe
District, Guangzhou, China Postal Code: 510630. Tel: 011-86-020-85613432, Fax:
011-86-020-81613659 and Email: [email protected].
Investing
in our securities involves a great deal of risk. Careful consideration should
be
made of the following factors as well as other information included in this
prospectus before deciding to purchase our common stock. You should pay
particular attention to the fact that we conduct a majority of our operations
in
China and are governed by a legal and regulatory environment that in some
respects differs significantly from the environment that may prevail in other
countries. Our business, financial condition or results of operations could
be
affected materially and adversely by any or all of these risks.
THE
FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS.
RISKS
RELATED TO OUR BUSINESS
WE
HAVE A LIMITED OPERATING HISTORY AND RECENTLY EXPERIENCED A SIGNIFICANT INCREASE
IN REVENUE THAT MAY NOT BE SUSTAINED.
Our
business operations commenced in 1994, and subsequently the business was
incorporated as a Delaware corporate entity in 1999. Our operating history
may
be insufficient to evaluate our business and future prospects. Although our
revenue have grown rapidly in the past two years, primarily as a result of
our
increased acquisition activity, we cannot assure investors that we will maintain
our profitability or that we will not incur net losses in the future. We expect
that our operating expenses will increase as we expand. Any significant failure
to realize anticipated revenue growth could result in significant operating
losses. We will continue to encounter risks and difficulties in implementing
our
business model, including our potential failure to:
|
|
increase
awareness of our brands, protect our reputation and develop customer
loyalty;
|
|
|
manage
our expanding operations and service offerings, including the integration
of any future acquisitions;
|
|
|
maintain
adequate control of our expenses;
and
|
|
|
anticipate
and adapt to changing conditions in the markets in which we operate
as
well as the impact of any changes in government regulation, mergers
and
acquisitions involving our competitors, technological developments
and
other significant competitive and market
dynamics.
|
If
we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
THE
ACQUISITION OF NEW BUSINESSES IS COSTLY AND SUCH ACQUISITIONS MAY NOT ENHANCE
OUR FINANCIAL CONDITION.
Our
growth strategy is to acquire companies and identify and acquire assets and
technologies from businesses in greater China that have services, products,
technologies, industry specializations or geographic coverage that extend or
complement our existing business. The process to undertake a potential
acquisition is time-consuming and costly. We expend significant resources to
undertake business, financial and legal due diligence on our potential
acquisition target and there is no guarantee that we will acquire the company
after completing due diligence. Any future acquisitions will be subject to
a
number of challenges, including:
|
|
the
diversion of management time and resources and the potential disruption
of
our ongoing business;
|
|
|
difficulties
in maintaining uniform standards, controls, procedures and
policies;
|
|
|
potential
unknown liabilities associated with acquired
businesses;
|
|
|
the
difficulty of retaining key alliances on attractive terms with partners
and suppliers; and
|
|
|
the
difficulty of retaining and recruiting key personnel and maintaining
employee morale.
|
Our
acquisitions could result in the use of substantial amounts of cash, potentially
dilutive issuances of equity securities and exposure to undisclosed or potential
liabilities of acquired companies. During the fiscal year ended December 31,
2005, we acquired a controlling interest in Guangzhou 3G Information Technology
Co. Ltd. (“Guangzhou3G-WOFE”), Guangzhou Clickcom Digit-net Science and
Technology Ltd. (“Clickcom-WOFE”) and Shenzhen GuHaiGuanChao Investment
Consultant Company Limited (“ChinaGoHi”), a wholly owned foreign enterprise
(WOFE) registered in China. We expect that acquisitions will strengthen our
position as a provider of outsourced call center, VAS and communication products
in Asia. Although our agreements provide that the consideration is payable
upon
the acquired company attaining certain income milestones annually, there is
no
guarantee that these milestones will be reached. If they are not reached as
anticipated, the time, cost and capital to acquire the company may outweigh
the
anticipated benefits from consolidation of their income. PacificNet recorded
approximately $8.88 million of goodwill as a result of several acquisitions
that
is not subject to amortization in the ordinary course of business. To the extent
that the businesses acquired in these transactions do not remain competitive,
some or all of the goodwill related to that acquisition could be charged against
future earnings.
A
SUBSTANTIAL PORTION OF OUR BUSINESS DEPENDS ON MOBILE TELECOMMUNICATIONS
OPERATORS IN CHINA AND ANY LOSS OR DETERIORATION OF SUCH RELATIONSHIPS MAY
RESULT IN SEVERE DISRUPTIONS TO OUR BUSINESS OPERATIONS.
We
rely
entirely on the networks and gateways of China Mobile and China Unicom to
provide our wireless value-added services. Thus, we face certain risks in
conducting our wireless value-added services business, such as the
following:
|
(1)
|
Currently,
China Mobile and China Unicom are the only mobile telecommunications
operators in China that have platforms for wireless value-added services.
Our agreements with them are generally for a period of less than
one year
and generally do not have automatic renewal provisions. If neither
of them
is willing to continue to cooperate with us, we will not be able
to
conduct our existing wireless value-added services
business.
|
|
(2)
|
Our
agreements with China Mobile and China Unicom are subject to negotiation
upon expiration. If any of the mobile telecommunications operators
decides
to change its content or transmission fees or its share of revenue,
or
does not comply with the terms of the agreement, our revenue and
profitability could be materially adversely
affected.
|
THE
MOBILE TELECOMMUNICATIONS OPERATORS MAY LAUNCH AND MAY HAVE ALREADY LAUNCHED
COMPETING SERVICES OR COULD DISCONTINUE THE USE OF EXTERNAL CONTENT AGGREGATORS
SUCH AS OURSELVES ENTIRELY AT ANY TIME.
Due
to
our reliance on the mobile telecommunications operators for our wireless
value-added services, any loss or deterioration of our relationship with any
of
the mobile telecommunications operators may result in severe disruptions to
our
VAS business operations and the loss of a significant portion of our
revenue.
OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE MATERIALLY AFFECTED BY
THE
CHANGES IN POLICIES OR GUIDELINES OF THE MOBILE TELECOMMUNICATIONS
OPERATORS.
The
mobile telecommunications operators in China may, from time to time, issue
certain operating policies or guidelines, requesting or stating its preference
for certain actions to be taken by all wireless value-added service providers
using their platforms. Due to our reliance on the mobile telecommunications
operators, a significant change in their policies or guidelines may have a
material adverse effect on us. For example, some mobile telecommunications
operators recently revised their billing policies to request all wireless
value-added service providers to confirm the subscription status of those users
who have not been active for three months. Such change in policies or guidelines
may result in lower revenue or additional operating costs for us, and we cannot
assure investors that our financial condition and results of operations will
not
be materially adversely affected by any policy or guideline change by the mobile
telecommunications operators in the future.
WE
MAY BE SUBJECT TO ADVERSE ACTIONS FOR ANY BREACH OR PERCEIVED BREACH BY US
OF
THE POLICIES OR GUIDELINES IMPOSED BY THE MOBILE TELECOMMUNICATIONS OPERATOR
WITH RESPECT TO CONTENT PROVIDED ON OR LINKED THROUGH OUR
WEBSITES.
The
mobile telecommunications operators in China may impose policies or guidelines
to govern or restrict the content provided by all wireless value-added service
providers, including content developed by us or content supplied by others
to
us. The mobile telecommunications operators from time to time have requested
wireless value-added services providers, including us, to remove objectionable
content or links to or from websites with certain categories of content,
including content that they may deem to be sexually explicit. We aggregate
and
develop content that we consider attractive to our targeted user base, and
we
cannot assure investors that the mobile telecommunications operators will not
from time to time find certain portions of our content to be objectionable.
In
the case of a breach or perceived breach of such policies or guidelines, the
mobile telecommunications operators may require us to reduce or curtail the
content on our Internet portal, which may reduce our portal traffic, and the
mobile telecommunications operators may have the right to impose monetary fines
upon us, or terminate our cooperation with them. In addition, we would be liable
to the mobile telecommunications operators for their economic losses pursuant
to
our agreements with these operators if we were found to be in breach of the
policies or guidelines promulgated by them. As a result of the occurrence of
any
of the above, our financial condition and results of operations may be
materially adversely affected.
OUR
DEPENDENCE ON THE SUBSTANCE AND TIMING OF THE BILLING SYSTEMS OF THE MOBILE
TELECOMMUNICATIONS OPERATORS MAY REQUIRE US TO ESTIMATE PORTIONS OF OUR REPORTED
REVENUE FOR WIRELESS VALUE-ADDED SERVICES FROM TIME TO TIME. AS A RESULT,
SUBSEQUENT ADJUSTMENTS MAY HAVE TO BE MADE TO OUR WIRELESS VALUE-ADDED SERVICES
REVENUE IN OUR FINANCIAL STATEMENTS.
As
we do
not bill our wireless value-added services users directly, we depend on the
billing systems and records of the mobile telecommunications operators to record
the volume of our wireless value-added services provided, charge our users
through mobile telephone bills and collect payments from our users and pay
us.
In addition, we do not generally have the ability to independently verify or
challenge the accuracy of the billing systems of the mobile telecommunications
operators. Generally, within 20 to 60 days after the end of each month, a
statement from each of the mobile telecommunications operators confirming the
value of wireless value-added services they bill to users in that month will
be
delivered to us, and generally within 60 days after such delivery, we will
be
paid by the mobile telecommunications operators for the wireless value-added
services, net of their revenue share, transmission fees and applicable business
taxes, for that month based on such statements.
OUR
COMMUNICATION PRODUCTS ARE PROVIDED CASH-ON-DELIVERY, WHICH LEAVES US VULNERABLE
TO THEFT AND EMPLOYEE EMBEZZLEMENT.
The
purchase of calling cards, SIM cards and other mobile phone products are made
with cash. Although there is a low risk that clients will not pay for these
services when delivered, our retail stores maintain cash on hand which might
make them robbery targets. We also face the risk that employees who collect
the
cash and others who may be aware that cash is available at these sites might
embezzle the money. Theft or embezzlement could have a material adverse effect
on the revenue generated and the financial condition of our business
operations.
WE
INTEND TO OPERATE EACH OF OUR ACQUIRED BUSINESSES ON A STANDALONE BASIS.
We
do not
intend to integrate the information or communications systems, management,
or
other aspects of the businesses we acquire. If we integrated the businesses,
we
might be able to reduce expenses by eliminating duplicative personnel,
facilities, or technology and other costs. In addition, facilities and
technology integration might make inter-company communications and transactions
more efficient. By declining to integrate the acquired businesses, we might
forego opportunities to operate more profitably. Furthermore, our decision
not
to integrate these businesses might result in difficulties in evaluating the
effectiveness of our internal control over financial reporting, which could
complicate compliance with Section 404 of the Sarbanes-Oxley Act of
2002.
BECAUSE
WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH MANAGEMENT OF THE ACQUIRED COMPANIES,
OUR BUSINESS OPERATIONS MIGHT BE INTERRUPTED IF THEY WERE TO RESIGN AND SEEK
EMPLOYMENT WITH COMPETITORS.
As
part
of our acquisition strategy, we do not use our own employees or members of
our
management team to operate the acquired companies. Key management at these
companies has been in place for several years and has established solid
relationships with their customers. Competition in our industry for
executive-level personnel is strong and we can make no assurance that we will
be
able to retain the highly effective executive employees. Although we provide
incentives to management to stay with the acquired business, we have not entered
into employment agreements with them. If such key persons were to resign we
might face impairment of relationships with remaining employees or customers,
which might result in further resignation by employees, and might cause
long-term clients to terminate their relationship with us. Furthermore, we
have
not entered into any non-competition and confidentiality agreements with these
employees and management. Due to the limited enforceability of these types
of
agreements in China, we face the risk that employees of the acquired
subsidiaries might divulge our software and other protected intellectual
property secrets to competitors.
OUR
CUSTOMERS ARE CONCENTRATED IN A LIMITED NUMBER OF
INDUSTRIES.
Our
clients are concentrated primarily in the telecommunications, telemarketing
and
technology industries, and to a lesser extent, the insurance and financial
services industries, where the current trend is to outsource certain CRM and
VAS. Our ability to generate revenue depends on the demand for our services
in
these industries. An economic downturn, or a slowdown or reversal of the
tendency in any of these industries to rely on outsourcing could have a material
adverse effect on our business, results of operations or financial
condition.
THE
MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE AND FRAGMENTED AND WE MAY
NOT
BE ABLE TO MAINTAIN MARKET SHARE.
We
expect
competition to persist and intensify in the future. Our competitors are mainly
leaders in the CRM services market, such as PCCW Teleservices (Hong Kong)
Limited, China Motion Telecom International Limited, and Teletech (Hong Kong)
Limited. Our competitors also include small firms offering specific
applications, divisions of large entities and other large independent firms.
We
face the risk that new competitors with greater resources than ours will enter
our market. Furthermore, increasing competition among telecom companies in
greater China has led to a reduction in telecommunication services fees that
can
be charged by such companies. If a reduction in telecommunication services
fees
negatively impacts revenue generated by our clients, they may require us to
reduce the price of our services, or seek competitors of ours that charge less.
If we must significantly reduce the price of our services, the decrease in
revenue could adversely affect our profitability.
KEY
EMPLOYEES ARE ESSENTIAL TO GROWING OUR BUSINESS.
Tony
Tong, our Chairman and Chief Executive Officer, and Victor Tong, our President,
are essential to our ability to continue to grow through acquisitions. Messrs.
Tong and Tong have established relationships within our industry. Their business
contacts have been critical in identifying and negotiating with acquisition
candidates. If either of them were to leave our employ, our growth strategy
might be hindered, which could limit our ability to increase
revenue.
THE
ESTABLISHMENT AND EXPANSION OF INTERNATIONAL OPERATIONS REQUIRES SIGNIFICANT
MANAGEMENT ATTENTION.
All
of
our current, as well as any anticipated future revenue, are or are expected
to
be derived from Asia. Our international operations are subject to risks,
including the following, which, if not planned and managed properly, could
materially adversely affect our business, financial condition and operating
results:
|
|
legal
uncertainties or unanticipated changes regarding regulatory requirements,
liability, export and import restrictions, tariffs and other trade
barriers;
|
|
|
longer
customer payment cycles and greater difficulties in collecting accounts
receivable;
|
|
|
uncertainties
of laws and enforcement relating to the protection of intellectual
property; and
|
|
|
potentially
uncertain or adverse tax
consequences.
|
OUR
OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED ADDITIONAL
FINANCING.
Since
inception our investments and operations primarily have been financed through
sales of our common stock. In the first quarter of 2006 we completed a financing
of convertible debentures for $8,000,000. In the future we may need to raise
additional funds through public or private financing, which may include the
sale
of equity securities, including securities convertible into our common stock.
The issuance of these equity securities could result in dilution to our
stockholders. If we are unable to raise capital when needed, our business growth
strategy may slow, which could severely limit our ability to increase
revenue.
FLUCTUATIONS
IN THE VALUE OF THE HONG KONG DOLLAR OR RMB RELATIVE TO FOREIGN CURRENCIES
COULD
AFFECT OUR OPERATING RESULTS.
We
have
historically conducted transactions with customers outside the United States
in
United States dollars. Payroll and other costs of foreign operations are payable
in foreign currencies, primarily Hong Kong dollars and Chinese renminbi. To
the
extent future revenue is denominated in foreign currencies, we would be subject
to increased risks relating to foreign currency exchange rate fluctuations
that
could have a material adverse affect on our business, financial condition and
operating results. The value of Hong Kong dollars and Chinese renminbi against
the U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in the PRC’s political and economic conditions. As our
operations are primarily in Asia, any significant revaluation of Hong Kong
dollars or the Chinese renminbi may materially and adversely affect our cash
flows, revenue and financial condition. For example, to the extent that we
need
to convert U.S. dollars into Hong Kong dollars or Chinese renminbi for our
operations, appreciation of either currency against the U.S. dollar could have
a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert our Hong Kong dollars or Chinese
renminbi into U.S. dollars for other business purposes and the U.S. dollar
appreciates against either currency, the U.S. dollar equivalent of the
respective currency we convert would be reduced. To date, we have not engaged
in
any hedging transactions in connection with our international
operations.
WE
HAVE NEVER PAID CASH DIVIDENDS AND ARE NOT LIKELY TO DO SO IN THE FORESEEABLE
FUTURE.
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings for use in the operation and expansion
of
our business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate.
RISKS
ASSOCIATED WITH DOING BUSINESS IN GREATER CHINA
There
are
substantial risks associated with doing business in greater China, as set forth
in the following risk factors.
OUR
OPERATIONS AND ASSETS IN GREATER CHINA ARE SUBJECT TO SIGNIFICANT POLITICAL
AND
ECONOMIC UNCERTAINTIES.
Changes
in laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on
our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
CURRENCY
FLUCTUATIONS AND RESTRICTIONS ON CURRENCY EXCHANGE MAY ADVERSELY AFFECT OUR
BUSINESS, INCLUDING LIMITING OUR ABILITY TO CONVERT CHINESE RENMINBI INTO
FOREIGN CURRENCIES AND, IF CHINESE RENMINBI WERE TO DECLINE IN VALUE, REDUCING
OUR REVENUE IN U.S. DOLLAR TERMS.
Our
reporting currency is the U.S. dollar and our operations in China and Hong
Kong
use their respective local currencies as their functional currencies. The
majority of our revenue derived and expenses incurred are in Chinese renminbi
with a relatively small amount in Hong Kong dollars and U.S. dollars. We are
subject to the effects of exchange rate fluctuations with respect to any of
these currencies. For example, the value of the renminbi depends to a large
extent on Chinese government policies and China’s domestic and international
economic and political developments, as well as supply and demand in the local
market. Since 1994, the official exchange rate for the conversion of renminbi
to
U.S. dollars had generally been stable and the renminbi had appreciated slightly
against the U.S. dollar. However, on July 21, 2005, the Chinese government
changed its policy of pegging the value of Chinese renminbi to the U.S. dollar.
Under the new policy, Chinese renminbi may fluctuate within a narrow and managed
band against a basket of certain foreign currencies. As a result of this policy
change, Chinese renminbi appreciated approximately 2.5% against the U.S. dollar
in 2005. It is possible that the Chinese government could adopt a more flexible
currency policy, which could result in more significant fluctuation of Chinese
renminbi against the U.S. dollar. We can offer no assurance that Chinese
renminbi will be stable against the U.S. dollar or any other foreign
currency.
The
income statements of our international operations are translated into U.S.
dollars at the average exchange rates in each applicable period. To the extent
the U.S. dollar strengthens against foreign currencies, the translation of
these
foreign currencies denominated transactions results in reduced revenue,
operating expenses and net income for our international operations. Similarly,
to the extent the U.S. dollar weakens against foreign currencies, the
translation of these foreign currency denominated transactions results in
increased revenue, operating expenses and net income for our international
operations. We are also exposed to foreign exchange rate fluctuations as we
convert the financial statements of our foreign subsidiaries into U.S. dollars
in consolidation. If there is a change in foreign currency exchange rates,
the
conversion of the foreign subsidiaries’ financial statements into U.S. dollars
will lead to a translation gain or loss which is recorded as a component of
other comprehensive income. In addition, we have certain assets and liabilities
that are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or loss.
We
have not entered into agreements or purchased instruments to hedge our exchange
rate risks, although we may do so in the future. The availability and
effectiveness of any hedging transaction may be limited and we may not be able
to successfully hedge our exchange rate risks.
Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of Chinese renminbi into foreign currency for current account
items, conversion of Chinese renminbi into foreign exchange for capital items,
such as foreign direct investment, loans or securities, requires the approval
of
the State Administration of Foreign Exchange, or SAFE, which is under the
authority of the People’s Bank of China. These approvals, however, do not
guarantee the availability of foreign currency. We cannot be sure that we will
be able to obtain all required conversion approvals for our operations or that
Chinese regulatory authorities will not impose greater restrictions on the
convertibility of Chinese renminbi in the future. Because a significant amount
of our future revenue may be in the form of Chinese renminbi, our inability
to
obtain the requisite approvals or any future restrictions on currency exchanges
could limit our ability to utilize revenue generated in Chinese renminbi to
fund
our business activities outside China, or to repay foreign currency obligations,
including our debt obligations, which would have a material adverse effect
on
our financial condition and results of operation.
WE
ARE REQUIRED TO OBTAIN LICENSES TO EXPAND OUR BUSINESS INTO MAINLAND
CHINA.
Our
activities must be reviewed and approved by various national and local agencies
of the Chinese government before they will issue business licenses to us. There
can be no assurance that the current Chinese government, or successors, will
continue to approve and renew our licenses. If we are unable to obtain licenses
or renewals we will not be able to continue our business operations in mainland
China, which would have a material adverse effect on our business, financial
condition and results of operations.
WE
MAY HAVE LIMITED LEGAL RECOURSE UNDER PRC LAW IF DISPUTES ARISE UNDER OUR
CONTRACTS WITH THIRD PARTIES.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing, interpreting
and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. If our
new
business ventures are unsuccessful, or other adverse circumstances arise from
these transactions, we face the risk that the parties to these ventures may
seek
ways to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government,
and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence
of
any such events could have a material adverse effect on our business, financial
condition and results of operations.
WE
MUST COMPLY WITH THE FOREIGN CORRUPT PRACTICES ACT.
We
are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are not subject
to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and
other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority
in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we can not assure that our
employees or other agents will not engage in such conduct for which we might
be
held responsible. If our employees or other agents are found to have engaged
in
such practices, we could suffer severe penalties.
PRC
LAWS AND REGULATIONS RESTRICT FOREIGN INVESTMENT IN CHINA’S TELECOMMUNICATIONS
SERVICES INDUSTRY AND SUBSTANTIAL UNCERTAINTIES EXIST WITH RESPECT TO OUR
CONTRACTUAL AGREEMENTS WITH DIANXUN-DE, SUNROOM-DE, WANRONG-DE AND IMOBILE-DE
TO
UNCERTAINTIES REGARDING THE INTERPRETATION AND APPLICATION OF CURRENT OR FUTURE
PRC LAWS AND REGULATIONS.
Since
we
are deemed to be foreign persons or foreign funded enterprises under PRC laws
and cannot directly invest in telecommunications companies, we operate our
IVR,
call center and telecom value-added services business in China through operating
companies or variable interest entities (VIEs) owned by PRC citizens. We control
these companies and operate these businesses through contractual arrangements
with the respective operating companies and their individual shareholders,
but
we have no equity control over these companies. Although we believe we are
in
compliance with current PRC regulations, we cannot be sure that the PRC
government would view these operating arrangements to be in compliance with
PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. In the
opinion of our in-house PRC legal counsel, our current ownership structure,
the
contractual arrangements among our wholly owned subsidiaries and the operating
company and their shareholders comply with all existing applicable PRC laws,
rules and regulations. Because this structure has not been challenged or
examined by PRC authorities, they have not commented on it and uncertainties
exist as to whether the PRC government may interpret or apply the laws governing
these arrangements in a way that is contrary to the opinion of our in-house
PRC
counsel. If we, or the operating companies, were found to be in violation of
any
existing PRC laws or regulations, the relevant regulatory authorities would
have
broad discretion to deal with such violation, including, but not limited to
the
following:
|
|
shutting
down servers or blocking websites;
|
|
·
|
requiring
a restructure of ownership or operations;
and/or
|
|
|
requiring
the discontinuance of wireless VAS and online advertising
businesses.
|
We
may
also encounter difficulties in obtaining performance under or enforcement of
related contracts. Any of these or similar actions could cause significant
disruption to our business operations or render us unable to conduct a
substantial portion of our business operations and may materially adversely
affect our business, financial condition and results of operations.
OUR
CONTRACTUAL AGREEMENTS WITH DIANXUN-DE, SUNROOM-DE, WANRONG-DE AND IMOBILE-DE
MAY NOT BE AS EFFECTIVE IN PROVIDING OPERATIONAL CONTROL AS DIRECT OWNERSHIP OF
THESE BUSINESSES.
We
depend
on operating companies in which we have little or no equity ownership interest
and must rely on contractual agreements to control and operate these businesses.
Our contractual agreements with each of the operating companies may not be
as
effective in providing and maintaining control over the operating companies
and
their business operations as direct ownership of these businesses. For example,
we may not be able to take control of the operating company upon the occurrence
of certain events, such as the imposition of statutory liens, judgments, court
orders, death or capacity. Furthermore, if the operating companies fail to
perform as required under those contractual agreements, we will have to rely
on
the PRC legal system to enforce those agreements and due to the uncertainties
that exist under PRC Law about the structure of our acquisition, and there
is no
guarantee that we will be successful in an enforcement action. In addition,
the
PRC government may propose new laws or amend current laws that may be
detrimental to our current contractual agreements with our operating companies,
which may in turn have a material adverse effect on our business
operations.
THE
PRC GOVERNMENT MAY PREVENT US FROM ADVERTISING OR DISTRIBUTING CONTENT THAT
IT
BELIEVES IS INAPPROPRIATE
China
has
enacted regulations governing Internet access and the distribution of news
and
other information. In the past, the Chinese government has stopped the
distribution of information over the Internet or through VAS that it believes
to
violate PRC law, including content that it believes is obscene, incites
violence, endangers national security, is contrary to the national interest
or
is defamatory. In addition, we may need the permission of the Chinese government
prior to publishing certain news items, such as news relating to national
security. Furthermore, the Ministry of Public Security has the authority to
cause any local Internet service provider to block any website maintained
outside China at its sole discretion. If the PRC government were to take any
action to limit or prohibit the distribution of information through our network
or via our VAS, or to limit or regulate any current or future content or
services available to users on our network, our business could be significantly
harmed. We are also subject to potential liability for content on our website
that is deemed inappropriate and for any unlawful actions of our subscribers
and
other users of our systems. Furthermore, we are required to delete content
that
clearly violates the laws of China and report content that we suspect may
violate PRC law. It is difficult to determine the type of content that may
result in liability for us, and if we are wrong, we may be prevented from
operating our website.
POTENTIAL
VIOLATION OF THE PRC REGULATION DUE TO INSUFFICIENT REGISTERED CAPITAL OF
VIE
Through
GuangZhou DianXun Company Limited (the “Dianxun-DE”), a Chinese variable
interest entity (‘VIE’) controlled through business agreement, we are able
to provide indirectly to China’s telecom operators, a wide variety of wireless
internet services for mobile phones, such as SMS, Wireless Application Protocol,
or WAP, which allows users to access information instantly via handheld wireless
devices, and Java mobile applications. The registered capital of Dianxun-DE
was
approx. US$1.25million, 90% of which was funded by borrowed assets at the
inception of the company in order to obtain the operating license for the
regulated VAS industry in which the VIE operates. The borrowed assets were
returned to lenders subsequent to obtaining the necessary regulatory approval
for the registered capital. On consolidation of this VIE for the year ended
December 31, 2005, we reduced the registered capital of the VIE to $125,000
to
reflect the fair value of its net asset value at the time of acquisition. We
will not be able to continue our business operations through this VIE if the
regulatory authorities do not renew the licenses due to insufficient registered
capital. For indicative purposes according to the PRC Telecommunication Rules,
all telecommunication value added service providers can only carry on business
if a Company maintains a minimum capital requirement of at least RMB10,000,000.
The minimum capital requirement required in Shanghai, China, in order to get
a
provincial VAS license is Rmb1,000,000 (or US$125,000).
RISKS
RELATED TO OUR TECHNOLOGY AND EQUIPMENT
OUR
INSURANCE MAY NOT BE SUFFICIENT TO RESTORE OUR CALL CENTER IF OPERATIONS ARE
INTERRUPTED BY NATURAL DISASTER OR OTHER DESTRUCTION OF OUR FACILITIES OR
EQUIPMENT.
Our
operations depend on our ability to protect our call centers, data centers,
CRM
information, customer database, data warehouse, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, hacker attacks, natural disaster,
epidemic, terrorism, act of war and other similar events. In the event we
experience a temporary or permanent interruption at one or more of our call
centers, through casualty, operating malfunction or otherwise, our business
could be materially adversely affected and we may be required to pay contractual
damages to some clients or allow some clients to terminate or renegotiate their
contracts with us. While we maintain certain property and business interruption
insurance, such insurance may not adequately compensate us for all losses that
we may incur and may not be adequate to cover the costs of rebuilding these
centers. If we are unable to restore our operations, our business activities
would cease.
WE
MUST RESPOND QUICKLY AND EFFECTIVELY TO NEW TECHNOLOGICAL
DEVELOPMENTS.
Our
VAS
business is highly dependent on our computer and telecommunications equipment
and software systems. Our failure to maintain the superiority of our
technological capabilities or to respond effectively to technological changes
could adversely affect our business, results of operations or financial
condition. Our future success also depends on our ability to enhance existing
software and systems and to respond to changing technological developments.
If
we are unable to successfully develop and bring to market new software and
systems in a timely manner, our competitors technologies or services may render
our products or services noncompetitive or obsolete.
RISKS
RELATED TO OUR COMMON STOCK
EFFORTS
TO COMPLY WITH RECENTLY ENACTED CHANGES IN SECURITIES LAWS AND REGULATIONS
WILL
INCREASE OUR COSTS AND REQUIRE ADDITIONAL MANAGEMENT RESOURCES. OUR FAILURE
TO
COMPLY COULD ADVERSELY AFFECT OUR STOCK PRICE.
We
have
rapidly grown by acquisition during 2004 and 2005. We do not integrate the
business operations of our target companies and therefore have separate
administration and accounting personnel at each subsidiary location. We have
sought to improve our existing disclosure controls and procedures and to that
end, have substantially increased our accounting and administrative resources.
Due to the number of new subsidiaries we have acquired, we have faced
significant challenges with the timely reporting of information necessary to
complete the financial statements to be filed with the Securities and Exchange
Commission. Our failure to timely file our annual and quarterly reports may
have
an adverse affect on our stock price and may put our common stock in jeopardy
of
being delisted.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, public companies
are
required to include a report of management on the company’s internal controls
over financial reporting in their annual reports on Form 10-K and the public
accounting firm auditing a company’s financial statements must attest to and
report on management’s assessment of the effectiveness of the company’s internal
controls over financial reporting. This requirement will first apply to our
annual report on Form 10-K for our fiscal year ending December 31, 2007. We
have
only recently begun to evaluate our internal controls over financial reporting.
Given the status of our efforts, coupled with the fact that guidance from
regulatory authorities in the area of internal controls continues to evolve,
substantial uncertainty exists regarding our ability to comply by applicable
deadlines. If we are unable to conclude that we have effective internal controls
over financial reporting, or if our independent auditors are unable to provide
us with an unqualified report as to the effectiveness of our internal controls
over financial reporting as of December 31, 2007 and future year ends, as
required by Section 404 of the Sarbanes-Oxley Act, we could experience delays
or
inaccuracies in our reporting of financial information, or non-compliance with
SEC reporting and other regulatory requirements. This could subject us to
regulatory scrutiny and result in a loss of public confidence in our management,
which could, among other things, adversely affect our stock price.
WE
ISSUED $8,000,000 IN CONVERTIBLE DEBENTURES DUE IN 2009, OR POSSIBLY EARLIER,
WHICH WE MAY NOT BE ABLE TO REPAY IN CASH AND COULD RESULT IN DILUTION OF OUR
BASIC EARNINGS PER SHARE.
In
March
2006, we issued $8 million in convertible debentures due March 2009. The
debentures are convertible at any time into shares of our common stock at an
initial fixed conversion price of $10.00 per share, subject to adjustments
for
certain events. If any event of default occurs under the debentures or other
related documents (including, but not limited to the payment of liquidated
damages under the terms of the registration rights agreement, which as of the
date of this prospectus, has not been paid), the holders may elect to accelerate
the payment of the outstanding principal amount of the debenture, plus accrued,
but unpaid interest, liquidated damages or other amounts, which shall become
immediately due and payable. Beginning January 1, 2007, we are obligated to
redeem $320,000 every month, plus accrued, but unpaid interest, liquidated
damages and penalties. We may choose to pay such redemption amount in cash,
or,
subject to meeting certain conditions, we may pay all or a part of the
redemption amount in shares of common stock. We may not have enough cash on
hand
or have the ability to access cash to pay the redemption amount, or upon
acceleration of the debenture in the case of an event of default, or at
maturity. In addition, the redemption of the debentures with our shares or
the
conversion of the debentures into shares of common stock could result in
dilution of our basic earnings per share.
THE
PRICE OF OUR STOCK HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO DO
SO.
Our
stock
price has fluctuated dramatically. There is a significant risk that the market
price of our common stock will decrease in the future in response to any of
the
following factors, some of which are beyond our control:
|
|
variations
in our quarterly operating results;
|
|
|
announcements
that our revenue or income are below analysts’
expectations;
|
|
|
general
economic slowdowns;
|
|
|
changes
in market valuations of similar
companies;
|
|
|
sales
of large blocks of our common
stock;
|
|
|
announcements
by us or our competitors of significant contracts, acquisitions,
strategic
partnerships, joint ventures or capital commitments;
and
|
|
|
fluctuations
in stock market prices and volumes, which are particularly common
among
highly volatile securities of companies with primarily international-based
operations.
|
FUTURE
SALES OF SHARES COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON
STOCK
As
of
October 31, 2006, we had 14,008,497 shares of common stock issued, of which
11,671,836 shares were outstanding, which shares will be available to be sold
in
the public market in the near future, subject to, with respect to shares of
common stock held by affiliates and shares issued between 12 and 24 months
ago,
the volume restrictions and/or manner of sale requirements of Rule 144 under
the
Securities Act. On February 4, 2005, a registration statement on Form SB-2
was
declared effective with respect to 2,702,230 shares of our common stock. These
shares are freely tradable without restriction or further registration, subject
to the related prospectus delivery requirements. Sales by our current
shareholders of a substantial number of shares could significantly reduce the
market price of our common stock.
As
of
September 30, 2006, we had stock options outstanding to purchase an aggregate
of 1,026,000 shares
of
common stock, of which 526,000
stock
options were exercisable and warrants outstanding to purchase
1,026,000 shares of our common stock.
To the
extent that the options and warrants are exercised, they may be exercised at
prices below the price of our shares of common stock on the public market,
resulting in a significant number of shares entering the public market and
the
dilution of our common stock. Further, in March 2006, we completed a private
placement of $8,000,000 in convertible debentures. The debentures are
convertible into shares of common stock at an initial fixed conversion price
of
$10.00, subject to adjustments. In the event that any future financing should
also be in the form of securities convertible into, or exchangeable for, equity
securities, investors may experience additional dilution upon the conversion
or
exchange of such securities.
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by certain selling stockholders. There will be no proceeds
to
us from the sale of shares of common stock in this offering. Assuming that
all
of the warrants held by selling stockholders are exercised for cash, we will
realize proceeds of approximately $10,606,647. We would use these funds for
general corporate purposes.
We
are
registering for resale shares of our common stock (i) held by the selling
stockholders
identified below and (ii) issuable to the selling security holders upon the
conversion of outstanding debentures or exercise of outstanding warrants, or
that may be issued in the form of interest payments on such debentures. We
are
registering the shares to permit the securityholders and their pledgees, donees,
transferees and other successors-in-interest that receive their shares from
a
stockholder as a gift, partnership distribution or other non-sale related
transfer after the date of this prospectus to resell the shares when and as
they
deem appropriate.
The
following table set forth:
|
|
the
name of the securityholders,
|
|
|
the
number and percent of shares of our common stock that the securityholders
beneficially owned prior to the offering for resale of the shares
under
this prospectus,
|
|
|
the
number of shares of our common stock that may be offered for resale
for
the account of the securityholders under this prospectus,
and
|
|
|
the
number and percent of shares of our common stock to be beneficially
owned
by the security holders after the offering of the resale shares (assuming
all of the offered resale shares are sold by the
securityholders).
|
The
number of shares in the column “Maximum Number of Shares to be Sold” represents
all of the shares that each security holder may offer under this prospectus.
We
do not know how long the security holders will hold the shares before selling
them or how many shares they will sell, and we currently have no agreements,
arrangements or understandings with any of the security holders regarding the
sale of any of the resale shares. The shares offered by this prospectus may
be
offered from time to time by the securityholders listed below.
This
table is prepared solely based on information supplied to us by the listed
securityholders, any Schedules 13D or 13G and Forms 3 and 4, and other public
documents they have filed with the SEC, and assumes the sale of all of the
shares offered hereby. The applicable percentages of beneficial ownership are
based on an aggregate of 11,671,836 shares of our common stock issued and
outstanding on November 1, 2006 or subject to issuance upon exercise of the
warrants, adjusted as may be required by rules promulgated by the
SEC.
On
March
13, 2006, we completed a private placement in which we sold $8,000,000 in
convertible debentures, convertible into shares of common stock at an initial
fixed conversion price of $10.000, subject to adjustment, and issued warrants
to
purchase up to an aggregate of 416,000 shares of common stock. Under the terms
of the registration rights agreement, we are required to register 150% of the
maximum number of shares of our common stock issuable upon (i) conversion of
the
convertible debentures, (ii) exercise of the warrants and (iii) the payment
of
interest assuming the debentures remain outstanding for three years. Accordingly
we have registered for resale an additional 660,000 shares. The number of shares
included below in the columns entitled “Shares Beneficially Owned Prior to the
Offering” and the “Maximum Number of Shares to be Sold” do not include the
104,000 interest shares issuable if the Company elects to issue such shares
in
lieu of cash and the additional 660,000 shares as these share amounts are not
beneficially owned by the selling stockholders who participated in the March
2006 private placement. The 104,000 interest shares and 660,000 additional
shares if issued, will be allocated to the investors from the convertible
debenture financing on a pro rata basis.
On
June
8, 2005, we entered into a consulting agreement with CEOCast, Inc., our current
investor relations and public relations firm. Pursuant to the terms of the
agreement, part of the compensation to CEOCast consisted of the issuance of
26,000 shares of our common stock. We granted CEOCast piggyback registration
rights with respect to those shares.
1,152,228
of the shares being offered by certain of the selling shareholders set forth
below were previously registered on a Registration Statement of Form SB-2
(Registration No. 333-121792), that was declared effective on February 4,
2005.
No
selling stockholder listed below has held any position nor had any material
relationship with the us or our affiliates during the past three years, except
that C.E. Unterberg, Towbin LLC acted as placement agent in the convertible
debenture financing consummated in March 2006. C.E. Unterberg, Towbin Capital
Partners I, L.P. is an entity associated with C.E. Unterberg, Towbin LLC.
CEOCast is our investor and public relations firm.
Name
of Selling Stockholder
|
|
Shares
Beneficially
Owned
Prior
to
Offering
|
|
Maximum
Number
of
Shares to
be
Sold
|
|
Number
of Shares
Beneficially
Owned
After
Offering
|
|
Percentage
Ownership
After
Offering
|
|
|
|
|
|
|
|
|
|
|
|
SF
Capital Partners Ltd.(1)
|
|
|
135,000
|
|
|
135,000
|
|
|
0
|
|
|
0
|
|
Bluegrass
Growth Fund LP(2)
|
|
|
11,667
|
|
|
11,667
|
|
|
0
|
|
|
0
|
|
Bluegrass
Growth Fund Ltd.(3)
|
|
|
11,667
|
|
|
11,667
|
|
|
0
|
|
|
0
|
|
Omicron
Master Fund(4)
|
|
|
33,515
|
|
|
33,515
|
|
|
0
|
|
|
0
|
|
Iroquois
Capital LP(5)
|
|
|
566,667
|
|
|
566,667
|
|
|
0
|
|
|
0
|
|
Smithfield
Fiduciary LLC(6)
|
|
|
23,333
|
|
|
23,333
|
|
|
0
|
|
|
0
|
|
Portside
Growth and Opportunity Fund(7)
|
|
|
23,333
|
|
|
23,333
|
|
|
0
|
|
|
0
|
|
Satellite
Strategic Finance Associates, LLC(8)
|
|
|
105,000
|
|
|
105,000
|
|
|
0
|
|
|
0
|
|
CEOCast,
Inc.
|
|
|
20,000
|
|
|
20,000
|
|
|
0
|
|
|
0
|
|
Sino
Strategic Investment Limited (9)
|
|
|
385,848
|
|
|
385,848
|
|
|
0
|
|
|
0
|
|
Sunshine
Ocean Investment Limited (10)
|
|
|
192,924
|
|
|
192,924
|
|
|
0
|
|
|
0
|
|
C.E.
Unterberg, Towbin Capital Partners I, L.P. (11)
|
|
|
75,000
|
|
|
75,000
|
|
|
0
|
|
|
0
|
|
Alpha
Capital AG (12)
|
|
|
175,720
|
|
|
175,720
|
|
|
0
|
|
|
0
|
|
Whalehaven
Capital Fund Limited (13)
|
|
|
150,000
|
|
|
150,000
|
|
|
0
|
|
|
0
|
|
Basso
Private Opportunities Holding Fund Ltd. (14)
|
|
|
37,500
|
|
|
37,500
|
|
|
0
|
|
|
0
|
|
Basso
Fund Ltd. (15)
|
|
|
30,000
|
|
|
30,000
|
|
|
0
|
|
|
0
|
|
Basso
Multi-Strategy Holding Fund Ltd. (16)
|
|
|
82,500
|
|
|
82,500
|
|
|
0
|
|
|
0
|
|
DKR
SoundShore Oasis Holding Fund LTd.(17)
|
|
|
225,000
|
|
|
225,000
|
|
|
0
|
|
|
0
|
|
C.E.
Unterberg, Towbin LLC (18)
|
|
|
16,000
|
|
|
16,000
|
|
|
0
|
|
|
0
|
|
Whalehaven
Fund Limited (19)
|
|
|
5,144 |
|
|
5,144 |
|
|
0 |
|
|
0 |
|
Rockmore
Investment Master Fund Ltd. (20)
|
|
|
15,538 |
|
|
15,538 |
|
|
0 |
|
|
0 |
|
Excalibur
Limited Partnership (21)
|
|
|
15,432 |
|
|
15,432 |
|
|
0 |
|
|
0 |
|
Vertical
Ventures LLC (22)
|
|
|
25,720 |
|
|
25,720 |
|
|
0 |
|
|
0 |
|
Stonestreet
LP (23)
|
|
|
25,720 |
|
|
25,720 |
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________
(1)
|
Includes
35,000 shares of common stock issuable upon exercise of a
warrant.
|
|
|
(2)
|
Includes
11,667 shares of common stock issuable upon exercise of a warrant.
Bluegrass Growth Fund Partners is the managing partner of Bluegrass
Growth
Fund LP. By virtue of such relationship, Bluegrass Growth Fund Partners
may be deemed to have voting and dispositive power over the shares
owned
by Bluegrass Growth Fund LP. Bluegrass Growth Fund Partners disclaims
beneficial ownership of such shares. Mr. Brian Shatz has delegated
authority from the partners of Bluegrass Growth Fund Partners with
respect
to the shares of common stock owned by Bluegrass Growth Fund LP.
As such,
Mr. Shatz is deemed to have voting and dispositive power over the
shares
of common stock owned by Bluegrass Growth Fund LP. Mr. Shatz disclaims
beneficial ownership of such shares of our common stock and has no
legal
right to maintain such delegated authority..
|
|
|
(3)
|
Includes
11,667 shares of common stock issuable upon exercise of a warrant.
Mr.
Brian Shatz is a director of Bluegrass Growth Fund, Ltd. and has
delegated
authority from the shareholders of Bluegrass Growth Fund, Ltd. with
respect to the shares of common stock owned by Bluegrass Growth Fund,
Ltd.
As such, Mr. Shatz is deemed to have voting and dispositive power
over the
shares of common stock owned by Bluegrass Growth Fund, Ltd. Mr. Shatz
disclaims beneficial ownership of such shares of our common stock
and has
no legal right to maintain such delegated authority.
|
|
|
(4)
|
Includes
33,515 shares of common stock issuable upon exercise of a
warrant.
|
|
|
(5)
|
Includes
(i) 300,000 shares of common stock issuable upon conversion of the
convertible debenture; (ii) 266,667 shares of common stock issuable
upon
exercise of warrants.
|
|
|
(6)
|
Includes
23,333 shares of common stock issuable upon exercise of a warrant.
.
Highbridge Capital Management, LLC is the trading manager of Smithfield
Fiduciary LLC and has voting control and investment discretion over
the
securities held by Smithfield Fiduciary LLC. Glenn Dubin and Henry
Swieca
control Highbridge Capital Management, LLC and have voting control
and
investment discretion over the securties held by Smithfield Fiduciary
LLC.
Each of Highbridge Capital Management, LLC, Glenn Dubin and Henry
Swieca
disclaims beneficial ownership of the securities held by Smithfield
Fiduciary LLC.
|
(7)
|
Includes
23,333 shares of common stock issuable upon exercise of a warrant.
Ramius
Capital Group, L.L.C (“Ramius Capital”) is the investment adviser of
Portside Growth and Opportunity Fund (“Portside”) and consequently has
voting control and investment discretion over securities held by
Portside.
Ramius Capital disclaims beneficial ownership of the shares held
by
Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and
Jeffrey
M. Solomon are the sole managing members of C4S & Co., L.L.C., the
sole managing member of Ramius Capital. As a result, Messrs. Cohen,
Stark,
Strauus and Solomon may be considered beneficial owners of any shares
deemed to be beneficially owned by Ramius Capital. Messrs. Cohen,
Stark,
Strauss and Solomon disclaim beneficial ownership of these
shares.
|
|
|
(8)
|
Includes
105,000 shares of common stock issuable upon exercise of a
warrant.
|
|
|
(9)
|
Includes
64,308 shares of common stock issuable upon exercise of a
warrant.
|
|
|
(10)
|
Includes
32,154 shares of common stock issuable upon exercise of a
warrant.
|
|
|
(11)
|
Includes
50,000 shares of common stock issuable upon conversion of the convertible
debenture and 25,000 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(12)
|
Includes
100,000 shares of common stock issuable upon conversion of the convertible
debenture and 75,720 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(13)
|
Includes
100,000 shares of common stock issuable upon conversion of the convertible
debenture and 50,000 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(14)
|
Includes
25,000 shares of common stock issuable upon conversion of the convertible
debenture and 12,500 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(15)
|
Includes
20,000 shares of common stock issuable upon conversion of the convertible
debenture and 10,000 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(16)
|
Includes
55,000 shares of common stock issuable upon conversion of the convertible
debenture and 27,500 shares of common stock issuable upon exercise
of a
warrant.
|
|
|
(17)
|
Includes
150,000 shares of common stock issuable upon conversion of the convertible
debenture and 75,000 shares of common stock issuable upon exercise
of a
warrant. The investment manager of DKR SoundShore Oasis Holding Fund
Ltd.
(the “Fund”) is DKR Oasis Management Company LP (the “Investment
Manager”). The Investment Manager has the authority to do any and all acts
on behalf of the Fund, including voting any shares held by the Fund.
Mr.
Seth Fischer is the managing partner of Oasis Management Holdings
LLC, one
of the general partners of the Investment Manager. Mr. Fischer has
ultimate responsibility for trading with respect to the Fund. Mr.
Fischer
disclaims beneficial ownership of the shares.
|
|
|
(18)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
|
|
(19)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
|
|
(20)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
|
|
(21)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
|
|
(22)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
|
|
(23)
|
Includes
shares of common stock issuable upon exercise of
warrants.
|
Each
Selling Stockholder (the “Selling
Stockholders”)
of the
common stock and any of their pledgees, assignees and successors-in-interest
may, from time to time, sell any or all of their shares of common stock on
the
Nasdaq National Market or any other stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may
be at
fixed or negotiated prices. A Selling Stockholder may use any one or more of
the
following methods when selling shares:
|
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
privately
negotiated transactions;
|
|
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
|
|
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
|
a
combination of any such methods of sale;
or
|
|
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities
Act”),
if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In
no
event shall any broker-dealer receive fees, commissions and markups which,
in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only
through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement
is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including
by
compliance with Rule 172 under the Securities Act).
The
selected financial data presented below summarizes certain financial data which
has been derived from and should be read in conjunction with our consolidated
financial statements and footnotes thereto included in the section beginning
on
page F-1. The
information for the six months ended June 30, 2005 and 2006 was derived
from our unaudited financial statements but, in the opinion of management,
reflects all adjustments necessary for a fair presentation of the results of
such periods. You should read this data together with our financial statements
and related notes included elsewhere in this prospectus and the information
under “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”
|
|
|
Six
months ended
June
30,
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
(unaudited)
|
|
|
2005
(unaudited)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(in
thousands, except per share data)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
34,364
|
|
|
21,492
|
|
$
|
44,341
|
|
$
|
29,709
|
|
$
|
1,217
|
|
$
|
2,319
|
|
$
|
961
|
|
Cost
of revenues
|
|
|
(22,960
|
)
|
|
(17,127
|
)
|
|
(33,439
|
)
|
|
(24,074
|
)
|
|
(698
|
)
|
|
(1,787
|
)
|
|
(803
|
)
|
Operating
expenses: selling, general and administrative
|
|
|
(8,175
|
)
|
|
(2,399
|
)
|
|
(6,333
|
)
|
|
(3,698
|
)
|
|
(1,856
|
)
|
|
(3,176
|
)
|
|
(4,044
|
)
|
Earning/(loss)
from operations
|
|
|
3,229
|
|
|
1,966
|
|
|
4,569
|
|
|
1,937
|
|
|
(1,337
|
)
|
|
(2,644
|
)
|
|
(3886
|
)
|
Earnings/(loss)
available to common stockholders
|
|
|
1,719
|
|
|
1,008
|
|
|
2,489
|
|
|
774
|
|
|
(1,281
|
)
|
|
(2,921
|
)
|
|
(5,005
|
)
|
Basic
earnings/(loss) per share
|
|
|
0.18
|
|
|
0.10
|
|
|
0.25
|
|
|
0.11
|
|
|
(0.24
|
)
|
|
(0.70
|
)
|
|
(3.10
|
)
|
Diluted
earnings/(loss) per share
|
|
|
0.16
|
|
|
0.10
|
|
|
0.23
|
|
|
0.09
|
|
|
(0.23
|
)
|
|
(0.70
|
)
|
|
(3.10
|
)
|
Shares
used in computing earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares (1)
|
|
|
10,939,834
|
|
|
9,840,681
|
|
|
10,154,271
|
|
|
7,268,374
|
|
|
5,234,744
|
|
|
4,191,816
|
|
|
1,612,415
|
|
Diluted
weighted average shares (1)
|
|
|
12,702,019
|
|
|
10,559,064
|
|
|
10,701,211
|
|
|
8,241,996
|
|
|
5,472,565
|
|
|
4,191,816
|
|
|
1,612,415
|
|
(1)
The
number of shares taking into effect a 5-for 1 reverse stock split effected
in
January 2003.
|
|
Six
months ended
June
30,
|
|
As
of December 31,
|
|
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents, and marketable securities
(excludes
restricted cash)
|
|
$
|
6,474
|
|
$
|
6,019
|
|
$
|
10,118
|
|
$
|
6,793
|
|
$
|
3,823
|
|
$
|
3,694
|
|
$
|
1,344
|
|
Working
capital
|
|
|
29,822
|
|
|
16,117
|
|
|
20,510
|
|
|
16,185
|
|
|
1,442
|
|
|
3,081
|
|
|
1,012
|
|
Total
assets
|
|
|
66,457
|
|
|
43,017
|
|
|
51,203
|
|
|
33,250
|
|
|
7,770
|
|
|
4,314
|
|
|
2,555
|
|
Total
stockholders’ equity
|
|
|
36,042
|
|
|
29,267
|
|
|
31,785
|
|
|
25,310
|
|
|
2,509
|
|
|
3,253
|
|
|
1,682
|
|
The
supplementary financial information presented below summarizes certain financial
data which has been derived from and should be read in conjunction with our
consolidated financial statements and footnotes thereto included in the section
beginning on page F-1.
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
(in
thousands, except per share data)
|
|
2006
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
15,034
|
|
$
|
19,330
|
|
|
--
|
|
|
--
|
|
Gross
margin
|
|
$
|
6,481
|
|
$
|
4,923
|
|
|
--
|
|
|
--
|
|
Basic
net earnings per share
|
|
|
0.08
|
|
|
0.10
|
|
|
--
|
|
|
--
|
|
Diluted
net earnings per share
|
|
|
0.07
|
|
|
0.08
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
9,212
|
|
$
|
12,280
|
|
$
|
11,047
|
|
$
|
11,802
|
|
Gross
margin
|
|
$
|
1,698
|
|
$
|
2,667
|
|
$
|
2,195
|
|
$
|
4,342
|
|
Basic
net earnings per share
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.08
|
|
Diluted
net earnings per share
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
3,502
|
|
$
|
8,084
|
|
$
|
8,054
|
|
$
|
10,069
|
|
Gross
margin
|
|
$
|
1,249
|
|
$
|
1,295
|
|
$
|
1,372
|
|
$
|
1,719
|
|
Basic
net earnings per share
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.06
|
|
Diluted
net earnings per share
|
|
$
|
0.02
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
97
|
|
$
|
123
|
|
$
|
124
|
|
$
|
873
|
|
Gross
margin
|
|
$
|
61
|
|
$
|
76
|
|
$
|
29
|
|
$
|
353
|
|
Basic
net loss per share
|
|
$
|
(0.12
|
)
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
Diluted
net loss per share
|
|
$
|
(0.12
|
)
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors
that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things:
|
|
the
impact of competitive products;
|
|
|
changes
in laws and regulations;
|
|
|
adequacy
and availability of insurance
coverage;
|
|
|
limitations
on future financing;
|
|
|
increases
in the cost of borrowings and unavailability of debt or equity
capital;
|
|
|
the
inability of the Company to gain and/or hold market
share;
|
|
|
exposure
to and expense of resolving and defending liability claims and other
litigation;
|
|
|
consumer
acceptance of the Company’s
products;
|
|
|
managing
and maintaining growth;
|
|
|
market
and industry conditions;
|
|
|
the
success of product development and new product introductions into
the
marketplace;
|
|
|
the
departure of key members of management, and the effect of the United
States War on Terrorism, as well as other risks and uncertainties
that are
described from time to time in the Company’s filings with the Securities
and Exchange Commission.
|
The
following factors could affect current and future results of Epro, which
conducts our call center operations:
|
|
insufficient
sales forces for business development & account
servicing;
|
|
|
lack
of PRC management team in
operation;
|
|
|
less
familiarity with partners’ product
knowledge;
|
|
|
deployment
costs of a new HR application and the costs to upgrade the call center
computer system;
|
|
|
increasing
costs of operations (cost of salaries, rent, interest rates &
inflation) under rising economy in Hong
Kong;
|
|
|
insufficient
brand awareness initiatives in the
market;
|
|
|
salary
increases due to an active labor market in Hong Kong and GuangZhou;
and
|
|
|
increasing
competition of call center solutions in the Hong Kong and PRC
markets.
|
CRITICAL
ACCOUNTING POLICIES
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 certain estimates and judgments that affect the reported
amount of assets, liabilities, revenue and expenses, and related disclosure
of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to research and development, long-lived
assets including goodwill and purchased intangible assets, allowance for
doubtful accounts, inventories, income taxes and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions.
Management
believes the following critical accounting policies reflect the most significant
estimates and assumptions used in the preparation of its consolidated financial
statements.
RESEARCH
AND DEVELOPMENT
We
evaluate research and development costs to identify any research and development
activities that could be objectively measured and recognized as an asset for
accounting purposes at the time they are acquired or at the time they have
developed future economic benefits. Some costs and expenses are recognized
as
costs and expenses incurred during the period, provided that (a) there are
no
discernible future benefits, (b) costs recorded as assets in prior periods
no
longer provide discernible benefits, and (c) allocating costs either on the
basis of association with revenue or among several accounting periods is
considered to serve no useful purpose.
VALUATION
OF LONG-LIVED ASSETS INCLUDING GOODWILL AND PURCHASED INTANGIBLE
ASSETS
We
review
property, plant and equipment, goodwill and purchased intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Our asset impairment review assesses
the fair value of the assets based on the future cash flows the assets are
expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset
plus
net proceeds expected from the disposition of the asset (if any) are less than
the carrying value of the asset. This approach uses our estimates of future
market growth, forecasted revenue and costs, expected periods the assets will
be
utilized and appropriate discount rates. Such evaluations of impairment of
long-lived assets including goodwill arising on a business combination and
purchased intangible assets are an integral part of, but not limited to, our
strategic reviews of our business and operations performed in conjunction with
restructuring actions. When impairment is identified, the carrying amount of
the
asset is reduced to its estimated fair value. Deterioration of our business
in a
geographic region or within a business segment in the future could also lead
to
impairment adjustments as such issues are identified. The accounting effect
of
an impairment loss would be a charge to income, thereby reducing our net
profit.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
We
evaluate the collectibility of our trade receivables based on a combination
of
factors. We regularly analyze our significant customer accounts, and, when
we
become aware of a specific customer’s inability to meet its financial
obligations to us, such as in the case of bankruptcy filings or deterioration
in
the customer’s operating results or financial position, we record a specific
reserve for bad debt to reduce the related receivable to the amount we
reasonably believe is collectible. We also record reserves for bad debt for
all
other customers based on a variety of factors including the length of time
the
receivables are past due, the financial health of the customer, macroeconomic
considerations and historical experience. If circumstances related to specific
customers change, our estimates of the recoverability of receivables could
be
further adjusted. In the event that our trade receivables become uncollectible,
we would be forced to record additional adjustments to receivables to reflect
the amounts at net realizable value. The accounting effect of this entry would
be a charge to income, thereby reducing our net profit. Although we consider
the
likelihood of this occurrence to be remote based on past history and the current
status of our accounts, there is a possibility of this occurrence.
TAXES
ON EARNINGS
We
record
a valuation allowance to reduce our deferred tax assets to the amount that
is
more likely than not to be realized. We have considered future market growth,
forecasted earnings, future taxable income, the mix of earnings in the
jurisdictions in which we operate and prudent and feasible tax planning
strategies in determining the need for a valuation allowance. In the event
we
determine that we would not be able to realize all or part of our net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to earnings in the period such determination is made. Likewise, if
we
later determine that it is more likely than not that the net deferred tax assets
would be realized, the previously provided valuation allowance would be
reversed.
RECENT
ACCOUNTING PRONOUNCEMENTS
The
Financial Accounting Standards Board issued the following accounting
pronouncements:
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”.
SFAS No. 154 replaces APB Opinion No. 20 “Accounting Changes” and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 did have an impact on the Company’s consolidated financial
statements.
In
December 2004, the FASB issued SFAS No. 123R (revised 2004) “Share-Based
Payment” which amends FASB Statement No. 123 and will be effective for public
companies (small business issuers) for interim or annual periods beginning
after
December 15, 2005. SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans. The Company adopted the new standard
as of January 1, 2006. Based on the Company’s evaluation of the adoption of the
new standard, the Company believes that it could have a significant impact
to
the Company’s financial position and overall results of operations depending on
the number of stock options granted in a given year.
RESULTS
OF OPERATIONS
The
following table sets forth selected consolidated income statement data as a
percentage of revenues for the periods indicated.
|
|
THREE
MONTHS ENDED JUNE 30,
|
|
SIX
MONTHS ENDED JUNE 30,
|
|
|
|
2006
(%)
|
|
2005
(%)
|
|
2006
(%)
|
|
2005
(%)
|
|
Revenues
|
|
|
100
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Cost
of Revenues
|
|
|
(74.53
|
)
|
|
(78.28
|
)
|
|
(66.81
|
)
|
|
(79.69
|
)
|
Gross
Margin
|
|
|
25.47
|
|
|
21.72
|
|
|
33.19
|
|
|
20.31
|
|
Selling,
general and administrative expense
|
|
|
(19.17
|
)
|
|
(12.01
|
)
|
|
(23.79
|
)
|
|
(11.16
|
)
|
Earnings
from operations
|
|
|
6.30
|
|
|
9.71
|
|
|
9.40
|
|
|
9.15
|
|
Earnings
before income taxes, minority interest and discontinued
operations
|
|
|
8.46
|
|
|
12.26
|
|
|
11.07
|
|
|
11.03
|
|
NET
EARNINGS
|
|
|
4.13
|
|
|
4.83
|
|
|
5.00
|
|
|
4.69
|
|
THREE
AND SIX MONTHS
ENDED JUNE 30, 2006 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005
REVENUES.
Revenues for the three and six months ended June 30, 2006 were $19,330,000
and
$34,364,000, an increase of 57% and 60% from $12,280,000 and $21,492,000 for
the
three and six months ended June 30, 2005, respectively. During the second
quarter and first half of 2006, revenues of $3,552,000, $5,517,000, $8,914,000
and $6,579,000, $12,557,000, $11,851,000 were derived from the services rendered
by the Company’s three operating units: Outsourcing Services, Value-Added
Services, and Communications Products Distribution Services, respectively.
The
revenues in product sales during the second quarter and first half of 2006
increased by 85.1% and 45.2% compared to the same periods of 2005. The revenues
in services sales during the second quarter and first half of 2006 increased
by
28.9% and 79.1% compared to the same periods of 2005.
The
increase in revenue was mainly due to the following sources:
(1)
|
Outsourcing
services: The year-over-year growth in outsourcing services in
the second
quarter and first half of 2006 was primarily due to the higher
revenue
from Call Centre business in Hong Kong. For the second quarter
of 2006,
Epro’s revenues increased $643,000, or 26.8%, year-over-year, which
was
largely due to a 148% increase in revenues from facilities management
services, and a 54% increase in revenue from outbound services.
Its
revenues accounted for 86% and 85% of total outsourcing services
revenues
in the second quarter and first half of 2006, respectively. Due
to rising
labor costs, management believes that Business Process Outsourcing
(BPO)
has become a firmly-entrenched trend in Hong Kong and the PRC.
Demand for
outsourcing services has been steadily increasing, especially in
sectors
such as banking, insurance and telecom, and such demand has lead
to
continued growth in the first half of 2006. The Company’s combined Hong
Kong-China operations expanded total contract center capacity to
host 1000
working positions and to occupy a total of 53,000 square feet.
During the
first half of 2006, the outsourcing contract center in Hong Kong
was at
nearly full utilization. With increasing information technology
expenditures by Hong Kong companies, both the Contact Center (or
Customer
Services Center) System and IT Solutions departments enjoyed revenue
growth. Additionally, EPRO is the Value-added Reseller (VAR) of
EPICOR’s
Customer Relationship Management Solution (CRM) and Enterprise
Resource
Planning Solution (ERP) which led to additional marketing activities
and
promotional programs in the first half of 2006. Management retains
its
positive outlook on its software operations as companies search
for tools
to streamline or automate their business processes. With an experienced
technical support team, EPRO is able to provide end-to-end solutions
to
meet the increasing IT needs of clients.
|
|
|
(2)
|
Value-added
Telecom Services: In the aggregate, revenues received through VAS
business
and its subsidiaries accounted for 28.5% and 36.5% of the Company’s total
revenues for the three and six months ended June 30, 2006,
respectively, and 38.6% and 28.6 % of the Company’s total revenues for the
three and six months ended June 30, 2005, respectively. Guangzhou 3G,
Linkhead, Lion Zone contributed 12.8%, 8.9%, and 6.5%, respectively,
of
the total revenues for the three month ended June 30, 2006 and
13.1 %,
9.7% and 13.4%, respectively, for the six month ended June 30,
2006,
respectively. During the second quarter and first half of 2006,
China
accounted for 37.5% and 45.8% of the total revenues, respectively,
compared to 46.8 % and 37.4% in the same periods of 2005, respectively.
The significant increase in revenues during the second quarter
of 2006 and
a small increase during the first half of 2006 in Guangzhou 3G
was mostly
attributed to providing new 3G services and through the merger
of
Guangzhou Wanrong, which added approximately $308,000 and $574,000
to
three and six months ended June 30, 2006, respectively. On a
year-over-year basis, the Company’s VAS revenue only increased a small
percentage, approximately 16% in the second quarter, which is primarily
attributed to the approximate 20% decline in the sales of voice
cards from
Linkhead. During 2006, there was a general market decline for voice
cards
in Asia, and a 25% decline in SMS revenues from Clickcom in which
SMS
advertising has been restricted by China Information Industry Department.
However, voice cards revenues had a slight increase of 5% ($81,000)
quarter-to-quarter. Additionally, the development of WAP and color
ring
back tone services had growth during the period to partially offset
the
decline in SMS business. Separately, stricter guidelines established
by the China Securities Regulatory Commission (CSRC) led to a decrease
in
the Company’s ability to market its investment consulting services to
retail audiences, which resulted in a revenue underperformance.
Nevertheless, although barriers remain on marketing through television,
the Company has successfully expanded its use of stored-value cards
to
maintain its market position. Due to its large loyal retail following,
the
Company believes it can work through the current regulatory environment.
Additionally, the Company has shifted its marketing emphasis to
the
internet and magazines.
|
|
|
(3)
|
Communication
Products Distribution: iMobile added approximately $1,230,000 and
$2,231,000, or accounted for 13.8% and 18.8% in Communication Products
Distribution revenues for the three and six months ended June 30,
2006,
respectively, in which its major business included internet sales
of
mobile phone and accessories. The revenues from the sales of Motorola
and
Nokia contributed 95% of iMobile’s total revenues during the second
quarter and first half of 2006. Additionally, the completion of
a charging
platform for new services and content information is in process
and is
expected to be rolled out in August of this year. PacCom revenues
accounted for 54 % and 8 % of total revenues in the Communication
Products
Distribution business in the first half of 2006 and 2005, respectively.
Revenues from PacCom increased by 2535% and 811% year-over-year
in the
second quarter and first half of 2006, respectively, primarily
due to
approximately $1.9million (HK$15million) revenues from providing
LED
lighting technology and solution for Galaxy Starworld Hotel of
Macau and
approximately $0.23million (HK$1.78million) revenues from Dell
computer,
Fiber Converter, Mirror Finish Steel, Cabling, DCM player, and
others
during the second quarter of 2006.
|
|
|
(4)
|
The
remaining incremental revenues for the three and six months ended
June 30,
2006 as compared to respective period was derived from organic
growth from
existing subsidiaries, such as PacPower ($894,000 and $2,474,000)
and
PacificNet Limited ($407,000 and $825,000). The Light Eco installation
system project awarded in the second quarter of 2006 posted positive
revenue increases during the second quarter and first half of 2006.
Additionally, projects involving $0.13million (HK$1.04million)
of the
installation of Central Air-Conditioning Chilled-Water Pump Intelligence
Control System at the incorporate owner of Goodrich Garden and
$0.96million (HK$7.50million) of Nan Fung Centre chiller replacement
project strongly help pushed drive revenues. The Company also received
two
services agreements during the second quarter of 2006 including
providing
consulting services in the areas of legal, accounting, finance,
management
and web site design and construction (HK$1million), and providing
Internet
e-commerce software application and e-commerce web site development
service (HK$1.5million).
|
Acquisitions
during the first quarter of 2006 also expanded PacificNet’s position as a
leading provider of e-commerce, customer services and CRM in China’s mobile
distribution market, and increased our e-commerce and VAS revenues and our
nationwide CRM service coverage. Several of our businesses experienced
fluctuations in quarterly performance. Revenues from the VAS and IVR segment
can
vary from quarter to quarter due to new products and services launches and,
the
seasonality of certain product lines.
Summarized
financial information concerning each of our main operating units is set forth
in the following table. The “Other Business” column included our other
insignificant subsidiaries and corporate related items.
FOR
THE
THREE MONTHS ENDED
JUNE
30, 2006
|
|
Group
1 Outsourcing Business ($)
|
|
Group
2. VAS Business ($)
|
|
Group
3 Communications Distribution Business ($)
|
|
Group
4 Other Business ($)
|
|
TOTAL
($)
|
|
Revenues
|
|
|
3,552,000
|
|
|
5,517,000
|
|
|
8,914,000
|
|
|
1,347,000
|
|
|
19,330,000
|
|
Earnings
/ Loss from Operations
|
|
|
283,000
|
|
|
1,130,000
|
|
|
208,000
|
|
|
(404,000
|
)
|
|
1,217,000
|
|
FOR
THE
SIX MONTHS ENDED
JUNE
30, 2006
|
|
Group
1 Outsourcing Business ($)
|
|
Group
2. VAS Business ($)
|
|
Group
3 Communications Distribution Business ($)
|
|
Group
4 Other Business ($)
|
|
TOTAL
($)
|
|
Revenues
|
|
|
6,579,000
|
|
|
12,557,000
|
|
|
11,851,000
|
|
|
3,377,000
|
|
|
34,364,000
|
|
Earnings
/ Loss from Operations
|
|
|
403,000
|
|
|
2,844,000
|
|
|
265,000
|
|
|
283,000
|
|
|
3,229,000
|
|
COST
OF
REVENUES. Cost of revenues for the three and six months ended June 30, 2006
was
$14,407,000 and $22,960,000, an increase of 49.9% and 34.1% from $9,613,000
and
$17,127,000 for the three and six months ended June 30, 2005,
respectively. The cost of revenues in services and product sales in the
second quarter and first half of 2006 increased by 3.8% and 81.1%, respectively,
and 17.4% and 43.5%, respectively, compared with the respective period in 2005.
The increase is directly associated with the corresponding increase in revenues.
In comparison to the same period last year, the majority of the costs associated
with revenues were from PacCom and Epro. For the second quarter and first half
of 2006, PacCom accounted 34.1% and 26.9% of the total cost of revenues,
respectively and approximately $1.86million (HK$14.5million) cost of revenue
from PacCom is the IT equipment cost paid for Macau Galaxy Starworld Hotel
project during the second quarter of 2006. Cost of revenues from Epro accounted
for 15.7% and 18.7% of the total cost of revenues in the first half of 2006
and
2005, respectively, which was mainly related to 27% increase in staff cost
related to software sales, 277% increase in occupancy costs such as rents and
electricity and 46% increase in other operating activity. Additionally, 4%
and
8.2% of total cost of revenues was contributed from PacPower for the second
quarter and first half of 2006, respectively, which resulted from a Central
Air-Conditioning chiller replacement project and a Light Eco installation system
project awarded during the first and second quarter of 2006 respectively. In
addition, PacPower received a contract for a frequency inverter energy-saving
air-conditioning solution project from a client.
GROSS
PROFIT. Gross profit for the three and six months ended June 30, 2006 was
$4,923,000 and $11,404,000, a significant increase of 84.6% and 161.3 % as
compared to $2,667,000 and $4,365,000 for the three and six months ended June
30, 2005, respectively. Gross margin was 25.5% and 33.2% of total revenues
for
the second quarter and first half of 2006, compared to 21.7% and 20.3% for
the
second quarter and first half of 2005, respectively. As explained above, the
improvement on gross margin for three and six months periods from the prior
periods was primarily due to contributions from higher margin subsidiaries.
The
significant increase in gross margin year-over-year came primarily from our
facilities management and outbound services, and mobile phone sales. One of
our
subsidiaries transformed its operation from a resource outsourcing basis to
more
of a project outsourcing basis. For resource outsourcing, we had high revenue
and low profit margin in the second quarter and first half of 2005. As a result
of the shift in operations, we had lower revenue and higher than normal profit
margin for project outsourcing in the second quarter and first half quarter
of
2006. We believe that our overall gross margins approximate the industry
standards and we expect our gross margin percentage to increase gradually as
a
result of cost reduction and greater efficiencies in our utilization of
assets.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative
expenses totaled $3,177,000 and $7,500,000 for the three and six months ended
June 30, 2006, an increase of 131% and 232% from $1,376,000 and $2,257,000
for
the three and six months ended June 30, 2005, respectively. General and
administrative expenses consist primarily of staff salaries, rent, insurance
and
traveling costs. The year-over-year increase in total general and administrative
expenses in the second quarter and first half of 2006 was mainly due to the
increase of staff cost as well as rent and electricity expenses for the
expansion of call centre. The marketing expenses from the new 3G service and
Wanrong’s services also significantly affected the total expenses during the
second quarter of 2006, increasing approximately 288% compared to the same
period in 2005. Furthermore, the expenses from project outsourcing services
included traveling and training expenses.
The
sharp
increase in the second quarter and first half of 2006 for PACT SZ was primarily
due to 25% and 24 % increase of salary cost from the expansion of accounting,
auditing, SOX internal control and Kingdee software maintenance teams, a 495%
and 292% increase from staff traveling cost resulting from the annual audit
and
the increase in management fees from the regular annual board and audit
committee meetings in SZ. Most of the subsidiaries had representatives attend
the meetings to present their previous one year and current period’s business
financial performance and their forecasts for quarterly financial figures.
Open
and transparent communication is essential as it improves the relationship
between PACT and each subsidiary so that each company can know more about the
others’ business operation. In order to meet the requirements of Sarbanes-Oxley
Act (SOX 404), it is essential to have adequate internal controls and procedure,
and to improve efficiency by using accounting software.
Significant
general expenses from PacificNet Inc. year-over-year in the second quarter
and
first half of 2006 was largely due to $58,334 and $120,043 of vesting option
expense for compensation cost amortization, $27,500 increase in D&O
commercial insurance expense (the total prepayment of $110,000 for its insurance
was from June 2005 to June 2006), $85,996 amortization cost from $8 million
convertible debt issuance cost (3 years amortization) and depreciation cost
from
Beijing Time court (USD1.6m depreciated through 40 years). Additionally, there
is approximately $148,080 financial expense for PacificNet Inc. Such expense
consists of (1) convertible debt interest, in which 5% is prepaid interest
expense, $100,000 is expensed in Q2 2006 and the following three quarters (Q3
2006, Q4 2006 and Q1 2007); and (2) the bank loan interest for Beijing Time
Court ($57,969) in which the total amount of its bank loan is
$1,082,000.
EARNINGS
FROM OPERATIONS. On a year-over-year basis, earnings from operations increased
2% and 64% in the second quarter and first half of 2006, respectively. Operating
earnings of $283,000, $1,130,000, and $208,000 for the three months ended June
30, 2006 were generated from the Company’s three business units: (1) CRM
Outsourcing Services, (2) Value Added Services (VAS), and (3) Communications
Distribution Services, respectively. This compares to operating earnings of
$305,000, $1,086,000 and $118,000 for the three months ended June 30, 2005,
respectively. Various factors affected operating earnings during the second
quarter of 2006, including increased capital expenditures resulting in greater
non-cash charges such as depreciation and amortization expenses. As the Company
expanded its call centre sites in Hong Kong, amortization and depreciation
expenses related to the new leasehold improvement, furniture & fixtures,
computer equipment and software incurred in the second quarter and first half
of
2006 also increased. The increase in fixed assets also included a recorder
monitor system, DVCAM, computer equipment. We continued to shift our business
from our traditional lower-margin distribution business (B2B services) to higher
margin value-added telecom services and B2C e-commerce which we believe will
help drive superior bottom-line results. We believe that the Company has made
substantial progress in a relatively short period of time which has been
demonstrated by our increase in both gross and operating margins in the second
quarter. Furthermore, the acquisition of the majority interest in both iMobile
and Guangzhou Wanrong during the first quarter enhanced our position in this
rapidly growing B2C market in China.
INCOME
TAXES. Income tax provision was $85,000 and $200,000 for the three and six
months ended June 30, 2006, as compared to $37,000 and $64,000 for the three
and
six months ended June 30, 2005. 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.
We expect our income taxes to increase as our net earnings increase and the
tax
holidays we have benefited from in Hong Kong and the PRC expire.
MINORITY
INTERESTS. Minority interests for the second quarter and first half of 2006
totaled $804,000 and $1,934,000 compared with $887,000 and $1,304,000 for the
same period in the prior year, representing outside ownership interests in
subsidiaries that is consolidated with the parent for financial reporting
purposes.
NET
EARNINGS. Overall net earnings year-over-year increased 34.6% and 70.5% in
the
second quarter and first half of 2006, respectively. The Company’s results for
the six months ended June 30, 2006 included a total of $888,000 in non-cash
expenses, including depreciation and amortization expense of $768,000 and
$120,000 non-cash stock-based compensation expense recognized during 2006 as
a
result of the implementation of SFAS 123(R), which we adopted effective on
January 1, 2006. The Company’s quarterly results also included a total of
$530,000 in non-cash expenses, including depreciation and amortization expense
of $472,000 and non-cash stock-based compensation expense $58,000 recognized
during the second quarter as a result of the implementation of SFAS 123(R),
which we adopted effective on January 1, 2006. Each of our subsidiaries and
investments, including Epro, Smartime, Guangzhou 3G, Clickcom, ChinaGoHi,
iMobile, PacificNet Communications, PacificNet Limited and PacificNet Power
were
profitable.
In
the
outsourcing business, Smartime signed an outsourcing contract with a local
Bank
in Hong Kong, Wing Lung Bank, in May which will help drive growth in the
outsourcing business, and provide a platform for further penetrating this market
in the region. Smartime provided some senior engineers for the Bank and will
also jointly recruit some recently-graduated students and train them.
Furthermore, the Company is constantly seeking new channels to provide lower
prices for resources, leading to lower operating costs.
Two
recently acquired subsidiaries, iMobile and Wanrong, also added approximately
$2
million and $268,000 net profit, respectively, to the total amount of net profit
during the second quarter of 2006. With the new operation of 2, 2.5 and 3G
VAS
services, net profit has rapidly increased. PacificNet Limited and PacificNet
Power also added approximately $214,000 and $296,000 net profit, respectively,
to the Company due to newly obtained projects during the second quarter of
2006.
Overall, management is optimistic in our ability to drive revenue and profits
quarter-to-quarter as a result of cost reductions and efficient utilization
of
assets.
RESULTS
OF OPERATIONS
The
following table sets forth selected statement of operations data as a percentage
of revenue for the periods indicated.
|
|
Year
Ended
December
31
2005
(%)
|
|
Year
Ended
December
31
2004
(%)
|
|
Year
Ended
December
31
2003
(%)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
|
|
100
|
|
|
100
|
|
Cost
of revenue
|
|
|
(75.4
|
)
|
|
(81.0
|
)
|
|
(57.4
|
)
|
Gross
margin
|
|
|
24.6
|
|
|
19.0
|
|
|
42.6
|
|
Selling,
general and administrative
|
|
|
(13.2
|
)
|
|
(11.6
|
)
|
|
(129.2
|
)
|
Depreciation
and amortization
|
|
|
(0.7
|
)
|
|
(0.3
|
)
|
|
(6.2
|
)
|
Earnings
from operations
|
|
|
10.3
|
|
|
6.5
|
|
|
(109.8
|
)
|
Interest
(expenses) income, net
|
|
|
0.1
|
|
|
0.3
|
|
|
2.2
|
|
Sundry
income
|
|
|
1.9
|
|
|
1.4
|
|
|
4.4
|
|
Provision
for income taxes
|
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(2.6
|
)
|
Share
of profit of associated companies
|
|
|
(0.00
|
)
|
|
0.1
|
|
|
--
|
|
Minority
interest
|
|
|
(6.6
|
)
|
|
(5.5
|
)
|
|
5.8
|
|
Discontinued
operations
|
|
|
—
|
|
|
(0.1
|
)
|
|
--
|
|
Net
earnings
|
|
|
5.6
|
|
|
2.6
|
|
|
(105.3
|
)
|
REVENUE.
Revenue for the year ended December 31, 2005 was $44,341,000, an increase of
49%
as compared to $29,709,000 for the year ended December 31, 2004. The increase
in
revenue was mainly due to revenue derived from the value-added telecom services
rendered by the Company’s newly acquired subsidiaries, Guangzhou3G ($3,143,000),
Clickcom ($365,000) and Lion Zone ($1,194,000). In the aggregate, the three
newly acquired subsidiaries contributed to 11% of the total revenue. Revenue
from the VAS and IVR segment can vary from quarter to quarter due to new product
launches and the seasonality of certain product lines. The “Other Business”
column includes the revenue and earnings/(loss) from operations of our other
insignificant subsidiaries. Summarized financial information for each of our
four business operating segments is set forth in the table
below.
YEAR
ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31,
2004
For
the year ended December
31, 2005
|
|
Group
1 Outsourcing Business ($)
|
|
Group
2 VAS Business ($)
|
|
Group
3 Communications Distribution Business ($)
|
|
Group
4 Other Business ($)
|
|
Total
($)
|
|
Revenue
|
|
|
13,505,000
|
|
|
13,834,000
|
|
|
16,201,000
|
|
|
801,000
|
|
|
44,341,000
|
|
(%)
of Total
|
|
|
(30.5%)
|
|
|
(31.2%)
|
|
|
(36.5%)
|
|
|
(1.8%)
|
|
|
(100%)
|
|
Earnings/(Loss)
from
Operations
|
|
|
1,360,000
|
|
|
3,899,000
|
|
|
558,000
|
|
|
(1,248,000
|
)
|
|
4,569,000
|
|
(1)
OUTSOURCING SERVICES
Revenue
for the year ended December 31, 2005 was $13,505,000, an increase of 44% as
compared to $9,385,000 for the year ended December 31, 2004. Outsourcing
services revenue made up 26.54% of the Company’s total revenue for the fourth
quarter of the year due to its subsidiary being selected by China’s State
Administration of Taxation to provide integrated call center services training
for the tax bureau’s “123661” customer services center in Shenzhen and it is
believed that the contact center expansion in Guangzhou will lead to over 40%
annual revenue growth in the coming years. One of the reasons the revenue
increased is due to the continuous rapid growth on computer software product
and
the company provides a seamless solution and multi-media channels for clients
to
communicate with their customers for building better customer relationship
and
generating more sales revenue. The combination of its innovative infomercials
along with our growing call center operations will allow us to support
significant future growth. It is a strong vote of confidence in our future
development in China’s growing CRM call center market due to our expansion from
B2B outsourced call center services into B2C infomercial services market for
vertical industries which a growing number of domestic and multinational
companies across a number of industries are selecting us to enhance customer
services. This demand for CRM services reflects the increasingly competitive
nature of the Chinese marketplace where customers choose a provider not solely
based upon price, but also on customer services. We believe that our CRM contact
center has emerged as the new competitive advantage for the market leaders
in
China and we are well positioned to benefit from this trend.
(2)
VALUE-ADDED SERVICES
VAS
revenue for the year ended December 31, 2005 was $13,834,000, a significant
increase of 142% as compared to $5,724,000 for the year ended December 31,
2004.
Our acquisition of 3G, Clickcom and Lion Zone in 2005 contributed to the
increase in revenue for this business segment and helped us enter the mobile
Internet market in China. VAS revenue made up 49.1% of the Company’s total
revenue for the fourth quarter of the year. Presently, approximately 80% of
mobile phone users use VAS in China. The Company’s revenue in the sales of voice
cards continued to grow through Linkhead-generated NMS cards and with the cards
increasing use in voice hardware equipment, based on CPCT industry control
machines and Media Server which supports access from both PSTN and VoIP,
softswitch and 3Gnetworks. These phone cards sold through the VAS segment differ
from the calling cards sales in the Communication Distribution Business as
described below in that those phone cards are geared towards the end user and
include prepaid calling cards, IDD long distance calling cards, internet access
cards, bundled cross-selling insurance cards, shopping discount cards, travel
and hotel reservation cards, entertainment cards, and customer loyalty
membership cardsFor example, the Bank of China Shanghai selected PacificNet
Epro
to provide CRM and call center management training, to enhance agent
productivity, to improve call center service quality, and to revise the
strategic market positioning for the bank.
(3)
COMMUNICATION PRODUCTS DISTRIBUTION
Revenue
for the year ended December 31, 2005 was $16,201,000, an increase of 37% as
compared to $11,790,000 for the year ended December 31, 2004. Its revenue
remained steady growth during the year due to the increasing market growth
in
communication products distribution services. Communication products
distribution revenue made up 20.3% of the Company’s total revenue for the fourth
quarter of the year. In FY2005, sales mix of high-margin products such as number
cards and IP cards increased whereas substantial portion of FY2004 revenue
were
derived from low-margin prepaid stored-value cards. This improved sales mix
was
achieved through sales incentive scheme. Furthermore, we believe that our Take1
and My Memory Maker Kiosks are a natural fit in the self-service vending
machine, party, amusement, and casino market, and we also believe there are
strong opportunities for growth in high-traffic tourist and amusement
destinations. Recently, the Company had entered into a definitive agreement
to
acquire iMobile in order to enhance our position in this rapidly growing B2C
market in China.
COST
OF
REVENUE AND GROSS MARGIN. Cost of revenue for the year ended December 31, 2005
was $33,439,000 an increase of 38% from $24,074,000 for the year ended December
31, 2004. The slight increase in the cost of revenue was directly associated
with the increase in revenue. Cost of revenue, as a percentage of revenue,
was
75% for the year ended December 31, 2005 as compared with 81% for the year
ended
December 31, 2004. The decrease in percentage cost of revenue was attributable
to the changes in operations, from supplying systems integration and software
applications in 2004 to becoming value-added telecom services and product
providers in 2005. Gross profit for the year ended December 31, 2005 was
$10,902,000 an increase of 93% as compared to $5,635,000 for the year ended
December 31, 2004, resulting from gross margin contributions from our newly
acquired subsidiaries in 2005. Gross profit for the fourth quarter of the year
was $5,047,000, a significant increase of 265% as compared to $1,379,000 for
the
same period in 2004; or a significant increase of 153% as compared to the third
quarter of 2005.
We
believe that our gross margin overall approximates the industry standards.
The
significant increase in gross margin came primarily from, our phone card
business, which has higher gross margins, typical for that industry. We expect
our gross margin percentage to increase gradually as a result of cost reduction
and efficient utilization of assets.
(1)
OUTSOURCING SERVICES
As
compared to prior year, cost of revenue for outsourcing services increased
by
55% to $10,095,000 (2004: $6,491,000). Gross profit was 4% lower at $3,409,000
(2004: $3,543,000). Gross profit of $1,069,000 for the fourth quarter had a
significant increase of 56% as compared to $682,000 for the third quarter of
2005 due to the increasing demand for outsourcing contact center services,
especially from the industries of telecom, banking, market research and
fast-moving consumer goods, among others. The slightly decline year over year
was primarily due to the enhanced Hong Kong market competition.
However,
from the perspective of high-margin IT Solutions, EPRO enjoyed growth in FY2005
from its self-developed Contact Center System - WISE-xb Contact Center System
and TNT Hong Kong selected this contact center solution with customer management
capabilities to improve efficiency and enhance customer
satisfaction.
(2)
VALUE-ADDED SERVICES
As
compared to prior year, cost of revenue for VAS increased by 75% to $7,715,000
(2004: $4,403,000). Gross profit was 262% much higher at $6,119,000 (2004:
$1,688,000). Gross profit of $3,241,000 for the fourth quarter also had a
significant increase of 471% as compared to the same period in 2004; or an
increase of 184% as compared to $1,141,000 for the third quarter of 2005.
Throughout the new acquisitions in 2005 such as Lion Zone with higher gross
margin, it moved our strategic consolidation in China’s CRM and VAS market, and
increased our customer base and improved our gross margin. The increasing gross
profit is also derived from the continued profitability in the sale of phone
cards. Furthermore, Company increased market share in the voice/IVR supplier
market.
(3)
COMMUNICATION PRODUCTS DISTRIBUTION
As
compared to prior year, cost of revenue for communication products distribution
slightly increased by 17% to $15,347,000 (2004: $13,106,000). Gross profit
was
194% higher at $854,000 (2004: $290,000). The fourth quarter is normally the
strongest due to holiday-related promotions which increase the spending of
our
customers with us and therefore higher margin was expected. Furthermore, since
revenue made up the highest rate of 36.5% of the Company’s total revenue and
cost of revenue had only slightly increased in 2005, its gross profit relatively
increased more to reach our future expectation. As one of its subsidiaries,
Shanghai Classic Group Limited (Yueshen) signed an agreement to become a
designated integrated services distributor of China Mobile in 2005, it increased
the Company’s overall distribution revenue and profit margin. The improved gross
margin was mainly due to increased sales mix from higher margin products such
as
number cards with average gross margin of 8 to 15% and IP calling cards with
average gross margin of 30% instead of low-margin prepaid stored-value cards
with just around 2% gross margin.
(4)
OTHER
BUSINESS
Cost
of
revenue and gross profit for PacificNet Power for the year ended December 31,
2005 was $269,000 and $67,000. PacificNet Power did not exist in 2004, so no
comparison is available for 2004.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and Administrative
expenses totaled $5,811,000 for the year ended December 31, 2005, an increase
of
69% from $3,435,000 for the year ended December 31, 2004. As our fourth quarter
results included several one-time charges or expenses such as the $103,250
NASDAQ National Market Entry Fee, quarterly SG&A had significant increase of
183% as compared to the third quarter of the year. The increase in selling,
general and administrative expenses reflected the expansion of our operations
of
which expenses were incurred by our newly acquired subsidiaries and the
expansion of the management team. In addition to making several key acquisitions
in 2005, we laid the foundation for a strong future, by hiring additional
personnel in key areas to support our accounting and back-office functions,
as
well as implemented the systems to allow the Company to better measure the
performance of each of its units.
(1)
OUTSOURCING SERVICES
Selling,
General and Administrative expenses for outsourcing services were $1,628,000
for
the year ended December 31, 2005, a reduction of $502,000 from $2,130,000 for
the year ended December 31, 2004. Due to the increase in the demand for
telemarketing and call center services, one of the subsidiaries purchased a
new
250-seat call center facility in China, to support the rapidly growing business
of the company. It caused an increase of 103% to $482,000 for SG&A for the
fourth quarter of the year. However, a wide array of supporting services are
provided, including professional inbound services, outbound services, facilities
management and IVRS support services, to meet clients’ diversified
needs.
(2)
VALUE-ADDED SERVICES
Selling,
General and Administrative expenses for VAS were $2,159,000 for the year ended
December 31, 2005, an increase of $2,072,000 as compared to $87,000 in 2004.
The
increase of SG&A resulted from increasing the size of our operations which
included premises costs and staff costs from the three new
acquisitions.
(3)
COMMUNICATION PRODUCTS DISTRIBUTION
Selling,
General and Administrative expenses for communication products distribution
were
$271,000 for the year ended December 31, 2005, an increase of 188% as compared
to $94 for the year ended December 31, 2004. This business is easily scalable
depending on the availability of working capital, since one of the subsidiaries,
Shanghai Classic, needs to pay the telephone operators/suppliers cash
upfront.
(4)
OTHER
BUSINESS
Selling,
General and Administrative expenses were $167,000 for the year ended December
31, 2005.
DEPRECIATION
AND AMORTIZATION EXPENSES. Depreciation and amortization expenses were
$1,126,000 for the year ended December 31, 2005, which represented 1344%
increase as compared to the year ended December 31, 2004 of which depreciation
and amortization expenses was $78,000.
EARNINGS
FROM OPERATIONS. Operating profit of $4,569,000 for the year ended
December 31, 2005, a significant increase of 136% as compared to $1,937,000
from
the year ended December 31, 2004. Operating margins nearly doubled to 10.3%
from
6.5% in the previous year. Quarterly operating profit was $1,702,000, an
increase of 66% as compared to $1,026,000 from Q3 2005. Quarterly operating
profit of $380,000, $1,470,000, and $254,000 generated from the Company’s three
business units: (1) CRM Outsourcing Services, (2) Value-Added Services (VAS)
and
(3) Telecom Distribution Services, represented an increase of 75%, 50% and
47%
respectively. These are compared to $217,000, $974,000, and $172,000
respectively for Q3 2005. Operating profit of $1,360,000, $3,899,000 and
$558,000 generated from business units (1), (2) and (3) for the year ended
December 31, 2005 represented an increase of 36%, 110% and 556% respectively,
as
compared to $1,000,000, $1,859,000, and $85,000 respectively for the year ended
December 31, 2004. The increase in operating margin reflects Company’s
continuous shift away from our traditional lower-margin phone card distribution
business (B2B services) to higher margin value-added telecom services and B2C
e-commerce. We believe that in 2006 this strategy will result in increased
profitability. This strategy is beginning to work, as our operating margin
increased from 6.5% in 2004 to 10.3% in 2005.
INTEREST
EXPENSES / INCOME. Interest income was $246,000 for the year ended December
31,
2005, an increase of 211% as compared to $79,000 for the year ended December
31,
2004. The increase is due to 62% of interest income generated from PacificNet
Communications. Interest income was mainly generated from $152,000 of PacificNet
Communications from lending and fixed-rate bank deposits (62% of total interest
income) and $45,000 of PacificNet Strategic Investment Holdings Limited from
bank deposits. Interest expenses were $229,000 for the year ended December
31,
2005, an increase of 24% as compared to $185,000 for the year ended December
31,
2004. Most of the interest expenses were attributed to bank loans by PacificNet
Strategic Investment Holdings ($34,000) and Linkhead ($26,000), and bank loans
and bank overdraft by Epro ($133,000).
SUNDRY
INCOME/EXPENSE. Sundry income known as non-operating income is defined as the
external income (miscellaneous income) that results from factors outside of
our
operating subsidiaries’ control and such income does not related to each
subsidiaries’ core operating business. Income from the sale of various
investments is one of the typical examples. (See Note 11 for
details)
For
the
year ended December 31, 2004, the non-operating income or sundry income was
mainly derived from Linkhead’s consulting services income from system
integration services totaling $380,000.
For
the
year ended December 31, 2005, the non-operating income or sundry income was
$830,000 included in Statement of Operations was mainly derived from the
consulting services income of $116,000, software service income of $375,000,
investment income of $113,000, leasehold income of $75,000 and various other
totaling $151,000.
SHARE
OF
PROFIT OF ASSOCIATED COMPANIES. We recorded the loss of $8,000 for the year
ended 2005 with respect to our 20% ownership interest in Take1 Technology
(Cheer
Era Limited), acquired in April 2004.
INCOME
TAXES. The income taxes expenses for the Company’s subsidiaries were
$222,000 for the year ended December 31, 2005. The provision of income taxes
was
the result of the operating profit generated by Guangzhou3G, Clickcom and
ChinaGoHi, the subsidiaries we acquired in 2005. Pursuant to the PRC Income
Tax
Laws, the Company’s subsidiaries and VIEs are generally subject to Enterprise
Income Taxes (“EIT” at a statutory rate of 33%, which comprises 30% national
income tax and 3% local income tax. Some of these subsidiaries and VIEs are
qualified new technology enterprises and under PRC Income Tax Laws, they
are
subjected to a preferential tax rate of 15%. Guangzhou3G-DE as software
enterprise comprises 15% tax rate for one year during 2005 and it can continue
to apply 15% tax rate after this is expired. In addition, Guangzhou 3G-WOFE,
as
a new High Technology Foreign Investment Enterprises and under PRC Income
Tax
Laws, is entitled to a two-year tax exemption in 2005 and 2006. In order
to
improve the technology market in China, another of our high-tech subsidiaries,
Linkhead, is entitled a three-year tax exemption followed by three years
with a
50% reduction in the tax rate, commencing the first operating year. Therefore,
Linkhead’s taxes have been remitted during January 1, 2003 to December 31, 2005
but it pays taxes at 7.5% from January 1, 2006 to December 31,
2008.
MINORITY
INTERESTS. Minority interests for the year ended December 31, 2005 totaled
$2,926,000. Minority interests represented the interests of third parties
in our
subsidiaries’ results.
NET
EARNINGS. Net earnings for the year ended December 31, 2005 was $2,489,000
as compared to net earnings of $774,000 for the year ended December 31, 2004.
Operating profit of $1,360,000, $3,899,000 and $558,000 generated from the
Company’s three business units: (1) CRM Outsourcing Services, (2) Value-Added
Services (VAS) and (3) Telecom Distribution Services, represented an increase
of
36%, 110% and 556% respectively as compared to $1,000,000, $1,859,000, and
$85,000 respectively for the year ended December 31, 2004. The overall net
earnings increased sharply due to (i) the Company acquired direct response
television and infomercial marketing services company in China which received
an
award by the Chinese tax bureau as one of the “Top 100 Tax-Paying Enterprises”
in Shenzhen as recognition for profit generation, commercial leadership and
government contribution; (ii) launched a new Mobile Mailbox Service called
“UMAIL” for Unicom’s CDMA users on its WAP Portal website; (iii) signed up China
Mobile for New Blog Service and so forth. Furthermore, the new facility in
China
should lead to growth in profit margin because the labor cost and office
facility is less than half of the cost in Hong Kong.
YEAR
ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31,
2003
REVENUES.
Revenues for the year ended December 31, 2004 were $29,709,000, an increase
of
$28,492,000 from $1,217,000 for the year ended December 31, 2003. Increase
in
revenue was mainly due to revenues derived from the call center and value-added
telecom services rendered by the Company’s newly acquired subsidiaries of
YueShen, Epro, Linkhead and Smartime. In the aggregate, the four newly acquired
subsidiaries contributed to 91% of total revenues. Summarized financial
information concerning each of these subsidiaries was set forth in the following
table. The “Admin & Other” column included our other insignificant
subsidiaries and corporate related items.
For
the year ended December
31, 2004
|
|
Group
1 Outsourcing Business ($)
|
|
Group
2 VAS Business ($)
|
|
Group
3 Communications Distribution Business ($)
|
|
Admin
& Other Business ($)
|
|
Total
($)
|
|
Revenue
|
|
|
9,385,000
|
|
|
5,724,000
|
|
|
11,790,000
|
|
|
2,810,000
|
|
|
29,709,000
|
|
Earnings
/ (loss) from Operations
|
|
|
1,000,000
|
|
|
1,859,000
|
|
|
85,000
|
|
|
(1,007,000
|
)
|
|
1,937,000
|
|
For
the year ended December
31, 2003
|
|
1.Outsourcing
Business
($)
|
|
2.
VAS
Business
($)
|
|
3.Communications
Distribution
Business
($)
|
|
4.
Other Business
($)
|
|
Total
($)
|
|
Revenues
|
|
|
1,048
|
|
|
39
|
|
|
-
|
|
|
130
|
|
|
1,217
|
|
(%
of Total Rev)
|
|
|
(86.1%)
|
|
|
(3.3%)
|
|
|
-
|
|
|
(10.6%)
|
|
|
(100%)
|
|
Earnings
/ (Loss) from Operations
|
|
|
15
|
|
|
10
|
|
|
(18)
|
|
|
(1,344)
|
|
|
(1,337)
|
|
COST
OF
REVENUES AND GROSS MARGIN. Cost of revenues for the year ended December 31,
2004
were $24,074,000, an increase of $23,376,000 from $698,000 for the year ended
December 31, 2003. The significant increase in cost of revenues was directly
associated with the increase in revenues. Cost of revenues, as a percentage
of
revenues, was 81% for the year ended December 31, 2004 compared with 57% for
the
year ended December 31, 2003. The increase in percentage cost of revenues was
attributable to the changes in operations, from supplying systems integration
and software application in 2003 to becoming value-added telecom services and
product providers in 2004. Gross margin for the year ended December 31, 2004
was
$5,635,000, an increase of $5,116,000 from $519,000 for the year ended December
31, 2003, resulting from gross margin contributions from our newly acquired
subsidiaries in 2004. We believe that our gross margin overall approximates
the
industry standards. The decrease in gross margin came primarily from Yueshen,
our calling card business, which, typically for that industry, has lower gross
margins. However, we expect our gross margin percentage to increase gradually
as
a result of cost reduction and efficient utilization of assets.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES. Selling, General and Administrative
expenses, including interest expense, totaled $3,620,000 for the year ended
December 31, 2004, an increase of $1,840,000 from $1,780,000 for the year ended
December 31, 2003. The increase in selling, general and administrative expenses
reflected the expansion of our operations of which expenses were incurred by
our
newly acquired subsidiaries.
DEPRECIATION
AND AMORTIZATION EXPENSES. Depreciation and amortization expenses amounted
to
$78,000 for the year ended December 31, 2004, which was approximately the same
as the year ended December 31, 2003 of which depreciation and amortization
expenses was $76,000.
INTEREST
INCOME. Interest income was $79,000 for the year ended December 31, 2004, as
compared to an interest income of $27,000 for the year ended December 31, 2003.
The increase in income was due to increase in cash and bank balance during
2004
as a result of cash flow from funding activities.
SHARE
OF
PROFIT OF ASSOCIATED COMPANIES. For the year ended 2004, we recorded income
of
$32,000 with respect to our 30% ownership interest in Cheer Era Limited,
acquired in April 2004.
INCOME
TAXES. The income taxes expenses for the Company’s subsidiaries were $30,000 for
the year ended December 31, 2004. The provision of income taxes was the result
of the operating profit generated by YueShen and Smartime, the subsidiaries
we
acquired in 2004. During the year ended December 31, 2004, YueShen, Smartime
and
Epro provided income taxes expenses of $8,000, $12,000 and $10,000,
respectively.
MINORITY
INTERESTS. Minority interests for the year ended December 31, 2004 totaled
($1,623,000) compared to $7,000 for the year ended December 31, 2005. Minority
interest represented the interests of third parties in our subsidiaries’
results.
OFF-BALANCE
SHEET ARRANGEMENTS. We had no outstanding derivative financial instruments,
off-balance sheet guarantees, interest rate swap transactions or foreign
currency forward contracts. We did not engage in trading activities involving
non-exchange traded contracts during 2004.
LIQUIDITY
AND CAPITAL RESOURCES
CASH
AND
CASH EQUIVALENTS.
As
of
June 30, 2006, cash and cash equivalents were $5,935,000, compared to $9,579,000
at December 31, 2005 as a result of the decrease of cash and cash equivalents
of
more than $3.2million for Lion Zone. The significant reduction for Lion Zone
was
primarily attributed to a loan to a related party of approximately $2.1million,
acquisition of property and equipment, and taxes paid.
WORKING
CAPITAL.
The
Company’s working capital increased to $29,822,000 at June 30, 2006, as compared
to $20,510,000 at December 31, 2005. When compared to balances at December
31,
2005, an increase of 45.4% in working capital at June 30, 2006 was primarily
due
to the increases in current assets and the decrease in current liabilities
accounts. The increase of current assets was mainly the result of significant
increase in accounts receivable which was attributable to our existing
subsidiaries and a significant increase in loan receivable from related parties.
The decrease of current liabilities was primarily due to the decrease of accrual
expense and other payable. The increase of accounts receivable at June 30,
2006
was mainly driven from the increase of $2,070,000 from PacPower (due to the
installation of Central Air-Conditioning and chiller replacement project, and
two services agreements - see revenues (4) above), the increase of $2,575,000
from PacCom (see revenues (3) above), the increase of $839,000 from 3G (due
to
the expansion of 3G services) and the increase of $574,000 from Epro. The two
recently acquired subsidiaries, Wanrong and iMobile also added $255,000 and
$587,000 to accounts receivable at June 30, 2006, respectively.
CASH
FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006
NET
CASH
FROM OPERATING ACTIVITIES. Net cash used in operating activities was $7,531,000
for the six months ended June 30, 2006 as compared to net cash used in operating
activities of $110,000 for the six months ended June 30, 2005. Net cash used
in
operating activities in the six months ended June 30, 2006 was primarily due
to
net earnings of $1,719,000 offset by minority interest of $1,934,000, non-cash
related expenses of approximately $900,000, $208,000 for the change in fair
value of our derivatives as of the balance sheet date, and a net increase in
working capital items of $12,530,000. The increase in working capital was mainly
due to an increase in accounts receivable of $9,870,000 and an increase in
inventories of $415,000 which mainly resulted from higher revenues and a net
decrease in account payables and accrued expenses of $1,745,000 which was
primarily due to the decrease in accrued expenses and income tax
payable.
NET
CASH
FROM INVESTING ACTIVITIES. Net cash used in investing activities was $4,209,000
for the six months ended June 30, 2006 compared to $3,387,000 for the
comparative prior period. Net cash used in investing activities in the six
months ended June 30, 2006 was primarily due to the acquisition of property
and
equipment from the company, Dragon Roar, Lion Zone and Epro totaling $3,124,000,
and cash payment totaling $836,000 related to the ChinaGoHi, Wanrong and iMobile
acquisitions, and an increase of $2,233,000 in loan receivable from related
parties, offset by the release of the restricted cash of $1,422,000 from
ChinaGoHi and an decrease of $562,000 for loan receivables from third
parties.
NET
CASH
FROM FINANCING ACTIVITIES. Net cash provided by financing activities for the
six
months ended June 30, 2006 was $8,042,000, which was mainly due to the proceeds
from issuance of convertible debenture of $8,000,000 less debt issuance costs
paid of $500,000, the exercise of the share options and warrants of $86,000,
an
increase in bank loan of $623,000 which was due to the purchase of our Beijing
office, and an increase in loans payable to related party of $201,000 by Epro.
The amount was partially offset by the repayment of banking facilities of
$171,000 from Epro and Smartime, the repayment of amount borrowed under capital
lease of $73,000, and repurchase of treasury shares of $124,000. Net cash
provided by financing activities for the six months ended June 30, 2005 was
$2,302,000, which was primarily a result of an increase in loans payable to
related party of $390,000, an increase in advances from banking facilities
of
$142,000 primarily by EPRO, an increase in bank loan of $727,000, and an
increase from the exercise of share options and warrants of
$981,000.
CONTRACTUAL
OBLIGATIONS
We
have
significant cash resources to meet our contractual obligations as of June 30,
2006, as detailed below:
Payments
Due by Period
Contractual
Obligations
|
|
Total
|
|
Less
than 1 year
|
|
1-5
years
|
|
After
5 years
|
|
Line
of credit
|
|
$
|
889,000
|
|
$
|
889,000
|
|
|
0
|
|
|
0
|
|
Bank
Loans
|
|
$
|
1,899,000
|
|
$
|
401,000
|
|
$
|
725,000
|
|
$
|
773,000
|
|
Operating
leases
|
|
$
|
1,805,000
|
|
$
|
819,000
|
|
$
|
986,000
|
|
|
0
|
|
Capital
leases
|
|
$
|
131,000
|
|
$
|
88,000
|
|
$
|
43,000
|
|
|
0
|
|
Total
cash contractual obligations
|
|
$
|
4,724,000
|
|
$
|
2,197,000
|
|
$
|
1,754,000
|
|
$
|
773,000
|
|
We
have
significant cash resources to meet our contractual obligations as of December
31, 2005, as detailed below:
PAYMENTS
DUE BY PERIOD
|
|
Less
Than
|
|
Contractual
Obligations
|
|
Total
|
|
1
year
|
|
1-5
years
|
|
After
5 years
|
|
Line
of credit
|
|
$
|
1,060,000
|
|
$
|
1,060,000
|
|
|
—
|
|
|
—
|
|
Bank
Loans
|
|
$
|
194,000
|
|
$
|
188,000
|
|
$
|
6,000
|
|
|
—
|
|
Operating
Leases
|
|
$
|
1,676,000
|
|
$
|
870,000
|
|
$
|
806,000
|
|
|
—
|
|
Capital
Leases
|
|
$
|
204,000
|
|
$
|
126,000
|
|
$
|
78,000
|
|
|
—
|
|
Total
cash contractual obligations
|
|
$
|
3,134,000
|
|
$
|
2,244,000
|
|
$
|
890,000
|
|
|
—
|
|
OFF-BALANCE
SHEET ARRANGEMENTS. We had no outstanding derivative financial instruments,
off-balance sheet guarantees, interest rate swap transactions or foreign
currency forward contracts. We did not engage in trading activities involving
non-exchange traded contracts during 2005.
INFLATION.
Inflation has not had a material impact on the Company’s business in
recent years.
CURRENCY
EXCHANGE FLUCTUATIONS. All of the Company’s revenue are denominated either in
U.S. dollars or Hong Kong dollars, while its expenses are denominated primarily
in Hong Kong dollars and Chinese renminbi (“RMB”). The value of the RMB-to-U.S.
dollar or Hong Kong dollar-to-United States dollar and other currencies may
fluctuate and is affected by, among other things, changes in political and
economic conditions. Since 1994, the conversion of renminbi into foreign
currencies, including U.S. dollars, has been based on rates set by the People’s
Bank of China, which are set daily based on the previous day’s interbank foreign
exchange market rates and current exchange rates on the world financial markets.
Since 1994, the official exchange rate generally has been stable. Since October
2004, the renminbi has been pegged to the US dollar at the rate of one dollar
for 8.2765 yuan, which was scrapped when the renminbi reform was launched on
July 21 and since then the yuan was fixed at a market basket of currencies.
Recently there has been increased political pressure on the Chinese government
to decouple the renminbi from the United States dollar. At the recent quarterly
regular meeting of People’s Bank of China, its Currency Policy Committee
affirmed the effects of the reform on Chinese renminbi exchange rate, regarding
that in the past two months (February and March 2006) when the new currency
rate
system has been operating, the currency rate of renminbi has become more
flexible while basically maintaining stable and the expectation for a larger
appreciation range is shrinking. Although a devaluation of the Hong Kong dollar
or renminbi 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 renminbi 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. For fluctuations in period to period exchange rates, the translation
adjustment is required to translate from local functional currency to the USD
reporting currency (not RMB to HKD to USD). The Company has never engaged in
currency hedging operations and has no present intention to do so.
CONCENTRATION
OF CREDIT RISK. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions as described below:
|
|
The
Company’s business is characterized by rapid technological change, new
product and service development, and evolving industry standards
and
regulations. Inherent in the Company’s business are various risks and
uncertainties, including the impact from the volatility of the stock
market, limited operating history, uncertain profitability and the
ability
to raise additional capital.
|
|
|
All
of the Company’s revenue is derived from Asia and Greater China. Changes
in laws and regulations, or their interpretation, or the imposition
of
confiscatory taxation, restrictions on currency conversion, devaluations
of currency or the nationalization or other expropriation of private
enterprises could have a material adverse effect on our business,
results
of operations and financial
condition.
|
|
|
If
the Company is unable to derive any revenue from Greater China, it
would
have a significant, financially disruptive effect on the normal operations
of the Company.
|
A
substantial portion of the operations of business operations depend on mobile
telecommunications operators {operators) in China and any loss or deterioration
of such relationship may result in severe disruptions to their business
operations and the loss of a significant portion of the Company’s revenue. The
VIEs rely entirely on the networks and gateways of these operators to provide
its wireless value-added services. Specifically these operators are the only
entities in China that have platforms for wireless value-added services. The
Company’s agreements with these operators are generally for a period of less
than one year and generally do not have automatic renewal provisions. If neither
of them is willing to continue to cooperate with the Company, it would severely
affect the Company’s ability to conduct its existing wireless value-added
services business.
COMPREHENSIVE
INCOME (LOSS). Comprehensive income (loss) consists of net earnings and other
gains (losses) affecting stockholders’ equity that, under generally accepted
accounting principles are excluded from net earnings in accordance with
Statement of Financial Accounting Standards (“SFAS”) 130, Reporting
Comprehensive Income. Additionally, the translation adjustment is recorded
as
component of comprehensive income (loss) in stockholders’ equity section of
balance sheet.
SEASONALITY
AND QUARTERLY FLUCTUATIONS Several of our businesses experience fluctuations
in
quarterly performance. Traditionally, the first quarter from January to March
is
a low season for our call center business due to the long Lunar New Year
holidays in China. Revenue and income from operations for the call center and
VAS tend to be higher in the fourth quarter due to special holiday promotions.
Internet/Direct Commerce revenue also tends to be higher in the fourth quarter
due to increased consumer spending during that period. Revenue from the VAS
and
IVR segment can vary from quarter to quarter due to new product launches and
the
seasonality of certain product lines.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We
are
exposed to various market risks arising from adverse changes in market rates
and
prices, such as foreign exchange fluctuations and interest rates, which could
impact our results of operations and financial position. We do not currently
engage in any hedging or other market risk management tools, and we do not
enter
into derivatives or other financial instruments for trading or speculative
purposes.
Foreign
Currency Exchange Rate Risk. Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies,
primarily the Hong Dollar and the Chinese Renminbi, could adversely affect
our
financial results. Approximately all of our sales are denominated in foreign
currencies. We expect that foreign currencies will continue to represent a
similarly significant percentage of our sales in the future. Selling, marketing
and administrative costs related to these sales are largely denominated in
the
same respective currency, thereby mitigating our transaction risk exposure.
We
therefore believe that the risk of a significant impact on our operating income
from foreign currency fluctuations is not substantial. However, for sales not
denominated in U.S. dollars, if there is an increase in the rate at which a
foreign currency is exchanged for U.S. dollars, it will require more of the
foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases and if we price our products in the foreign
currency, we will receive less in U.S. dollars than we did before the rate
increase went into effect. If we price our products in U.S. dollars and
competitors price their products in local currency, an increase in the relative
strength of the U.S. dollar could result in our price not being competitive
in a
market where business is transacted in the local currency. All of our sales
denominated in foreign currencies are denominated in the Hong Dollar and the
Chinese Renminbi. Our principal exchange rate risk therefore exists between
the
U.S. dollar and these two currencies. Fluctuations from the beginning to the
end
of any given reporting period result in the re-measurement of our foreign
currency-denominated receivables and payables, generating currency transaction
gains or losses that impact our non-operating income/expense levels in the
respective period and are reported in other (income) expense, net in our
combined consolidated financial statements. We do not currently hedge our
exposure to foreign currency exchange rate fluctuations. We may, however, hedge
such exposure to foreign currency exchange rate fluctuations in the
future.
All
of
our sales denominated in foreign currencies are denominated in the Hong Dollar
and the Chinese Renminbi. Our principal exchange rate risk therefore exists
between the U.S. dollar and these two currencies. Fluctuations from the
beginning to the end of any given reporting period result in the re-measurement
of our foreign currency-denominated receivables and payables, generating
currency transaction gains or losses that impact our non-operating
income/expense levels in the respective period and are reported in other
(income) expense, net in our combined consolidated financial statements. We
do
not currently hedge our exposure to foreign currency exchange rate fluctuations.
We may, however, hedge such exposure to foreign currency exchange rate
fluctuations in the future.
Interest
Rate Risk. Changes
in interest rates may affect the interest paid (or earned) and therefore affect
our cash flows and results of operations. We are exposed to interest rate change
risk with respect to our subsidiary, Epros’ credit facility with a commercial
lender. However, we do not believe that this interest rate change risk is
significant.
We
were
incorporated in the state of Delaware in 1987. Our business consists of four
groups, all of which operate within the outsourcing and telecommunications
industries in Asia, primarily Greater China, which includes the People’s
Republic of China (PRC), or mainland China, Hong Kong Special Administrative
Region (HKSAR), Macau Special Administrative Region, and Taiwan. Through our
Subsidiaries we invest in and operate companies that provide outsourcing
services, value-added telecom services (VAS) and communication products
distribution services. Our business process outsourcing (BPO) services include
call centers, providing customer relationship management (CRM), and
telemarketing services, and our information technology outsourcing (ITO)
includes software programming and development. We are value-added resellers
and
providers of telecom VAS, which comprises interactive voice response (IVR)
systems, call center management systems and voice over internet protocol (VOIP),
as well as mobile phone VAS, such as short messaging services (SMS) and
multimedia messaging services (MMS). Our communication products distribution
services include the wholesale and retail sale and distribution of calling
cards
in China, multimedia interactive self-service kiosk distribution and online
mobile phone distribution. We also have a number of subsidiaries that we use
primarily for administration, internal control and acquisition purposes. We
intend to continue to grow our business by acquiring and managing growing
technology and network communications businesses with established products
and
customers in Asia.
Our
business process outsourcing services generate revenue from call center
services, call center management software sales, and training and consulting.
We
invoice our call center clients monthly at per seat monthly rates, a base price
plus commission per call, or a per hour charge rate, depending on the client’s
preference. Our call center software clients pay per license, for which there
is
usually a one-time charge on sale of the software and annual maintenance fees
for service. We charge per project for our consulting and training services
and
for our telecom VAS, which are invoiced throughout the project. Our telecom
VAS
often includes a post-sale service contract for systems integration and
consulting services for which we bill separately. Our communication products
such as calling cards, kiosks and cell phones are sold
cash-on-delivery.
Our
clients include the leading telecom operators, banks, insurance, travel,
marketing, and service companies, as well as telecom consumers, in Greater
China. Clients include China Telecom, China Netcom, China Mobile, China Unicom,
PCCW, Hutchison Telecom, CSL, SmarTone, Sunday, Swire Travel, Coca-Cola, SONY,
Samsung, Motorola, Nokia, TNT Express, Huawei, TCL, Dun & Bradstreet,
American Express, Bank of China, DBS, Hong Kong Government, and Hongkong Post.
PacificNet employs over 2,000 staff in our various subsidiaries in China with
offices in Hong Kong, Beijing, Shanghai, Shenzhen, and Guangzhou.
PacificNet’s
operations include the following four groups:
(1)
Outsourcing Services: including Business Process Outsourcing (BPO), call center,
IT Outsourcing (ITO) and software development services.
(2)
Value-Added Telecom Services (VAS): including Content Providing (CP),
Interactive Voice Response (IVR), Platform Providing (PP) and Service Providing
(SP).
(3)
Communication Products Distribution Services: including calling cards, GSM/
CDMA/ XiaoLingTong products, and multimedia self-service kiosks.
(4)
Other
Business: including internal administrative matters and other related corporate
items.
CORPORATE
STRUCTURE
We
conduct our business operations through the following business units and
subsidiaries:
(I)
OUTSOURCING
SERVICES GROUP
1)
PACIFICNET EPRO HOLDINGS LIMITED (FORMERLY KNOWN AS: EPRO TELECOM HOLDINGS
LIMITED)
PacificNet
Epro Holdings Limited (referred to herein as “Epro”), a company incorporated in
the Hong Kong Special Administrative Region of the PRC, is engaged in the
business of providing call center and customer relationship management (CRM)
services, mobile marketing and promotion services, call center training,
management and consulting services, call center software, IVR systems, mobile
payment and mobile point of sale (POS) solutions, Internet e-commerce and mobile
commerce, mobile applications based on short messaging services (SMS),
multimedia messaging services (MMS), outsourced telemarketing and customer
support services, and other mobile value-added services (VAS). Epro’s business
serves Hong Kong and the PRC’s telecom operators, banks, insurance, and other
financial services companies in the PRC. Epro’s clients include major telecom
operators, banks, insurance and financial services companies in Greater China,
such as China Telecom (NYSE: CHA), China Unicom (NYSE: CHU), PCCW (NYSE: PCW),
CSL, SmarTone Telecom, Sunday Communications (NASDAQ: SDAY), Hutchison Whampoa
Limited (HKSE: 0013.HK), Swire Coca-Cola, Samsung, Dun & Bradstreet, DBS,
Dao Heng Insurance, Shenzhen Development Bank, Hong Kong Government Housing
Authority and Hong Kong Post.
2)
PACIFIC SMARTIME SOLUTIONS LIMITED / PACIFIC SOLUTIONS TECHNOLOGY (SHENZHEN)
CO.
LTD.
Pacific
Smartime Solutions Limited (referred to herein as “Smartime”) is an IT
outsourcing company incorporated in Hong Kong that operates through its China
subsidiary Pacific Solutions Technology ( (Shenzhen) Co. Ltd. (referred to
herein as: Soluteck Shenzhen), which is a leading provider of outsourcing
services including software development, R&D, and project management
services in China. Smartime employs over 280 staff and provides outsourcing
services to the leading telecom, banking and financial services companies in
China, including Huawei, IBM, Bank of East Asia. In December 2004, Smartime
launched a new software development outsourcing center in Shenzhen, located
in a
Grade A office building, currently occupying two floors (total 26,000 square
feet) with the capacity to expand to two additional floors. Each of the two
floors will have the capacity to house about 200 employees. The new outsourcing
development center will serve its existing clients, which includes some of
the
world’s leading telecom and IT companies.
3)
PACIFICNET SOLUTIONS LIMITED (Incorporated in Hong Kong)
PacificNet
Solutions Ltd. (referred to herein as “PacSo”), incorporated in Hong Kong, is a
subsidiary that specializes in systems integration, software application, and
e-business solutions services in Hong Kong and Greater China. The scope of
PacSo’s products and services includes smart card solutions, web based front-end
applications and web based connections to backend enterprise planning
systems.
(II)
VALUE-ADDED
TELECOM SERVICES (VAS) GROUP
CONTENT
PROVIDER COMPANY
CHINAGOHI/LION
ZONE (SPECIAL PURPOSE VEHICLE (SPV)), HOLDING COMPANY FOR CHINAGOHI
In
December, 2005, we acquired a controlling interest in Shenzhen GuHaiGuanChao
Investment Consultant Company Limited (“ChinaGoHi”), a wholly owned foreign
enterprise (WOFE) registered in China, through the purchase of a 51% interest
of
ChinaGoHi’s parent, GoHi Holdings Limited (referred to herein as “Lion Zone”), a
British Virgin Islands company. Lion Zone is an investment holding company
principally engaged in providing investment advisory consulting services and
direct response television (DRTV) telemarketing services. Through ChinaGoHi,
we
provide infomercial marketing services and telemarketing services and financial
advisory services in China, including Direct Response Television (DRTV)
infomercials through satellite and cable TV broadcasting, web portals, and
subscription-based value-added services including Internet email short message
services (SMS), mobile WAP services, and interactive voice response (IVR)
services via fixed and mobile phones. ChinaGoHi (“““ChinaGoHi”““,
http://www.ChinaGoHi.cn) is a leading information content provider of Chinese
stock market information, analysis, and investment advisory services via DRTV
infomercials through satellite and cable TV broadcasting, IVR, SMS and WAP
based
mobile value-added services, web portals and subscription based audio-video
streaming via the Internet.
PLATFORM
PROVIDER COMPANY
BEIJING
LINKHEAD TECHNOLOGIES COMPANY LIMITED (Incorporated in the PRC)
Beijing
Linkhead Technologies Company Limited, (referred to herein as “Linkhead”), a PRC
limited liability corporation, is engaged in the business of providing
value-added services (VAS), interactive voice response (IVR) system development
and integration, voice Internet portals, computer telephony integration (CTI),
VoIP, Internet and mobile application development, telecom customer relationship
management (CRM) services for China’s telecom operators, telecom related
management and consulting services, mobile consumer analytics, mobile
data-mining, Internet e-commerce and mobile commerce, mobile applications based
on WAP, K-Java, BREW, EMS, short messaging services (SMS), multimedia messaging
services (MMS), outsourced software development, and other mobile value-added
services (VAS) in the PRC. Linkhead’s major clients and profit-sharing partners
include some of the leading telecom operators such as China Telecom, China
Mobile, China Unicom. Linkhead is also channel partner, or a master reseller,
of
NMS Communications (NASDAQ: NMSS), a leading provider of communications
technologies and solutions which enable new enhanced services and efficient
networks that help customers grow their profits and revenue.
SERVICE
PROVIDER COMPANIES
1)
PACIFICNET CLICKCOM LIMITED (INCORPORATED IN THE PRC)
In
December 16, 2004, we entered an agreement to acquire a controlling interest
in
Guangzhou Clickcom Digit-net Science and Technology Ltd. (“Clickcom-WOFE”)
through the purchase of a 51% interest of Clickcom-WOFE’s parent company,
PacificNet Clickcom Limited, a British Virgin Islands Company (“Clickcom-BVI”).
The deal has been completed on March 28, 2005. Clickcom-WOFE conducts its VAS
operations with GuangZhou DianXun Company Limited (“Dianxun-DE”), a PRC
registered Domestic Enterprise (DE)., through a series of contractual
agreements. Under these agreements, the shareholders of Dianxun-DE are required
to transfer their ownership in these entities to our subsidiaries when permitted
by PRC laws and regulations and all voting rights are assigned to us. Through
Clickcom-WOFE, we have also entered into a consulting and services agreements
with Dianxun-DE, under which Clickcom-WOFE provides technical services and
other
services to Dianxun-DE in exchange for all of the net income of Dianxun-DE.
In
addition, the shareholders of Dianxun-DE have pledged their shares in Dianxun-DE
as collateral for non-payment of fees for the services we provide. Through
Clickcom-WOFE we provide directly to China’s telecom operators a wide variety of
wireless Internet services for mobile phones, such as SMS, Wireless Application
Protocol (WAP), which allows users to access information instantly via handheld
wireless devices and Java mobile applications. The acquisition of Clickcom-WOFE
is our first step in entering the VAS service provider market in which we will
be able to design our own mobile phone VAS for distribution directly to telecom
operators.
2)
GUANGZHOU 3G INFORMATION TECHNOLOGY CO. LIMITED (Incorporated in the
PRC)
In
March
2005 we entered an agreement to acquire a controlling interest in Guangzhou
3G
Information Technology Co. Ltd. (“Guangzhou3G-WOFE”), a PRC registered wholly
owned foreign enterprise (WOFE), through the purchase of a 51% interest in
Guangzhou 3G’s parent company, Pacific 3G Information & Technology Co.
Limited, a British Virgin Islands Company (“Guangzhou3G-BVI”). Guangzhou3G-WOFE
conducts it VAS operations with Guangzhou Sunroom Information Industrial Co.,
Ltd. (“Sunroom-DE”), a PRC registered Domestic Enterprise (DE), through a series
of contractual agreements. Under these agreements, the shareholders of
Sunroom-DE are required to transfer their ownership in these entities to our
subsidiaries when permitted by PRC laws and regulations and all voting rights
are assigned to us. Through Guangzhou3G-WOFE, we have also entered into a
consulting and services agreements with Sunroom-DE, under which Guangzhou3G-WOFE
provides technical services and other services to Sunroom-DE in exchange for
all
of the net income of Sunroom-DE. In addition, the shareholders of Sunroom-DE
have pledged their shares in Sunroom DE as collateral for non-payment of fees
for the services we provide. Sunroom-DE is one of the largest value-added
telecom and information services providers in China with both voice (IVR and
call center) and data (SMS, MMS, WAP, JAVA, GPRS) connection to the four major
telecom operators in Asia, China Mobile, China Unicom, China Telecom, and China
Netcom, covering both mobile and fixed-line networks. Guangzhou 3G-DE also
offers a wide variety of IVR and other wireless and fixed-line, value-added
telecom services including color ring back tone (CRBT) services, background
music (BGM) services, video ICQ (VICQ) mobile instant messaging services, sports
and soccer news, weather forecasts, stock prices, jokes, short stories, dramas,
songs and mobile karaoke, mobile TV, games, entertainment, as well as
community-oriented services, such as chatline and dating services. Mobile and
fixed-line phone users can access Guangzhou 3G-DE’s IVR services through one of
the four major telecom operators’ networks. Guangzhou 3G-DE currently employs
280 staff, and has offices in 26 provinces in China including Guangdong,
Guangxi, Hubei, Hunan, Jiangsu, Zhejiang, Shanghai, Henan, Anhui, Yunnan, Gansu,
Ningxia, Inner Mongolia, Guizhou, Tianjin, Qinghai, Hainan, Heilongjiang,
Shanxi, Shandong, Chongqing, Jiangxi, Beijing, Hebei, Liaoning, and Jilin.
Guangzhou 3G’s market covers all the major regions of China with over 3 million
accumulated fee paying customers.
3)
GUANGZHOU WANRONG INFORMATION TECHNOLOGY CO., LIMITED (Incorporated in the
PRC)
On
January 31, 2006, we consummated an agreement to acquire a 51% majority interest
in Guangzhou Wanrong Information Technology Co., Ltd. (“Guangzhou Wanrong,), one
of the leading value-added telecom service providers in China. Since its
inception in 2003, Guangzhou Wanrong has achieved strong growth in its VAS
including SMS, WAP, JAVA, MMS, IVR, multimedia entertainment download services,
media interactive products, mobile email services, life, sports, entertainment,
and business information services. Guangzhou Wanrong was granted nationwide
SMS
service numbers “2388” for China Mobile and “9928” for China
Unicom.
4)
IPACT
INTERNATIONAL INVESTMENT LIMITED (Incorporated in the BVI)
Our
subsidiary, PacificNet Strategic Investment Holdings Limited holds an 80% equity
interest in IPACT International Investment Limited (“IPACT”). IPACT is a newly
formed business entity in October 2005. Its primary business will be to sign
up
qualified Voice-VAS and IVR service providers as profit sharing members in
China
under a unified brand “iPACT”. We will provide to qualified VAS-Alliance
partners, on a profit sharing basis, all of the hardware, software, application,
and content for VAS, including a variety of IVR and other wireless and
fixed-line VAS content, including color ring back tone (CRBT) services,
background music (BGM) services, VICQ mobile instant messaging services, sports
news, weather forecasts, stock market, humor, songs and mobile karaoke, mobile
TV, games, entertainment, as well as community-oriented services, such as
chatline and dating services. Mobile and fixed-line phone users can access
PacificNet’s VAS-Alliance services through Guangzhou 3G presence in 26 provinces
in China.
5)
PACIFICNET AD. LIMITED (Incorporated in Hong Kong)
PacificNet
Ad. Limited was incorporated in Hong Kong in December 2005 and 68% of its
outstanding equity shares are held by PacificNet Limited. Its principle business
is advertising and media services.
(III)
COMMUNICATION
PRODUCTS DISTRIBUTION GROUP
1)
SHANGHAI CLASSIC GROUP LIMITED (“SHANGHAI CLASSIC”)
Shanghai
Classic Group Limited (referred to herein as “Shanghai Classic”)is a subsidiary
of PacificNet. Shanghai Classic is a leading distributor of telecom services
including mobile phones, phone cards, mobile SIM cards, prepaid stored-value
cards, re-chargeable phone cards, VoIP and IDD calling cards, Internet access
cards, and bundled cross-selling insurance cards, travel and hotel reservation
cards and customer loyalty membership cards in Hong Kong and China. Shanghai
Classic is a leading wholesaler and distributor for the major telecom operators
in Hong Kong and China.
2)
PACIFICNET IMOBILE (BEIJING) TECHNOLOGY CO., LIMITED (Incorporated in the
PRC)
On
February 06, 2006, we entered into an agreement to acquire a 51% majority
interest in PacificNet iMobile (Beijing) Technology Co., Ltd (“iMobile”), one of
the leading Internet information portal and e-commerce distributors for
mobile phone and accessories and mobile related value-added service
providers in China. iMobile operates its e-commerce business via two Internet
portals, “http://www.iMobile.com.cn”“ and “http://www.18900.com” and one WAP
portal “17wap.com” for mobile phone browsing. In addition, iMobile’s 18900.com
operation is the designated Internet distributor for Motorola, Nokia, and NEC’s
mobile products in China. 18900.com is the leading Internet e-commerce
distributor of mobile products in China, and provides Internet, email, customer
service centers, pre-sale and post-sale services, logistics and cash-on-delivery
(COD) services to mobile related products in China. iMobile’s 18900.com
e-commerce operations combines both online Internet services with its offline
customer services network composed of a nationwide chain of logistic and
customer centers covering 22 provinces and 40 major cities in China, including
Beijing, Shanghai, Chongqing, Tianjin, Chengdu, Dalian, Qingdao, Guangzhou,
Shenzhen, Zhuhai, Dongguan, Hangzhou, Suzhou, Ningbo, Wenzhou, Nanjing, Wuhan,
Xi’an, Harbin, Qiqihaer, Hunan and Changsha. iIMobile’s Internet portal has been
one of the top ranked traffic sites and has achieved about 2.3 million
registered online users and over 400,000 active users, with 5 million daily
page
views and 20,000 blog postings per day, which makes iMobile the top ranked
site
in its category in China. It is expected this acquisition was structured in
the
same manner as our other acquisitions, with operation and services agreements
between Beijing Xing Chang Xin Science and Technology Development Co. Limited
Incorporated DE and PacificNet Imobile (Beijing) Technology, Co. Ltd.
WOFE.
3)
PACIFICNET COMMUNICATIONS LIMITED
PacificNet
Communications Limited (referred to herein as “PacCom”), incorporated in Hong
Kong, is a wholly owned subsidiary of PacificNet that specializes in telecom
related services in Hong Kong and Greater China.
4)
TAKE1
TECHNOLOGIES GROUP LIMITED (“TAKE1” , FORMERLY KNOWN AS: CHEER ERA LIMITED)
Take1
(http://www.take1technologies.com/) is a leading designer, developer and
manufacturer of multimedia entertainment and communication kiosk products
including photo and video entertainment kiosks, digital camera photo development
stations, multimedia messaging services (MMS) and mobile content download,
payment and delivery stations for mobile phones, and other coin-operated kiosks
and kiosk consumables. Take1 markets and distributes its multimedia
communication stations around the world including the USA, Canada, Mexico,
Europe, Korea, China, India and SE Asia. Take1 is headquartered in Hong Kong
with operations in China, Canada, and USA.
OTHER
BUSINESS ENTITIES
1)
PACIFICNET LIMITED (INCORPORATED IN HONG KONG)
PacificNet
Limited is incorporated in Hong Kong as a wholly owned subsidiary of PacificNet
Inc. Its primary purpose is to handle the general administrative operations
of
PacificNet in Hong Kong.
2)
PACIFICNET STRATEGIC INVESTMENT HOLDINGS LIMITED (Incorporated in the
BVI)
PacificNet
Strategic Investment Holdings Limited (referred to herein as “PacInvest”),
incorporated in the British Virgin Islands (BVI), is a wholly owned subsidiary
of PacificNet that specializes in strategic investment, direct investment,
mergers and acquisitions, joint venture development, and other financial and
investment services in Hong Kong and Greater China. Its primary purpose is
to
help PacificNet identify strategic investment opportunities, process deal flow,
conduct due diligence, negotiate terms and valuation, monitor investment
performance and conduct synergy development, with a focus in Chinese investment
opportunities related to PacificNet’s business.
3)
PACIFICNET POWER LIMITED (Incorporated in Hong Kong)
PacificNet
Power Ltd. (referred to herein as “PacPower”), incorporated in Hong Kong, is a
subsidiary that specializes in information technology (IT) solutions, systems
integration, software application, energy saving and electric power management
systems and solutions in Hong Kong and Greater China. PacificNet Power was
registered in Hong Kong in January 2005 as a subsidiary of PacificNet Limited
with 51% controlling ownership by PacificNet.
4)
PERPETUAL GROWTH INVESTMENTS LIMITED (Incorporated in the BVI)
Perpetual
Growth Investments Limited incorporated in the British Virgin Islands (BVI),
is
a wholly owned subsidiary of PacificNet Communications Limited.
5)
PACIFIC FINANCIAL SERVICES LIMITED (Incorporated in Hong Kong)
Pacific
Financial Services Limited incorporated in Hong Kong in November 2005, is a
wholly owned subsidiary of PacificNet Inc. Its primary purpose is to provide
financial services in Hong Kong.
6)
PACIFICNET GAMES LIMITED(Incorporated in the BVI)
PacificNet
Games Limited incorporated in the British Virgin Islands (BVI), is a wholly
owned subsidiary of PacificNet Strategic Investment Holdings Limited. Its
primary purpose is to design and distribute Internet online games and offline
gaming machines. On
August
3, 2006, PacGames completed the acquisition of 100% of Able Entertainment
Technology Ltd., by exchanging 65% of the share ownership of PacGames and by
the
issuing of 200,000 restricted shares of PacificNet Inc. Upon completion of
this
transaction, PacificNet Inc. owns 35% of PacificNet Games Limited.
7)
PACIFICNET TECHNOLOGY (SHENZHEN) LIMITED (Incorporated in the PRC)
PacificNet
Technology (Shenzhen) Limited (referred to herein as “PacSZ”) is incorporated in
the PRC as a wholly owned foreign enterprise (WOFE) , is a wholly owned
subsidiary of PacificNet Limited Hong Kong. Its primary purpose is to provide
administrative support back-office, IT support and software development
services, to support PacificNets' operations in China, and to conduct the
general administrative operations of PacificNet in China.
8)
PACIFICNET BEIJING LIMITED (Incorporated in the PRC)
PacificNet
Beijing Limited (referred to herein as “PacBJ”) incorporated in the PRC as a
wholly owned foreign enterprise (WOFE) is a wholly owned subsidiary of
PacificNet Limited Hong Kong. Its primary purpose is to provide administrative
back-office support, IT support and software development services, to support
PacificNet’s operations in China, and to conduct the administrative operations
of PacificNet in China.
OUR
ACQUISITION MODEL FOR TELECOM VALUE- ADDED SERVICES COMPANIES IN
CHINA
CORPORATE
OWNERSHIP STRUCTURE
Set
forth
below is an illustration of our acquisition model using Clickcom as an
example.
PRC
laws
and regulations restrict us, as a foreign entity, from having a direct
controlling interest in entities such as Dianxun-DE Sunroom-DE, Wanrong-DE,
and
Imobile-DE that hold operating licenses to engage in domestic telecom
value-added services and online ecommerce in China. As a result, we conduct
substantially all of our operations through Clickcom-WOFE, Guangzhou3G-WOFE,
Wanrong-WOFE and Imobile-WOFE. We own 51% of the shares in each of the WOFEs.
Clickcom-WOFE, Guangzhou3G-WOFE, Wanrong-WOFE and Imobile-WOFE each signed
Consulting and Services Agreements respectively with Dianxun-DE Sunroom-DE
Wanrong-DE and Imobile-DE (the entities that actually carry out the operating
activities). These agreements provide that all of the DE profits will flow
through to the respective WOFEs. Pursuant to these agreements, we guarantee
any
obligations undertaken by these companies under their contractual agreements
with third parties, and we are entitled to receive service fees in an amount
equal to 51% of the net income of these companies. Accordingly, we bear the
risks of, and enjoy the rewards associated with, the investments in
Clickcom-WOFE, Guangzhou3G-WOFE, Wanrong-WOFE and Imobile-WOFE . The operations
of DEs are managed by their original management teams. We do not put our own
management in place, nor do we integrate current management of the DEs with
management from other subsidiaries. According to the operating agreements
between the DEs and WOFEs, each DEs board of directors has the power to appoint
the General Manager of the DE who in turn has the power to appoint other members
of the management. We do not directly participate in the daily operations DE,
however, we have the power to appoint or change directors and senior management
because PacificNet indirectly ultimately controls the voting power of the
shareholders of each DE through the Power of Attorney given to our President,
Mr. Victor Tong.
In
the
opinion of our internal PRC legal counsel, the ownership structures of, and
contractual agreements between Clickcom-WOFE, Guangzhou3G-WOFE, Wanrong-WOFE
and
Imobile-WOFE with Dianxun-DE Sunroom-DE Wanrong-DE and Imobile-DE, respectively,
and their shareholders, and the businesses and operations of the DEs as,
respectively, described in this Annual Report, comply with all existing PRC
laws, rules and regulations and are fully enforceable in accordance with their
terms and conditions. In addition, our internal PRC legal counsel is of the
opinion that no consent, approval or license, other than those already obtained,
is required under any of the existing PRC laws, rules and regulations for the
effectiveness and enforceability of the ownership structures, contractual
agreements and businesses and operations of the WOFEs and those DE’s. However,
there may be uncertainties regarding the interpretation and implementation
of
current PRC laws and regulations. See “Risk Factors — Risks Relating to Our
Business.”
BUSINESS
OPERATIONS OF THE WOFES
The
business of each of Clickcom, Guangzhou3G, Wanrong and Imobile WOFE’s are
conducted through a series of contractual agreements with their affiliated
PRC-incorporated Domestic Enterprise (DE) value-added service (VAS) or ecommerce
providers, Dianxun-DE, Sunroom-DE, Wanrong-DE and Imobile-DE, respectively,
and
their respective shareholders. We do not have any ownership interests in
Dianxun-DE, Sunroom-DE, Wanrong-DE and Imobile-DE.
WIRELESS
DATA SERVICES
Dianxun-DE,
Sunroom-DE and Wanrong-DE have established cooperation arrangements with mobile
telecommunications operators, mobile phone producers and other wireless data
service providers in the wireless VAS business. They provide wireless data
services through China Mobile’s Monternet and China Unicom’s UNI-Info platforms
pursuant to revenue sharing agreements that they have entered into with these
mobile telecommunications operators. These services include color ring back
tone
(CRBT) services, background music (BGM) services, VICQ mobile instant messaging
services, sports and soccer news, weather forecasts, stock prices, jokes, short
stories, dramas, songs and mobile karaoke, mobile TV, games and
entertainment.
China
Mobile and China Unicom control the two mobile telecommunications networks
through which all wireless data services are currently provided to mobile phone
users in China. Close working relationships with China Mobile and China Unicom
are critical to the operation and continued development of wireless data
services business. See “Risk Factors — Risks Relating to Our Business.” A
substantial portion of Dianxun-DE, Sunroom-DE and Wanrong-DE business depends
on
mobile telecommunications operators in China, and any loss or deterioration
of
such relationship may result in severe disruptions to their business operations
and the loss of a significant portion of our revenue. As of the end of 2005,
Dianxun-DE, Sunroom-DE and Wanrong-DE had entered into approximately 25
cooperation and revenue sharing agreements with various provincial subsidiaries
of China Mobile, as well as China Unicom, to provide wireless data services
to
mobile phone users, to research and develop new wireless data technologies
and
to promote the use of wireless data services in China.
Dianxun-DE,
Sunroom-DE and Wanrong-DE established the fees for data services in consultation
with telecommunications operators in China. They share the revenue from these
fees with the telecommunications operators, content providers and mobile phone
producers. They also pay a transmission fee to the appropriate
telecommunications operator with respect to messages that they send through
its
value-added services platform.
The
mobile telecommunications operators establish standards within which wireless
data services providers are able to set the fees for their services. These
standards are filed with the Ministry of Information Industry by the mobile
telecommunications operators. In accordance with these standards, they charge
the users content fees on either a per-message or a monthly subscription basis.
Both per-message and monthly subscription content fees vary for the different
wireless data products and services.
WIRELESS
INTERACTIVE VOICE RESPONSE (IVR) SERVICES
In
May
2003, China Mobile launched its wireless IVR services nationwide. Mobile phone
users access Sunroom-DE’s wireless IVR services through China Mobile’s network.
Sunroom-DE’s wireless IVR services include weather forecasts, stock prices,
jokes, short stories, dramas, songs and other entertainment topics, as well
as
community-oriented services, such as chat and dating services.
We
believe that demand for wireless IVR services in China, like demand for other
wireless value-added services, has been driven by the rapid increase in mobile
phone ownership, the rise in average income and the emergence of a youth culture
that rapidly adopts new modes of affordable entertainment.
CONSULTING
AND SERVICE AGREEMENTS
The
Consulting and Service Agreement signed between each WOFE and their respective
DE is similar. Pursuant to the terms of the agreement, the WOFE (“Party A”)
agrees to be the exclusive provider of telecom consulting services to the DE
(“Party B”““). During the term of the agreement, Party B shall not accept
technical and consulting services provided by any third party. Party B agrees
to
pay a fee to Party A equal to 100% of its monthly net income for the services
provided. Payment of the service fees has been secured through a share pledge
agreement with the shareholders of each of the DEs, whereby they pledged all
of
their shares to the respective WOFE. In addition, each of the shareholders
of
the DEs has granted to our President, Mr. Victor Tong, a Power of Attorney
which
gives him the full power and authority to exercise all of the rights of the
shareholders of the DEs.
(1)
Each
of the DEs, by design, is thinly capitalized because a substantial portion
of
PacificNet’s invested amounts or consideration were paid or payable directly to
previous owners of Sunroom-DE and Dianxun-DE for entering into the acquisition
transactions while none of the investment consideration was injected into the
DEs. Therefore, additional funding from PacificNet is needed to support the
DEs’
business development and working capital.
(2)
Fees
from Service Contracts - Fees from these service contracts are substantial,
but
are not commensurate with the level of service provided by the WOFEs to the
DEs.
The contractual and funding arrangements with the DEs evidence that PacificNet
has closely participated in the majority of the DEs’ economics. PacificNet is
the primary beneficiary through its WOFE subsidiaries since PacificNet is the
only enterprise with a sufficiently large interest in the VIEs. Accordingly,
we
conclude that going forward PacificNet should consolidate the DEs’ financial
interests.
BUSINESS
OPERATION HIGHLIGHTS OF 2005
During
the three months ended December 31, 2005, we continued to win business from
high-profile Chinese and multinational companies conducting business in China
such as China Mobile, China Unicom, China Telecom, Bank of China, Ping An
Insurance, TCL, TNT Express, Watsons, Hutchison. All of our business units
remain strong, and we continue to focus on penetrating the CRM and VAS/IVR
markets through organic growth and by acquisition. With the launch of the
‘iPACT’ IVR-Alliance program, we hope to sign up new local IVR service providers
to join our unified brand and strong IVR content and service offerings, under
a
chain of unified service standard under the iPACT brand. We look forward to
revenue growth, market share improvement, and stronger partnerships with all
the
major telecom operators and local IVR service providers in China. With business
activity increasing across all of our units, we are excited about the prospects
for the Company in the coming quarters. We believe that our fundamentals are
stronger than ever and that market opportunities for sustainable growth and
profitability in China’s CRM and VAS sector are vast. The following are some of
the highlights of 2005:
In
January, Watsons Water selected PacificNet Epro’s WISE-xb Multimedia Contact
Center System as its customer services initiative for its customer services
center.
In
January, PacificNet Linkhead, a leading provider of interactive voice response
(IVR), voice chatline, mobile QQ, and other voice based value-added services
in
China, launched the Color Ring-back Tone (CRBT) services for China Unicom
(NYSE:CHU) in Shandong and Henan. We partnered with North Tech, a leading system
integrator and channel partner, in deploying the customized Color Ring-back
Tone
(CRBT) service for China Unicom Henan Province, with over 200,000 users based
on
both CDMA and GSM networks. With the CRBT service (“Cai-Ling”), subscribers can
customize the ring tone from a wide selection of commercial music, personalized
messages, celebrity greetings, or voice advertisements to replace the monotonous
ring connecting tone that the caller would hear.
In
February, we successfully deployed WISE-xb Interactive Voice Response System
(IVRS) Contact Center Solution for TNT Hong Kong, a division of TPG NV and
the
world’s leading business to business express delivery company, as TNT’s key
customer relationship management (CRM) initiative to enhance its customer
services.
In
March,
we expanded our operations by acquiring entities that operate as service
providers in the VAS & IVR industries, which have grown rapidly in China in
recent years and to further develop products and services organically. On the
acquisition front, the purchase of Guangzhou 3G Information Technology Co.
Ltd.
in April was a significant event. We purchased a 51% controlling interest,
which
is expected to help expand PacificNet’s value-added service coverage to all of
China through Guangzhou 3G’s experienced operation team of 280 staff and sales
offices in 26 provinces in China. Guangzhou 3G is one of the largest value-added
telecom and information services providers in China with both voice and data
connections to the four major telecom operators (China Mobile, China Unicom,
China Telecom, and ChinaNetcom), covering both mobile and fixed-line
networks.
In
April,
we were selected by Ping An Insurance (“Ping An”), the second largest life
insurance company in China, to provide CRM consulting and call center training
services to Ping An’s main customer service center located in Suzhou with 300
seats and 500 customer service representatives.
In
April,
we have formed an alliance with the largest Call Center in Japan, under which
we
became designated agent for Bellsystem24, Inc. in China and Hong Kong.
Bellsystem24 is Japan’s largest telemarketing, call center and CRM services
company with over 4,300 clients, 22,135 communication service representatives,
9,500 workstations, 160 system engineers, and 31 offices in Japan.
In
June,
we formed a partnership with Epicor Software Corporation (NASDAQ:EPIC), a
recognized global leader of software solutions for middle-market companies,
to
provide Customer Relationship Management (CRM) for Chinese
companies.
In
July,
we announced the launch of a new IVR-Alliance program called “iPACT” at the 2005
Voice Value-Added Service (VAS) Conference. Under this iPACT program, PacificNet
plans to sign up qualified Voice-VAS and IVR service providers as profit sharing
members in China under a unified brand “iPACT”. PacificNet will provide to
qualified VAS-Alliance partners, on a profit sharing basis, all of the hardware,
software, application, and content for VAS, including a variety of IVR and
other
wireless and fixed-line VAS content. Mobile and fixed-line phone users can
access PacificNet’s VAS-Alliance services through Guangzhou 3G presence in 26
provinces in China.
In
August, PacificNet Clickcom, reached an agreement with China Unicom’s Guangdong
Branch to launch a new Mobile Mailbox Service called “UMAIL” for Unicom’s CDMA
users on its WAP Portal website. Guangdong is one of the largest and most
affluent provinces in China and represents a significant opportunity for
PacificNet to offer value-added telecom services. As of June 2005, China Unicom
has 30.47 million CDMA users and 8.5 million WAP users nationwide. China
Unicom’s CDMA users in Guangdong may go to its WAP Portal, enter UMAIL service,
and be able to send and receive e-mail by mobile phone.
In
October, PacificNet Epro acquired a 70% ownership interest in Guangzhou JunFeng
Network Technology Co. Ltd. (JunFeng). The acquisition is expected to be
additive to Epro’s 2006 earnings.
In
November, PacificNet Linkhead was awarded an open project tender by Industrial
and Commercial Bank of China (“ICBC”), the largest commercial bank in China with
over 21,000 domestic branches, to develop its integrated IVR telephone banking
system.
In
December, we continued to win high-profile government and private sector
projects. We won a project tender by the City of Guangzhou, one of the largest
and most affluent cities in China, to develop an Internet and intranet based
e-business platform for Guangzhou Metro.
RECENT
DEVELOPMENTS
Recently,
we expanded our operations by acquiring entities that operate as Internet
e-commerce providers and service providers in the wireless VAS & IVR
industries, which have grown rapidly in China in recent
years.
BUSINESS
ACQUISITIONS
ACQUISITION
OF GUANGZHOU WANRONG
In
January 2006, we completed the acquisition of a 51% interest in Guangzhou
Wanrong Information Technology Co., Ltd. (“Guangzhou Wanrong”,
http://www.my2388.com), one of the leading value-added telecom service providers
in China. The acquisition is expected to be accretive to the Company’s earnings
in 2006. Since its inception in 2003, Guangzhou Wanrong has achieved strong
growth in its VAS including SMS, WAP, JAVA, MMS, IVR, multimedia entertainment
download services, media interactive products, mobile email services, life,
sports, entertainment, and business information services. Guangzhou Wanrong
was
granted nationwide SMS service numbers “2388” for China Mobile and “9928” for
China Unicom. Wanrong’s integrated value-added mobile services system is
valuable for the implementation of PacificNet’s “iPACT program”, a standard
service-mark for PacificNet’s VAS profit-sharing alliance partnership program.
See “Product and Service Offerings: Value-Added Telecom Services” above for a
detailed description of the iPACT program.
We
paid
approximately US$1.75million for the equity interest in Guangzhou Wanrong,
which
payable 21% in cash and 79% in restricted shares of PacificNet common stock
payable in restricted shares of PacificNet valued at $8 per share, or about
173,000 restricted shares. The purchase price is payable upon achievement of
certain quarterly earn-out targets based on net income Under the purchase
agreement, Guangzhou Wanrong is obligated to generate $500,000 in annual net
income. In the event of a shortfall, the purchase price will be adjusted
accordingly. PacificNet will also invest approximately $370,000 (or about RMB
3
million) in Guangzhou Wanrong for general corporate purposes.
ACQUISITION
OF IMOBILE IN Q1 2006
iMobile
operates its e-commerce business via two Internet portals
(“http://www.iMobile.com.cn” and http://www.18900.com) and one WAP portal
(“17wap.com”) for mobile phone browsing. In addition, iMobile’s 18900.com
operation is the designated Internet distributor for Motorola, Nokia, and NEC’s
mobile products in China. 18900.com is the leading Internet e-commerce
distributor of mobile products in China, and provides Internet, email, customer
service centers, pre-sale and post-sale services, logistics and cash-on-delivery
(COD) services to mobile related products in China. iMobile’s 18900.com
e-commerce operations combines both online Internet services with its offline
customer services network composed of a nationwide chain of logistic and
customer centers covering 21 provinces and 40 major cities in China, including
Beijing, Shanghai, Chongqing, Tianjin, Chengdu, Dalian, Qingdao, Guangzhou,
Shenzhen, Zhuhai, Dongguang, Hanzhou, Suzhou, Ningbo, Wenzhou, Nanjing, Wuhan,
Xian, Harbin, Qiqihaer, Hunan and Changsha.
iMobile’s
Internet portal has been one of the top ranked traffic sites and has achieved
about 2.3 million registered online users and over 400,000 active users, with
5
million daily page views and 20,000 blog postings per day, which makes iMobile
the top ranked site in its category in China. The purchase consideration for
51%
of the equity interest of iMobile is approximately US$1.8 million, which
represents approximately seven times the anticipated future annual net income
of
iMobile. The purchase consideration is payable 14% in cash and 86% in restricted
shares of PacificNet valued at $8 per share, or about 191,875 restricted shares.
The purchase price is payable upon achievement of certain quarterly earn-out
targets based on net income. Under the purchase agreement, iMobile has committed
to generate $500,000 in annual net income. In the event of a shortfall, the
purchase price will be adjusted accordingly. PacificNet will also invest
approximately $250,000 (about RMB 2 million) in iMobile for general corporate
and working capital purposes to support growth.
ACQUISITION
OF ABLE ENTERTAINMENT TECHNOLOGY LTD.
On
August
3, 2006, PacificNet's wholly owned subsidiary PacGames completed the acquisition
of 100% of Able Entertainment Technology Ltd., by exchanging 65% of the share
ownership of PacGames and by the issuing of 200,000 restricted shares of
PacificNet Inc. Upon completion of this transaction, PacificNet Inc. owned
35%
of PacGames.
Under
the
purchase agreement, Able Entertainment Technology Ltd. has committed to generate
an audited annual profit of USD$1,600,000 and will provide for an adjustment
to
the purchase price if it does not achieve an annual net profit of USD$1,600,000
during the first 12-month period and USD$3,000,000 during the second 12-month
period.
Private
Placement of Convertible Debentures and Warrants
On
March
13, 2006, we completed a private placement in which we sold $8,000,000 in
convertible debentures and issued warrants to purchase up to an aggregate of
400,000 shares of common stock. The debentures are convertible at any time
into
shares of our common stock at an initial fixed conversion price of $10.00 per
share, subject to adjustments for certain dilutive events. The debentures are
due March 13, 2009. The warrants are exercisable for a period of five years
at
an exercise price of $12.20 per share. At the closing of the private placement,
we prepaid the first year’s interest on the debentures equal to 5% of the
aggregate principal amount of debentures. We will pay interest in cash or
shares, provided that certain conditions are met, at the rate of 6% for the
second year the debentures are outstanding and then 7% for the third. Beginning
January 1, 2007, we are obligated to redeem $320,000 every month, plus accrued,
but unpaid interest, liquidated damages and penalties. We also have the option
to prepay at any time, provided that certain conditions have been met, after
the
12 month anniversary of the effective date of the registration statement of
which this prospectus is part, some or all of the outstanding debentures for
cash in an amount equal to 120% of the principal amount outstanding, plus
accrued, but unpaid interest, liquidated damages and penalties outstanding.
At
any time after the six month anniversary of the effective date, we may force
the
holders to convert up to 50% of the then outstanding principal amount of the
debentures, subject to certain trading conditions being met. If any event of
default occurs under the debentures or other related documents, the holders
may
elect to accelerate the payment of the outstanding principal amount of the
debenture, plus accrued, but unpaid interest, liquidated damages and penalties,
which shall become immediately due and payable.
Under
the
terms of the registration rights agreement, dated February 28, 2006, entered
into among the Company and the holders, we are obligated to register for resale
150% of the shares of common stock issuable upon conversion of the debentures
and the warrants, and interest on the convertible debentures. We are currently
in default under the private placement transaction documents for the untimely
filing of the registration statement, of which this prospectus is part, and
for
the failure to have the registration statement declared effective prior to
the
effectiveness date set forth in the registration rights agreement. As of
November 1,
2006, we
could be liable for liquidated damages of approximately $800,000 as a result
of
the foregoing. As
of the
date of this prospectus, the holders have not elected to accelerate the payment
of the outstanding principal and interest owing on the debenture.
Also
in
connection with the private placement, Messrs. Tony Tong, Victor Tong and
Shaojian Wang and Sino Mart Management Ltd., and its sole officer and director,
Mr. Cho Sam Tong, entered into lock-up agreements restricting the disposition
of
shares of our common stock benefically owned by them until the earlier of 30
days from the effective date of the registration statement, or February 28,
2008.
Messrs.
Tony and Victor Tong, Wang and Sino Mart Management Ltd. each executed letter
agreements to the holders of the convertible debentures and warrants, in which
they each agreed to vote all of the shares of the Company over which they have
voting control in favor of any resolutions presented to the stockholders of
the
Company to approve the issuance, in the aggregate, of more than 19.999% of
the
number of shares of common stock of the Company outstanding on the closing
date
of the private placement. They executed each letter agreement in consideration
of, and as a condition to the consummation of the private
placement.
C.E.
Unterberg, Towbin LLC acted as Placement Agent and received a cash fee in the
amount of $449,500 and a warrant to purchase up to 16,000 shares. Maxim Group
also acted as Placement Agent and received a cash fee in the amount of
$50,000.
PRODUCTS
AND SERVICES OFFERED
Our
goal
is to take a leading role in providing information technology services and
network communications, which are rapidly expanding business sectors in Asia.
The services offered by each of our subsidiaries can be classified within one
of
the following three business groups:
1.
OUTSOURCING SERVICES
BUSINESS
PROCESS OUTSOURCING (BPO)
PACIFICNET
EPRO HOLDINGS Limited (“Epro”) operates our call center offering 24 hour
staff-answering and automatic-answering service hotlines in our service areas,
handling customer inquiries regarding services, billing, and technical support,
as well as customer complaints. We offer services targeted at high-value and
corporate customers. We provide them with dedicated account executives, on-site
visits, and systems for collecting comments and handling
complaints.
Epro
is a
leading provider of outsourced call-center services with over 15 years of field
experience in greater China. Epro’s business consists of the following three
major categories:
(1)
OUTSOURCED CALL CENTER SERVICES Epro’s ISO 9001 certified outsourcing contact
center hosts over 1,000 workstations and 1,200 agents, processing over 100,000
calls daily and provides multi-lingual inbound and outbound CRM services. The
call center is the largest outsourced call center in Hong Kong. Epro permits
its
clients to recruit and hire their own personnel to work in its call center,
for
which Epro provides managerial services, call center seats, and equipment.
Our
inbound call center services include sales inquiry hotline, telephone orders,
technical helpdesk, and customer service. Certain of our clients also engage
us
to provide telemarketing and telesales for their products and for promotions,
to
conduct market surveys, and to provide administrative functions, such as
appointment setting.
(2)
TRAINING AND CONSULTING SERVICES The Epro Call Center Training Institute (ECCTI)
is a leading provider of Contact Center Management Consulting and Training
services, which helps clients to maximize the return on investment of their
CRM
operations. Through ECCTI, we provide on-site training and consulting services,
and we offer courses and seminars for call center managers and professionals,
sales representatives, customer service representatives and telemarketing
service representatives and in-house trainers.
(3)
CALL
CENTER MANAGEMENT SOFTWARE PRODUCTS AND SOLUTIONS WISE-xb Call Center agent
performance management and reporting software is Epro’s proprietary call center
management software. Wise-xb has been installed in over 60 customer sites in
the
PRC. Epro’s products also include Automatic Call Distribution (ACD) System,
Unified Messaging System (UMS), SMS, and VAS.
INFORMATION
TECHNOLOGY OUTSOURCING (ITO)
PACIFIC
SMARTIME SOLUTIONS LIMITED (“Smartime”) - Through Pacific Solutions Technology
(Shenzhen) Company Limited, its operating subsidiary in Shenzhen, China,
Smartime provides outsourced consulting services and programming services,
including software development, R&D, and project management to leading
telecom, banking and financial services companies including Huawei, IBM, Bank
of
East Asia and others.
PACIFICNET
SOLUTIONS LIMITED (“PacSo”) - PacSo specializes in systems integration, software
application, and e-business solutions services in Hong Kong and Greater China.
The scope of PacSo’s products and services includes smart card solutions, web
based front-end applications and web based connections to backend enterprise
planning systems.
2.
VALUE-ADDED TELECOM SERVICES (VAS)
CHINAGOHI
- Through our subsidiary, ChinaGoHi, we provide China with telemarketing
services, financial advisory services, and infomercial marketing services,
including Direct Response Television (DRTV) infomercials through satellite,
cable tv broadcasting, and web portals. We also offer subscription-based
value-added services including Internet email, short message services (SMS),
mobile WAP services, and interactive voice response (IVR) services via
fixed-line and mobile phones.
LINKHEAD
- Linkhead is a value-added reseller and provider of VAS, such as IVR system
development and integration, SMS, and voice-portal services. Linkhead is also
a
channel partner, or a master reseller, of NMS Communications system hardware,
a
leading provider of communications technologies. Linkhead also acts as a mobile
phone systems integrator for service providers in China, providing the hardware,
know-how, and software for mobile phone VAS, such as mobile chat, mobile
karaoke, and color ring back tone. The service providers ultimately provide
the
Linkhead systems to telecom operators, such as China Unicom and China
Netcom.
CLICKCOM-WOFE
- Through Clickcom-WOFE and its affiliated company Dianxun-DE we can offer,
directly to China’s telecom operators, a wide variety of wireless Internet
services for mobile phones, such as SMS, Wireless Application Protocol (WAP),
which allows users to access information instantly via handheld wireless
devices, and Java mobile applications. The acquisition of Clickcom-WOFE was
our
first step in entering the VAS service provider market where we anticipate
designing our own mobile phone VAS for distribution directly to telecom
operators.
GUANGZHOU3G-WOFE
- Guangzhou3G-WOFE is one of the largest value-added telecom and information
services providers in China with both voice (IVR and call center) and data
(SMS,
MMS, WAP, JAVA, GPRS) connections to the four major telecom operators: China
Mobile, China Unicom, China Telecom, and China Netcom, covering both mobile
and
fixed-line networks. Guangzhou 3G also offers a wide variety of IVR and other
wireless and fixed-line, value-added telecom services including color ring
back
tone (CRBT) services, background music (BGM) services, VICQ mobile instant
messaging services, sports and soccer news, weather forecasts, stock prices,
jokes, short stories, dramas, songs and mobile karaoke, mobile TV, games,
entertainment, as well as community-oriented services, such as chatline and
dating services. Mobile and fixed-line phone users can access Guangzhou 3G
IVR
services through one of the four major telecom operators’ networks.
IPACT
INTERNATIONAL INVESTMENT LIMITED - IPACT plans to sign up qualified Voice-VAS
and IVR service providers as profit sharing members in China under a unified
brand “iPACT.” We will provide to qualified VAS-Alliance partners, on a profit
sharing basis, all of the hardware, software, application, and content for
VAS,
including a variety of IVR and other wireless and fixed-line VAS content,
including color ring back tone (CRBT) services, background music (BGM) services,
VICQ mobile instant messaging services, sports news, weather forecasts, stock
market, humor, songs and mobile karaoke, mobile TV, games, entertainment, as
well as community-oriented services, such as chatline and dating services.
Mobile and fixed-line phone users can access PacificNet’s VAS-Alliance services
through Guangzhou 3G presence in 26 provinces in China.
PACIFICNET
AD. LIMITED - PacificNet Ad. Limited was newly formed in December 2005 in Hong
Kong and provides advertising and media services.
3.
COMMUNICATION PRODUCTS DISTRIBUTION
SHANGHAI
CLASSIC - Shanghai Classic distributes telecom services for mobile phones,
such as mobile phones, calling cards, mobile SIM cards, prepaid
stored-value cards, wireless broadband and Internet services for mobile phones.
We sell mobile phones and calling cards wholesale to distributors who in turn
sell to retail shops and newsstands. IMOBILE - iMobile’s Internet
portal has been one of the top ranked traffic sites and has achieved about
2.3
million registered online users and over 400,000 active users, with 5 million
daily page views and 20,000 blog postings per day, which makes iMobile the
top
ranked site in its category in China.
PACIFICNET
COMMUNICATIONS LIMITED - PacificNet communication (referred to herein as
“PacCom”), was incorporated in Hong Kong, and is a wholly owned subsidiary of
PacificNet that specializes in telecom related services in Hong Kong and Greater
China.
PRINCIPAL
CUSTOMERS
Our
principal customers in each of our business groups are located in Hong Kong,
mainland China and other regions of Asia. Our key clients consist of leading
telecom operators, banks, insurance, travel, marketing, government, services
companies and telecom consumers.
1.
OUTSOURCING SERVICES (INCLUDING BPO, ITO, CALL CENTER SERVICES)
CUSTOMERS
The
following is a brief description of some of the Company’s customers in the
outsourcing services group:
HUTCHISON
TELECOM - A subsidiary of Hutchison Whampoa Ltd, is one of the world’s leading
owners and operators of telecommunications, offering a wide range of
communication services in Hong Kong and around the globe including mobile
telephony (voice and multimedia), paging, trunked radio, fixed-line services,
Internet services, fiber optic broadband networks and radio
broadcasting.
PCCW
LIMITED - A leading telecommunications carrier and service provider in Hong
Kong.
SUNDAY
COMMUNICATIONS LIMITED - One of the six mobile operators in Hong Kong, SUNDAY
was granted a mobile carrier license in Hong Kong to construct and operate
a 3G
network. SUNDAY offers its mobile subscribers basic airtime services,
value-added services, enhanced services, short messaging services, wireless
data
services, roaming services and international long distance calling services,
and
sells accessories.
BANK
OF
CHINA GROUP INSURANCE COMPANY (BOCGI) - BOCGI owns 6 branches and one wholly
owned subsidiary life insurance company (Bank of China Group Life Assurance
Company Ltd.) in Hong Kong and Mainland China.
AMERICAN
EXPRESS BANK (HONG KONG) - A diversified worldwide travel, financial and network
services company founded in 1850. It is a world leader in charge and credit
cards, Travelers Cheques, financial planning, business services, insurance
and
international banking.
ACNIELSEN
(CHINA) LTD. - The world’s leading provider of market research, information and
analysis to the consumer products and services industries, primarily in retail
measurement, consumer panel research, customized research and media measurement,
as well as to government and social services.
HSBC
-
One of the largest banking and financial services organizations in the world.
HSBC’s international network comprises over 9,500 offices in 76 countries and
territories in Europe, the Asia-Pacific region, the Americas, the Middle East
and Africa.
SO-NET,
HONG KONG - A wholly owned subsidiary of Sony Corporation of Hong Kong Limited.
So-net was granted a sub-license from Sony Communication Network Corporation
(SCN) to create a broadband service under the So-net brand. So-net has become
the third largest Internet Service Provider in Japan with a subscriber base
of
1.7 million. Sony is a leading manufacturer of audio, video, game,
communications and information technology products for the consumer and
professional markets
TCL
CORPORATION - A leading consumer electronics brand in China that runs its
business from multimedia to mobile phones, from personal computers to home
appliances, from electric lighting to digital products.
HONG
KONG
GOVERNMENT - Hong Kong Housing Authority - The Hong Kong Housing Authority
(HA)
was established as a statutory body in April 1973 under Hong Kong’s Housing
Ordinance. Within the Government’s overall housing policy framework, the HA
determines and implements public housing programs.
2.
VALUE-ADDED TELECOM SERVICES (VAS) CUSTOMERS
CHINA
TELECOM - The largest fixed service telecommunications provider in China, which
includes data, Internet, and the XiaoLingTong PAS wireless system.
CHINA
NETCOM - One of the four major telecom carriers in China, which includes fixed
line, data, Internet, and the XiaoLingTong wireless system.
CHINA
MOBILE - The largest mobile operator in China.
CHINA
UNICOM - One of the major mobile operators in China operating both GSM and
CDMA
mobile networks, long-distance call, local call, data communication including
Internet service and IP phone, value-added telecom service, wireless paging
and
a variety of relevant services.
3.
COMMUNICATION PRODUCTS DISTRIBUTION CUSTOMERS
China
Telecom, China Netcom, China Mobile and China Unicom are our primary
customers.
MOTOROLA
- A world leader in wireless and broadband communications.
NOKIA
-
Nokia is a world leader in mobile communications, with products like mobile
phones, devices and solutions for imaging, games, media and businesses. Nokia
provides equipment, solutions and services for network operators and
corporations.
SALES
AND
MARKETING
We
do not
engage in any significant marketing activities. We advertise our services by
attending various CRM and VAS trade shows and conferences in China. There are
a
limited number of competitors in our industry; accordingly, new business
opportunities are generated mainly through business contacts and by word of
mouth. We rely on our reputation for quality and efficiency among our customers
and leveraging our strategic investors to obtain new business.
GOVERNMENT
REGULATION
We
operate our business in China under a legal regime that consists of the State
Council, which is the highest authority of the executive branch of the PRC
central government, and several ministries and agencies under its leadership,
including:
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the
Ministry of Information Industry
(MII);
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the
China Securities Regulatory Commission
(CSRC);
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the
General Administration of Press and Publication of the P.R.
China;
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the
State Copyright Bureau;
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·
|
the
State Administration of Industry and Commerce
(SAIC);
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the
Ministry of Public Security; and
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the
Ministry of Commerce.
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The
State
Council and these ministries and agencies have issued a series of rules that
regulate a number of different substantive areas of our business, which are
discussed below.
FOREIGN
OWNERSHIP RESTRICTION ON BUSINESSES ENGAGED IN PROVIDING INTERNET
CONTENT
PRC
regulations currently limit foreign ownership of companies that provide Internet
content services to 50%. This limitation extends to our IVR, call center and
telecom VAS and to our business of providing financial information and data
to
Internet users. To comply with this foreign ownership restriction, with respect
to our Internet content services, we operate our website in China through
Shenzhen DongFang Digital Port Technology Development Company Limited
(“““DongFang Digital”““), which is 59% owned by Mr. Wang Wen Ming, the Chairman
and CEO of ChinaGoHi, who is a PRC citizen. Under PRC law, we cannot hold the
licenses and obtain the approvals necessary to operate the website because
those
licenses and approvals can not be held by foreign entities or majority
foreign-owned entities. Furthermore, because Lion Zone and ChinaGoHi are wholly
owned foreign enterprises, they cannot hold such licenses or obtain the
approvals.
There
are
substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations with respect to our acquisition
model. In the opinion of our in-house PRC legal counsel, our current ownership
structure, the contractual arrangements among our wholly owned subsidiaries
and
the operating company and their shareholders comply with all existing applicable
PRC laws, rules and regulations. We cannot assure that the PRC regulatory
authorities will not ultimately take a view that is contrary to the opinion
of
our PRC legal counsel. If the PRC government finds that the agreements that
establish the structure of our operations in China do not comply with PRC
government restrictions on foreign investment in our industry, we could be
subject to severe penalties.
LICENSES
AND PERMITS
There
are
a number of aspects of our business which require us to obtain licenses from
a
variety of PRC regulatory authorities. For example, in order to host our
website, DongFang Digital is required to hold an Internet content provider,
or
ICP, license issued by the Ministry of Information Industry or its local
offices. DongFang Digital currently holds an ICP license issued by Ministry
of
Information Industry Guangdong department. Each ICP license holder that provides
analysis and research information relating to stocks and other securities must
obtain a securities advisory permit from China Securities Regulatory Commission,
or the CSRC. Our subsidiary ChinaGoHi currently holds a securities advisory
permit, which allows it to operate in securities investment consultancy service.
We also receive securities analysis and research information from other licensed
securities advisors that hold securities advisory permits, and we have disclosed
on our websites, reports, and in our software the sources of such information
as
required by the CSRC.
A
recent
regulation issued by the Ministry of Information Industry requires short
message, or SMS, content providers to obtain an SMS license from the Ministry
of
Information Industry or its local offices. DongFang Digital has obtained the
required SMS license for the delivery of our financial short message content.
Furthermore, the Ministry of Information Industry has promulgated rules
requiring ICP license holders that provide online bulletin board services to
register with, or obtain an approval from, the relevant telecommunications
authorities. DongFang Digital has obtained such approval from Guangdong
Communications Administration, the government agency in charge of this matter
in
Guangdong and Shenzhen.
REGULATION
OF INTERNET CONTENT
The
PRC
government has promulgated measures relating to Internet content through a
number of ministries and agencies, including the Ministry of Information
Industry, the Ministry of Culture and the State Press and Publications
Administration. These measures specifically prohibit Internet activities that
result in the publication of any content which is found to, among other things,
propagate obscenity, gambling or violence, instigate crimes, undermine public
morality or the cultural traditions of the PRC, or compromise State security
or
secrets. If an ICP license holder violates these measures, the PRC government
may revoke its ICP license and shut down its websites. DongFang Digital’s ICP
license expressly states that it is not allowed to publish news, among other
things, in relation to its Internet content provision. Specifically, Shenzhen,
Beijing and Guangzhou branches of the General Administration of Press and
Publication of the PRC, the government authority regulating news publication,
confirmed with us that so long as we do not provide general news on politics,
society or culture, or establish a “news column,” or provide such information
under express heading of “news,” we are not required to obtain a license to
publish financial or economic related news content.
REGULATION
OF INFORMATION SECURITY
Internet
content in China is also regulated and restricted by the PRC government to
protect State security. The National People’s Congress, China’s national
legislative body, has enacted a law that may subject to criminal punishment
in
China any effort to: (1) gain improper entry into a computer or system of
strategic importance; (2) disseminate politically disruptive information; (3)
leak State secrets; (4) spread false commercial information; or (5) infringe
intellectual property rights.
The
Ministry of Public Security has promulgated measures that prohibit use of the
Internet in ways which, among other things, result in a leakage of State secrets
or a spread of socially destabilizing content. The Ministry of Public Security
has supervision and inspection rights in this regard and we may be subject
to
the jurisdiction of the local security bureaus. If an ICP license holder
violates these measures, the PRC government may revoke its ICP license and
shut
down its websites.
INTELLECTUAL
PROPERTY RIGHTS
The
State
Council and the State Copyright Bureau have promulgated various regulations
and
rules relating to protection of software in China. Under these regulations
and
rules, software owners, licensees and transferees should register their rights
in software with the State Copyright Bureau or its local offices and obtain
software copyright registration certificates. Although such registration is
not
mandatory under PRC law, software owners, licensees and transferees are
encouraged to go through the registration process. Therefore persons with
registered software rights may receive better protection. We have registered
all
of our self-developed software with the State Copyright Bureau.
PRC
law
requires owners of Internet domain names to register their domain names with
qualified domain name registration agencies approved by the Ministry of
Information Industry and obtain a registration certificate from such
registration agencies. A registered domain name owner has an exclusive use
right
over its domain name. Unregistered domain names may not receive proper legal
protections and may be misappropriated by unauthorized third parties. Our
primary domain names, www.ChinaGoHi.cn and www.GHGC.cn are registered with
CNNIC, a domain name registration agency approved by the Ministry of Information
Industry. In addition, we have registered another domain name, www.FMM88.com,
with the Internet Corporation for Assigned Names and Numbers, or ICANN, an
internationally organized, non-profit corporation that has responsibility for
Internet Protocol (IP) address space allocation.
PRIVACY
PROTECTION
PRC
law
does not prohibit Internet content providers from collecting and analyzing
personal information from their users. On our website, our users are required
to
accept a user agreement whereby they agree to provide certain personal
information to us. PRC law prohibits Internet content providers from disclosing
to any third parties any information transmitted by users through their networks
unless otherwise permitted by law. If an Internet content provider violates
these regulations, the Ministry of Information Industry or its local offices
may
impose penalties and the Internet content provider may be liable for damages
caused to its users.
ADVERTISING
REGULATION
PRC
law
requires entities conducting advertising activities to obtain an advertising
permit from the SAIC’s local offices. Entities conducting advertising activities
without such permit may be charged a fine or imposed other penalties by the
SAIC’s local offices. Currently, foreign investors cannot own more than 70%
equity interest in an advertising agency in China. DongFang Digital holds an
advertising permit.
COMPETITION
We
expect
competition to persist and intensify in the future. Our competitors include
small firms offering specific applications, divisions of large entities and
large independent firms. A number of competitors have or may develop greater
capabilities and resources than ours. We face the risk that new competitors
with
greater resources than ours will enter our market. Our competitors are mainly
leaders in the CRM and VAS markets. Competitive pressures from current or future
competitors could cause our services to lose market acceptance or require a
significant reduction in the price of our services.
1.
OUTSOURCING SERVICES (INCLUDING BPO, ITO, CALL CENTER SERVICES)
COMPETITORS:
PCCW
is
one of Asia’s leading integrated communications services companies, providing
local telephony and broadband services to businesses.
Chinasoft
International Limited, or ICSS, is a leading e-government solution provider
and
software developer in the PRC, and has entered the software outsourcing,
interrelated systems integration, consultancy and training services
industry.
2.
VALUE-ADDED TELECOM SERVICES (VAS) COMPETITORS:
China
Finance Online Co. Ltd., (NASDAQ:JRJC), is one of the leading companies that
specialize in providing online financial and listed company data and information
in China. They offer subscription-based services based on a single information
platform that integrates data and information from multiple sources with
features and functions such as data and information search, retrieval, delivery,
storage and analysis.
TOM
Online Inc. (NASDQ:TOMO), is a leading wireless Internet company in China
providing value-added multimedia products and services, targeting the young
and
trendy demographics. The company’s primary business activities include wireless
value-added services and online advertising. The company offers an array of
services such as SMS, MMS, WAP, wireless IVR (interactive voice response)
services, content channels, search and classified information, and free and
fee-based advanced email.
SINA
Corporation (NASDAQ:SINA) is a leading online media company and value-added
information service (VAS) provider for China and for Chinese communities
worldwide offering Internet users and government and business clients an array
of services.
3.
COMMUNICATION PRODUCTS DISTRIBUTION COMPETITORS
There
are
various smaller regional players in the communications distribution
industry.
RESEARCH
AND DEVELOPMENT
We
place
great emphasis on the continued enhancement of our existing products and
solutions, including designing, developing and supporting a portfolio of
converged voice and data enhanced services, products and solutions to help
wireless, fixed-line and Internet service providers offer unprecedented access
to communications, information and commerce. We have ongoing research and
development activities with respect to the following products and
solutions:
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multi-media
information on demand systems, which integrates the dynamics
of the
Internet with voice-based communication applications, including
text-to-speech and voice recognition
capabilities;
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web-based
multimedia call center/customer relationship management for service
providers and corporations;
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WISE-xb,
which is a call center agent performance management and reporting
software. It provides intelligent routing, comprehensive ACD/PBX
capabilities, Email, IVR, Voice Mail, Messaging, Conference, Recording,
Coaching/Supervising, Reporting and Interface;
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color
ringback tone systems; and
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value-added
services for mobile users.
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EXECUTIVE
OFFICES
Our
executive offices are located in Beijing, Hong Kong, Shenzhen and,
Guangzhou, China at the following addresses:
PacificNet
Beijing Office: 23/F, Building A, TimeCourt, No.6 Shuguang Xili, Chaoyang
District, Beijing, China Postal Code: 100028. Tel:86-010-59225020, Fax:
86-010-59225001 and Email: [email protected].
PacificNet
Limited Hong Kong Office: 601 New Bright Building, 11 Sheung Yuet Road, Kowloon
Bay, Kowloon, Hong Kong. Tel: 011-852-2876-2900, Fax: 011-852-27930689 and
E-mail: [email protected]
PacificNet
Shenzhen Office: Room 901, Tower A, Tian An High-Tech Plaza, Tian An Cyber
Park,
Fu Tian District, Shenzhen, China Postal Code: 518040. Tel:011-86-7553360672,
Fax: 011-86-7553360675 and Email: [email protected].
PacificNet
Guangzhou Office: 15/F, Building A, Huajian Plaza, No. 233 Tianfu Road, Tianhe
District, Guangzhou, China Postal Code: 510630. Tel: 011-86-020-85613432, Fax:
011-86-020-81613659 and Email: [email protected].
We
maintain a website at www.PacificNet.com.
Legal
Proceedings
We
are
not aware of any material pending or threatened legal proceedings that involve
us.
Employees
As
of
September 30, 2006, together with our subsidiaries, we had 2,314 employees
and
contractors. We have not experienced any labor stoppages. None of our employees
are covered by collective bargaining agreements. The breakdown of number of
employees for each of the business units of the Company is as
follows:
COMPANY
AND SUBSIDIARIES
|
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NUMBER
OF EMPLOYEES
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|
PacificNet
Inc
|
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5
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PacificNet
Limited (Hong Kong)
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12
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PacificNet
Beijing
|
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16
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|
PacificNet
Shenzhen
|
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13
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PacificNet
Guangzhou
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1
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PacificNet
Solutions Ltd.
|
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1
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|
PacificNet
Power Ltd.
|
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4
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|
Epro
Telecom Holdings Limited
|
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750
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|
Beijing
Linkhead Technologies Company Limited
|
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60
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|
Shanghai
Classic Group Limited
|
|
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32
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Smartime/Soluteck
Technology (Shenzhen) Company Limited
|
|
|
170
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|
Guangzhou
3G
|
|
|
280
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Clickcom
|
|
|
10
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|
ChinaGoHi
|
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860
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Wanrong
|
|
|
42
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iMobile
|
|
|
58
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TOTAL
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2,314
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Set
forth
below are the names of the directors, executive officers and significant
employees of the Company as of November 7, 2006:
Name
|
|
Age
|
|
Title
|
Tony
Tong
|
|
37
|
|
Chairman
and Chief Executive Officer
|
Victor
Tong
|
|
35
|
|
President
and Director
|
Joseph
Levinson
|
|
30
|
|
Chief
Financial Officer
|
ShaoJian
(Sean) Wang
|
|
42
|
|
Director
|
Peter
Wang
|
|
51
|
|
Independent
Director
|
Michael
Ha
|
|
36
|
|
Independent
Director
|
Jeremy
Goodwin
|
|
33
|
|
Independent
Director
|
Tao
Jin
|
|
38
|
|
Independent
Director
|
Mary
Ma
|
|
35
|
|
Vice
President of Finance China
|
Wenming
Wang
|
|
44
|
|
President
of ChinaGoHi Operation
|
Jingjin
Wu
|
|
46
|
|
Vice
President of ChinaGoHi & DRTV Operations
|
David
Lin
|
|
39
|
|
Vice
President of Investment Management
|
Victor
Choy
|
|
37
|
|
Vice
President, Mobile Distribution Services
|
Brian
Lin
|
|
41
|
|
Vice
President, Northern China
|
Fei
Sun
|
|
40
|
|
Vice
President, Southern China
|
Philip
Cheng
|
|
42
|
|
Vice
General Manager
|
Jack
Ou
|
|
39
|
|
Vice
General Manager, Southern China
|
Mike
Fei
|
|
38
|
|
Corporate
Secretary and Chief Legal Counsel, China Operations
|
Star
Mu
|
|
37
|
|
Regional
Manager, Northern China
|
Shannon
Lee
|
|
29
|
|
Vice
President of Investment
|
Jacob
Lakhany
|
|
29
|
|
Director
of Investor Relations and Public Relations
|
Super
Yongchao Wang
|
|
32
|
|
Vice
President of Value-Added Services
|
Telly
Wai-Hon Wong
|
|
44
|
|
Vice
President of Call Center Services
|
Carol
Men-Yee Chang
|
|
43
|
|
Vice
President & COO of Call Center Operations
|
Joyce
Mei-Wei Poon
|
|
40
|
|
Vice
President of CRM Services
|
Fiona
Yee-Chong Cheuk
|
|
31
|
|
Marketing
and PR Manager, CRM & Call Center
Services
|
Our
executive officers are appointed at the discretion of our board of directors
with no fixed term. There are no family relationships between or among any
of
our executive officers or our directors other than the relationship between
Mr.
Tony Tong and Mr. Victor Tong.
The
following is a brief description of each board of director, key positions and
brief biography:
Mr.
Tony Tong,
age 37, 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, which was 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 the 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: 0110.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 is the Vice Chairman (PRC) of Hong Kong Call Centre Association,
a Fellow of Hong Kong Institute of Directors, a consultant on privatization
and
securitization for Chinas State-Owned Assets Supervision and Administration
Commission (SASAC), and a frequent speaker for LexisNexis, a licensed Continued
Professional Development (CPD) trainer, on China investment. 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. Tony Tong is
the
brother of Victor Tong.
Mr.
Victor Tong,
age 35, currently is the President, Secretary and an Executive Director
of the Company. Previously, Mr. Victor Tong worked for Andersen Consulting
(now
Accenture), American Express Financial Advisors (IDS), and 3M. In 1999, he
was
recognized in “CityBusiness 40 Under 40” as one of the future business and
community leaders in Minnesota. Mr. Tong won the Student Commencement Speaker
Award while graduated with honors with a Bachelor of Science in Physics from
the
University of Minnesota. Mr. Tong was an adjunct professor at the College of
Software of Beihang University, one of the top software colleges in China.
Mr.
Joseph Levinson, age 30, is the Chief Financial Officer. Mr. Levinson
first came to China 10 years ago to take an executive position at Hong
Kong-listed China Strategic Holdings ("CSH", HKSE:0235.HK), one of the earliest
foreign venture capital firms involved in China. His responsibilities at CSH
included its subsidiary China Tire (formerly listed as NYSE: TIR), one of the
first mainland Chinese companies to list on the New York Stock Exchange, as
well
as other overseas listed companies. After CSH, Mr. Levinson worked at KPMG
and
later Deloitte and Touche. At age 24, Mr. Levinson became the youngest manager
in Deloitte's New York office. After gaining experience as a manager in New
York
at the Big-4, Levinson left to devote himself to opportunities in China. In
the
last 5 years, Mr. Levinson has held senior positions in Chinese companies,
including CFO of a China-based media company, a consultant for various Chinese
companies seeking to list overseas, and most recently, as the CFO of an
OTCBB-listed Chinese pharmaceutical company. Mr. Levinson has been a CPA since
1996. He completed his bachelors degree in 1994 in 2.5 years, graduating summa
cum laude, and scored in the top 1% of the November 1994 CPA exam.
Mr.
ShaoJian (Sean) Wang,
age 42, is a Director and has served on our board of directors since 2002.
He is
currently President and COO of Hurray! Holdings. Sean Wang served as the
chairman of GoVideo, a subsidiary of Opta which is a majority owned subsidiary
of TCL, a leading consumer electronics company in China. From 1987 to 1993,
Mr.
Wang held a number of increasingly important positions with St. Paul,
Minnesota-based Ecolab Inc., culminating in his serving as General Manager
for
the companys Indonesia operations. Mr. Wang received a Bachelor of Science
Degree in Economics from Hamline University in St. Paul, Minnesota, and a
Masters of Business Administration from The Carlson School of Management at
the
University of Minnesota. Mr. Wang also attended Peking University in Beijing,
China.
Mr.
Peter Wang,
age 51, is a Director. Mr. Wang has served on our board of directors since
2003.
Since December 2000, Mr. Wang has served as President and Chief Executive
Officer of Techedge, Inc. Mr. Wang was a founder of Unitech Telecom (now named
UTStarcom, NASDAQ: UTSI) and from June 1990 through August 1995 was President
of
Unitech Telecom. Under his management, UTStarcom created the first digital
loop
carrier system and installed the first PHS (Personal Handyphone System) system
in China. From September 1995 through November 2000, he co-founded and served
as
President and Chief Executive Officer of World Communication Group. As an
entrepreneur, he has successfully co-founded and built other ventures in the
US,
including World PCS, Inc. Before forming his own companies, he worked at
AT&T Bell Labs and Racal-Milgo Information System. With AT&T Bell Labs,
he worked on Network Evolution Planning and representing AT&T Network System
Division served on Network Management Protocol Forum. He also serves on the
board of directors of two publicly traded companies in the United States,
Techedge, Inc. and General Components, Inc. Mr. Wang has a BS in Computer
Science and a MS in Electrical Engineering from University of Illinois, as
well
as an MBA in Marketing from Southeast-Nova University.
Mr.
Michael Chun Ha,
age 36,
is a Director. Mr. Ha has served on our board of directors since 2003. Mr.
Ha
graduated from the Faculty of Law, University of Hong Kong in 1994 with a
bachelor degree in law and was admitted as a solicitor of the High Court of
the
Hong Kong Special Administrative Region in 1997 and a solicitor of the Supreme
Court of England and Wales in 1998. From 1995 to 2002, Mr. Ha worked as a lawyer
in a number of prestigious international and Hong Kong law firms, specializing
in the areas of corporate finance, securities offerings, takeovers, cross-border
mergers and acquisitions, venture capital, corporate restructuring, regulatory
and compliance issues, project finance, and general commercial transactions
and
services in Hong Kong and the Peoples Republic of Hong Kong. In 2002, Mr. Ha
commenced his own practice in the trade name of “Ha and Ho Solicitors”. Mr. Ha
specializes in the areas of general commercial transactions, corporate finance
and civil and criminal litigation. Mr. Ha has been the company secretary of
Shanxi Central Pharmaceutical International Company Limited, a Hong Kong main
board listed company. Since 2003, Mr. Ha has been a director of a private
investment company, Metro Concord Investment Limited.
Mr.
Jeremy Goodwin, Mr.
Jeremy Goodwin, age 33, has served on our board as an Independent Director
since
December 24, 2004. Jeremy
Goodwin is founder of China Diligizer and Managing Partner of 3G Capital
Partners. He began his career in 1995 at Mees Pierson Investment Finance S.A.
in
Geneva, Switzerland where he supported the fund’s private placement/private
equity finance team. Noteworthy transactions executed by the group included
assistance on the placements of the $1.2 Billion Carlyle Partners II Limited
Partnership. In 1997 he went to work for the then parent institution, ABN Amro,
in Beijing, China where he established the Global Clients desk representing
the
bank’s multinational clients to sovereign regulatory agencies and local
financial institutions while monitoring their working capital needs. During
his
time there, the office was approved by the Central Bank of China to operate
as a
fully licensed branch. Noteworthy transactions executed by the group included
assistance in the business development and project management for the Royal
Dutch Shell Oil project and the Beijing Capital International Airport listing
on
the Hong Kong Stock Exchange arranged by the Hong Kong office of ABN Amro
Rothschild. He also assisted the Singapore Debt Capital Markets team in the
business development origination of Sovereign Euro Debt Issuances for the
Ministry of Finance and the State Development Bank in Beijing for the People’s
Republic of China.
In
1999,
Mr. Goodwin was employed with ING Barings in London as an International
Associate working directly for the business manager to the CEO. One of his
primary assignments was in Hong Kong with the ING Beijing Investment arm of
Baring Private Equity Partners, a joint venture with the Beijing Municipal
Government established in 1994 at the decree of then Chinese Premier Zhu Rong
Ji
and widely considered the first domestic Chinese Private Equity fund. Mr.
Goodwin received his BS from Cornell University in 1996 in conjunction with
the
Institute of Higher International Studies in Geneva, Switzerland. He later
pursued his advanced degree with Princeton University with a concentration
in
Chinese affairs which he completed at the prestigious Nanjing Chinese Studies
Center of the Johns Hopkins School of Advanced International Studies. Jeremy
is
fluent in written and spoken Mandarin Chinese, French and has working knowledge
of Dutch.
Mr.
Tao Jin,
age 38,
is a Director. Mr. Jin is a partner at JunHe, one of the top five law firms
in
China. Prior to JunHe, from April 2002 to May 2005, he was a Vice President
and
Assistant General Counsel of J.P. Morgan Chase Bank. From August 1999 to March
2002, Mr. Jin served as a Senior New York Qualified Lawyer for Sullivan &
Cromwell, which represented China Unicom, PetroChina and China Telecom in their
IPO’s and dual listings in New York and Hong Kong. From 1996 to 1999, Mr. Jin
served as Associate Lawyer for Cleary, Gottlieb Steen & Hamilton, which
represented various Fortune 500 companies and investment banks in public and
private securities offerings and M&A activities. Mr. Jin received his Juris
Doctor in 1996 with high honors from Columbia University, and received B.S.
in
Psychology in 1990 from Beijing University.
The
following is the list of PacificNet’s management team, key positions and brief
biography:
Ms.
Mary Ma,
age 35,
has been with PacificNet since Feb 2004. Previously, Ms. Ma worked as Manager
of
Corporate Finance and Audit Division for China Motion, a telecom company listed
on the Hong Kong Stock Exchange. Ms. Ma also worked as Finance Manager for
Shenzhen Lufthansa Technik Ltd., a subsidiary of Germany Lufthansa Group. Ms.
Ma
also worked as Vice President for a public company listed on NASDAQ where she
gained working experience in the US. Ms. Ma is experienced accountant with
working knowledge of Chinese Accounting Standard, IAS and USGAAP, corporate
finance, finance analysis and operation. Ms. Ma received MBA degree from
American Kennedy Western University, and bachelor degree in
Accounting.
Mr.
Wenming Wang,
age 44,
has been the President of PacificNet’s ChinaGoHi Operation since December 2005.
In addition to being a successful self-made private entrepreneur in China,
Mr.
Wang has been elected a congressman of People’s Congress for Shenzhen
Municipality, China, since 2005. Mr. Wang is the Founder, Chairman and Chief
Executive Officer of Shenzhen Guhaiguanchao Investment Advisory Co., Ltd.
(ChinaGoHi), a leading investment advisory services company in China. Mr. Wang
is also the chief publisher of Sino-Business Weekly (ISSN 1671-6728,
www.fmm88.com , www.lcgj.cn), a leading financial investment management magazine
covering China’s stock market and securities investment. Mr. Wang has extensive
experience in China’s stock market and investment consulting industry for more
than 10 years since the launch of China’s stock markets. Under his leadership,
Shenzhen Guhaiguanchao has achieved growing revenue, profits, and industry
recognition since its establishment in 2002, and was by Shenzhen government
as
“Shenzhen’s Top 100 Tax-paying Enterprises” in 2003 and 2004.
Mr.
Wu Jingjin,
age 46,
,is one of the co-founders and executive director of Shenzhen Guhaiguancao
Investment Advisory Co., Ltd. (ChinaGoHi) a leading investment advisory company
in mainland China. Mr. Wu was one of the pioneer analysts in mainland China
and
has extensive working experience in China’s investment banking and investment
consulting industry since the launch of China’s stock market. From1994-1999, Mr.
Wu worked as Senior Manager at J&A Securities, one of the leading
investment banks in mainland China at that time. Mr. Wu holds an MBA degree
from the State University of New York at Buffalo.
Mr.
David Lin, age
39,
has been with PacificNet since 2004. Previously, Mr. Lin worked as Assistant
President of ABB Meishi Power Investment Co., Ltd. Mr. Lin also worked as
Corporate Secretary and Assistant General Manager for a public company listed
on
NASDAQ where he gained working experience in the US. Mr. Lin received Master
degree of finance from Fudan University, and Bachelor degree of English from
Tianjin University.
Mr.
Victor Choy,
age 37,
joined PacificNet in 2005 as Vice President of Mobile Distribution Services.
From 2003 to present, Mr. Choy is a partner and director of Ora Telecom China,
a
subsidiary of the Singapore based manufacturer and distributor of original
accessories for major brands including Nokia and Motorola, as well as OEM
branded Bluetooth products, with sales offices in 12 countries in Asia and
Europe. Mr. Choy has over 13 years of telecom experience in HK, China and SE
Asia. From 1998 to 2002, Mr. Choy worked as the General Manager of Asia Pacific
(APAC) for Avenir Telecom, a listed company from France and a leading mobile
distributor, telecom retailer, Internet service provider, and mobile accessory
manufacturer in Europe. Mr. Choy helped Avenir Telecom build its APAC business
from $0 to annual revenue of US$100 million within 2 years of operation in
mobile phone and accessories distribution. In 2000, Mr. Choy expanded the
company into China and found Avenir Telecom China Limited in Shenzhen. In one
year, the Avenir China opened 7 retail outlets in the city of Shenzhen and
Guangzhou and also started the distribution of products for China Mobile and
China Unicom by signing first level distributorship agreements. At Avenir,
Mr.
Choy initiated a JV between Cetelec and China Motion, a Hong Kong listed telecom
company, to run an after sales service center for mobile phones and pagers
in
Shenzhen. Mr. Choy formed a cooperation with France Telecom’s Rapidlink
subsidiary, to provide retail and distribution services to China Unicom
Guangdong. Mr. Choy received the Bachelor of Science degree in Actuarial Science
and Computer Science from University of Toronto in 1992.
Mr.
Bin “Brian” Lin,
age 41,
was promoted to the Vice President for PacificNet China Operations in 2005.
Mr.
Lin is currently the President of Linkhead, a leading IVR and CTI technology
provider 51% owned by PacificNet. Previously, Mr. Lin worked for Nortel in
Canada, Tandem Computer, Motorola, and UTStarcom. Mr. Lin received the Master
of
Applied Science degree in Electrical Engineering from the University of Toronto
in 1989.
Mr.
Fei Sun,
age 40,
has been with PacificNet since 2003 and has served several positions including
Manager of Shenzhen office, Director of Investment, etc. Mr. Sun has been a
director of Linkhead for 10 years and serves as the General Manager of Linkhead
Shenzhen Office. From 1991, Mr. Sunfei worked in Japan as the Chief
Representative of China in a software company co-organized by CATIC and Japanese
Central Electronic Power Research Institution, focused on software development
and organized the Japanese company software development outsourced to the
Chinese company. Mr. Sun graduated with Master Degree of Electronic Engineering
from China NorthEast Industrial University.
Mr.
Philip Cheng, age
42, has been with PacificNet since 2005. As the Vice General Manager of
PacificNet, Philip is responsible for the company’s synergy development,
corporate strategy coordinating and execution for all PacificNet’s subsidiaries
so as to enhance the internal control and resource sharing among the group.
Prior to joining PacificNet, Mr. Cheng worked for CSL, the largest mobile
operator in Hong Kong, and was in charge of CSL’s Value-Added Services
development in China. Previously, Mr. Cheng worked as deputy general manager
in
the VAS department for Guangzhou Suntek Technology, a leading telecom equipment
and VAS provider listed on China’s stock exchange. Mr. Cheng received his Master
and Bachelor degree of Science respectively in 1988 and 1985 from Southern
China
University of Technology, Department of Radio Engineering, Major of
Communications, and performed his master research in Digital Signal Processing.
Mr.
Jack Ou, age
39, joined PacificNet in 2005 as Manager and Financial Controller of PacificNet
Guangzhou Operations. From 1986 to 1998, Mr. Jack Ou worked as the Vice Director
at the Guangzhou Justice Bureau and as PRC attorney at Guangdong Overseas
Chinese Law Firm. Subsequently, Mr. Jack Ou worked as the Manager of Research
Department and Assistant General Manager in Guangdong Huafu Investment Inc.
From
2003 to 2005, Mr. Ou served as a Manager and Research Analyst at Everbright
Securities, a leading securities brokerage firm in China. Mr. Ou published
many
research reports covering China stock market and listed companies, with a focus
on analyzing the financial accounting reports of China’s listed companies. Mr.
Ou is an accredited PRC lawyer and received his Law Degree from the Sun Yat-Sen
University, Guangzhou, China. Mr. Ou also graduated from Guangdong Communist
Party Executive College and received a Master of Economics Degree.
Mr.
Mike Fei,
38,
joined PacificNet in 2004 as in-house Chief Legal Counsel for PacificNet’s China
Operations. Mr. Fei is a Member of the All-China Bar Association and holds
a
Master of Law degree from the University of New South Wales of Australia. Mr.
Fei has 8 years of experience in the legal profession and dealt with more than
200 cases of litigation and arbitration which related to the issues of foreign
investment, bankruptcy, merging, commercial contract and debt
disputes.
Mr.
Star Mu,
age 37,
joined PacificNet in 2003 as Regional Manager, North China. Mr. Mu received
his
bachelor degree in Computer Science from the Northwestern Polytechnical
University of China in 1992.
Miss.
Shannon Lee,
age 29,
joined PacificNet in 2005 as Vice President of China Investment of PacificNet.
From 2003 to 2004, Miss Li served as a Project Manager (Investment) of Sun
&
Sun Capital Holdings Pte. Ltd., a leading Singapore-based investment bank
focusing on IPO and investment banking services. Previously, Miss Li worked
as
the Executive Assistant to President at Linkhead (now 51% owned by PacificNet).
Miss Li graduated with honors with a Bachelor of Science in Automobile Design
and Manufacturing from Harbin Institute of Technology, China in 1998 and
received the Master of Business Administration degree from the University of
Nottingham, UK in 2003.
Mr.
Jacob Lakhany,
age 29,
is the Director of Investor Relations and has been with PacificNet since 2003.
Previously Mr. Lakhany was a Quality Assurance Supervisor for APAC Customer
Service, a leading CRM call center services company listed on NASDAQ, where
he
gained experience in the outsourced telemarketing industry overseeing service
quality and relationships with companies such as Citibank, Sears, Shell, Chase
Manhattan, and Bank One. Mr. Lakhany attended Northern State University in
Aberdeen, SD.
Mr.
Super Yongchao Wang,
age 32,
joined PacificNet as VP of VAS in 2005. Mr. Wang is also the President of
Guangzhou 3G Information Technology Co., Ltd. (GZ3G), a 51% owned subsidiary
of
PacificNet. Previously, Mr. Wang was the Deputy General Manager of Suntek
Information (Listed on China’s Shanghai stock exchange), the first private voice
information IVR service provider in China. From 1996 to 1999, Mr. Wang served
as
the Deputy General Manager of GD Suntek, managing 18 branches’ operation
nationwide. In 2000 Mr. Wang founded Guangzhou Sunroom Information Ltd.
(GZ-Sunroom, subsidiary of GZ3G) focusing on wireless value-added services
provision and was appointed CEO of the company. In the following two years,
GZ-Sunroom worked with 27 branches of China Mobile successfully to launch its
VAS and IVR business. GZ-Sunroom had become one of the largest mobile and
telephone information service providers (SP) serving 26 provinces in China.
Mr.
Wang received the B.A in Business Administration from Jinan University in
Guangzhou in 1994 and studied master course of Economics at Guangdong Academy
of
Sciences in 2002.
Mr.
Telly Wong, age
44, joined PacificNet in 2003 as part of the Epro acquisition. Mr. Wong is
the
Managing Director and a co-founder of PacificNet Epro for the last 10 years,
and
is responsible for directing the overall business policies and strategies and
overseeing the business development of Epro’s overall call center and CRM
services. Prior to Epro, Mr. Wong was the MIS Manager of Star Paging, one of
the
largest paging operation in Hong Kong. During his services with Star Paging,
Mr.
Wong was responsible for managing the entire management information system
of
the paging group. He was also a founder of Brightfair Technology Ltd which
was
incorporated in 1989 and mainly involved in paging system software design for
carriers in the countries of South East Asia. Mr. Wong, holds a Master Degree
in
Business Administration,
Ms.
Carol Chang, age
43, joined PacificNet in 2003 as part of the Epro acquisition. Ms. Chang joined
Epro in 1988 as Marketing Executive and was late promoted to Epro Telecom’s
General manager in 1994 and then to Chief Operating Officer for PacificNet
Epro’s call center operations. Ms. Chang is now mainly responsible for Hong Kong
call center business operations. Ms. Chang holds a BSc Degree in Computer
Science from the University of Texas at Austin, USA.
Ms.
Joyce Poon,
age
40, joined PacificNet in 2003 as part of the Epro acquisition. Ms. Poon is
the General Manager of PacificNet Epro responsible for the development and
management of CRM consulting and training services in China. Mr. Poon has been
with Epro since its founding in 1994, serving many key roles in customer service
operations and business development. Her most recent role was, and continues
to
be, in charge of the Company’s Training and Consulting Division she formed two
years ago. The Division has enjoyed steady growth and has received high praises
from some of the largest enterprise clients in China. Ms. Poon, General Manager
of PRC Business, holds a MBA Degree in Marketing.
Ms.
Fiona Cheuk,
age 31,
joined PacificNet Epro in 2004 as Marketing Manager. The major duty of Ms.
Cheuk
is to drive innovative and effective marketing strategy of exploring more
business opportunities for the company. She also takes responsibility for
delivering efficient marketing communications of raising brand awareness and
revealing value differentiation of our products and services in the competitive
market. Prior to joining Epro, Ms. Cheuk gained customer relationship management
and marketing experiences while working at SmarTone Telecom (HKSE:0315.HK)
and
Cisco Systems. Ms. Cheuk holds a MBA Degree in Marketing from Western Sydney
University.
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.
|
Annual
Compensation
|
|
Long
Term Compensation Awards
|
|
Name
/ Principal Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Other
($)
|
|
Restricted
Stock
Award
($)
|
|
Stock
Options
|
|
All
Other Comp. ($)
|
|
Tony
Tong, CEO
|
|
|
2005
|
|
$
|
70,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66,000
|
|
$
|
8,000
|
|
|
|
|
2004
|
|
$
|
70,000
|
|
|
—
|
|
$
|
24,000
(1
|
)
|
|
—
|
|
|
75,000
|
|
$
|
4,000
|
|
|
|
|
2003
|
|
$
|
100,000
|
|
|
—
|
|
|
—
|
|
|
120,000
|
|
$
|
3,000
|
|
|
|
|
(1)
This amount represents a housing allowance.
(2) Represents
medical and life insurance premiums paid by the Company. Mr. Tong has no
arrangement to receive any cash surrender amount under the life insurance
policy.
OPTION
GRANTS DURING FISCAL YEAR 2005 (INDIVIDUAL GRANTS)
The
following table sets forth certain information with respect to stock option
grants to our named executive officers during the fiscal year ended December
31,
2005.
|
|
|
|
|
Potential
Realizable Value at Assumed Rates of Stock Price Appreciation for
Option
Term(3)
|
Name
|
Options
Granted
(1)
|
%
of Total
Options
Granted
to
Employees in
2005
(2)
|
Exercise
or
Base
Price
|
Expiration
Date
|
5%
|
10%
|
Tony
Tong, CEO
|
66,000
|
9.7%
|
$6.50
|
July
26, 2009
|
$521,452
|
$628,099
|
(1) All
options were granted pursuant to our 1999 Stock Plan, as amended in 2002 and
2003. The options have a ten-year term and vest and become exercisable over
four years. In the event of a change in control of the Company, the options
will be substituted by the successor corporation or will fully vest and become
exercisable for a period of fifteen days.
(2) Based
on an aggregate of 2,000,000 shares subject to options granted to our
employees in 2005.
(3) Potential
realizable values are computed by (a) multiplying the number of shares of Common
Stock subject to a given option by the exercise price, (b) assuming that the
aggregate stock value from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire four-year term of the option and (c)
subtracting from that result the aggregate option exercise price. The 5% and
10%
assumed annual rates of stock price appreciation are mandated by the rules
of
the SEC and do not represent our estimate or projection of future Common Stock
prices.
OPTION
EXERCISE AND VALUES
Aggregated
Option Exercises During Fiscal Year 2005 and Fiscal Year-End Option
Values.
The
following table sets forth information for our executive officers relating
to
the number and value of securities underlying exercisable and unexercisable
options they held at December 31, 2005 and sets forth the number of shares
of
Common Stock acquired and the value realized upon exercise of stock options
held
as of December 31, 2005 by our named executive officers.
Name
|
Shares
Acquired
On
Exercise
|
Value
Realized
(1)
|
No.
of Securities Underlying
Unexercised
Options
At
12/31/05
|
Value
($) of Unexercised
In-the-Money
Options
At
12/31/05 (2)
|
|
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
Tony
Tong, CEO
|
6,000
|
$29,700
|
145,000
|
66,000
|
$677,650
|
$12,120
|
(1)
The
“Value Realized” is based on the closing price of our Common Stock as quoted on
NASDAQ on the date of exercise, minus the per share exercise price, multiplied
by the number of shares issued upon exercise of the option.
(2)
The
value of unexercised in-the-money options is calculated based on the difference
between the closing price of $6.77 per share as quoted on NASDAQ on December
31,
2005, and the exercise price for the shares, multiplied by the number of shares
underlying the option. The actual value of unexercised options fluctuate
depending on the price of our Common Stock.
EMPLOYMENT
CONTRACTS AND TERMINATION OF EMPLOYMENT, AND
CHANGE-IN-CONTROL
On
December 30, 2002, we entered into an Executive Employment Contract with Tony
Tong. Mr. Tong currently serves as our Chief Executive Officer. The employment
agreement provides for Mr. Tong to earn an annual base salary of $100,000 in
cash, plus $60,000 in stock compensation annually until April 1, 2005. Mr.
Tong
is also eligible for an annual bonus for each fiscal year during the term of
his
contract based on performance standards as the Board or compensation committee
designates. Mr. Tong is entitled to receive a monthly housing allowance of
$2,500, monthly automobile allowance of $500, tax preparation expenses of $2,000
per year, and cash bonus based on our net profit.
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 paid a sign-on bonus of 10,000 stock
options of common stock of the Company. 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, payable by cash,
common stock or stock options of the Company, at the option of the
Company.
ANNUAL
RETAINER FEE.
Each
director is paid an annual retainer fee of US$10,000 in the form of common
stock
or stock option of the Company. Such retainer fee is paid semi-annually in
arrears. The number of shares of common stock issued is based on the average
closing market price over the ten trading days prior to the end of the six
month
period that the retainer fee is due.
The
following table sets forth as of November 7, 2006 the number of shares of our
Common Stock beneficially owned by (i) each person who is known by us to be
the
beneficial owner of more than five percent of the Company’s Common Stock; (ii)
each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the stockholders listed in the table have sole
voting and investment power with respect to the shares indicated.
NAME
AND ADDRESS OF BENEFICIAL OWNER
|
NUMBER
OF SHARES STOCK BENEFICIALLY OWNED(1)
|
%
OF COMMON STOCK BENEFICIALLY OWNED
|
|
|
|
Sino
Mart Management Ltd. (2)
c/o
ChoSam Tong
16E,
Mei On Industrial Bldg.
17
Kung Yip Street, Kwai Chung, NT, Hong Kong
|
1,851,160
|
15.9%
|
|
|
|
ChoSam
Tong (3)
16E,
Mei On Industrial Bldg.
17
Kung Yip Street, Kwai Chung, NT, Hong Kong
|
1,861,160
|
15.9%
|
|
|
|
Kin
Shing Li (4)
Rm.
3813, Hong Kong Plaza
188
Connaught Road West, Hong Kong
|
1,150,000
|
9.9%
|
|
|
|
Tony
Tong (5)
|
347,391
|
2.9%
|
|
|
|
Victor
Tong (6)
|
175,400
|
1.5%
|
|
|
|
ShaoJian
(Sean) Wang (7)
|
88,000
|
*
|
|
|
|
Peter
Wang (8)
|
11,000
|
*
|
|
|
|
Michael
Chun Ha (9)
|
10,000
|
*
|
|
|
|
Tao
Jin (10)
|
10,000
|
*
|
|
|
|
Jeremy
Goodwin (11)
|
6,000
|
*
|
|
|
|
All
directors and officers as a group (7 persons)
|
647,791
|
5.4%
|
|
|
*
|
Less
than one percent.
|
**
|
The
address for each beneficial owner not otherwise specified is: c/o
PacificNet Inc., 23/F, Tower A, Timecourt, No.6 Shuguang Xili, Chaoyang
District, Beijing, China 100028.
|
(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. 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 owners 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.
|
(2)
|
Sino
Mart Management Ltd. is owned by Mr. ChoSam Tong, the father of Messrs.
Tony Tong and Victor Tong.
|
(3)
|
Includes
shares of common stock of Sino Mart Management Ltd., which is owned
by Mr.
ChoSamTong.
|
(4)
|
Information
obtained from the Schedule 13D/A filed by Mr. Kin Shing Li on October
14,
2003.
|
(5)
|
Includes
Currently Exercisable Options to acquire 163,000 shares of common
stock.
|
(6)
|
Includes
Currently Exercisable Options to acquire 153,000 shares of common
stock.
|
(7)
|
Includes
59,000 shares issuable upon exercise of Currently Exercisable
Options.
|
(8)
|
Represents
shares issuable upon exercise of Currently Exercisable
Options.
|
(9)
|
Includes
6,000 shares issuable upon exercise of Currently Exercisable
Options.
|
(10)
|
Represents
shares issuable upon exercise of Currently Exercisable
Options.
|
(11)
|
Represents
shares issuable upon exercise of Currently Exercisable
Options.
|
None
RELATED
STOCKHOLDER INFORMATION
As
of
October 6, 2005, our common stock was listed on the NASDAQ National Market,
now
known as the NASDAQ Global Market, under the symbol “PACT”. Prior to that time,
our common stock was listed on the NASDAQ Capital Market under the same symbol.
The following table sets forth the range of high and low bid prices of common
stock reported by NASDAQ in each fiscal quarter from January 1, 2004 to December
31, 2005, for the fiscal quarters ended March 31, June 30 and September 30,
2006, and the period from October 1 through November 6, 2006. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
|
|
HIGH
|
|
LOW
|
|
FISCAL
2004
|
|
|
|
|
|
Quarter
Ended March 31, 2004
|
|
$
|
7.40
|
|
$
|
4.81
|
|
Quarter
Ended June 30, 2004
|
|
$
|
5.65
|
|
$
|
2.62
|
|
Quarter
Ended September 30, 2004
|
|
$
|
3.85
|
|
$
|
1.91
|
|
Quarter
Ended December 31, 2004
|
|
$
|
14.08
|
|
$
|
2.43
|
|
|
|
|
|
|
|
|
|
FISCAL
2005
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2005
|
|
$
|
11.34
|
|
$
|
6.46
|
|
Quarter
Ended June 30, 2005
|
|
$
|
10.23
|
|
$
|
6.71
|
|
Quarter
Ended September 30, 2005
|
|
$
|
9.00
|
|
$
|
6.85
|
|
Quarter
Ended December 31, 2005
|
|
$
|
8.48
|
|
$
|
6.30
|
|
|
|
|
|
|
|
|
|
FISCAL
2006
|
|
|
|
|
|
|
|
Quarter
Ended - March 31, 2006
|
|
$
|
8.88
|
|
$
|
6.57
|
|
Quarter
Ended June 30, 2006
|
|
$
|
8.52 |
|
$
|
7.05
|
|
Quarter
Ended September 30, 2006
|
|
$
|
7.62 |
|
$
|
4.62
|
|
October
1 through November 6, 2006
|
|
$
|
6.28 |
|
$
|
5.05
|
|
HOLDERS
OF RECORD
As
of
November 7, 2006, there were 170 record
holders of our common stock. However, the total number of beneficial holders
is
unknown as they hold our common stock in street name.
DIVIDENDS
We
have
not paid any cash dividends on our common stock, and we currently intend to
retain any future earnings to fund the development and growth of our
business.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth aggregate information regarding the Company’s equity
compensation plans in effect as of December 31, 2005:
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
($)
|
Remaining
available for further issuance under equitycompensation
plans
|
Equity
compensation plans approved by security holders (under 1998 Stock
Option
Plan) (1)
|
1,360,100
|
3.99
|
0
|
|
|
|
|
Equity
compensation plans approved by security holders (under 2005 Stock
Option
Plan) (2)
|
155,600
|
6.59
|
1,844,400
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
(1)
Reflects options granted and available for issuance under the 1998 Stock Option
Plan.
(2)
Reflects options granted and available for issuance under the 2005 Stock Option
Plan.
General
The
following description of our securities does not purport to be complete and
is
subject in all respects to applicable Delaware law and to the provisions of
our
Certificate of Incorporation and By-laws. Our current authorized capital
stock consists of 125,000,000 shares of common stock, par value $.0001 per
share, of which 14,008,497 shares were issued and 11,671,836 were outstanding
as
of October 26, 2006, and 5,000,000 shares of preferred stock, par value $.0001
per share, none of which were issued and outstanding as of October 26,
2006.
Common
Stock
The
holders of common stock are entitled to one vote for each share held of record
on all matters to be voted on by the stockholders. The holders of common stock
are entitled to receive dividends ratably when, as and if declared by the board
of directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share equally and ratably in all assets remaining available for distribution
after payment of liabilities and after provision is made for each class of
stock, if any, having preference over the common stock.
The
holders of common stock, as such, have no conversion, preemptive, or other
subscription rights and there are no redemption provisions applicable to the
common stock. All of the outstanding shares of common stock are validly issued,
fully-paid and nonassessable.
Convertible
Debentures
On
March
13, 2006, we entered into a securities purchase agreement in connection with
the
private placement in which we sold $8,000,000 in convertible debentures and
issued warrants to purchase up to an aggregate of 400,000 shares of common
stock. The debentures are due March 13, 2009. The debentures are convertible
at
any time into shares of our common stock at an initial fixed conversion price
of
$10.00 per share, subject to adjustments for certain dilutive events. At the
closing of the private placement we prepaid the first year’s interest on the
debentures equal to 5% of the aggregate principal amount of debentures. We
will
pay interest in cash or shares, provided that certain conditions are met, at
the
rate of 6% for the second year the debentures are outstanding and then 7% for
the third. Beginning January 1, 2007, we are obligated to redeem $320,000 every
month, plus accrued, but unpaid interest, liquidated damages and penalties.
We
also have the option to prepay, provided that certain conditions have been
met,
after the 12 month anniversary of the effective date of the registration
statement of which this prospectus is part, some or all of the outstanding
debentures for cash in an amount equal to 120% of the principal amount
outstanding, plus accrued, but unpaid interest, liquidated damages and penalties
outstanding. At any time after the six month anniversary of the effective date,
we may force the holders to convert up to 50% of the then outstanding principal
amount of the debentures, subject to certain trading conditions being met.
Under
the
terms of the debenture, as long as 20% of the original aggregate principal
amount of the debentures are outstanding, without the prior written consent
of
holders of the debentures who at such time hold a principal amount that is
more
than $50,000, we are not permitted to: (i) incur additional indebtedness or
liens, (ii) amend our organizational documents, (iii) repurchase our shares
of
common stock, except as provided for in the debenture, or (iv) pay any dividends
on any equity securities.
If
an
event of default occurs under the debentures or other related documents, the
holders may elect to accelerate the payment of the outstanding principal amount
of the debenture, plus accrued, but unpaid interest, liquidated damages and
penalties, which shall become immediately due and payable. The following are
some of the events that constitute an event of default under the debenture
and
related documents (i) our failure to perform our obligations or a breach under
the debenture and related agreements, or failure to perform under our other
material agreements; (ii) we or our subsidiaries being subject to a bankruptcy
event, (iii) failure of our common stock to be eligible for listing or quotation
and not eligible to resume listing or quotation within five trading days, (iv)
any change of control or agreement to sell or dispose of all or in excess of
33%
of our assets; and (v) a monetary judgment, writ or similar final process filed
against us or any subsidiary for more than $50,000.
The
debentures contain customary anti-dilution protection in the event of a
subsequent offering of securities or rights of the company at a price below
the
current exercise price and provide for additional adjustments in the event
of a
stock dividend, stock split, or pro rata distribution of indebtedness or assets
to our holders of common stock.
Warrants
We
have
included for registration herein shares underlying warrants to purchase 862,462
shares of common stock.
|
|
123,456
of the warrants expire on January 15, 2009, and are currently exercisable
into shares of common stock at an exercise price of $7.15 per share.
The
warrants permit the cashless exercise if at any time one year after
its
issuance there is no effective registration statement covering
the shares
underlying the warrant.
|
|
|
96,462
of the warrants expire on November 15, 2009, and are currently exercisable
into shares of common stock at an exercise price of $3.89 per share.
The
warrants permit the cashless exercise of the warrant if at any time
one
year after its issuance there is no effective registration statement
covering the shares underlying the warrant. The warrant provides
for the
adjustment of the number and kind of securities in the event of a
stock
split;
|
|
|
350,000
of the warrants expire on December 9, 2009, and are currently exercisable
into shares of common stock at an exercise price of $12.21 per share.
The
warrants contain customary anti-dilution protection in the event
of the
issuance of common stock or common stock equivalents at a price below
the
current exercise price and provide for the adjustment of the number
and
kind of securities in the event of a stock split; and
|
|
|
416,000
of the warrants expire on March 13, 2011, and are currently exercisable
into shares of common stock at an exercise price of $12.20 per share.
The
warrants contain customary anti-dilution protection in the event
of a
subsequent offering of securities or rights of the company at a price
below the current exercise price and provide for additional adjustments
in
the event of a stock dividend, stock split, or pro rata distribution
of
indebtedness or assets to our holders of common
stock.
|
The
Transfer Agent and Registrar for shares of our common stock is American Stock
Transfer & Trust Company, New York, New York.
The
validity of the securities offered hereby have been passed upon for us by Loeb
& Loeb LLP, New York, New York.
The
financial statements as of December 31, 2005 and 2004, and for the years ended
December 31, 2005, 2004 and 2003 included in this prospectus and in the
registration statement have been audited by Clancy and Co., P.L.L.C., an
independent registered public accounting firm, as stated in their report
appearing herein.
We
have
filed with the SEC a registration statement on Form S-1 under the Securities
Act
of 1933 with respect to the common stock offered hereby. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits of the registration
statement. For further information with respect to us and the shares being
offered under this prospectus, we refer you to the registration statement,
including the exhibits and schedules thereto.
You
may
read and copy the registration statement of which this prospectus is a part
at
the SECs Public Reference Room, which is located at 100 F Street, N.E.,
Washington, D.C. 20549. You can request copies of the registration statement
by
writing to the SEC and paying a fee for the copying cost. Please call the SEC
at
1-800-SEC-0330 for more information about the operation of the SECs Public
Reference Room. In addition, the SEC maintains an Internet web site, which
is
located at www.sec.gov , which contains reports, proxy and information
statements and other information regarding issuers that file electronically
with
the SEC. You may access the registration statement of which this prospectus
is a
part at the SECs Internet web site. We are subject to the information reporting
requirements of the Securities Exchange Act of 1934, and we will file reports,
proxy statements and other information with the SEC.
We
maintain an Internet web site at www.pacificnet.com. We have not incorporated
by
reference into this prospectus the information on our web site, and you should
not consider it to be a part of this prospectus.
PACIFICNET, INC.
Unaudited
Interim Financial Information - as of and for the Six Months Ended
June
30, 2006
|
|
Consolidated
Balance Sheets
|
F-2
|
Consolidated
Income Statements
|
F-3
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-4
|
Consolidated
Statements of Cash Flows
|
F-5 |
Notes
to Unaudited Consolidated Financial Statements
|
F-6
|
|
|
Audited
Financial Information - as of December 31, 2005 and 2004 and For
the Years
Ended December 31, 2005, 2004, and 2003
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-20
|
Consolidated
Balance Sheets
|
F-21
|
Consolidated
Statements of Operations
|
F-22
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-23 |
Consolidated
Statements of Cash Flows
|
F-24
|
Notes
to Consolidated Financial Statements
|
F-25
|
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands of United States dollars, except par values and share
numbers)
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,935
|
|
$
|
9,579
|
|
Restricted
cash - pledged bank deposit
|
|
|
230
|
|
|
1,652
|
|
Accounts
receivables, net of allowance for doubtful accounts of $33 and
$5
|
|
|
16,112
|
|
|
5,998
|
|
Inventories
|
|
|
2,368
|
|
|
1,836
|
|
Loan
receivable from related parties
|
|
|
4,753
|
|
|
2,520
|
|
Loan
receivable from third parties
|
|
|
1,010
|
|
|
1,572
|
|
Other
current assets
|
|
|
8,444
|
|
|
7,973
|
|
Total
Current Assets
|
|
|
38,852
|
|
|
31,130
|
|
Property
and equipment, net
|
|
|
8,361
|
|
|
4,300
|
|
Investments
in affiliated companies and subsidiaries
|
|
|
463
|
|
|
410
|
|
Marketable
equity securities - available for sale
|
|
|
539
|
|
|
539
|
|
Goodwill
|
|
|
17,285
|
|
|
14,824
|
|
Other
assets - debt issuance costs (net)
|
|
|
957
|
|
|
-
|
|
TOTAL
ASSETS
|
|
$
|
66,457
|
|
$
|
51,203
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Bank
line of Credit
|
|
|
889
|
|
|
1,060
|
|
Bank
loans-current portion
|
|
|
401
|
|
|
188
|
|
Capital
lease obligations - current portion
|
|
|
88
|
|
|
126
|
|
Accounts
payable
|
|
|
4,101
|
|
|
3,186
|
|
Accrued
expenses and other payables
|
|
|
2,558
|
|
|
4,620
|
|
Income
tax payable
|
|
|
33
|
|
|
296
|
|
Subscription
payable
|
|
|
390
|
|
|
775
|
|
Loan
payable to related party
|
|
|
570
|
|
|
369
|
|
Total
Current Liabilities
|
|
|
9,030
|
|
|
10,620
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Bank
loans - non current portion
|
|
|
1,498
|
|
|
6
|
|
Capital
lease obligations - non current portion
|
|
|
43
|
|
|
78
|
|
Convertible
Debenture
|
|
|
8,000
|
|
|
-
|
|
Warrant
Liability
|
|
|
616
|
|
|
-
|
|
Compound
Embedded Derivatives Liability
|
|
|
1,019
|
|
|
-
|
|
Interest
discount
|
|
|
(1,689
|
)
|
|
-
|
|
Total
long-term liabilities
|
|
|
9,487
|
|
|
84
|
|
Total
liabilities
|
|
|
18,517
|
|
|
10,704
|
|
Minority
interest in consolidated subsidiaries
|
|
|
11,898
|
|
|
8,714
|
|
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, 2006 - 13,483,497 shares issued, 11,369,336
outstanding
|
|
|
|
|
|
|
|
December
31, 2005 - 12,000,687 issued, 10,831,024 outstanding
|
|
|
1
|
|
|
1
|
|
Treasury
stock, at cost (2006 Q2: 2,114,161 shares, 2005: 1,169,663 shares)
|
|
|
(243
|
)
|
|
(119
|
)
|
Additional
paid-in capital
|
|
|
60,678
|
|
|
57,690
|
|
Cumulative
other comprehensive income (loss)
|
|
|
399
|
|
|
247
|
|
Accumulated
deficit
|
|
|
(24,271
|
)
|
|
(25,990
|
)
|
Less
stock subscription receivable
|
|
|
(522
|
)
|
|
(44
|
)
|
Total
Stockholders' Equity
|
|
|
36,042
|
|
|
31,785
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
66,457
|
|
$
|
51,203
|
|
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
INCOME STATEMENTS
(Unaudited.
In thousands of United States dollars, except loss per share and share
amounts)
|
|
THREE
MONTHS ENDED JUNE 30
|
|
SIX
MONTHS ENDED JUNE 30
|
|
|
|
2006
(RESTATED)
|
|
2005
(RESTATED)
|
|
2006
(RESTATED)
|
|
2005
(RESTATED)
|
|
Revenues
|
|
$
|
19,330
|
|
$
|
12,280
|
|
$
|
34,364
|
|
$
|
21,492
|
|
Services
|
|
|
7,812
|
|
|
6,060
|
|
|
16,700
|
|
|
9,324
|
|
Product
sales
|
|
|
11,518
|
|
|
6,220
|
|
|
17,664
|
|
|
12,168
|
|
Cost
of revenues
|
|
|
(14,407
|
)
|
|
(9,613
|
)
|
|
(22,960
|
)
|
|
(17,127
|
)
|
Services
|
|
|
(4,027
|
)
|
|
(3,880
|
)
|
|
(7,283
|
)
|
|
(6,201
|
)
|
Product
sales
|
|
|
(10,380
|
)
|
|
(5,733
|
)
|
|
(15,677
|
)
|
|
(10,926
|
)
|
Gross
margin
|
|
|
4,923
|
|
|
2,667
|
|
|
11,404
|
|
|
4,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(3,177
|
)
|
|
(1,376
|
)
|
|
(7,500
|
)
|
|
(2,257
|
)
|
Depreciation
and amortization
|
|
|
(161
|
)
|
|
(99
|
)
|
|
(219
|
)
|
|
(142
|
)
|
Interest
expense
|
|
|
(368
|
)
|
|
-
|
|
|
(456
|
)
|
|
-
|
|
EARNINGS
FROM OPERATIONS
|
|
|
1,217
|
|
|
1,192
|
|
|
3,229
|
|
|
1,966
|
|
Interest
income
|
|
|
49
|
|
|
-
|
|
|
81
|
|
|
-
|
|
Change
in fair value of derivatives
|
|
|
208
|
|
|
|
|
|
208
|
|
|
|
|
Sundry
income
|
|
|
161
|
|
|
313
|
|
|
286
|
|
|
406
|
|
Earnings
before Income Taxes and Minority Interest
|
|
|
1,635
|
|
|
1,505
|
|
|
3,804
|
|
|
2,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(85
|
)
|
|
(37
|
)
|
|
(200
|
)
|
|
(64
|
)
|
Share
of earnings of associated companies
|
|
|
52
|
|
|
12
|
|
|
49
|
|
|
4
|
|
Minority
interests
|
|
|
(804
|
)
|
|
(887
|
)
|
|
(1,934
|
)
|
|
(1,304
|
)
|
Net
Earnings Available to Common Stockholders
|
|
$
|
798
|
|
$
|
593
|
|
$
|
1,719
|
|
$
|
1,008
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
0.10
|
|
$
|
0.06
|
|
$
|
0.18
|
|
$
|
0.10
|
|
DILUTED
EARNINGS PER SHARE
|
|
$ |
0.08
|
|
$ |
0.06
|
|
$ |
0.16 |
|
$ |
0.10 |
|
The
accompanying condensed notes are an integral part of these consolidated
financial statements.
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
.
|
|
PREFERRED
STOCK
|
|
COMMON
STOCK
|
|
ADDITIONAL
PAID-IN CAPITAL
|
|
STOCK
SUBSCRIP-TION
RECEIVABLE
|
|
CUMULATIVE
OTHER COMPRE-HENSIVE INCOME
|
|
ACCUMU-LATED
DEFICIT
|
|
TREASURY
STOCK
|
|
TOTAL
STOCK-HOLDERS' EQUITY
|
|
BALANCE
AT DECEMBER 31, 2005
(10,831,024
SHARES)
|
|
|
--
|
|
$
|
1
|
|
$
|
57,690
|
|
$
|
(44
|
)
|
$
|
247
|
|
|
($25,990
|
)
|
|
($119
|
)
|
$
|
31,785
|
|
Net
earnings
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,719
|
|
|
|
|
|
1,719
|
|
Exercise
of stock options for cash and receivable (269,000 shares)
|
|
|
--
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564
|
|
Issuance
of common stock for acquisition of subsidiaries (293,512
shares)
|
|
|
--
|
|
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,275
|
|
PIPE
related expenses
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common shares (less 24,200 shares)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
(124
|
)
|
Cumulative
foreign exchange gain/(loss)
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
152
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
Issuance
of warrants for fees of issuing convertible debt (16,000
warrants)
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Less
stock subscription receivable
|
|
|
--
|
|
|
|
|
|
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
(478
|
)
|
BALANCE
AT JUNE 30, 2006
(11,369,336
SHARES)
|
|
|
--
|
|
$
|
1
|
|
$
|
60,678
|
|
$
|
(522
|
)
|
$
|
399
|
|
$
|
(24,271
|
)
|
$
|
(243
|
)
|
$
|
36,042
|
|
The
accompanying condensed notes are an integral part of these consolidated
financial statements.
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited.
In thousands of United States dollars, except earnings per share and share
amounts)
|
|
SIX
MONTHS ENDED JUNE 30,
|
|
|
|
(RESTATED)
2006
|
|
(RESTATED)
2005
|
|
Cash
Flows from operating activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
1,719
|
|
$
|
1,008
|
|
Adjustment
to reconcile net earnings to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Equity
loss of associated company
|
|
|
(49
|
)
|
|
(4
|
)
|
Provision
for income taxes
|
|
|
33
|
|
|
64
|
|
Provision
for allowance for doubtful accounts
|
|
|
28
|
|
|
-
|
|
Minority
Interest
|
|
|
1,934
|
|
|
1304
|
|
Depreciation
and amortization
|
|
|
768
|
|
|
141
|
|
Stock-based
compensation
|
|
|
120
|
|
|
-
|
|
Change
in fair value of derivatives
|
|
|
(208
|
)
|
|
-
|
|
Amortization
of interest discount
|
|
|
154
|
|
|
-
|
|
Changes
in current assets and liabilities net of effects from purchase
of
subsidiaries:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(9,870
|
)
|
|
(2,027
|
)
|
Inventories
|
|
|
(415
|
)
|
|
(891
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(1,745
|
)
|
|
295
|
|
Net
cash used in operating activities
|
|
|
(7,531
|
)
|
|
(110
|
)
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
1,422
|
|
|
2,796
|
|
Increase
in purchase of marketable securities
|
|
|
-
|
|
|
(421
|
)
|
Acquisition
of property and equipment
|
|
|
(3,124
|
)
|
|
(1,341
|
)
|
Acquisition
of subsidiaries and affiliated companies
|
|
|
(836
|
)
|
|
(1,183
|
)
|
Loans
receivable from third parties
|
|
|
562
|
|
|
(2,081
|
)
|
Loans
receivable from related party
|
|
|
(2,233
|
)
|
|
(1,157
|
)
|
Net
cash used in investing activities
|
|
|
(4,209
|
)
|
|
(3,387
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Increase
in loan payable to related party
|
|
|
201
|
|
|
390
|
|
Advances
(repayments) under bank line of credit
|
|
|
(171
|
)
|
|
142
|
|
Advances
under bank loan
|
|
|
623
|
|
|
727
|
|
Increase
(repayments) of amount borrowed under capital lease obligations
|
|
|
(73
|
)
|
|
62
|
|
Repurchase
of treasury shares
|
|
|
(124
|
)
|
|
-
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
86
|
|
|
981
|
|
Proceeds
from issuance of convertible debenture
|
|
|
8,000
|
|
|
-
|
|
Payment
of convertible debenture issuance costs
|
|
|
(500
|
) |
|
-
|
|
Net
cash provided by financing activities
|
|
|
8,042
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate change on cash and cash
equivalents
|
|
|
54
|
|
|
-
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,644
|
)
|
|
(1,195
|
)
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
|
|
9,579
|
|
|
6,764
|
|
CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
$
|
5,935
|
|
$
|
5,569
|
|
CASH
PAID FOR:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
292
|
|
$
|
127
|
|
Income
taxes
|
|
$
|
463
|
|
$
|
34
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Issuance
of option shares through increase in subscription
receivable
|
|
|
522
|
|
|
-
|
|
Investments
in subsidiaries acquired through the issuance of common stock
|
|
|
2,275
|
|
$
|
1,977
|
|
The
accompanying condensed notes are an integral part of these consolidated
financial statements.
PACIFICNET
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
expressed in United States dollars unless otherwise stated)
1.
BASIS OF PRESENTATION
Description
of Operations -
PacificNet Inc. (referred to herein as "PacificNet" or the "Company"), through
our subsidiaries, provides outsourcing services, value-added telecom services
(VAS), communication products distribution services and the design and
distribution of entertainment kiosks and gaming machines. Our business process
outsourcing (BPO) services include call centers, providing customer relationship
management (CRM), mail order direct marketing and telemarketing services, and
our information technology outsourcing (ITO) includes software programming
and
development. We are value-added resellers and providers of telecom VAS, which
is
comprised of interactive voice response (IVR) systems, call center management
systems, and voice over Internet protocol (VOIP), as well as mobile phone VAS,
such as short messaging services (SMS) and multimedia messaging services (MMS).
The Company's operations are primarily targeted in the mainland China, Hong
Kong
and Macau Special Administrative Region markets.
Condensed
Consolidated Financial Statements
- The
condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”) for interim
financial reporting consistent in all material respects with those applied
in
the Company’s Annual Report on Form 10-KSB, as amended, for the year ended
December 31, 2005, but do not include all disclosures required by GAAP. You
should read these interim condensed consolidated financial statements in
conjunction with the audited financial statements, including the notes thereto,
and the other information set forth in the Company’s Annual Report on Form
10-KSB, as amended, for the year ended December 31, 2005. The condensed
unaudited consolidated financial statements include the accounts of Pacificnet
Inc. and its subsidiaries and variable interest entities (“VIEs”) for which the
Company is the primary beneficiary. All significant intercompany balances and
transactions have been eliminated in consolidation. In the opinion of
management, all material adjustments considered necessary for a fair
presentation of the Company’s interim results have been reflected. PacificNet’s
2005 Annual Report on Form 10-KSB includes certain definitions and a summary
of
significant accounting policies and should be read in conjunction with this
report. The results for interim periods are not necessarily indicative of
annual results.
Use
of Estimates
- The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates, and such differences may be material to the financial
statements. Certain prior year amounts have been reclassified to conform to
the
current year presentation.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 123-R, Share-Based
Payment
(“SFAS
123(R)”). SFAS 123(R) replaces SFAS 123, Accounting
for Stock-Based Compensation,
and
supersedes APB Opinion 25, Accounting
for Stock Issued to Employees.
SFAS
123(R) requires, among other things, that all share-based payments to employees,
including grants of stock options, be measured based on their grant-date fair
value and recognized as expense. Effective January 1, 2006, PacificNet adopted
the fair value recognition provisions of SFAS 123(R) using the modified
prospective application method. Under this transition method, compensation
expense recognized for the quarter June 30, 2006, includes the applicable
amounts of: (a) compensation expense of all stock-based payments granted prior
to, but not yet vested as of January 1, 2006 (based on the grant-date fair
value
estimated in accordance with the original provisions of SFAS 123 and previously
presented in pro forma footnote disclosures), and (b) compensation expense
for
all stock-based payments granted subsequent to January 1, 2006 (based on the
grant-date fair value estimated in accordance with the new provisions of SFAS
123(R)). Results for periods prior to January 1, 2006, have not been restated.
See Note 7.
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments—an amendment of FASB Statements
No. 133 and 140
(“SFAS 155”). This statement amends SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities
(“SFAS 133”), and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
and
resolves issues addressed in SFAS 133 Implementation Issue No. D1,
“Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets.” This Statement: (a) permits fair value re-measurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation; (b) clarifies which interest-only
strips and principal-only strips are not subject to the requirements of
SFAS 133; (c) establishes a requirement to evaluate beneficial
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and, (e) eliminates restrictions on a qualifying
special-purpose entity’s ability to hold passive derivative financial
instruments that pertain to beneficial interests that are or contain a
derivative financial instrument. The standard also requires presentation within
the financial statements that identifies those hybrid financial instruments
for
which the fair value election has been applied and information on the income
statement impact of the changes in fair value of those instruments. The Company
is required to apply SFAS 155 to all financial instruments acquired, issued
or subject to a re-measurement event beginning January 1, 2007, although
early adoption is permitted as of the beginning of an entity’s fiscal year. The
Company is evaluating the provisions of SFAS 155. The effects of adopting
of SFAS 155 on the Company’s financial statements are not known at this
time.
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
the Company recognize in its financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN 48
on
its consolidated financial position, cash flows and results of operations.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force (“EITF”)), the American Institute of Certified Public
Accountants (“AICPA”), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial
statements.
3.
EARNINGS PER SHARE
Basic
and
diluted earnings per share (EPS) amounts in the financial statements are
computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is
based on the weighted average number of common shares outstanding. Diluted
EPS
is based on the weighted average number of common shares outstanding plus
dilutive common stock equivalents. Basic EPS is computed by dividing net
earnings available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. Diluted
EPS
is calculated by dividing net earnings by the weighted average number of common
shares outstanding and other dilutive securities. Dilutive EPS for second
quarter of 2006 exclude the potential dilutive effect of 766,000 warrants and
800,000 convertible debentures because their impact would be anti-dilutive
based
on current market prices. All per share and per share information are adjusted
retroactively to reflect stock splits and changes in par value.
The
reconciliation of the numerators and denominators of the basic and diluted
EPS
calculations was as follows:
|
|
Three
Months Ended June 30
|
|
Six
Months Ended June 30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(IN
THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND
PER SHARE
AMOUNTS)
|
|
(IN
THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND
PER SHARE
AMOUNTS)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
798
|
|
$
|
593
|
|
$
|
1,719
|
|
$
|
1,008
|
|
Convertible
debenture interest
|
|
|
254
|
|
|
-
|
|
|
254
|
|
|
-
|
|
Net
earnings used in computing EPS
|
|
|
1,052
|
|
|
593
|
|
|
1,973
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares used to compute basic EPS
|
|
|
11,022,984
|
|
|
9,887,274
|
|
|
10,939,834
|
|
|
9,840,681
|
|
Dilutive
potential from assumed exercise of stock options and
warrants
|
|
|
856,713
|
|
|
731,501
|
|
|
962,185
|
|
|
718,383
|
|
Dilutive
potential from convertible debenture
|
|
|
800,000
|
|
|
-
|
|
|
800,000
|
|
|
-
|
|
Weighted-average
shares used to compute diluted EPS
|
|
|
12,679,697
|
|
|
10,618,775
|
|
|
12,702,019
|
|
|
10,559,064
|
|
Basic
earnings per common share:
|
|
$
|
0.10
|
|
$
|
0.06
|
|
$
|
0.18
|
|
$
|
0.10
|
|
Diluted
earnings per common share:
|
|
$ |
0.08 |
|
$ |
0.06 |
|
$ |
0.16 |
|
$ |
0.10 |
|
4.
GOODWILL AND PURCHASED INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the following reporting periods
are summarized below:
(US$000s)
|
|
Group
1.
Outsourcing
Services
|
|
Group
2.
Value-Added
Services
|
|
Group
3.
Distribution
of
Communications
|
|
Total
|
|
Balance
as of December 31, 2005
|
|
$
|
3,936
|
|
$
|
9,788
|
|
$
|
1,100
|
|
$
|
14,824
|
|
Goodwill
acquired during the first quarter
|
|
|
--
|
|
|
461
|
|
|
--
|
|
|
461
|
|
Impairment
losses
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Goodwill
written off related to sale of business unit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance
as of March 31, 2006
|
|
$
|
3,936
|
|
$
|
10,249
|
|
$
|
1,100
|
|
$
|
15,285
|
|
Goodwill
acquired during the second quarter
|
|
|
--
|
|
|
1,571
|
|
|
429
|
|
|
2,000
|
|
Impairment
losses
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Goodwill
written off related to sale of business unit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance
as of June 30, 2006
|
|
$ |
3,936 |
|
$ |
11,820 |
|
$ |
1,529 |
|
$ |
17,285 |
|
5.
STOCKHOLDERS' EQUITY
a)
COMMON
STOCK
For
the
quarter ended June 30, 2006, the Company had the following equity transactions:
(i) 245,000 shares of common stock were issued as a result of the exercise
of
stock options with cash consideration of $521,700 in the aggregate; (ii) 234,725
shares of common stock were released from escrow (PACT treasury shares) for
acquisition of iMobile and GZ3G valued at $1,877,800.
b)
STOCK
OPTION PLAN - See Note 7 for further details.
The
status of the Stock Option Plan as of June 30, 2006, is as follows:
|
|
OPTIONS
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
OUTSTANDING,
DECEMBER 31, 2005
|
|
|
1,384,100
|
|
$
|
3.99
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(24,000
|
)
|
$
|
1.75
|
|
OUTSTANDING,
MARCH 31, 2006
|
|
|
1,360,100
|
|
$
|
4.17
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
(680,000
|
)
|
$
|
6.57
|
|
Exercised
|
|
|
(245,000
|
)
|
$
|
2.13
|
|
OUTSTANDING,
JUNE 30, 2006
|
|
|
435,100 |
|
$ |
2.00 |
|
On
May
28, the board of director and management approved and authorized the
cancellation of 680,000 stock options that were previously granted during fiscal
year 2005, that were unvested and unexercised. The option cancellation was
authorized by the board and the management in order to reduce stock compensation
expense due to the implementation of FASB 123R.
c)
WARRANTS
At
June
30, 2006, the Company had outstanding and exercisable warrants to purchase
an
aggregate of 1,007,138 shares of common stock. The weighted average remaining
life is 3.88 years and the weighted average price per share is $10.61 per share
as follows:
Shares
of
common
stock
|
|
EXERCISE
PRICE
PER
SHARE
|
|
EXPIRATION
DATE OF
WARRANTS
|
123,456
|
|
$7.15
|
|
January
15, 2009
|
117,682
|
|
$3.89
|
|
November
15, 2009
|
350,000
|
|
$12.21
|
|
December
9, 2009
|
400,000
|
|
$12.20
|
|
March
13, 2011
|
16,000
|
|
$12.20
|
|
March
13, 2011
|
1,007,138
|
|
|
|
|
On
March
13 of 2006, we issued 400,000 warrants to several institutional investors in
connection with a private placement of $8 million in convertible debentures.
On
the same day we issued 16,000 warrants to our placement agent for the
transaction. See Note 7 for further details.
d)
TREASURY STOCK
The
following is a summary of the movement of the Company's shares held as treasury
stock for the quarterly ended June 30 of 2006:
|
|
Number
of
shares
|
|
Remarks
|
|
Balance,
December 31, 2005:
|
|
|
1,169,663
|
|
|
|
|
Plus:
options exercised and issued during Q1
|
|
|
24,000
|
|
|
|
|
Share
consideration for acquisition of ChinaGoHi issued during Q1 under
Sale and
Purchase Agreement
|
|
|
137,500
|
|
|
|
|
Less:
Shares issued to Shanghai Classic
|
|
|
(24,200
|
)
|
|
|
|
Plus:
Repurchase of shares from Shanghai Classic
|
|
|
24,200
|
|
|
|
|
Holdback
shares as contingent consideration due
to performance targets
not yet met
|
|
|
1,017,723
|
|
|
Including
687,500 shares relating to ChinaGoHi; 138,348 shares to Guangzhou
Wanrong;
191,875 shares to iMobile
|
|
Balance,
March 31, 2006
|
|
|
2,348,886
|
|
|
|
|
Less:
Shares issued to iMobile
|
|
|
(38,375
|
)
|
|
|
|
Shares
issued to Guangzhou 3G
|
|
|
(196,350
|
)
|
|
|
|
Balance,
June 30, 2006
|
|
|
2,114,161
|
|
|
|
|
Shares
outstanding at June 30, 2006
|
|
|
11,369,336
|
|
|
|
|
Shares
issued at June 30, 2006
|
|
|
13,483,497
|
|
|
|
|
On
March
13, 2006, we repurchased 24,200 restricted shares of our common stock from
Yueshen, a subsidiary of Shanghai Classic for a repurchase price of RMB1,000,000
(approximately USD$124,223 using exchange rate of 1USD= 8.05 RMB). The
repurchase of the shares was proposed by Yueshen and was unanimously agreed
by
the both parties.
6.
STOCK-BASED COMPENSATION
Prior
to
January 1, 2006, PacificNet accounted for awards granted under stock-based
compensation plans following the recognition and measurement principles of
APB
25, Accounting
for Stock Issued to Employees,
and
related interpretations. Accordingly, compensation expense was recognized for
awards granted at an exercise price less than fair market value of the
underlying common stock on the date of grant. Effective January 1, 2006,
PacificNet adopted the fair value recognition provisions of SFAS 123(R). See
Note 2 for a description of the Company’s adoption of SFAS 123R. The fair value
of stock options is determined using the Black-Scholes option pricing model,
which is consistent with the valuation techniques previously utilized for
options in footnote disclosures required under SFAS 123, as amended by FASB
Statement No. 148, “Accounting for Stock-Based Compensation - Transition
and Disclosure.” The determination of the fair value of stock-based compensation
awards on the date of grant using an option-pricing model is affected by the
Company’s stock price as well as assumptions regarding a number of complex and
subjective variables, including the expected volatility of the Company’s stock
price over the term of the awards, actual and projected employee stock option
exercise behaviors, risk-free interest rate and expected dividends. The amount
of stock-based compensation expense recognized during the three months ended
June 30, 2006 was $58,334.
During
the quarter ended June 30, 2006, the Company did not grant any new stock
options, 245,000 options were exercised, and 680,000 options were cancelled.
See
note 5 b) for the status of the Company’s stock option plan.
Additional
information on options outstanding as of June 30, 2006 is as
follows:
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
OPTIONS
|
AVERAGE
REMAINING
CONTRACTUAL
LIFE
|
Options
outstanding
|
$2.00
|
435,100
|
1.08
years
|
Options
exercisable
|
$2.00
|
435,100
|
1.08
years
|
7.
CONVERTIBLE DEBENTURES
On
March
13, 2006, we completed a private placement in which we sold $8,000,000 in
convertible debentures and issued warrants to purchase up to an aggregate of
400,000 shares of common stock. The debentures are convertible at any time
into
shares of our common stock at an initial fixed conversion price of $10.00 per
share, subject to adjustments for certain dilutive events. The debentures are
due March 13, 2009. The warrants are exercisable for a period of five years
at
an exercise price of $12.20 per share. At the closing of the private placement,
we prepaid the first year's interest on debentures equal to 5% of the aggregate
principal amount of debentures. We will pay interest in cash or shares, provided
that certain conditions are met, at the rate of 6% for the second year the
debentures are outstanding and then 7% for the third. Beginning January 1,
2007,
we are obligated to redeem up to $320,000 every month, plus accrued, but unpaid
interest, liquidated damages and penalties. We also have the option to prepay
the debentures at any time, provided that certain conditions have been met,
after the 12 month anniversary of the effective date of the registration
statement that has been filed with the Securities and Exchange Commission with
respect to the common stock issuable upon conversion of the debentures, some
or
all of the outstanding debentures for cash in an amount equal to 120% of the
principal amount outstanding, plus accrued, but unpaid interest, liquidated
damages and penalties outstanding. At any time after the six month anniversary
of the effective date of the registration statement, we may force the holders
to
convert up to 50% of the then outstanding principal amount of the debentures,
subject to certain trading conditions being met. If any event of default occurs
under the debentures or other related documents, the holders may elect to
accelerate the payment of the outstanding principal amount of the
debenture, plus accrued, but unpaid interest, liquidated damages and penalties,
which shall become immediately due and payable.
C.E.
Unterberg, Towbin L.L.C. acted as placement agent and received a negotiated
cash
fee in the amount of $449,500 and a warrant to purchase up to 16,000 shares
at
an exercise price of $12.20 per share, which expire five years from the date
of
issuance. The fair value of these warrants totaled $28,952 and such amount
was
charged to other assets, net, and will be amortized over the life of the
debentures, and credited to additional paid-in capital during the six months
ended June 30, 2006. Maxim Group also acted as Placement Agent and received
a
cash fee in the amount of $50,000.
In
connection with the issuance of the debentures, the Company incurred $1,403,000
of issuance costs, which primarily consisted of investment banker fees, legal
and other professional fees. These costs are being amortized and are recorded
as
additional expense through three years, the scheduled date on which holders
have
the option to require the Company to repurchase the debentures. Amortization
expense related to the issuance costs during the three months ended June 30,
2006 was $86,000. At June 30, 2006, net debt issuance costs associated with
the
debentures was $957,000 and is recorded in Other assets, net.
The
gross
proceeds of $8,000,000 are recorded as a debenture liability. In addition,
fair
values attributed to the Investors’ warrants and to the embedded conversion
feature in accordance with EITF issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Company’s Own
Stock” are recorded as liabilities. The debt discount consisted of an initial
$693,278 value related to the Investors’ warrants and a $1,149,077 value
attributed to the compound embedded derivatives liability, as well as the
warrants liability. An aggregate gain of $207,679 representing the change in
fair value of these derivative liabilities was recognized during the six months
ended June 30, 2006.
In
accordance with recent FASB guidance, due to certain factors, including a
liquidated damages provision in the registration rights agreement, the Company
values and accounts for the embedded conversion feature and the warrants related
to the Debentures as derivatives. Accordingly, these derivative liabilities
are
measured at fair value with changes in fair value reported in earnings as long
as they remain classified as liabilities. The Company reassesses the
classification at each balance sheet date. If the classification required under
EITF No. 00-19 changes as a result of events during the period, the contract
should be reclassified as of the date of the event that caused the
reclassification.
8.
SEGMENT INFORMATION
The
Company determines and classified its operating segments in accordance with
SFAS
No. 131 “DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION.” The Company identifies and classifies its operating segments
based on reporting entities that exhibit similar long-term financial performance
based on the nature of the products and services with similar economic
characteristics such as margins, business practices and target market. The
operating segments are classified into four major segments which are summarized
as follows:
(1)
Outsourcing Services - involves human voice services such as Business Process
Outsourcing, CRM, call center, IT Outsourcing and software development services.
These types of services are conducted through our subsidiaries EPRO,
Smartime/Soluteck and PacificNet Solution Ltd.
(2)
Value-Added Telecom Services (VAS) - primarily involves machine voice services
such as Interactive Voice Response, SMS and related VAS, which are conducted
through our subsidiaries such as ChinaGoHi (Lion Zone, aka ChinaGoHi), Linkhead,
Clickcom and Guangzhou 3G.
(3)
Communication Products Distribution Services Group - primarily involves voice
products distribution such as distribution of mobile phones and related software
and accessories, calling cards and other communication products, as well as
gaming machines and entertainment kiosks, which are conducted through our
subsidiaries iMobile, Shanghai Classic, PacificNet Communications Limited,
Take1
and PacificNet Games Limited.
(4)
Other
Business -other administrative, financial and investment services and non-core
businesses such as PacificNet Power Limited (PacPower), Pacific Financial
Services Limited, etc.
The
Company's reportable segments are operating units, which represent the
operations of the Company's significant business operations. Summarized
financial information concerning the Company's reportable segments is shown
in
the following table. The "Other" column includes the Company's other
insignificant services and corporate related items, and, as it relates to
segment earnings (loss), income and expense not allocated to reportable
segments.
For
the three months ended
June
30, 2006
|
Group
1.
Outsourcing
Business
($)
|
Group
2.
VAS
Business
($)
|
Group
3.
Communications
Distribution
Business
($)
|
Group
4.
Other
Business
($)
|
Total
($)
|
Revenues
|
3,552,000
|
5,517,000
|
8,914,000
|
1,347,000
|
19,330,000
|
(%
of Total Revenues)
|
18%
|
29%
|
46%
|
7%
|
100%
|
|
|
|
|
|
|
Earnings
/ (Loss) from Operations
|
283,000
|
1,130,000
|
208,000
|
-404,000
|
1,217,000
|
(%
of Total Earnings)
|
23%
|
93%
|
17%
|
-33%
|
100%
|
Total
Assets
(%
of Total Assets)
|
8,503,000
13%
|
20,382,000
31%
|
12,626,000
19%
|
24,946,000
37%
|
66,457,000
100%
|
Goodwill
|
3,936,000
|
11,820,000
|
1,529,000
|
-
|
17,285,000
|
Geographic
Area
|
HK,
PRC
|
PRC
|
HK,
PRC
|
HK,PRC,USA
|
|
For
the three months ended
June
30, 2005
|
Group
1.
Outsourcing
Business
($)
|
Group
2.
VAS
Business
($)
|
Group
3.
Communications
Distribution
Business
($)
|
Group
4.
Other
Business
($)
|
Total
($)
|
Revenues
|
3,403,000
|
4,744,000
|
4,055,000
|
78,000
|
12,280,000
|
(%
of Total Revenues)
|
28%
|
39%
|
33%
|
1%
|
100%
|
|
|
|
|
|
|
Earnings
/ (Loss) from Operations
|
305,000
|
1,086,000
|
118,000
|
-317,000
|
1,192,000
|
(%
of Total Earnings)
|
26%
|
91%
|
10%
|
-27%
|
100%
|
Total
Assets
(%
of Total Assets)
|
5,468,000
13%
|
11,261,000
27%
|
13,661,000
32%
|
12,627,000
28%
|
43,017,000
100%
|
Goodwill
|
3,936,000
|
8,209,000
|
1,100,000
|
-
|
13,245,000
|
Geographic
Area
|
HK,
PRC
|
PRC
|
HK,
PRC
|
HK,PRC,USA
|
|
For
the six months ended
June
30, 2006
|
Group
1.
Outsourcing
Business
($)
|
Group
2.
VAS
Business
($)
|
Group
3.
Communications
Distribution
Business
($)
|
Group
4.
Other
Business
($)
|
Total
($)
|
Revenues
|
6,579,000
|
12,557,000
|
11,851,000
|
3,377,000
|
34,364,000
|
(%
of Total Revenues)
|
19%
|
37%
|
34%
|
10%
|
100%
|
Earnings
/ (Loss) from
|
|
|
|
|
|
Operations
|
403,000
|
2,844,000
|
265,000
|
-283,000
|
3,229,000
|
(%
of Total Earnings)
|
12%
|
88%
|
8%
|
-8%
|
100%
|
Total
Assets
|
8,503,000
|
20,382,000
|
12,626,000
|
24,946,000
|
66,457,000
|
(%
of Total Assets)
|
13%
|
31%
|
19%
|
37%
|
100%
|
Goodwill
|
3,936,000
|
11,820,000
|
1,529,000
|
-
|
17,285,000
|
Geographic
Area
|
HK,
PRC
|
PRC
|
HK,
PRC
|
HK,PRC,USA
|
|
For
the six months ended
June
30, 2005
|
Group
1.
Outsourcing
Business
($)
|
Group
2.
VAS
Business
($)
|
Group
3.
Communications
Distribution
Business
($)
|
Group
4.
Other
Business
($)
|
Total
($)
|
Revenues
|
6,492,000
|
6,154,000
|
8,731,000
|
115,000
|
21,492,000
|
(%
of Total Revenues)
|
30%
|
29%
|
41%
|
1%
|
100%
|
Earnings
/ (Loss) from
|
|
|
|
|
|
Operations
|
649,000
|
1,589,000
|
236,000
|
-508,000
|
1,966,000
|
(%
of Total Earnings)
|
33%
|
81%
|
12%
|
-26%
|
100%
|
Total
Assets
|
5,468,000
|
11,261,000
|
13,661,000
|
12,627,000
|
43,017,000
|
(%
of Total Assets)
|
13%
|
27%
|
32%
|
28%
|
100%
|
Goodwill
|
3,936,000
|
8,602,000
|
1,100,000
|
-
|
13,245,000
|
Geographic
Area
|
HK,
PRC
|
PRC
|
HK,
PRC
|
HK,PRC,USA
|
|
Product
and service revenues classified by major geographic areas are as follows (in
US$):
For
the three months ended June 30, 2006
|
Hong
Kong
|
PRC
|
United
States
|
Total
|
Product
revenues
|
8,546,000
|
2,972,000
|
-
|
11,518,000
|
Service
revenues
|
3,504,000
|
4,308,000
|
-
|
7,812,000
|
For
the three months ended June 30, 2005
|
Hong
Kong
|
PRC
|
United
States
|
Total
|
Product
revenues
|
4,085,000
|
2,135,000
|
-
|
6,220,000
|
Service
revenues
|
2,452,000
|
3,608,000
|
-
|
6,060,000
|
For
the six months ended June 30, 2006
|
Hong
Kong
|
PRC
|
United
States
|
Total
|
Product
revenues
|
12,094,000
|
5,570,000
|
-
|
17,664,000
|
Service
revenues
|
6,535,000
|
10,165,000
|
-
|
16,700,000
|
For
the six months ended June 30, 2005
|
Hong
Kong
|
PRC
|
United
States
|
Total
|
Product
revenues
|
8,761,000
|
3,407,000
|
-
|
12,168,000
|
Service
revenues
|
4,686,000
|
4,638,000
|
-
|
9,324,000
|
9.
RELATED PARTY TRANSACTIONS
LOAN
DUE TO AND FROM RELATED PARTIES
As
of
June 30, 2006, there was a total loan receivable of approximately $4,753,000
due
from related parties while the loan due to related party was
$570,000.
As
of
June 30, 2006, the related party loan receivables included $1,026,000 due from
Take 1, an affiliated company that is 20% owned by PacificNet, and $3,727,000
due from shareholders and directors of certain of the Company’s subsidiaries.
The loans receivable from shareholders and directors of these subsidiaries
is
comprised of $1,249,000 due from a shareholder of Yueshen, $192,000 due from
a
director of Soluteck, $265,000 due from a director of Clickcom, and $2,021,000
due from a company owned by a shareholder of Lion zone (ChinaGoHi). The terms
of
these related parties loan receivables and payables are summarized
below:
LOAN
TO TAKE 1 (Cheer Era)
Take
1 is
an affiliated company and is 20% owned by PacificNet as of June 30, 2006. A
convertible loan of $1,026,000 is outstanding from Take 1 as of June 30, 2006.
Conversion terms of the convertible loan provide PacificNet an option at any
time during the Term to convert in part or in whole of the then outstanding
loan
principle up to $1,794,000 (or HKD$800,000) into shares of Take 1 to reach
51%
ownership of Take 1. The loan was extended as a working capital loan to finance
the expansion of Take 1's business in Europe and North America.
LOAN
TO YUESHEN'S SHAREHOLDER
As
of
June 30, 2006, there was a $1,249,000 loan receivable due from the shareholder
of Yueshen, a subsidiary of the Company. The purpose of the loan was to repay
the working capital loan owed by the predecessor of Yueshen prior to
PacificNet's acquisition, and to finance Yueshen shareholder's other projects.
This loan is collateralized with 106,240 PacificNet shares owned by the
shareholder of Yueshen.
LOAN
TO SOLUTEK'S DIRECTOR
As
of
June 30, 2006, there was a loan outstanding of $192,000 receivable from a
director of Soluteck, payable in three equal installments of $72,314 each,
which
includes principal plus interest, due on December 14 for three consecutive
years
ending 2007. The interest rate for the loan is 8% per annum plus 5% penalty
interest in case it has not been timely paid. The loan is collateralized with
100,000 PacificNet's shares owned by the borrowing director and Ms Iris Lo,
and
the remaining assets of Smartime Holding Ltd.
LOAN
TO DIRECTOR OF CLICKCOM
As
of
June 30, 2006, there was a loan of $265,000 receivable from the shareholders
of
Clickcom VIE. The loan was advanced by the Company to Clickcom VIE which in
turn
was loaned to the shareholders of Clickcom VIE to finance the development of
new
projects. Pursuant to the loan agreement signed between the Company and Clickcom
VIE, this loan has a two year term and is due on August 30, 2007. The loan
bears
interest at a rate of 2% per annum and is personally and jointly guaranteed
by
all three of the shareholders of Clickcom VIE. As additional collateral,
Clickcom VIE has pledged up to 130,000 PacificNet's shares and all remaining
assets and equity ownership of Clickcom BVI.
LOAN
TO A COMPANY OWNED BY A SHAREHOLDER OF LION ZONE
(CHINAGOHI)
As
of
June 30, 2006, a loan of $2,021,000 was receivable from a company owned by
a
shareholder of Lion Zone (ChinaGoHi). The loan is collateralized with this
company’s real estate.
LOAN
PAYABLE TO RELATED PARTY
As
of
June 30, 2006, a loan of $570,000 was payable to a shareholder of EPRO. The
loan
was advanced to Epro for working capital purposes. The loan is due on August
4,
2010. Interest being charged per annum is at Hong Kong Prime lending rate,
which
was approximately 6.5% per annum in 2005 and 8% in 2006..
10.
COMMITMENTS AND CONTINGENCIES
Operating
leases.
The
Company leases warehouse and office space under operating leases with fixed
monthly rentals. None of the leases included contingent rentals. Lease expense
charged to operations for 2006 Q2 amounted to $598,000 (2005 Q2: $191,000).
Future minimum lease payments under non-cancelable operating leases are $819,000
for July 2006 through June 2007 and $986,000 for July 2007 through June
2012.
Restricted
Cash
- The
Company has a $230,000 pledged bank deposit for Epro which represents overdraft
protections with certain financial institutions.
Bank
Line Of Credit:
As of
June 30, 2006, Epro has an overdraft banking facility with certain major
financial institutions in the aggregate amount of $889,000, which is secured
by
a pledge of its fixed deposits of $230,000, pursuant to the following terms:
interest will be charged at the Hong Kong Prime Rate per annum and payable
at
the end of each calendar month or the date of settlement, whichever is
earlier.
Minimum
Stated Capital Requirements.
Guangzhou Dianxun Co, Limited (DE) ("Dianxun"), a subsidiary of the Group,
is
carrying on business as a telecommunication value added service provider in
the
People's Republic of China ("PRC"). Initially, Dianxun obtained a certificate
(the "Certificate") from PRC authorities to transact business in accordance
with
PRC Telecommunication Rules which require that all telecommunication value
added
service providers n conduct business if the Certificate is granted, and if
the
Company maintains a minimum capital requirement of at least
RMB10,000,000.
In
order
to satisfy the capital requirement of RMB 10,000,000, the shareholders of
Dianxun contributed relevant assets equivalent to RMB9,000,000 on behalf of
Dianxun and such assets were verified by an independent professional accountant.
Subsequently, such assets were returned back to the shareholders. In the opinion
of management, even though the capital requirement is not currently fulfilled,
Dianxun can continue to carry on business. No provision for any loss arising
from the consequential actions that may be taken by the authority in the PRC
and
any potential penalties or claims for the Company not maintaining the minimum
stated capital requirements of the PRC have been made in these financial
statements.
Dianxun's
contribution to consolidated revenues and net earnings for 2006 was
approximately 0.42% and 1.14% respectively. Pursuant to a request by the PRC
authorities, PacificNet agreed to loan Clickcom the remaining balance of the
registration capital to provide the stated capital in accordance with PRC
laws.
Bank
Loans. Bank
loans represent the following at June 30, 2006:
Secured
[1]
|
|
$
|
1,088,000
|
|
Unsecured
|
|
$
|
811,000
|
|
Less:
current portion
|
|
$
|
401,000
|
|
Non
current portion
|
|
$
|
1,498,000
|
|
Bank
Loans are generated by two of the Company's subsidiaries. One of the
subsidiaries is Pacificnet Epro Holdings Limited, a company incorporated in
the
Hong Kong Special Administrative Region of the PRC, primarily engaged in the
business of providing call center and customer relationship management (CRM)
services as well as other business outsourcing services.
[1]
The
loans were secured by the following: joint and several personal guarantees
executed by certain directors of the subsidiary of the Company; corporate
guarantee executed by a subsidiary of the Company; second legal charge over
a
property owned by a subsidiary of the Company; and pledged bank deposits of
$230,000 of a subsidiary of the Company.
(Aggregate
future maturities of borrowing for the next five years are as follows: 2006:
$354,000, 2007: $277,000 and 2008: $231,000)
The
remaining bank loans of $1,038,000 are generated by PacificNet Inc. relating
to
a fixed asset bought during the first quarter with total cost of $1,648,000.
The
repayment of the bank loan was $44,000. (Aggregate future maturities of
borrowing for the following period are as follows: Less than 1 year: $47,000,
1-5 year: $217,000 and after 5 years: $774,000)
CAPITAL
LEASE OBLIGATIONS. The Company leases various equipments under capital leases
expiring in various years through 2008. Aggregate minimum future lease payments
under capital leases for each of the next five years are as
follows:
(2006:
$88,000; 2007: $41,000; and 2008: $2,000)
11.
OTHER CURRENT ASSETS
Other
current assets consist of the following at June 30, 2006 (in
thousands):
|
|
June
30, 2006
$
(in thousands)
|
|
Deposit
|
|
$
|
1,216
|
|
Prepayment
|
|
|
1,027
|
|
Other
receivables
|
|
|
5,539
|
|
Prepaid
Expense
|
|
|
618
|
|
Tax
Receivable
|
|
|
44
|
|
Total
|
|
$
|
8,444
|
|
12.
INVENTORY
Inventories
of approximately $2.4 million consist primarily of finished goods and represent
telecommunication products such as mobile phone, rechargeable phone cards,
smart
chip, and interactive voice response cards and are accounted for using the
first-in, first out (FIFO) method. Most inventories are held by the Company’s
Linkhead subsidiary.
13.
SUBSCRIPTION RECEIVABLE
Subscription
receivable of approximately $522,000 represents funds receivable from the
exercise of options.
14.
INCOME TAXES
The
Company is registered in the Delaware and has operations in primarily three
tax
jurisdictions - the PRC, Hong Kong and the United States. For operations in
the
United States of America, Hong Kong and Taiwan, the Company has incurred net
accumulated operating losses for income tax purposes. The Company believes
that
it is more likely than not that these net accumulated operating losses will
not
be utilized in the future. Therefore, the Company has provided full valuation
allowance for the deferred tax assets arising from the losses at these locations
as of June 30, 2006. Accordingly, the Company has no net deferred tax assets
as
of June 30, 2006.
The
components of income before income taxes are as follows:
United
States of America
The
components of earnings before income taxes separating U.S. and non U.S.
operations are as follows:
As
of
June 30, 2006, the Company’s subsidiary in the United States of America had
approximately $5,000,000 in net operating loss carryforwards available to offset
future taxable income. Federal net operating losses can generally be carried
forward 20 years. The Tax Reform Act of 1986 limits the use of net operating
loss and tax credit carryforwards in certain situations when changes occur
in
the stock ownership of a company. In the event the Company has a change in
ownership, utilization of carryforwards could be restricted. The deferred tax
assets for the United States subsidiary at June 30, 2006 consists mainly of
net
operating loss carryforwards and were fully reserved as the management believes
it is more likely than not that these assets will not be realized in the future.
Hong
Kong
As
of
June 30, 2006, the Company’s Hong Kong subsidiary had net operating loss
carryforwards which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Hong Kong subsidiary at June 30, 2006
consists mainly of net operating loss carryforwards and were fully reserved
as
the management believes it is more likely than not that these assets will not
be
realized in the future.
China
Pursuant
to the PRC Income Tax Laws, the Company’s subsidiaries and VIEs are generally
subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which
comprises 30% national income tax and 3% local income tax. Some of these
subsidiaries and VIEs are qualified new technology enterprises and under PRC
Income Tax Laws, they are subject to preferential tax rates.
Composition
of income tax expenses for China operation
The
following table sets forth current and deferred portion of income tax expenses
of the Company’s China subsidiaries and VIEs, which were included in the
consolidated statements for the periods presented:
Deferred
Tax Assets
Net
Operating Loss Carry forwards
|
$
|
86,000
|
|
Total
deferred tax assets
|
|
86,000
|
|
Less:
Valuation Allowance
|
|
(86,000
|
)
|
Deferred
Tax Assets
|
$
|
-
|
|
Income
tax payable was approximately $33,000 at June 30, 2006, a decrease from $296,000
at December 31, 2005. The decrease was primarily attributed to the settling
of a
tax liability by Lion Zone (ChinaGoHi).
15.
RESTATEMENT AND CORRECTION OF ERROR
Consolidated
Statement of Cash Flows
The
consolidated statement of cash flows has been restated for the six months ended
June 30, 2006. The nature of the revisions can be classified into two
categories:
1.
|
Reclassification
of payment of convertible debenture issue costs from operating activities
to financing activities.
|
2.
|
Reclassification
of certain reconciling items that have no cash or net earnings effect
from
operating activities to a separate line labeled “Effect of exchange rate
on cash and cash equivalents.”
|
3.
|
Reclassification
of loan receivables from financing activities to investing activities.
|
The
restatement had no effect on previously reported net increase in cash and cash
equivalents or cash balances.
The
restatement for the six months ended June 30, 2006, can be summarized as
follows:
|
|
SIX
MONTHS
ENDED
JUNE
30
(Originally
Reported)
|
|
SIX
MONTHS
ENDED
JUNE
30
(RESTATED)
|
|
|
|
2006
|
|
2006
|
|
Cash
Flows from operating activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
1,873
|
|
|
1,719
|
|
Adjustment
to reconcile net earnings to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Equity
loss of associated company
|
|
|
(49
|
)
|
|
(49
|
)
|
Provision
for income taxes
|
|
|
33
|
|
|
33
|
|
Provision
for allowance for doubtful accounts
|
|
|
28
|
|
|
28
|
|
Minority
Interest
|
|
|
1,934
|
|
|
1,934
|
|
Depreciation
and amortization
|
|
|
768
|
|
|
768
|
|
Stock-based
compensation
|
|
|
120
|
|
|
120
|
|
Change
in fair value of derivatives
|
|
|
(208
|
)
|
|
(208
|
)
|
Amortization
of interest discount
|
|
|
|
|
|
154
|
|
Changes
in current assets and liabilities net of effects from purchase
of
subsidiaries:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(10,370
|
)
|
|
(9,870
|
)
|
Inventories
|
|
|
(415
|
)
|
|
(415
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(1,745
|
)
|
|
(1,745
|
)
|
Net
cash used in operating activities
|
|
|
(8,031
|
)
|
|
(7,531
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
1,422
|
|
|
1,422
|
|
Increase
in purchase of marketable securities
|
|
|
-
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(3,124
|
)
|
|
(3,124
|
)
|
Acquisition
of subsidiaries and affiliated companies
|
|
|
(836
|
)
|
|
(836
|
)
|
Loans
receivable from third parties
|
|
|
562
|
|
|
562
|
|
Loans
receivable from related party
|
|
|
(2,233
|
)
|
|
(2,233
|
)
|
Net
cash used in investing activities
|
|
|
(4,209
|
)
|
|
(4,209
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Increase
in loan payable to related party
|
|
|
201
|
|
|
201
|
|
Advances
(repayments) under bank line of credit
|
|
|
(171
|
)
|
|
(171
|
)
|
Advances
under bank loan
|
|
|
623
|
|
|
623
|
|
Increase
(repayments) of amount borrowed under capital lease obligations
|
|
|
(73
|
)
|
|
(73
|
)
|
Repurchase
of treasury shares
|
|
|
(124
|
)
|
|
(124
|
)
|
Proceeds
from exercise of stock options and warrants
|
|
|
86
|
|
|
86
|
|
Proceeds
from issuance of convertible debenture
|
|
|
8,000
|
|
|
8,000
|
|
Payment
of convertible debenture issue costs
|
|
|
-
|
|
|
(500
|
)
|
Net
cash provided by financing activities
|
|
|
8,542
|
|
|
8,042
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate change on cash and cash
equivalents
|
|
|
54
|
|
|
54
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,644
|
)
|
|
(3,644
|
)
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
|
|
9,579
|
|
|
9,579
|
|
CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
|
5,935
|
|
|
5,935
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
292
|
|
$
|
292
|
|
Income
taxes
|
|
$
|
463
|
|
$
|
463
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Issuance
of option shares through increase in subscription
receivable
|
|
|
522
|
|
|
522
|
|
Investments
in subsidiaries acquired through the issuance of common stock
|
|
|
2,275
|
|
|
2,275
|
|
16.
SUBSEQUENT EVENTS
Stock
Option Exercise
On
July
1, 2006, PacificNet issued 100,000 shares of common stock as a result of stock
option exercise in accordance to PacificNet’s stock option plan.
Business
Acquisitions
Able
Entertainment Technology Ltd by PacificNet Games Limited
On
August
3, 2006, PacificNet’s wholly owned subsidiary PacificNet Games Limited
(“PacGames”, Chinese Company Name 太平洋网络游戏有榰公司)
completed the acquisition of 100% of Able Entertainment Technology Ltd., a
leading gaming technology provider based in the Macau Special Administrative
Region of China, by exchanging 65% of the share ownership of PacificNet Games
Limited and the issuance of 200,000 restricted shares of PacificNet Inc.
Upon completion of this transaction, PacificNet Inc. owns 35% of PacificNet
Games Limited (Chinese Company Name 太平洋网络游戏有榰公司).
Under
the purchase agreement, Able Entertainment Technology Ltd has committed to
generate an annual profit of USD$1,600,000 and will provide for an adjustment
to
the purchase price if the PacGames does not achieve an annual net profit of
USD$1,600,000 during the first 12-month period and USD$3,000,000 during the
second 12-month period.
The
consideration was paid as follows:
The
purchase consideration for the entire Issued Shares of 100,000 shares
(representing 100%) of the equity interest of Able Entertainment Technology
Ltd.
is 650 shares (representing 65%) of the ownership interest in PacificNet Games
Limited, a Special Purpose Vehicle (SPV) company registered in the BVI, plus
200,000 restricted PACT shares. Able Entertainment Technology Ltd. has
represented it expects to generate USD$1,600,000, and will provide for an
adjustment to the purchase price if the Company does not achieve an annual
net
profit of USD$1,600,000 during the first 12-month period and USD$3,000,000
during the second 12-month period. The purchase consideration is payable 100%
in
restricted shares of PACT, equivalent to 200,000 restricted PACT
shares.
Allink
Hong Kong Limited
On
August
11, 2006, PacificNet’s wholly owned subsidiary PacificNet Communications Limited
(“PacCom”) completed the acquisition of 80% of Allink Hong Kong Limited (Allink,
Chinese name “瘺瑑濦晧港有榰公司”),
a
leading provider of security and surveillance technology and services based
in
the Hong Kong Special Administrative Region of China, through the issuance
of
200,000 restricted shares of PacificNet Inc. Upon completion of this
transaction, PacificNet Inc. owns 80% of Allink. Under the purchase agreement,
Allink has committed to generate an annual profit of HKD$3,000,000 (approx
USD$385,000) and will provide for an adjustment to the purchase price if the
Allink does not achieve an annual net profit of HKD$3,000,000. Allink
operates one of the leading CCTV communication and security surveillance
technology and services provider utilizing extra low voltage technology for
property management companies in Hong Kong and Macau, China.
The
consideration was paid as follows:
(1)
|
The
purchase consideration for 80% of the equity interest of the Company
is
payable entirely (100%) in restricted shares of PACT, equivalent
to
200,000 restricted PACT shares.
|
(2)
|
The
purchase price is payable upon achievement of certain quarterly earn-out
targets based on net profits.
|
[END
OF UNAUDITED INTERIM INFORMATION]
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of PacificNet Inc.:
We
have
audited the accompanying consolidated balance sheets of PacificNet Inc. (a
Delaware Corporation) and Subsidiaries as of December 31, 2005 and 2004, and
the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2005, 2004, and 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards established by the Public
Company Accounting Oversight Board (United States). Those standards require
that
we plan and perform the audit to obtain reasonable assurance about whether
the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PacificNet Inc. and
Subsidiaries as of December 31, 2005 and 2004, and the results of their
consolidated operations and cash flows for the years ended December 31, 2005,
2004, and 2003, in conformity with accounting principles generally accepted
in
the United States of America.
As
discussed in Note 1 to the accompanying financial statements, the Company
corrected an error in its accounting for business combinations recorded as
of
and for the year ended December 31, 2003. As discussed in Note 16, the 2004
consolidated income statement and the 2004 and 2005 consolidated statements
of
cash flows have been restated.
/s/
CLANCY AND CO, P.L.L.C.
CLANCY
AND CO, P.L.L.C.
Scottsdale,
Arizona
April
25, 2006, except as to the matters discussed in Note 1 concerning
the
correction of an error in accounting for business combinations, which
is
dated October 25, 2006
|
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands of United States dollars, except par values and share
numbers)
|
|
(RESTATED)
DECEMBER 31, 2005
|
|
(RESTATED)
DECEMBER 31, 2004
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,579
|
|
$
|
6,764
|
|
Restricted
cash - pledged bank deposit
|
|
|
1,652
|
|
|
3,501
|
|
Accounts
receivables
|
|
|
5,998
|
|
|
5,644
|
|
Inventories
|
|
|
1,836
|
|
|
1,297
|
|
Loan
receivable from related parties
|
|
|
2,520
|
|
|
—
|
|
Loan
receivable from third parties
|
|
|
1,572
|
|
|
—
|
|
Other
current assets
|
|
|
7,973
|
|
|
4,325
|
|
Total
Current Assets
|
|
|
31,130
|
|
|
21,531
|
|
Property
and equipment, net
|
|
|
4,300
|
|
|
1,118
|
|
Investments
in affiliated companies and subsidiaries
|
|
|
410
|
|
|
1,063
|
|
Marketable
equity securities - available for sale
|
|
|
539
|
|
|
29
|
|
Goodwill
|
|
|
14,824
|
|
|
9,509
|
|
TOTAL
ASSETS
|
|
$
|
51,203
|
|
$
|
33,250
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Bank
line of Credit
|
|
$
|
1,060
|
|
$
|
651
|
|
Bank
loans-current portion
|
|
|
188
|
|
|
1,327
|
|
Capital
lease obligations - current portion
|
|
|
126
|
|
|
80
|
|
Accounts
payable
|
|
|
3,186
|
|
|
3,150
|
|
Accrued
expenses
|
|
|
4,620
|
|
|
128
|
|
Income
tax payable
|
|
|
296
|
|
|
10
|
|
Subscription
payable
|
|
|
775
|
|
|
—
|
|
Loan
payable to related party
|
|
|
369
|
|
|
—
|
|
Total
Current Liabilities
|
|
|
10,620
|
|
|
5,346
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
Bank
loans - non current portion
|
|
|
6
|
|
|
69
|
|
Capital
lease obligations - non current portion
|
|
|
78
|
|
|
129
|
|
Total
long-term liabilities
|
|
|
84
|
|
|
198
|
|
Total
liabilities
|
|
|
10,704
|
|
|
5,544
|
|
Minority
interest in consolidated subsidiaries
|
|
|
8,714
|
|
|
2,396
|
|
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:
|
|
|
|
|
|
|
|
December
31, 2005 - 12,000,687 issued, 10,831,024 outstanding
|
|
|
|
|
|
|
|
December
31, 2004 - 10,627,737 shares issued, 9,791,583 outstanding
|
|
|
1
|
|
|
1
|
|
Treasury
stock, at cost (2005: 1,169,663 shares; 2004: 836,154
shares)
|
|
|
(119
|
)
|
|
(104
|
)
|
Additional
paid-in capital
|
|
|
57,690
|
|
|
53,916
|
|
Cumulative
other comprehensive income (loss)
|
|
|
247
|
|
|
(24
|
)
|
Accumulated
deficit
|
|
|
(25,990
|
)
|
|
(28,479
|
)
|
Less
stock subscription receivable
|
|
|
(44
|
)
|
|
—
|
|
Total
Stockholders’ Equity
|
|
|
31,785
|
|
|
25,310
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
51,203
|
|
$
|
33,250
|
|
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands of United States dollars, except loss per share and share
amounts)
|
|
(RESTATED)
|
|
(RESTATED)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
YEAR
ENDED DECEMBER 31:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
44,341
|
|
$
|
29,709
|
|
$
|
1,217
|
|
Services
|
|
|
20,994
|
|
|
10,222
|
|
|
1,066
|
|
Product
sales
|
|
|
23,347
|
|
|
19,487
|
|
|
151
|
|
Cost
of revenues
|
|
|
(33,439
|
)
|
|
(24,074
|
)
|
|
(698
|
)
|
Services
|
|
|
(12,540
|
)
|
|
(6,507
|
)
|
|
(534
|
)
|
Product
sales
|
|
|
(20,899
|
)
|
|
(17,567
|
)
|
|
(164
|
)
|
Gross
margin
|
|
|
10,902
|
|
|
5,635
|
|
|
519
|
|
Selling,
general and administrative expenses
|
|
|
(5,811
|
)
|
|
(3,435
|
)
|
|
(1,572
|
)
|
Depreciation
and amortization
|
|
|
(293
|
)
|
|
(78
|
)
|
|
(76
|
)
|
Interest
expense
|
|
|
(229
|
)
|
|
(185
|
)
|
|
(208
|
)
|
EARNINGS
FROM OPERATIONS
|
|
|
4,569
|
|
|
1,937
|
|
|
(1,337
|
)
|
Interest
income
|
|
|
246
|
|
|
79
|
|
|
27
|
|
Sundry
income
|
|
|
830
|
|
|
422
|
|
|
54
|
|
Earnings
before Income Taxes, Minority Interest and Discontinued
Operations
|
|
|
5,645
|
|
|
2,438
|
|
|
(1,256
|
)
|
Provision
for income taxes(1)
|
|
|
(222
|
)
|
|
(30
|
)
|
|
(32
|
)
|
Share
of profit of associated companies
|
|
|
(8
|
)
|
|
32
|
|
|
-
|
|
Minority
interests
|
|
|
(2,926
|
)
|
|
(1,623
|
)
|
|
7
|
|
Earnings
before Discontinued Operations
|
|
|
2,489
|
|
|
817
|
|
|
(1,281
|
)
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
—
|
|
|
(43
|
)
|
|
—
|
|
Net
Earnings Available to Common Stockholders
|
|
$
|
2,489
|
|
$
|
774
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.25
|
|
$
|
0.11
|
|
|
($0.24
|
)
|
Earnings
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
earnings
|
|
$
|
0.25
|
|
$
|
0.11
|
|
|
($0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
$
|
0.23
|
|
$
|
0.09
|
|
|
($0.24
|
)
|
Earnings
from discontinued operations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
earnings
|
|
$
|
0.23
|
|
$
|
0.09
|
|
|
($0.24
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
*
Income
taxes in 2005 of $66,000, $110,000, $20,000 and $26,000 generated from the
Company’s four business units: (1) CRM Outsourcing Services, (2) Value Added
Services (VAS), (3) Telecom Distribution Services and (4) Other
Business.
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
PREFERRED
STOCK
|
|
COMMON
STOCK
|
|
ADDITIONAL
PAID-IN CAPITAL
|
|
STOCK
SUBSCRIP-
TION
RECEIVABLE
|
|
CUMU-
LATIVE
OTHER COMPRE- HENSIVE INCOME/
(LOSS)
|
|
ACCUMU-LATED
DEFICIT
(RESTATED)
|
|
TREASURY
STOCK
|
|
TOTAL
STOCK-HOLDERS’ EQUITY (RESTATED)
|
|
Balance
at December 31, 2002 (4,907,252 shares)
|
|
|
-
|
|
$
|
1
|
|
$
|
31,253
|
|
|
-
|
|
$
|
(24
|
)
|
$
|
(27,972
|
)
|
$
|
(5
|
)
|
$
|
3,253
|
|
COMPREHENSIVE
LOSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, as restated (see Note 1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
-
|
|
|
—
|
|
|
(1,281
|
)
|
|
-
|
|
|
(1,281
|
)
|
TOTAL
COMPREHENSIVE LOSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,281
|
)
|
Issuance
of treasury shares (800,000 shares)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
Issuance
of common stock for services (16,725 shares)
|
|
|
-
|
|
|
-
|
|
|
27
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
27
|
|
Issuance
of common stock for officer employment compensation (200,000
shares)
|
|
|
-
|
|
|
-
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
100
|
|
Issuance
of common stock for cash (240,000 shares)
|
|
|
-
|
|
|
-
|
|
|
410
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
410
|
|
Balance
at December 31, 2003 (5,363,977 shares)
|
|
|
—
|
|
|
1
|
|
$
|
31,790
|
|
|
|
|
|
($24
|
)
|
|
($29,253
|
)
|
|
($5
|
)
|
$
|
2,509
|
|
COMPREHENSIVE
EARNINGS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
774
|
|
|
|
|
|
774
|
|
TOTAL
COMPREHENSIVE EARNINGS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774
|
|
Issuance
of common stock for acquisition of subsidiaries (1,756,240 shares)
|
|
|
—
|
|
|
—
|
|
|
8,866
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
8,866
|
|
Proceeds
from the sale of common stock, net of related costs (2,205,697, shares)
|
|
|
—
|
|
|
—
|
|
|
11,773
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
11,773
|
|
Issuance
of common stock for acquisition of Cheer Era (149,459 shares)
|
|
|
—
|
|
|
—
|
|
|
771
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
771
|
|
Repurchase
of common shares (less 36,154 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
(99
|
)
|
Exercise
of stock options and warrants for cash (352,364 shares)
|
|
|
|
|
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
716
|
|
BALANCE
AT DECEMBER 31, 2004 (9,791,583 SHARES)
|
|
|
—
|
|
|
1
|
|
$
|
53,916
|
|
|
|
|
|
($24
|
)
|
|
($28,479
|
)
|
|
($104
|
)
|
$
|
25,310
|
|
COMPREHENSIVE
EARNINGS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
2,489
|
|
|
|
|
|
2,489
|
|
Cumulative
Other Comprehensive gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
271
|
|
Total
comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,760
|
|
Issuance
of common stock for acquisition of subsidiaries (515,900 shares)
|
|
|
—
|
|
|
—
|
|
|
3,971
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
3,971
|
|
Issuance
of common stock (20,000 shares) for services
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
PIPE
related Expenses
|
|
|
—
|
|
|
—
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(547
|
)
|
Repurchase
of common shares for acquisition of Cheer Era (less 149,459 shares)
|
|
|
—
|
|
|
—
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
Cancellation
of common shares (less 45,000 shares)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchase
of common shares (less 2,000 shares)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
(15
|
)
|
Exercise
of stock options and warrants for cash (700,000 shares)
|
|
|
—
|
|
|
|
|
|
1,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,058
|
|
Less
stock subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
BALANCE
AT DECEMBER 31, 2005 (10,831,024 SHARES)
|
|
|
—
|
|
|
1
|
|
$
|
57,690
|
|
$
|
(44
|
)
|
$
|
247
|
|
|
($25,990
|
)
|
|
($119
|
)
|
$
|
31,785
|
|
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands of United States dollars, except profit per share and share
amounts)
|
|
(RESTATED)
2005
|
|
(RESTATED)
2004
|
|
(RESTATED)
2003
|
|
Cash
Flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
2,489
|
|
$
|
774
|
|
$
|
(1,281
|
)
|
Adjustment
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Equity
loss (earnings) of associated company
|
|
|
8
|
|
|
(32
|
)
|
|
-
|
|
Common
stock issued for services rendered
|
|
|
63
|
|
|
--
|
|
|
127
|
|
Minority
Interest
|
|
|
2,926
|
|
|
1,623
|
|
|
(7
|
)
|
Loss
on disposal of fixed assets
|
|
|
-
|
|
|
-
|
|
|
208
|
|
Provision
for write-off of goodwill
|
|
|
|
|
|
|
|
|
19
|
|
Depreciation
and amortization
|
|
|
1,126
|
|
|
78
|
|
|
76
|
|
Changes
in current assets and liabilities net of effects from purchase of
subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
7,057
|
|
|
(3,584
|
)
|
|
(153
|
)
|
Inventories
|
|
|
(539
|
)
|
|
(1,221
|
)
|
|
-
|
|
Accounts
payable and other accrued expenses
|
|
|
(3,880
|
)
|
|
(2,069
|
)
|
|
106
|
|
Net
cash provided by (used in) operating activities
|
|
|
9,250
|
|
|
(4,431
|
)
|
|
(905
|
)
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
1,849
|
|
|
(3,289
|
)
|
|
(52
|
)
|
Increase
in purchase of marketable securities
|
|
|
(521
|
)
|
|
(46
|
)
|
|
|
|
Acquisition
of property and equipment
|
|
|
(2,252
|
)
|
|
(206
|
)
|
|
(29
|
)
|
Acquisition
of intangible assetst
|
|
|
|
|
|
|
|
|
(19
|
)
|
Acquisition
of subsidiaries and affiliated companies
|
|
|
(1,183
|
)
|
|
(724
|
)
|
|
(211
|
)
|
Loan
receivables from third parties
|
|
|
(1,572
|
)
|
|
-
|
|
|
-
|
|
Loans
receivable from related parties
|
|
|
(2,520
|
)
|
|
-
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(6,199
|
)
|
|
(4,265
|
)
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Increase
in loan payable to related party
|
|
|
369
|
|
|
-
|
|
|
-
|
|
Advances
(repayments) under bank line of credit
|
|
|
409
|
|
|
(548
|
)
|
|
169
|
|
Advances
under bank loan
|
|
|
(1,201
|
)
|
|
(130
|
)
|
|
717
|
|
Advances
(repayments) of amount borrowed under capital lease obligations
|
|
|
(5
|
)
|
|
(92
|
)
|
|
49
|
|
Proceeds
from sale of common stock
|
|
|
--
|
|
|
11,773
|
|
|
-
|
|
Repurchase
of treasury shares
|
|
|
(15
|
)
|
|
(99
|
)
|
|
-
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
1,014
|
|
|
716
|
|
|
410
|
|
Payment
of certain PIPE related expenses
|
|
|
(547
|
)
|
|
--
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
24
|
|
|
11,620
|
|
|
1,345
|
|
Effect
of exchange rate change on cash and cash
equivalents
|
|
|
(260
|
)
|
|
17
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENT
|
|
|
2,815
|
|
|
2,941
|
|
|
129
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
6,764
|
|
|
3,823
|
|
|
3,694
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
9,579
|
|
$
|
6,764
|
|
$
|
3,823
|
|
CASH
PAID (RECEIVED) FOR:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
229
|
|
$
|
20
|
|
$
|
54
|
|
Income
taxes
|
|
$
|
(53
|
)
|
$
|
20
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services rendered
|
|
|
-
|
|
|
-
|
|
$
|
127
|
|
Issuance
of option shares through increase in subscription receivable
|
|
$
|
63
|
|
|
--
|
|
|
63
|
|
Investment
in subsidiary acquired through issuance of subscriptions payable
|
|
$
|
775
|
|
|
--
|
|
$
|
722
|
|
Repurchase
of shares issued to Take 1 Technologies Group Limited (formerly known
as
Cheer Era Limited)
|
|
$
|
771
|
|
|
--
|
|
$
|
771
|
|
Investments
in subsidiaries acquired through the issuance of common stock
|
|
$
|
3,971
|
|
$
|
9,637
|
|
|
-
|
|
PACIFICNET
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
expressed in United States dollars unless otherwise stated)
1.
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF
OPERATIONS
PacificNet
Inc. (referred to herein as "PacificNet" or the "Company") was originally
incorporated in the State of Delaware on April 8, 1987. Through our subsidiaries
we provide outsourcing services, value-added telecom services (VAS) and
communication products distribution services. Our business process outsourcing
(BPO) services include call centers, providing customer relationship management
(CRM), and telemarketing services, and our information technology outsourcing
(ITO) includes software programming and development. We are value-added
resellers and providers of telecom VAS, which is comprised of interactive voice
response (IVR) systems, call center management systems, and voice over Internet
protocol (VOIP), as well as mobile phone VAS, such as short messaging services
(SMS) and multimedia messaging services (MMS). The Company's operations are
primarily targeted in the China and Hong Kong market.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America and present
the
financial statements of the Company and its wholly owned and majority-owned
subsidiaries including variable interest entities ("VIEs") for which the Company
is the primary beneficiary. All significant inter-company accounts and
transactions have been eliminated. Investments in entities in which the Company
can exercise significant influence, but which are less than majority owned
and
not otherwise controlled by the Company, are accounted for under the equity
method.
The
Company has adopted FASB Interpretation No. 46R "Consolidation of Variable
Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research
Bulletin No. 51. FIN 46R requires a Variable Interest Entity (VIE) to be
consolidated by a company if that company is subject to a majority of the risk
of loss for the VIE or is entitled to receive a majority of the VIE's residual
returns. VIEs are those entities in which the Company, through contractual
arrangements, bears the risks of, and enjoys the rewards normally associated
with ownership of the entities, and therefore the company is the primary
beneficiary of these entities. Acquisitions of subsidiaries or variable interest
entities are accounted for using the purchase method of accounting. The results
of subsidiaries or variable interest entities acquired during the year are
included in the consolidated income statements from the effective date of
acquisition.
INITIAL
MEASUREMENT OF VIE- The Company initially measures the assets, liabilities,
and
non-controlling interests of the VIEs at their fair values at the date of the
acquisitions. Goodwill is recorded for the excess of the fair value of the
newly
consolidated assets and the reported amount of assets transferred by the primary
beneficiary to the VIE over the sum of the fair value of the consideration
paid,
the reported amount of any previously held interests, and the fair value of
the
newly consolidated liabilities and non-controlling interests are allocated
and
reported as a pro rata adjustment of the amounts that would have been assigned
to all of the newly consolidated assets as if the initial consolidation had
resulted from a business combination.
ACCOUNTING
AFTER INITIAL MEASUREMENT OF VIE - Subsequent accounting for the assets,
liabilities, and non-controlling interest of a consolidated variable interest
entity are accounted for as if the entity were consolidated based on voting
interests and the usual accounting rules for which the VIE operates are applied
as they would to a consolidated subsidiary as follows:
|
carrying
amounts of the VIE are consolidated into the financial statements
of
PacificNet as the primary beneficiary (referred as "Primary Beneficiary"
or "PB");
|
|
inter-company
transactions and balances, such as revenues and costs, receivables
and
payables between or among the Primary Beneficiary and the VIE(s)
are
eliminated in their entirety; and
|
|
because
there is no direct ownership interest by the Primary Beneficiary
in the
VIE, equity of the VIE is eliminated with an offsetting credit to
minority
interest.
|
PRC
laws
and regulations restrict us, as a foreign entity, from having a direct
controlling interest in entities such as Guangzhou Dianxun Co., Ltd.(Dianxun-DE)
and Guangzhou Sunroom Information Industry Co., Ltd.(Sunroom-DE) that hold
operating licenses to engage in domestic telecom value-added services and online
ecommerce in China. As a result, we conduct substantially all of our operations
through Guangzhou Clickcom Digit-net Science(WOFE) and Technology Ltd. and
Guangzhou 3G Information Technology Co., Ltd.(WOFE) We own 51% of the shares
in
each of the WOFEs and each WOFE signed Consulting and Services Agreements with
Dianxun-DE and Sunroom-DE (the entities that actually carry out the operating
activities). These agreements provide that all of the DE profits will flow
through to the respective WOFEs. Pursuant to these agreements, the Company
guarantees any obligations undertaken by these companies under their contractual
agreements with third parties, and the Company is entitled to receive service
fees in an amount equal to 51% of the net income of these companies.
Accordingly, we bear the risks of, and enjoy the rewards associated with, the
investments in the WOFEs.
The
operations of DEs are managed by their original management teams, however,
the
Company has the power to appoint or change directors and senior management
because it indirectly ultimately controls the voting power of the shareholders
of each DE through the Power of Attorney given to PacificNet's President
according to the operating agreements between the DEs and WOFEs. Pursuant to
the
Consulting and Service Agreements signed between each WOFE and their respective
DE, the WOFE ("Party A") agrees to be the exclusive provider of telecom
consulting services to the DE ("Party B"). During the term of the agreement,
Party B shall not accept technical and consulting services provided by any
third
party. Party B agrees to pay a fee to Party A equal to 100% of its monthly
net
income for the services provided. Payment of the service fees has been secured
through a share pledge agreement with the shareholders of each of the DEs,
whereby they pledged all of their shares to the respective WOFE. Further, (1)
Each of the DEs, by design, is thinly capitalized because a substantial portion
of PacificNet's invested amounts or consideration were paid or payable directly
to previous owners of Sunroom-DE and Dianxun-DE for entering into the
acquisition transactions while none of the investment consideration was injected
into the DEs. Therefore, additional funding from PacificNet is needed to support
the DEs' business development and working capital. (2) Fees from Service
Contracts are substantial, but are not commensurate with the level of service
provided by the WOFEs to the DEs. The contractual and funding arrangements
with
the DEs evidence that PacificNet has closely participated in the majority of
the
DEs' economics. PacificNet is the primary beneficiary through its WOFE
subsidiaries since PacificNet is the only enterprise with a sufficiently large
interest in the VIEs. In compliance with PRC's foreign investment restrictions
on Internet Content Provider and Value Added Telecom Services Provider's laws
and regulations, the Company conducts all of its value-added services for
telecom in China via the following significant domestic VIEs below. The
respective management agreements between the VIE's and WOFE's create a variable
interest and accordingly, these two Vies are consolidated as VIE through their
respective WOFEs from the date of acquisition.
The
following is a summary of all the VIEs of the Company:
|
|
GuangZhou
DianXun Company Limited (the "Dianxun-VIE"), a China company controlled
through business agreement. Through Dianxun-VIE, a variable interest
entity, PacificNet is able to provide indirectly to China's telecom
operators, a wide variety of wireless Internet services for mobile
phones,
such as SMS, Wireless Application Protocol, or WAP, which allows
users to
access information instantly via handheld wireless devices, and Java
mobile applications. The business of the VIE is managed by their
original
management teams. Clickcom VIE is owned by Zhang Ming, CEO 60%, Lai
Jinnan, COO 30%, Liu Dong, CTO 10% of the Company. The adjusted registered
capital of the VIE is $125,000 (the original registered capital of
Dianxun-VIE was approx. US$1.25m but was adjusted down to reflect
the fair
value of NAV at time of acquisition. (See Note 5) . The VIE's board
of
directors has the power to appoint the General Manager of the VIE
who in
turn has the power to appoint other members of the management. PacificNet
does not directly participate in the daily operation of the VIE.
It
however has the power to change the management, if needed, because
PacificNet is directly or indirectly controlling the board of this
VIE. As
at the December 31, 2005, Dianxun-VIE's revenues and net earnings
accounted for approximately 1.5% and 5.6% of our consolidated revenues
and
net earnings before minority interests
respectively.
|
|
|
Guangzhou
Sunroom Information Industrial Co., Ltd. ("Sunroom-VIE"), a PRC registered
domestic enterprise, controlled by PacificNet through a series of
contractual agreements. It is responsible for VAS in China under
its ICP
and VAS licenses. It is 31% owned by Mr. Wang Yongchao (CEO), 41.4%
owned
by Mr. Liao Mengjiang (COO) and 27.6% owned by non-participating
shareholder, Mr. Sun Zhengquan. The registered capital of the VIE
Company
is $4.0 million. Sunroom-VIE is required to transfer their ownership
in
these entities to our subsidiaries when permitted by PRC laws and
regulations and all voting rights are assigned to us. As of December
31,
2005, Sunroom-VIE's revenues and net loss accounted for approximately
11%
and -1.2% of our consolidated revenues and net earnings before minority
interests, respectively.
|
The
initial capital investments in these VIEs were not funded by us but we have
provided loans to these VIEs to fund their R&D and expansion plans. As of
December 31, 2005, the amount of loans to Clickcom VIE and Sunroom VIE were
approximately US$256,000 (low interest at 2%) and US$250,000 (interest free)
respectively. None of the VIEs' assets were collateralized for our loans. Given
the fact that we do not have direct ownership interests in these VIEs, the
creditors of these VIEs will not have recourse to the general credit of our
group being the primary beneficiary.
Under
various contractual agreements, employee shareholders of the VIEs are required
to transfer their ownership in these entities to our subsidiaries in China
when
permitted by PRC laws and regulations or to our designees at any time for the
amount of the outstanding loans. All voting rights of the VIEs are then assigned
to us. We have the power to appoint all directors and senior management
personnel of the VIEs. Through our wholly owned subsidiaries in China, we have
also entered into exclusive technical agreements and other service agreements
with the VIEs, under which these subsidiaries provide technical
services.
BUSINESS
COMBINATIONS
The
Company accounts for its business combinations using the purchase method of
accounting. This method requires that the acquisition cost to be allocated
to
the assets and liabilities the Company acquired based on their fair values.
The
Company makes estimates and judgments in determining the fair value of the
acquired assets and liabilities, based on valuations using management's
estimates and assumptions including its experience with similar assets and
liabilities in similar industries. If different judgments or assumptions were
used, the amounts assigned to the individual acquired assets or liabilities
could be materially different.
GOODWILL
AND PURCHASED INTANGIBLE ASSETS (CORRECTION OF AN ERROR)
Goodwill
represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired as a result of the Company's
acquisitions of interests in its subsidiaries and VIEs. Under Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets ("SFAS 142")," goodwill is no longer amortized, but tested for impairment
upon first adoption and annually, thereafter, or more frequently if events
or
changes in circumstances indicate that it might be impaired. The Company
assesses goodwill for impairment periodically in accordance with SFAS
142.
The
Company applies the criteria specified in SFAS No. 141, "Business Combinations"
to determine whether an intangible asset should be recognized separately from
goodwill. Intangible assets acquired through business acquisitions are
recognized as assets separate from goodwill if they satisfy either the
"contractual-legal" or "separability" criterion. Per SFAS 142, intangible assets
with definite lives are amortized over their estimated useful life and reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets." Intangible assets, such as purchased
technology, trademark, customer list, user base and non-compete agreements,
arising from the acquisitions of subsidiaries and variable interest entities
are
recognized and measured at fair value upon acquisition. Intangible assets are
amortized over their estimated useful lives from one to ten years. The Company
reviews the amortization methods and estimated useful lives of intangible assets
at least annually or when events or changes in circumstances indicate that
it
might be impaired. The recoverability of an intangible asset to be held and
used
is evaluated by comparing the carrying amount of the intangible asset to its
future net undiscounted cash flows. If the intangible asset is considered to
be
impaired, the impairment loss is measured as the amount by which the carrying
amount of the intangible asset exceeds the fair value of the intangible asset,
calculated using a discounted future cash flow analysis. The Company uses
estimates and judgments in its impairment tests, and if different estimates
or
judgments had been utilized, the timing or the amount of the impairment charges
could be different.
We
currently have seven reporting units: Lion Zone, Linkhead, EPRO, Shanghai
Classic, Smartime/Soluteck, Clickcom-WOFE, and Guangzhou 3G-WOFE for the purpose
of goodwill assessment. We determined our reporting units if the entity
constituted a business, financial information was available, and segment
management can regularly review the operating results of that component.
Excluding investment holding vehicles and self-developed units, reporting units
only include those operating units that PacificNet holds 50% or more through
acquisition and maintain effective control. Units such as PacificNet Solution,
PacificNet Limited, and PacificNet Communication are 100% owned by PacificNet
through self development and not through acquisition. Therefore, there is no
goodwill allocation to these self-developed units.
We
allocated goodwill amongst the reporting units based on the consideration paid
in shares and cash minus the proportional share of the fair value of net assets
and liabilities at the time of acquisition specific to each reporting unit.
The
fair value of each reporting unit represents the amount at which the unit as
a
whole could be bought or sold in a current transaction between willing parties
in an open marketplace. At the time of acquisition, the fair value of assets
and
liabilities was determined based on book value minus any potential write-down,
if any, to reflect the fair value of the assets and liabilities acquired in
the
transaction. The Company has one class of goodwill arising from business
combination resulting from the acquisitions of our subsidiaries. Goodwill has
been revised to reflect certain expenses that should have been written off
prior
to certain acquisitions, not subsequent to the acquisitions, to better reflect
the assets acquired and liabilities assumed in certain business combinations
during 2003 in accordance with SFAS No. 141, “Business Combinations”.
Originally, the Company had acquired certain intangible assets such as research
and development costs and related party receivables that were considered as
part
of the purchase price allocation, then subsequently expensed them at year end.
As of and for the year ended December 31, 2003, the correction of the error
resolved in an approximate $597,000 increase in goodwill with an offsetting
decrease in net loss, accumulated deficit, and total stockholders’ equity. Net
loss per share decreased from $0.36 to $0.24. Notes 4, 15 and Note 16 have
been
revised to reflect the corresponding correction of an error.
The
total
carrying amount of goodwill recorded on the balance sheets at December 31,
2005
is $14,824,000 and the changes in the carrying amount of goodwill for the
following reporting periods are summarized below:
(US$000s)
|
|
Group
1.
Outsourcing
Services
Products
|
|
Group
2.
Value-Added
Services
|
|
Group
3.
Distribution
of
Communications
|
|
Total
|
|
Balance
as of December 31, 2002
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Goodwill
acquired during the year
|
|
|
960
|
|
|
57
|
|
|
-
|
|
|
1,017
|
|
Impairment
losses
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Goodwill
written off related to sale of business unit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance
as of December 31, 2003
|
|
$
|
960
|
|
$
|
57
|
|
$
|
--
|
|
$
|
1,017
|
|
Goodwill
acquired during the year
|
|
|
2,976
|
|
|
4,416
|
|
|
1,100
|
|
|
8,492
|
|
Impairment
losses
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Goodwill
written off related to sale of business unit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance
as of December 31, 2004
|
|
|
3,936
|
|
|
4,473
|
|
|
1,100
|
|
|
9,509
|
|
Goodwill
acquired during the year
|
|
|
--
|
|
|
5,315
|
|
|
--
|
|
|
5,315
|
|
Impairment
losses
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Goodwill
written off related to sale of business unit
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance
as of December 31, 2005
|
|
$
|
3,936
|
|
$
|
9,788
|
|
$
|
1,100
|
|
$
|
14,824
|
|
The
Company assesses the need to record impairment losses on our goodwill assets
at
least annually or when an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The assessment includes using a combination of qualitative and
quantitative analyses such as DCF/PE multiples based on 5 year profit forecasts,
and published comparables, where applicable. The Company concluded that there
have been no material adverse changes on the operating environments during
the
reporting periods that would have otherwise affected the carrying value of
the
goodwill. In addition, there has been no disposal of any reporting subsidiaries
and, as a result, no gain or loss is recognized during those reporting
periods.
The
following table summarizes goodwill from the Company's acquisitions:
(USD000s)
|
|
December
31, 2005
|
|
December
31, 2004
|
|
December
31, 2003
|
|
Epro
|
|
$
|
3,703
|
|
$
|
3,703
|
|
$
|
960
|
|
Linkhead
|
|
|
4,473
|
|
|
4,473
|
|
|
57
|
|
Shanghai
Classic (Yueshen)
|
|
|
1,100
|
|
|
1,100
|
|
|
-
|
|
Smartime
(Soluteck)
|
|
|
233
|
|
|
233
|
|
|
-
|
|
Clickcom
|
|
|
391
|
|
|
-
|
|
|
-
|
|
GZ3G
(Sunroom)
|
|
|
4,042
|
|
|
-
|
|
|
-
|
|
Lion
Zone (ChinaGoHi)
|
|
|
882
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
14,824
|
|
$
|
9,509
|
|
$
|
1,017
|
|
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company periodically assesses the need to record impairment losses on long-lived
assets, such as property, plant and equipment, and purchased intangible assets,
used in operations and its investments when indicators of impairment are present
indicating the carrying value may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result
from
the use of the asset plus net proceeds expected from disposition of the asset
(if any) are less than the carrying value of the asset. When impairment is
identified, the carrying amount of the asset is reduced to its estimated fair
value. All goodwill will no longer be amortized and potential impairment of
goodwill and purchased intangible assets with indefinite useful lives will
be
evaluated using the specific guidance provided by SFAS No. 142 and SFAS No.
144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets."
This
impairment analysis is performed at least annually. For investments in
affiliated companies that are not majority-owned or controlled, indicators
or
value generally include revenue growth, operating results, cash flows and other
measures. Management then determines whether there has been a permanent
impairment of value based upon events and circumstances that have occurred
since
acquisition. It is reasonably possible that the impairment factors evaluated
by
management will change in subsequent periods, given that the Company operates
in
a volatile environment. This could result in material impairment charges in
future periods.
INVESTMENTS
IN AFFILIATED COMPANIES
The
Company's investments in affiliated companies for which its ownership exceeds
20%, but is not majority-owned or controlled, are accounted for using the equity
method. The Company's investments in affiliated companies for which its
ownership is less than 20% are accounted for using the cost method.
COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) consists of net earnings and other gains (losses) affecting
stockholders' equity that, under generally accepted accounting principles are
excluded from net earnings in accordance with Statement of Financial Accounting
Standards ("SFAS") 130, Reporting Comprehensive Income.
REVENUE
RECOGNITION
Revenues
are derived from the following categories as classified by our operating
segments (see Note 15): (1) outsourcing services including Business Process
Outsourcing (BPO), call center, IT Outsourcing (ITO) and software development
services; (2) Value-Added Telecom Services (VAS) including Content Providing
(CP), Interactive Voice Response (IVR), Platform Providing (PP) and Service
Providing (SP); and (3) Communication Products Distribution Services, including
calling cards, GSM/ CDMA/ XiaoLingTong products, and multimedia self-service
kiosks.
Revenues
from outsourcing services are recognized when the services are rendered.
Revenues from license agreements are recognized when a signed non-cancelable
software license exists, delivery has occurred, the Company's fee is fixed
or
determinable, and collectibility is probable at the date of sale. Revenues
from
software development services are recognized when the customer accepts the
installation and no significant modification or customization work is involved,
in accordance with SOP 97-2 "Software Revenue Recognition." Revenues from
support services such as consulting, implementation and training services are
recognized when the services are performed, collectibility is probable and
such
revenues are contractually nonrefundable.
Revenues
from value-added telecom services are derived principally from providing mobile
phone users with short messaging service ("SMS"), multimedia messaging service
("MMS"), color ring back tone ("CRBT"), wireless application protocol ("WAP")
and interactive voice response system ("IVR"). These services include news
and
other content subscriptions, mobile dating service, picture and logo download,
ring tones, ring back tones, mobile games, chat rooms and access to music files.
These revenues from are charged on a monthly or per-usage basis and are
recognized in the period in which the service is performed, provided that no
significant Company obligations remain, collection of the receivables is
reasonably assured and the amounts can be accurately estimated. In accordance
with EITF No. 99-19, "Reporting Revenues Gross as a Principal Versus Net as
an
Agent," revenues are recorded on a gross basis when the Company is considered
the primary obligor to the VAS users. Under the gross method, the amounts billed
to VAS users are recognized as revenues and the fees charged or retained by
the
third-party operators are recognized as cost of revenues.
Revenues
from the sale of products and systems are recognized when the product and system
is completed, shipped, and the risks and rewards of ownership have
transferred.
Revenues
from the distribution of all types of calling cards and product sales is
recognized in accordance with EITF No. 99-19, "Reporting Revenues Gross as
a
Principal Versus Net as an Agent," where revenues are recorded on a gross basis
when the Company is considered the primary obligor to the users, maintains
an
inventory of products before the products are ordered by customers, has latitude
in establishing the pricing power of products, is subject to physical inventory
loss risk, and has credit risk as it is responsible for collecting the sales
price from the customer and is responsible for paying the supplier regardless
of
whether or not the sales price is fully collectible.
The
effect of post-shipment/delivery obligations, such as customer acceptance,
product returns, etc. on our revenue recognition policy is as follows: (a)
there
is no effect on outsourcing services as revenue is recognized as the services
are performed; however product sale revenue is recognized when contracts are
approximately 80% completed for revenue recognition and fully when the customer
signs the UAT, (i.e., "User Acceptance Form"); (b) there is no effect on
value-added services revenue as the product sales mainly involve IVR hardware
that are from mature and stable products of multi-national vendors and there
have been minimal returns historically; and (c) there is no effect on
communication products distribution since the transactions are conducted on
cash
basis and revenue is recognized at the time the sale is transacted.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
The
Company presents accounts receivable, net of allowances for doubtful accounts
and returns. The allowances are calculated based on a detailed review of certain
individual customer accounts, historical rates and an estimate of the overall
economic conditions affecting the Company's customer base. The Company
frequently monitors its customers' financial condition and credit worthiness
and
only sells products, licenses or services to customers where, at the time of
the
sale, collection is reasonably assured. If the financial condition of its
customers were to deteriorate, resulting in an impairment of their ability
to
make payments, additional allowances may be required. The Company also records
reserves for bad debt for all other customers based on a variety of factors
including the length of time the receivables are past due, the financial health
of the customer, macroeconomic considerations and historical experience. If
circumstances related to specific customers change, the Company's estimates
of
the recoverability of receivables could be further adjusted. Allowance for
doubtful accounts at December 31, 2005 was approximately $5,000 (2004:
$0).
PROPERTY
AND EQUIPMENT
Property
and equipment is stated at cost and depreciated using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term,
ranging from three to five years. Significant improvements and betterments
are
capitalized. Routine repairs and maintenance are expensed when incurred. When
property and equipment is sold or otherwise disposed of, the asset account
and
related accumulated depreciation account are relieved, and any gain or loss
is
included in operations.
INVENTORIES
Inventories
consist of finished goods and are stated at the lower of cost or market value.
Cost is computed using the first-in, first-out method and includes all costs
of
purchase and other costs incurred in bringing the inventories to their present
location and condition. Market value is determined by reference to the sales
proceeds of items sold in the ordinary course of business after the balance
sheet date or management estimates based on prevailing market conditions. The
inventories consist of finished goods and represent telecommunication products
such as mobile phone, rechargeable phone cards, smart chip, and interactive
voice response cards.
INCOME
TAXES
Income
taxes are accounted for using an asset and liability approach, which requires
the recognition of income taxes payable or refundable for the current year
and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's consolidated financial statements
or
tax returns. The measurement of current and deferred tax liabilities and assets
is based on provisions of the enacted tax laws; the effects of future changes
in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence assessed using the criteria in SFAS No. 109, "Accounting
for
Income Taxes," will not more-likely-than-not be realized.
The
Company records a valuation allowance for deferred tax assets, if any, based
on
estimates of its future taxable income as well as its tax planning strategies
when it is more likely than not that a portion or all of its deferred tax assets
will not be realized. If the Company is able to utilize more of its deferred
tax
assets than the net amount previously recorded when unanticipated events occur,
an adjustment to deferred tax assets would be reflected in income when those
events occur.
RESEARCH
AND DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE COSTS
Expenditures
related to the research and development of new products and processes, including
significant improvements and refinements to existing products are expensed
as
incurred, unless they are required to be capitalized. Software development
costs
are required to be capitalized when a product's technological feasibility has
been established by completion of a detailed program design or working model
of
the product, and ending when a product is available for release to customers.
For the years ended December 31, 2005 and 2004, the Company did not capitalize
any costs related to the purchase of software and related technologies and
content. Research and development costs charged to operations for 2005, 2004
and
2003 were approximately $182,400, $161,000, and $0, respectively.
EARNINGS
PER SHARE (EPS)
Basic
and
diluted earnings or loss per share (EPS) amounts in the financial statements
are
computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is
based on the weighted average number of common shares outstanding. Diluted
EPS
is based on the weighted average number of common shares outstanding and
dilutive common stock equivalents. Basic EPS is computed by dividing net
income/loss available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period. Dilutive
earnings per share for 2005 exclude the potential dilutive effect of 473,456
warrants because their impact would be anti-dilutive based on current market
prices. All per share and per share information are adjusted retroactively
to
reflect stock splits and changes in par value.
The
reconciliation of the numerators and denominators of the basic and diluted
EPS
calculations was as follows for the years ended December 31:
|
|
FY2005
|
|
FY
2004
|
|
FY
2003
|
|
Numerator:
earnings
|
|
$
|
2,489
|
|
$
|
774
|
|
|
($1,281
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares used to compute basic EPS
|
|
|
10,154,271
|
|
|
7,268,374
|
|
|
5,234,744
|
|
Dilutive
potential from assumed exercise of stock options
|
|
|
489,552
|
|
|
157,585
|
|
|
-
|
|
Dilutive
potential from assumed exercise of stock warrants
|
|
|
57,388
|
|
|
816,037
|
|
|
-
|
|
Weighted-average
shares used to compute diluted EPS
|
|
|
10,701,211
|
|
|
8,241,996
|
|
|
5,234,744
|
|
Basic
earnings per common share:
|
|
$
|
0.25
|
|
$
|
0.11
|
|
|
($0.24
|
)
|
Diluted
earnings per common share:
|
|
$
|
0.23
|
|
$
|
0.09
|
|
|
($0.23
|
)
|
STOCK-BASED
COMPENSATION PLANS
The
Company has adopted SFAS No. 123, "Accounting for Stock Based Compensation".
As
permitted by SFAS No. 123, the Company measures compensation cost in accordance
with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Accordingly, no accounting recognition is given to stock
option granted at fair market value until they are exercised. Upon exercise,
net
proceeds including tax benefits realized, are credited to equity. Details
regarding a description and status of the Company's stock option plans can
be
found in Note 12.
The
Company's net earnings (loss) and net earnings (loss) per common share would
have changed to the pro forma amounts indicated below if compensation cost
for
the Company's stock option had been determined based on fair value at the grant
date for awards in accordance with SFAS No. 123, (in thousands, except per
share
amounts):
|
|
FY2005
|
|
FY2004
|
|
FY2003
|
|
Net
earnings/ (loss):
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
2,489
|
|
$
|
774
|
|
$
|
(1,281
|
)
|
Stock-based
compensation cost, net of tax
|
|
|
(3,300
|
)
|
|
(1,188
|
)
|
|
(2,090
|
)
|
Pro
forma
|
|
|
(811
|
)
|
|
(414
|
)
|
|
(3,371
|
)
|
Basic
earnings/ (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.25
|
|
$
|
0.11
|
|
$
|
(0.24
|
)
|
Pro
forma
|
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
$
|
(0.64
|
)
|
Diluted
profit/ (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.23
|
|
$
|
0.09
|
|
$
|
(0.24
|
)
|
Pro
forma
|
|
$
|
(0.08
|
)
|
$
|
(0.05
|
)
|
$
|
(0.64
|
)
|
The
fair
value of options granted during 2005, 2004, and 2003 was approximately $4.82,
$1.88, and $2.17, respectively, per option respectively based on the
Black-Scholes option pricing model using valuation assumptions of: a) average
remaining contractual life of four, two, and three years; b) expected volatility
of 43.18%, 153.68%, and 129.8%, c) dividend yield of 0% for all years; and
d) a
risk free interest rate of 5%, 3%, and 2.5%.
ADVERTISING
EXPENSES
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred and classify these costs under selling, general and
administrative expenses, which amounted to $150,047, $9,908, and $9,114 for
the
years ended December 31, 2005, 2004, and 2003, respectively.
CASH
EQUIVALENTS
Cash
and
cash equivalents comprise cash at bank and on hand, demand deposits with banks
and other financial institutions, and short-term, highly liquid investments
that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value. Bank overdrafts that are repayable
on
demand and form an integral part of the PacificNet's cash management are also
included as a component of cash and cash equivalents for the purpose of the
cash
flow statement. Highly liquid investments with original maturities of three
months or less are considered cash equivalents.
RELATED
PARTY TRANSACTIONS
A
related
party is generally defined as (i) any person that holds 10% or more of the
Company's securities including such person's immediate families, (ii) the
Company's management, (iii) someone that directly or indirectly controls, is
controlled by or is under common control with the Company, or (iv) anyone who
can significantly influence the financial and operating decisions of the
Company. A transaction is considered to be a related party transaction when
there is a transfer of resources or obligations between related parties. (See
Note 12)
RECLASSIFICATION
Certain
prior period amounts have been reclassified to conform to the current year
presentation. These changes had no effect on previously reported results of
operations or total stockholders' equity.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value is described as the amount at which the instrument could be exchanged
in a
current transaction between informed willing parties, other than a forced
liquidation. Cash and cash equivalents, accounts receivable and payable, accrued
expenses and other current liabilities are reported on the consolidated balance
sheets at carrying value which approximates fair value due to the short-term
maturities of these instruments. The Company does not have any off balance
sheet
financial instruments.
CONCENTRATION
OF CREDIT RISK
CASH
HELD
IN BANKS. For those financial institutions that the Company maintains cash
balances in the United States, the amounts are insured by the Federal Deposit
Insurance Corporation up to $100,000.
GEOGRAPHIC
RISK. All of the Company's revenues are derived in Asia and Greater China and
its operations are governed by Chinese laws and regulations. The operations
in
China are carried out by the subsidiaries and VIEs. If the Company was unable
to
derive any revenue from Asia and Greater China, it would have a significant,
financially disruptive effect on the normal operations of the
Company.
SIGNIFICANT
RELATIONSHIPS. A. substantial portion of the operations of the Company's VIEs
(Dianxun-DE and Sunroom-DE) business operations depend on mobile
telecommunications operators (operators) in China and any loss or deterioration
of such relationship may result in severe disruptions to their business
operations and the loss of a significant portion of the Company's revenue.
The
VIEs rely entirely on the networks and gateways of these operators to provide
its wireless value-added services. Specifically these operators are the only
entities in China that have platforms for wireless value-added services. The
Company's agreements with these operators are generally for a period of less
than one year and generally do not have automatic renewal provisions. If neither
of them is willing to continue to cooperate with the Company, it would severely
affect the Company's ability to conduct its existing wireless value-added
services business.
MARKETABLE
EQUITY SECURITIES
Marketable
equity securities are classified as available-for-sale and are recorded at
fair
value in other assets on the balance sheet, with the change in fair value during
the period excluded from earnings and recorded net of tax as a component of
other comprehensive income. Realized gains or losses are charged to the income
statement during the period in which the gain or loss is realized. Investments
classified as available-for-sale securities include marketable equity securities
of Unit Trust Funds and are based primarily on quoted market prices at December
31, 2005. The component costs of these securities are summarized as follows:
cost of $567,000, gross unrealized losses of $28,000 and estimated fair value
of
$539,000. The acquisition of marketable securities and unrealized losses on
marketable equity securities are recorded on consolidated statements of cash
flows.
FOREIGN
CURRENCY
The
Company's reporting currency is the U.S. dollar. The Company's operations in
China and Hong Kong use their respective currencies as their functional
currencies. The financial statements of these subsidiaries are translated into
U.S. dollars using period-end rates of exchange for assets and liabilities
and
average rates of exchange in the period for revenue and expenses. Translation
gains and losses are recorded in accumulated other comprehensive income or
loss
as a component of shareholders' equity. Net gains and losses resulting from
foreign exchange transactions are included in General and Administrative
Expenses an amount of US$76,000. During the year ended December 31, 2005, the
foreign currency translation adjustments to the Company's comprehensive income
was $271,000 and the currency translation gain was approximately $29,000,
primarily as a result of the Chinese Renminbi appreciating against the U.S.
dollar.
SEGMENT
INFORMATION
The
Company determines and classified its operating segments in accordance with
SFAS
No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
based on the following considerations: (a) each of the Company's operating
segments is a discrete business unit that earns revenues and incurs expenses;
(b) the operating results are regularly reviewed by PacificNet's chief operating
decision makers for the purposes of fine-tuning its strategies going forward,
making resource allocation decisions such as whether further working capital
advances are required and assessing individual performance; and (c) discrete
financial information for each subsidiary within each operating segment is
available. The chief operating decision makers are the Company's President
and
CEO and its Chairman, and their decisions are based on discussions with each
segment's senior management and financial controllers regarding non-financial
indicators such as customer satisfaction, loyalty and new marketplace
competition as well as financial indicators such as internally generated
financial statements, to assess overall financial performance.
RECENT
ACCOUNTING PRONOUNCEMENTS
The
Financial Accounting Standards Board issued the following recent accounting
pronouncements:
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections".
SFAS No. 154 replaces APB Opinion No. 20 "Accounting Changes" and SFAS No.
3,
"Reporting Accounting Changes in Interim Financial Statements". SFAS No. 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 did impact the Company's consolidated financial
statements.
In
December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment" which amends FASB Statement No. 123 and will be effective for public
companies (small business issuers) for interim or annual periods beginning
after
December 15, 2005. SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans. The Company adopted the new standard
as of January 1, 2006. Based on the Company's evaluation of the adoption of
the
new standard, the Company believes that it could have a significant impact
to
the Company's financial position and overall results of operations depending
on
the number of stock options granted in a given year.
2.
BUSINESS ACQUISITIONS
PacificNet
acquired various entities in accordance with the Company's strategy to grow
via
mergers and acquisitions. The entities acquired met various PacificNet
acquisition criteria, which include reasonable expectations for positive
earnings and cash flow within two years of acquisition and reputation for high
quality and performance in the customer relationship management, brand name
recognition, and well-established relationships with clients. Several factors
contributed to the determination of the negotiated purchase price and deal
structure. Among them were the value of assets acquired and liabilities assumed,
historical EBITDA and projected EBITDA. The assets acquired and liabilities
assumed were recorded at estimated fair values as determined by the Company's
management based on information currently available and on current assumptions
as to future operations
A
summary
of business acquisitions for the periods presented follows:
EPRO
TELECOM HOLDINGS LIMITED ("EPRO")
On
December 1 2003, the Company acquired 50% of the stock of EPRO Telecom Holdings
Limited, which specializes in customer relationship management located in Hong
Kong, for total consideration of 3,500,000 payable in cash ($500,000) and the
issuance of common stock $3,000,000 (600,000 shares valued at $5.00 per share).
Within 90 days of signing the agreement, the Company is required to pay $500,000
and within 30 days the Company is required to deliver 100,000 shares ("deposit
shares") of common stock to EPRO as a refundable deposit. As of the date of
issuance of these financial statements, the Company has paid the $500,000 and
issued the 100,000 deposit shares and 500,000 earnout shares of common stock
to
EPRO. Additionally, the Company has agreed to issue a maximum of 300,000 bonus
shares of common stock per year for achieving net income in excess of $1,000,000
in 2004 and 2005. EPRO is also required to return a portion of the shares
equivalent to the dollar amount of the shortfall of net income in years 2004
and
2005. There was no shortfall in 2004.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
|
|
|
|
Current
Assets
|
|
$
|
2,519,091
|
|
Property
Plant and equipment
|
|
|
344,428
|
|
Goodwill
|
|
|
3,703,000
|
|
Total
Assets Acquired
|
|
|
6,566,519
|
|
Current
Liabilities assumed
|
|
|
2,810,269
|
|
Long
Term Liabilities assumed
|
|
|
256,250
|
|
Net
assets acquired
|
|
$
|
3,500,000
|
|
The
following unaudited pro forma results were developed assuming the acquisition
of
Epro occurred January 1, 2003.
|
|
2004
|
|
2003
|
|
Revenue
|
|
|
|
|
$
|
6,825
|
|
Net
loss
|
|
|
Fully
|
|
|
(1,107
|
)
|
|
|
|
consolidated
|
|
|
|
|
Basic
loss per share
|
|
|
|
|
$
|
(0.21
|
)
|
Diluted
loss per share
|
|
|
|
|
$
|
(0.20
|
)
|
The
total
amount of goodwill by reportable segment for Business Process Outsourcing at
December 31, 2005 was $3,936,000. (See Note 15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for the Epro acquisition was
based on a management's estimates and overall industry experience. Immediately
after the signing of the definitive agreement, the Company obtained effective
control over Epro. Accordingly, the operating results of Epro have been
consolidated with those of the Company from the date of acquisition, December
1,
2003.
BEIJING
LINKHEAD TECHNOLOGIES COMPANY LIMITED ("LINKHEAD")
On
December 15, 2003, the Company acquired 51% of the stock of Beijing Linkhead
Technologies Company Limited, which specializes in interactive voice response
located in PRC, for total consideration of $4,972,500 payable in cash ($222,500)
and the issuance of common stock $4,750,000 (950,000 shares valued at $5.00
per
share). Within 30 days of signing the agreement, the Company is required to
pay
$222,500 and to deliver 350,000 shares ("deposit shares") of common stock as
a
refundable deposit. As of the date of issuance of these financial statements,
the Company has paid the $222,500 and issued the 350,000 deposit shares and
600,000 earnout shares of common stock to Linkhead. Additionally, the Company
has agreed to issue a maximum of 600,000 bonus shares of common stock for
achieving net income in excess of $1,500,000.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
|
|
|
|
Current
Assets
|
|
$
|
419,365
|
|
Property
Plant and equipment
|
|
|
80,135
|
|
Goodwill
|
|
|
4,473,000
|
|
Total
Assets Acquired
|
|
|
4,972,500
|
|
Liabilities
assumed
|
|
|
--
|
|
Net
assets acquired
|
|
$
|
4,972,500
|
|
The
following unaudited pro forma results were developed assuming the acquisition
of
Linkhead occurred January 1, 2003.
|
|
2004
|
|
2003
|
|
Revenue
|
|
|
|
|
$
|
1,217
|
|
Net
profit /(loss)
|
|
|
Fully
consolidated
|
|
|
(1,291
|
)
|
Basic
loss per share
|
|
|
|
|
$
|
(0.25
|
)
|
Diluted
loss per share
|
|
|
|
|
$
|
(0.24
|
)
|
The
total
amount of goodwill by reportable segment Value-Added Services was at December
31, 2005 was $9,788,000 (see Note 15). In accordance with SFAS 142, goodwill
is
not amortized but is tested for impairment at least annually. The purchase
price
allocation for the Linkhead acquisition was based on management's estimates
and
its overall industry experience. Immediately after the signing of the definitive
agreement, the Company obtained effective control over Linkhead. Accordingly,
the operating results of Linkhead have been consolidated with those of the
Company from the date of acquisition, December 15, 2003.
SHANGHAI
CLASSIC GROUP LIMITED ("YUESHEN")
On
April
12, 2004, the Company, through its subsidiary PacificNet Strategic Investment
Holdings Limited, consummated the acquisition of a 100% controlling interest
(the "Acquisition") in Shanghai Classic Group Limited, which owns 51% of
Guangzhou YueShen TaiYang Technology Limited, a newly formed telecommunication
company located and incorporated in the People's Republic of China ("Yueshen").
The Company acquired the 100% controlling interest in Shanghai Classic through
the purchase of 85 shares (representing 100% of the issued and outstanding
shares, the "Shanghai Shares") of Shanghai Classic Group Limited, which is
also
the beneficial owner of the 51% controlling interest in Yueshen. The
consideration for the Acquisition was an aggregate value of approximately
USD$1,196,143, which was paid in cash and shares of common stock of the Company
(the "Common Stock"), and a warrant to purchase up to 50,000 shares of Common
Stock. The consideration was paid as follows:
(i)
approximately USD$616,195 by delivery of 106,240 shares of Common Stock as
consideration for the purchase of 51 of the Shanghai Shares from Yan Kuan Li
("Ms. Li") within thirty (30) days of the signing of the agreement for the
Acquisition. All of the Common Stock deliverable to Ms. Li is being held in
escrow pursuant to the terms of an escrow agreement, which provides that the
Common Stock will be released in installments over the twelve month period
following the consummation of the Acquisition, provided, that Yueshen attains
certain net income milestones during such period. In the event there is a
shortfall in the net income during the period Ms. Li shall return to the Company
shares of Common Stock equivalent to the dollar amount of such shortfall divided
by $5.80;
(ii)
approximately USD$338,303 in cash as consideration for the purchase of 34 of
the
Shanghai Shares from Avatar Trading, Ltd. ("Avatar") within thirty (30) days
of
the closing of the Acquisition;
(iii)
approximately USD$241,645 in cash directly to Yueshen within thirty (30) days
of
the closing of the Acquisition, as consideration for the purchase of the Yueshen
shares by Shanghai Classic; and
(iv)
A
common stock purchase warrant to purchase 50,000 shares of PacificNet common
stock, par value $0.0001 per share. The exercise price under this warrant shall
be the 5-Day volume weighted average price of the common stock of PacificNet
before the signing date of this Agreement, exercisable within 3 years from the
date of issuance. The warrants are considered contingent consideration and
have
not been valued as the contingency has not been met.(See Note 5)
The
cash
portion of the purchase price for the Acquisition was paid from working capital
of the Company. The value of the common shares issued was determined based
on
the average market price of PacificNet's common shares over a reasonable period
before and after the terms of the acquisition were agreed to and
announced.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
Current
Assets
|
|
$
|
211,886
|
|
Property
Plant and equipment
|
|
|
38,917
|
|
Goodwill
|
|
|
1,100,585
|
|
Total
Assets Acquired
|
|
|
1,351,388
|
|
Current
Liabilities assumed
|
|
|
(155,245
|
)
|
Net
assets acquired
|
|
$
|
1,196,143
|
|
As
of
December 31, 2004 and 2005, Goodwill of $1,100,585 represents the excess of
the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired and is not deductible for tax purposes. The total
amount of goodwill by reportable segment Communications Distribution Business
was $1,100,585 (see Note 15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for the Shanghai Classic
acquisition was based on management's estimates and its overall industry
experience. Immediately after the signing of the definitive agreement, the
Company obtained effective control over Shanghai Classic. Accordingly, the
operating results of Shanghai Classic have been consolidated with those of
the
Company starting April 12, 2004.
UNAUDITED
PROFORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
DECEMBER 31, 2005 AND 2004
The
following un-audited pro forma consolidated financial information for the years
ended December 31, 2004 and 2005, as presented below, reflects the results
of
operations of the Company assuming the acquisition occurred on January 1, 2004
and 2005 respectively, and after giving effect to the purchase accounting
adjustments. These pro forma results have been prepared for information purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 2004 and 2005
respectively, and may not be indicative of future operating
results.
|
Year
ended December 31
|
|
2005
|
2004
|
(UN-AUDITED
AND IN THOUSANDS OF U.S. DOLLARS)
|
|
|
|
Revenues
|
Fully
|
$12,547
|
Net
earnings attributable to shareholders
|
consolidated
|
182
|
Earnings
per share - basic (cents)
|
|
0.02
|
Earnings
per share - diluted (cents)
|
In
2005
|
0.02
|
PacificNet
included the financial results of the subsidiary in its consolidated 2005
financial results and from the date of the acquisition, April 12, 2004 through
December 31, 2004.
PACIFIC
SMARTIME SOLUTIONS LIMITED ("SMARTIME")
On
September 15, 2004, the Company, through its subsidiary PacificNet Strategic
Investment Holdings Limited, consummated the acquisition of a 51% controlling
interest (the "Acquisition") in Soluteck Technology (Shenzhen) Company Limited,
a corporation incorporated in Shenzhen, China ("Soluteck"). The Company acquired
the controlling interest in Soluteck through the purchase of 630 shares (the
"Shares") of Pacific Smartime Solutions Limited ("Smartime"), the beneficial
owner of an 81% controlling interest in Soluteck, from the shareholders of
Smartime. The consideration for the Acquisition was payable as
follows:
(i)
USD$500,000, payable in shares of common stock of the Company (the "Common
Stock"), equivalent to 100,000 restricted shares (the "Shares") of Common Stock,
based on a fair market value of $5.00, deliverable within 30 days of signing
the
Agreement. All of the Shares deliverable to the Shareholders are being held
in
escrow pursuant to the terms of an escrow agreement, which provides that the
Common Stock will be released in installments over the twelve month period
ending on September 30, 2005; provided that Soluteck meets certain net income
milestones during such period. If at the end of the second twelve month period
ending on September 30, 2006, there is a shortfall in Soluteck's net income,
the
Shareholders shall return to the Company Shares equivalent to the dollar amount
of such shortfall divided by $5.00; and
(ii)
warrants to purchase up to 50,000 shares of common stock at an exercise price
equal to the 5 day volume weighted average price of the Company's common stock
before the signing of the Agreement. The warrants are exercisable for a period
of 3 years from the date of issuance. The warrants are considered contingent
consideration and have not been valued as the contingency has not been met.
(See
Note 5)
In
connection with the Acquisition, the Company's subsidiary has agreed to provide
Soluteck with an operating loan of RMB 3,000,000; provided that Soluteck secures
certain contracts with Huawei. The loan would mature within 3 years with
interest at a rate of 4% per year.
The
Shares are restricted shares issued under an exemption from registration of
the
Securities Act of 1933, as amended. If at the time the Shareholders are eligible
to sell the Shares under Rule 144, the fair market value of the Common Stock
is
less than USD$3.50, the Company shall issue additional shares of Common Stock
for an aggregate amount of USD$100,000, up to a maximum of 60,000 shares of
Common Stock. If at such time the fair market value of the Common Stock is
more
than USD$8.00 per share, the Shareholders and the Company will share on an
equal
basis any excess over USD$8.00 per share.
The
value
of the common shares issued was determined based on the average market price
of
PacificNet's common shares over a reasonable period before and after the terms
of the acquisition were agreed to and announced.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
Current
Assets
|
|
$
|
460,957
|
|
Property
Plant and equipment
|
|
|
60,505
|
|
Intangible
Assets
|
|
|
562
|
|
Goodwill
|
|
|
233,000
|
|
Total
Assets Acquired
|
|
|
755,024
|
|
Current
Liabilities assumed
|
|
|
(255,024
|
)
|
Net
assets acquired
|
|
$
|
500,000
|
|
As
of
December 31, 2004 and 2005, goodwill of $233,000 represents the excess of the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired and is not deductible for tax purposes and the total
amount of goodwill by reportable segment for Business Process Outsourcing was
$3,543,000 in both years (see Note 15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for Smartime acquisition is
based on a management's estimates and overall industry experience. Immediately
after the signing of the definitive agreement, the Company obtained effective
control over Smartime. Accordingly, the operating results of Smartime have
been
consolidated with those of the Company starting September 15, 2004.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
DECEMBER 31, 2005 AND 2004
The
following un-audited pro forma consolidated financial information for the years
ended December 31, 2004 and 2005, as presented below, reflects the results
of
operations of the Company assuming the acquisition occurred on January 1, 2004
and 2005 respectively, and after giving effect to the purchase accounting
adjustments. These pro forma results have been prepared for information purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 2004 and 2005
respectively, and may not be indicative of future operating
results.
|
2005
|
2004
|
|
(UN-AUDITED
AND IN THOUSANDS OF U.S. DOLLARS)
|
|
|
|
Revenues
|
Fully
|
$1,830
|
Operating
income
|
|
|
Net
earnings attributable to shareholders
|
Consolidated
|
$269
|
Earnings
per share - basic (cents)
|
|
$0.037
|
Earnings
per share - diluted (cents)
|
In
2005
|
$0.037
|
PacificNet
included the financial results of Smartime in its consolidated 2005 financial
results and from the date of the purchase, September 15, 2004 through December
31, 2004.
PACIFICNET
CLICKOM LIMITED
On
December 16, 2004, we entered into an agreement to acquire a controlling
interest in Guangzhou Clickcom Digit-net Science and Technology Ltd.
("Clickcom-WOFE") through the purchase of a 51% interest of Clickcom-WOFE's
parent company, PacificNet Clickcom Limited, a British Virgin Islands Company
("Clickcom-BVI") from three shareholders, Mr. Jinnan Lai, Mr. Ming Zhang and
Mr.
Dong Liu who are majority shareholders of GuangZhou DianXun Company Limited
("Dianxun-DE"), a PRC registered Domestic Enterprise (DE) either. The
acquisition was completed on March 28, 2005 upon receipt of the required
business license and approval from the local government.
The
total
purchase consideration for 51% of Clickcom is approximately one million, which
is payable 30% in cash and 70% in restricted shares of PACT. The purchase price
is payable upon achievement of certain quarterly earn-out targets based on
net
profits, through the issuance of 130,000 restricted shares of common stock
of
PacificNet. As of December 31, 2005, cash consideration of $267,826 and stock
consideration of $260,000, representing 52,000 restricted shares of PACT common
stock valued at $5.00 per share, was recorded as the cost of the acquisition.
Total unearned purchase consideration in the form of common stock to be
distributed based on the achievement of earnings was 78,000 restricted shares
(see Note 12). PacificNet will also issue warrants to purchase 50,000 shares
of
PacificNet's common stock. The warrants are considered contingent consideration
and have not been valued as the contingency has not been met. (See Note
5)
The
cash
portion of the purchase price for the Acquisition was paid from working capital
of the Company. The value of the common shares issued was determined based
on
the average market price of PacificNet's common shares over a reasonable period
before and after the terms of the acquisition were agreed to and
announced.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
Current
Assets
|
|
$
|
136,474
|
|
Goodwill
|
|
|
391,352
|
|
Total
Assets Acquired
|
|
|
527,826
|
|
Liabilities
assumed
|
|
|
-
|
|
Net
assets acquired
|
|
$
|
527,826
|
|
At
December 31, 2005, goodwill of $391,352 represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets
acquired and is not deductible for tax purposes and the total amount of goodwill
by reportable segment for VAS Business was $9,788,000 in the same year (see
Note
15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for the Clickcom acquisition
was based on a management's estimates and overall industry experience.
Immediately after the signing of the definitive agreement, the Company obtained
effective control over Clickcom. Accordingly, the operating results of Clickcom
have been consolidated with those of the Company starting March 28, 2005.
Pursuant to SFAS 141 "Business Combinations", the earn-out consideration is
considered contingent consideration, which will not become certain until the
audited combined after-tax profit of US$600,000 for 12 months ended December
31,
2005 is available. Accordingly, the contingent consideration of 78,000
restricted shares has not been reflected in the consolidated financial
statements of the Company as of December 31, 2005 due to the performance target
not being met.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
DECEMBER 31, 2005 AND 2004
The
following un-audited pro forma consolidated financial information for the years
ended December 31, 2004 and 2005, as presented below, reflects the results
of
operations of the Company assuming the acquisition occurred on January 1, 2004
and 2005 respectively, and after giving effect to the purchase accounting
adjustments. These pro forma results have been prepared for information purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 2004 and 2005
respectively, and may not be indicative of future operating
results.
|
Year
ended December 31
|
|
2005
|
2004
|
|
(UN-AUDITED
AND IN THOUSANDS OF U.S. DOLLARS)
|
Revenues
|
$44,481
|
$29,878
|
Operating
income
|
$4,737
|
$1,958
|
Net
profit
|
$2,620
|
$784
|
Earnings
per share - basic (cents)
|
$0.26
|
$0.11
|
Earnings
per share - diluted (cents)
|
$0.24
|
$0.10
|
PacificNet
included the financial results of Clickcom in its consolidated 2005 financial
results from the date of the purchase, March 28, 2005 through December 31,
2005.
GUANGZHOU
3G INFORMATION TECHNOLOGY CO. LTD
On
March
30, 2005 we entered into an agreement to acquire a controlling interest in
Guangzhou 3G Information Technology Co. Ltd. ("Guangzhou3G-WOFE"), a PRC
registered wholly owned foreign enterprise (WOFE), through the purchase of
a 51%
interest of Guangzhou 3G's parent company, Pacific 3G Information &
Technology Co. Limited, a British Virgin Islands Company ("Guangzhou3G-BVI")
from three shareholders, ASIAFAME INTERNATIONAL LIMITED, STARGAIN INTERNATIONAL
LIMITED, and TRILOGIC INVESTMENTS LIMITED. All of above three shareholders
are
incorporated in BVI. Guangzhou3G-WOFE conducts it VAS operations with Guangzhou
Sunroom Information Industrial Co., Ltd. ("Sunroom-DE"), a PRC registered
Domestic Enterprise (DE), through a series of contractual
agreements.
The
details of the acquisition are as follows:
The
purchase price for 51% controlling interest is approximately $5.9 million which
is payable 29% in cash and 71% in restricted shares of PacificNet. The purchase
price includes $500,000 cash payable to Guangzhou 3G, and the remaining amount
payable to the selling shareholders through the issuance of 522,750 restricted
shares of common stock of PacificNet plus $1.18 million cash payable to the
sellers upon achievement by Guangzhou 3G of certain quarterly earn-out targets
based on net profits. As of December 31, 2005, cash consideration of $1,683,000
and stock consideration of $2,611,200, representing 326,400 restricted shares
of
PACT common stock valued at $8.00 per share, was recorded as the cost of the
acquisition. Total unearned purchase consideration in the form of common stock
to be distributed based on the achievement of earnings was 196,350 restricted
shares (see Note 12). PacificNet also issue warrants to purchase 100,000 shares
of PacificNet's common stock. The warrants have never been issued since it
is
contingent upon a certain earning milestone which has not been met.
The
cash
portion of the purchase consideration was paid from working capital of the
Company. The value of the common shares issued was determined based on the
average market price of PacificNet's common shares over a reasonable period
before and after the terms of the acquisition were agreed to and
announced.
A
summary
of the assets acquired and liabilities for Guangzhou 3G WOFE assumed in the
acquisition follows:
Estimated
fair values:
|
Current
Assets
|
|
$
|
253,000
|
|
Goodwill
|
|
|
4,041,200
|
|
Total
Assets Acquired
|
|
|
4,294,200
|
|
Liabilities
assumed
|
|
|
--
|
|
Net
assets acquired
|
|
$
|
4,294,200
|
|
At
December 31, 2005, goodwill of $4,041,200 represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets
acquired and is not deductible for tax purposes and the total amount of goodwill
by reportable segment for VAS Business was $9,788,000. (See Note
15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for Guangzhou3G acquisition
is
based on a management's estimates and overall industry experience. Immediately
after the signing of the definitive agreement, the Company obtained effective
control over Guangzhou3G. Accordingly, the operating results of Guangzhou 3G
have been consolidated with those of the Company starting March 30, 2005.
Pursuant to SFAS 141 "Business Combinations", the earn-out consideration is
considered contingent consideration, which will not become certain until the
audited combined after-tax profit of US$2,000,000 for the 12 months ended
December 31, 2005 is available. Accordingly, the contingent consideration of
196,350 shares has not been reflected in the consolidated financial statements
of the Company as of December 31, 2005.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
DECEMBER 31, 2005 AND 2004
The
following un-audited pro forma consolidated financial information for the years
ended December 31, 2004 and 2005, as presented below, reflects the results
of
operations of the Company assuming the acquisition occurred on January 1, 2004
and 2005 respectively, and after giving effect to the purchase accounting
adjustments. These pro forma results have been prepared for information purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 2004 and 2005
respectively, and may not be indicative of future operating
results.
GZ3G
|
Year ended December 31
|
2005
|
2004
|
(UN-AUDITED
AND IN THOUSANDS OF U.S. DOLLARS)
|
Revenues
|
$45,312
|
$32,690
|
Operating
income
|
$4,910
|
$1,374
|
Net
profit
|
$2,734
|
$458
|
Earnings
per share - basic (cents)
|
$0.27
|
$0.06
|
Earnings
per share - diluted (cents)
|
$0.26
|
$0.06
|
PacificNet
included the financial results of 3G in its consolidated 2005 financial results
from the date of the purchase, March 30, 2005 through December 31,
2005.
SHENZHEN
GUHAIGUANCHAO INVESTMENT CONSULTANT COMPANY LIMITED
("CHINAGOHI")
On
December 19, 2005, we closed an agreement to purchase a 51% interest in Shenzhen
GuHaiGuanChao Investment Consultant Company Limited ("ChinaGoHi"), a wholly
owned foreign enterprise (WOFE) registered in China and a provider of DRTV
infomercial marketing company for financial advisory services in China. On
October 3, 2005 we announced that we had signed an agreement dated as of
September 30, 2005 to acquire 51% of the outstanding shares of ChinaGoHi from
Hitching International Corporation ("HIC"), the former majority owner of
ChinaGoHi to be closed upon the completion of due diligence and the approval
of
the WOFE structure by China's Industry and Commerce Department.
As
a
result of the due diligence process and receipt of the Chinese government's
WOFE
approval, we and HIC agreed to amend the Sale and Purchase Agreement and entered
into a Supplementary Agreement dated as of December 1, 2005 (the "Supplementary
Sale and Purchase Agreement") and permitted us to have direct ownership of
ChinaGoHi through the acquisition of 51% of the outstanding shares from Lion
Zone Holdings Limited instead of HIC.
We
agreed
to purchase 12,850 existing ordinary shares (the "Sale Shares") of ChinaGoHi
from Lion Zone Holdings Limited (the "Seller") and to subscribe 5,000 newly
issued ordinary shares (the "Subscription Shares") from the Seller, which
together with the Sale Shares, being 17,850 or 51% of the 35,000 entire
outstanding shares of ChinaGoHi. The purchase price for 51% of the outstanding
shares of ChinaGoHi is an aggregate of US$10.2 million: US$2.1 million payable
in cash to the Seller and US$6.6 million in shares (approximately 825,000
shares) of our common stock valued at $8 per share. The purchase price is
payable upon achievement of certain quarterly earn-out targets based on net
profits, through the issuance of our 825,000 shares. In addition, we has agreed
to issue our restricted shares, a number to be based on 51% of the net cash
divided by the 60-day volume weighted average price of PacificNet, upon
auditor's certification of ChinaGoHi's US$7 million accumulated net cash profit
for the fiscal years ended 2003, 2004 and 2005 (subject to completion of 2005
annual USGAAP audit).
The
cash
portion of the acquisition consideration was for the working capital of the
Company. The value of the common shares issued was determined based on the
average market price of PacificNet's common shares over a reasonable period
before and after the terms of the acquisition were agreed to and
announced.
A
summary
of the assets acquired and liabilities assumed in the acquisition
follows:
Estimated
fair values:
|
Current
Assets
|
|
$
|
4,785,924
|
|
Property
Plant and equipment
|
|
|
157,376
|
|
Goodwill
|
|
|
881,681
|
|
Total
Assets Acquired
|
|
$
|
5,824,981
|
|
Current
Liabilities assumed
|
|
|
(2,449,981
|
)
|
Long
Term Liabilities assumed
|
|
|
--
|
|
Net
assets acquired
|
|
$
|
3,375,000
|
|
As
of
December 31, 2005, the total amount of cash and stock consideration was
$2,275,000 and $1,100,000 respectively.
At
December 31, 2005, goodwill of $881,681 represents the excess of the purchase
price over the fair value of the net tangible and identifiable intangible assets
acquired and is not deductible for tax purposes and the total amount of goodwill
by reportable segment for VAS Business was $9,584,000 (see Note
15).
In
accordance with SFAS 142, goodwill is not amortized but is tested for impairment
at least annually. The purchase price allocation for ChinaGohi acquisition
is
based on management's estimates and overall industry experience. Immediately
after the signing of the definitive agreement, the Company obtained effective
control over ChinaGohi. Accordingly, the operating results of ChinaGohi have
been consolidated with those of the Company starting December 19, 2005. Pursuant
to SFAS 141 "Business Combinations", the earn-out consideration is considered
contingent consideration, which will not become certain until the audited
combined after-tax profit of US$4,500,000 for 15 months ending December 31,
2006
is available. Accordingly, the contingent consideration of 687,500 restricted
shares and cash of US$1,325,000 have not been reflected in the consolidated
financial statements of the Company as of December 31,
2005.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
DECEMBER 31, 2005 AND 2004.
The
following un-audited pro forma consolidated financial information for the years
ended December 31, 2004 and 2005, as presented below, reflects the results
of
operations of the Company assuming the acquisition occurred on January 1, 2004
and 2005 respectively, and after giving effect to the purchase accounting
adjustments. These pro forma results have been prepared for information purposes
only and do not purport to be indicative of what operating results would have
been had the acquisitions actually taken place on January 1, 2004 and 2005
respectively, and may not be indicative of future operating
results.
|
Year
ended December 31
|
2005
|
2004
|
(UN-AUDITED
AND IN THOUSANDS OF U.S. DOLLARS)
|
Revenues
|
$55,209
|
$39,164
|
Operating
income
|
$7,332
|
$4,267
|
Net
profit
|
$3,354
|
$1,688
|
Earnings
per share - basic (cents)
|
$0.33
|
$0.23
|
Earnings
per share - basic (cents)
|
$0.31
|
$0.20
|
PacificNet
included the financial results of Lion Zone in its consolidated 2005 financial
results from the date of the purchase, December 19, 2005 through December 31,
2005.
3.
INVESTMENT IN AFFILIATED COMPANIES
Investments
in affiliated companies consist of the following as of December 31, 2005 (in
thousands):
|
COLLATERAL/OWNERSHIP
%
AND
BUSINESS DESCRIPTION
|
|
|
AMOUNT
|
DESCRIPTION
|
|
|
|
|
|
INVESTMENTS
IN AFFILIATED COMPANIES:
|
12/31/05
|
|
12/31/04
|
|
Take1
(Cheer Era Limited) [1]
|
$
386
|
|
$1,063
|
20%
(2004:30%) ownership interest; trader of vending machine located
in Hong
Kong
|
Xmedia
Holdings Inc
|
95
|
|
95
|
25%
ownership; provides new media business development and marketing
to
advertisers.
|
Less:
Provision for Impairment
|
(95)
|
|
(95)
|
|
Total
|
$
386
|
|
$1,063
|
|
TAKE
1 TECHNOLOGIES GROUP LIMITED (FORMERLY KNOWN AS: CHEER ERA LIMITED
"CHEERERA")
The
investment in 30% of Take 1 Technologies Group Limited ("Take 1"), a trader
of
vending machine located in Hong Kong, was originally made in April 2004 with
details as follows:
In
April
2004 the Company, through its subsidiary PacificNet Strategic Investment
Holdings Limited, acquired 30% equity interest in Take 1. The aggregate
consideration was $1,156,812, of which $385,604 was paid in cash and $771,208
was paid in 149,459 PacificNet shares at $5.16, and warrants within a duration
of three years to purchase up to 80,000 PacificNet shares at 5-Day volume
weighted average price immediately prior to the transaction. The warrants have
been cancelled in the year 2005 because the warranted profit was not met. (See
Note 5).
In
2005
both the Company and Take 1 have mutually agreed to a change to the original
investment structure pursuant to the Securities Repurchase Agreements entered.
Summarized below are the effects of these repurchase
arrangements:
(i)
|
PacificNet
's interest in Take 1 was reduced to 20% in the year 2005 from 30%
in the
prior year;
|
(ii)
|
PacificNet
repurchased 149,459 shares in PacificNet previously issued to the
majority
owner of Take 1 at nominal value;
|
(iii)
|
In
addition to PacificNet 's existing loan of $769,000 (or HKD$6,000,000),
PacificNet will advance a new loan of $256,000 (or HKD$2,000,000)
to Take
1 (collectively called `Convertible Loan'). The Convertible Loan
is
guaranteed personally and jointly by the two majority owners of Take
1.
The term of the Convertible Loan shall be three years expiring on
October
17, 2008 (referred as "Term") with 8% interest per annum or HK Six-Month
Prime Rate, whichever is higher;
and
|
(iv)
|
Conversion
terms of the Convertible Loan provide PacificNet an option at any
time
during the Term to convert in part or in whole of the then outstanding
loan principal up toS$1,794,000 (or HKD$8,000,000) into shares of
Take 1
to reach 51% ownership of Take 1. The conversion rate will be based
on a
valuation of SIX (6) times the average annual net profits of 3 years
ending December 31, 2007 audited by PacificNet 's
auditors.
|
As
a
result, the original investment of Take 1 was reduced at cost to $385,604 as
of
December 31, 2005 due to the PacificNet shares repurchased under item (ii)
above. The management intends to cancel these repurchased shares subsequent
to
the year end. As of December 31, 2005, the outstanding loan amount due to Take
1
was US$769,000.
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following as of December 31 (in
thousands):
|
|
2005
|
|
2004
|
|
Office
furniture, fixtures and leasehold improvements
|
|
$
|
531
|
|
$
|
16
|
|
Computers
and office equipment
|
|
|
1,054
|
|
|
624
|
|
Motor
Vehicles
|
|
|
220
|
|
|
69
|
|
Software
|
|
|
568
|
|
|
235
|
|
Electronic
Equipment
|
|
|
3,520
|
|
|
13
|
|
Other
|
|
|
77
|
|
|
468
|
|
Total
Property and Equipment
|
|
|
5,970
|
|
|
1,425
|
|
Less
Accumulated Depreciation
|
|
|
(1,670
|
)
|
|
(307
|
)
|
Net
Property and Equipment
|
|
$
|
4,300
|
|
$
|
1,118
|
|
For
the
years ended December 31, 2005, 2004, and 2003, the total depreciation and
amortization expenses were $1,126,000, (of which $833,000 was included in the
cost of revenue), $78,000, and $72,000, respectively.
5.
COMMITMENTS AND CONTINGENCIES
OPERATING
LEASES -The Company leases warehouse and office space under operating leases
for
two years with fixed monthly rentals that expire through 2005. None of the
leases included contingent rentals. Lease expense charged to operations for
2005, 2004, and 2003 amounted to $653,000, $397,854, and $109,000. Future
minimum lease payments under non-cancelable operating leases are 2006: $870,000
and 2007: $806,000.
RESTRICTED
CASH - The Company has a $163,000 pledged bank deposit for Epro which represents
overdraft protections with certain financial institutions and a fixed deposit
of
$1,489,000 for Lion Zone utilized to provide guarantee for related
party.
BANK
LINE
OF CREDIT (2005): As of December 31, 2005, the Company utilized $1,060,000
of
the banking facility including $945,000 from Epro and $112,000 from Smartime,
and the differences of the exchange rate of $3,000. Epro has an overdraft
banking facility with certain major financial institutions in the aggregate
amount of $1,218,000, which is secured by a pledge of its fixed deposits of
$163,000, pursuant to the following terms: interest will be charged at the
Hong
Kong Prime Rate per annum and payable at the end of each calendar month or
the
date of settlement, whichever is earlier. For Smartime, there is no due date
payment stipulated by Hong Kong Hang Seng Bank because its overdraft banking
facility was borrowed directly from one of its directors personal fixed deposit
account as a mortgage. The detailed payment period is based on its funding
condition.
BANK
LINE
OF CREDIT (2004): The Company has an overdraft banking facility with certain
major bankers in the aggregate amount of $1,309,000, which is secured by a
pledge of the Company's fixed deposits in the amount of $212,000, pursuant
to
the following terms: interest will be charged at the Hong Kong Prime Rate per
annum and payable at the end of each calendar month or the date of settlement,
which ever is earlier. As of December 31, 2004, the Company utilized $651,000
of
the above-mentioned banking facility.
CONTINGENT
CONSIDERATION: Warrants have not been included as part of the acquisition price
of various S&P Agreements (Note 2) and are no longer considered as part of
the purchase consideration due to (i) the ambiguity of the S&P Agreements
with respect to the issuance of the warrants and (ii) the lack of actual
instruments to transfer the warrants, such as a warrant agreement that is signed
and sealed by the Company and property registered at the Company Registrar
of
securities in Hong Kong, and accordingly, there is no irrevocable obligation
by
the Company to issue the warrants. Furthermore, the net income milestones were
not achieved as required under the S&P Agreements according to Hong Kong
law. Based on the opinion of the Company's legal counsel in Hong Kong, the
Company does not have an irrevocable obligation to issue the warrants and
therefore the warrants are not considered issued and outstanding. The offer
to
issue the warrants is no longer part of the purchase price in the S&P
Agreements due to the failure by the Sellers to satisfy their warranties in
the
S&P Agreements. Accordingly, the warrants have not been valued.
MINIMUM
STATED CAPITAL REQUIREMENTS. Guangzhou Dianxun Co, Limited (DE) ("Dianxun"),
a
subsidiary of the Group, is carrying on business as a telecommunication value
added service provider in the People's Republic of China ("PRC"). Initially,
Dianxun obtained a certificate (the "Certificate") from the PRC authority to
transact business and according to the PRC Telecommunication Rules, all
telecommunication value added service providers can only carry on business
if
the Certificate is granted and if the Company maintains a minimum capital
requirement of at least RMB10,000,000.
In
order
to satisfy the capital requirement of RMB 10,000,000, the shareholders of
Dianxun had contributed relevant asset equivalent to RMB9,000,000 on behalf
of
Dianxun and such assets were verified by an independent professional accountant.
Subsequently, such assets were returned back to the shareholders. In the opinion
of the directors, even though the capital requirement is not fulfilled, Dianxun
can continue to carry on business. No provision for any loss arising from the
consequential actions that may be taken by the authority in the PRC and any
potential penalties or claims for the Company not maintaining the minimum stated
capital requirements of the PRC have been made in these financial
statements.
Dianxun's
contribution to consolidated revenues and net profit for 2005 was approximately
1.5% and 5.6%, respectively. Upon demand by the PRC authorities, PacificNet
has
agreed to loan Clickcom the remaining balance of the registration capital to
provide the stated capital in accordance with PRC laws.
6.
OTHER
CURRENT ASSETS
Other
current assets is represented in the Consolidated Balance Sheets and includes
the following at December 31 (in thousands):
|
|
2005
|
|
2004
|
|
Deposit
|
|
$
|
707
|
|
$
|
870
|
|
Prepayment
|
|
|
1,294
|
|
|
354
|
|
Other
receivables
|
|
|
5,972
|
|
|
3,101
|
|
Total
|
|
$
|
7,973
|
|
$
|
4,325
|
|
7.
BANK
LOANS
Bank
loans represent the following at December 31 (in thousands):
|
|
2005
|
|
2004
|
|
Secured
[1]
|
|
$
|
108
|
|
$
|
860
|
|
Unsecured
|
|
|
86
|
|
|
536
|
|
Less:
current portion
|
|
|
(188
|
)
|
|
(1,327
|
)
|
Non
current portion
|
|
$
|
6
|
|
$
|
69
|
|
Bank
Loans are generated by one of the Company's subsidiaries, PacificNet Epro
Holdings Limited, a company incorporated in the Hong Kong Special Administrative
Region of the PRC, primarily engaged in the business of providing call center
and customer relationship management (CRM) services as well as other business
outsourcing services. The loans were secured by the following: joint and several
personal guarantees executed by certain directors of the subsidiary of the
Company; corporate guarantee executed by a subsidiary of the Company; second
legal charge over a property owned by a subsidiary of the Company; and pledged
bank deposits of $163,000 (2004: $212,000) of a subsidiary of the
Company.
Aggregate
future maturities of borrowing for the next five years are as
follows:
(2006:
$188,000 and 2007: $6,000).
8.
CAPITAL LEASE OBLIGATIONS
The
Company leases various equipments under capital leases expiring in various
years
through 2005. The assets and liabilities under capital leases are recorded
at
the lower of the present value of the minimum lease payments or the fair value
of the asset. The assets are depreciated over the lesser of their related lease
terms or their estimated productive lives and are secured by the assets
themselves. Depreciation of assets under capital leases is included in
depreciation expense for 2005 and 2004.
Aggregate
minimum future lease payments under capital leases as of December 31, 2005
for
each of the next five years are as follows: (2006: $126,000; 2007: $57,000;
and
2008: $21,000).
Capital
lease obligations represent the following at December 31, 2005 (in
thousands):
|
|
2005
|
|
2004
|
|
Total
minimum lease payments
|
|
$
|
216
|
|
$
|
225
|
|
Interest
expense relating to future periods
|
|
|
(12
|
)
|
|
(16
|
)
|
Present
value of the minimum lease payments
|
|
|
204
|
|
|
209
|
|
Less:
current portion
|
|
|
(126
|
)
|
|
(80
|
)
|
Non
current portion
|
|
$
|
78
|
|
$
|
129
|
|
Following
is a summary of fixed assets held under capital leases at December 31 (in
thousands):
|
|
2005
|
|
2004
|
|
Computers
and office equipment
|
|
$
|
441
|
|
$
|
268
|
|
Less:
accumulated depreciation
|
|
|
(286
|
)
|
|
(246
|
)
|
|
|
$
|
155
|
|
$
|
22
|
|
9.
ACCRUED EXPENSES
Accrued
expenses consist of the following at December 31 (in thousands):
|
|
2005
|
|
2004
|
|
Deposits
and advance payments received
|
|
$
|
3,312
|
|
$
|
31
|
|
Payroll
payable
|
|
|
713
|
|
|
21
|
|
Other
|
|
|
595
|
|
|
76
|
|
Total
|
|
$
|
4,620
|
|
$
|
128
|
|
10.
SUBSCRIPTION PAYABLE
In
December 2005, the Company executed agreements and acquired controlling
interests in Shenzhen GuHaiGuanChao Investment Consultant Company Limited
("ChinaGoHi"), a wholly owned foreign enterprise (WOFE) registered in China
and
a provider of DRTV infomercial marketing company for financial advisory services
in China.
According
to the agreement for the acquisition of ChinaGoHi, the total purchase
consideration at the acquisition date approximated $10,200,000, which included
the following:
(1)
Cash
for original shareholders of ChinaGoHi: $2,100,000 (payable in installments
based on the terms and conditions; the payable amount is $775,000 at December
31, 2005);
(2)
PACT
common stock for original shareholders of ChinaGoHi: $6,600,000 (825,000 x
$8
per share); and
(3)
Cash
for registered capital of ChinaGoHi: $1,500,000.
Accordingly,
subscription payable of $775,000 represents the installment payment in cash
due
under the terms and conditions of the Sale and Purchase Agreement at December
31, 2005. See note 2 for details regarding the acquisitions.
11.
SUNDRY INCOME
Sundry
income consists of the following on the consolidated income statements (in
thousands):
|
|
2005
|
|
2004
|
|
2003
|
|
Consulting
service income
|
|
$
|
116
|
|
$
|
380
|
|
|
|
|
Investment
income
|
|
|
113
|
|
|
--
|
|
|
|
|
Leasehold
income
|
|
|
75
|
|
|
--
|
|
|
|
|
Software
service income
|
|
|
375
|
|
|
--
|
|
|
|
|
Others
|
|
|
151
|
|
|
42
|
|
|
54
|
|
TOTAL
|
|
$
|
830
|
|
$
|
422
|
|
$
|
54
|
|
12.
STOCKHOLDERS' EQUITY
a)
COMMON
STOCK
For
the
year ended December 31, 2005, the Company had the following equity transactions:
(i) 700,000 shares as a result of exercise of stock options and warrants with
cash consideration of $1,014,000; (ii) 515,900 shares for acquisition of
subsidiaries valued at $3,971,000;(iii) 20,000 shares at $3.10 per share, or
$63,000 for investor relations services rendered based on the fair market value
of the services rendered; and (iv) cancellation of 149,459 shares with a market
value of $771,000 related to affiliated company (see Note 3 for
details).
For
the
year ended December 31, 2004, the Company had the following equity transactions:
(i) 352,364 shares as a result of exercise of stock options and warrants with
cash consideration of $716,000; (ii) 1,756,240 shares for acquisition of
subsidiaries valued at $8,866,000; and (iii) 2,205,697 shares for cash proceeds
of $11,773,000 (net of offering costs); and (iv) 149,459 shares with a market
value of $771,000 for acquisition of affiliated company (see Note 3 for
details).
For
the
year ended December 31, 2003, the Company had the following equity transactions:
(i) 16,725 shares for cash consideration of $27,000 to settle expenses; (ii)
200,000 shares as a result of providing compensation for officer according
to
the employment contract of $100,000; and (iii) 240,000 shares as a result of
the
exercise of stock options and warrants for cash consideration of
$410,000.
b)
STOCK
OPTION PLAN
On
December 23, 2003, stockholders of the Company adopted an amendment to the
Stock
Option Plan (the "Plan") to increase the number of shares reserved under the
Plan from 1,666,667 to 2,000,000. On December 30, 2004, stockholders of the
Company approved the new 2005 Stock Option Plan (the "2005 Option Plan"). The
2005 Option Plan 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 2,000,000 shares of Common Stock. The 2005 Plan is
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 2005 Option Plan. Options granted under the 2005 Plan
are
"incentive stock options" as defined in Section 422 of the Internal Revenue
Code
of 1986, as amended (the "Code"), or nonqualified options.
The
purpose of the Plan is to attract and retain the best available personnel for
positions of responsibility and to provide incentives to such personnel to
promote the success of the business. The Plan provides for the grant to
directors, officers, employees and consultants of the Company (including its
subsidiaries) of options to purchase shares of common stock. Options granted
under the Plan may be "incentive stock options" as defined in Section 422 of
the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options. To date, all options granted have been nonqualified options. The
exercise price of incentive stock options may not be less than 100% of the
fair
market value of the common stock as of the date of grant. The number of options
outstanding and the exercise price thereof are subject to adjustment in the
case
of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends. Options granted under the Plan fully vest through June
2005.
The
status of the Stock Option Plan as of December 31, 2005, is as
follows:
|
|
OPTIONS
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
OUTSTANDING,
DECEMBER 31, 2002
|
|
|
312,600
|
|
$
|
1.13
|
|
Granted
|
|
|
963,000
|
|
$
|
2.97
|
|
Exercised
|
|
|
(350,000
|
)
|
$
|
1.13
|
|
OUTSTANDING,
DECEMBER 31, 2003
|
|
|
925,600
|
|
$
|
2.87
|
|
Granted
|
|
|
600,000
|
|
$
|
2.00
|
|
Cancelled
|
|
|
(400,000
|
)
|
$
|
4.25
|
|
Exercised
|
|
|
(321,500
|
)
|
$
|
2.11
|
|
OUTSTANDING,
DECEMBER 31, 2004
|
|
|
804,100
|
|
$
|
1.90
|
|
Granted
|
|
|
680,000
|
|
$
|
6.57
|
|
Cancelled
|
|
|
--
|
|
|
--
|
|
Exercised
|
|
|
(100,000
|
)
|
$
|
1.99
|
|
OUTSTANDING,
DECEMBER 31, 2005
|
|
|
1,384,100
|
|
$
|
3.99
|
|
Additional
information on options outstanding as of December 31, 2005 is as
follows:
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
OPTIONS
|
|
AVERAGE
REMAINING
CONTRACTUAL
LIFE
|
|
Options
outstanding
|
|
$
|
3.99
|
|
|
1,384,100
|
|
|
3.50
years
|
|
Options
exercisable
|
|
$
|
2.06
|
|
|
529,000
|
|
|
1.50
years
|
|
c)
WARRANTS
At
December 31, 2005, the Company had outstanding and exercisable warrants to
purchase an aggregate of 591,138 shares of common stock. The weighted average
remaining life is 3.74 years and the weighted average price per share is $9.50
per share as follows:
Shares
of common stock
|
|
EXERCISE
PRICE
PER
SHARE
|
|
EXPIRATION
DATE OF WARRANTS
|
|
123,456
|
|
$
|
7.15
|
|
|
January
15, 2009
|
|
117,682
|
|
$
|
3.89
|
|
|
November
15, 2009
|
|
350,000
|
|
$
|
12.21
|
|
|
December
9, 2009
|
|
591,138
|
|
|
|
|
|
|
|
The
Company believes 330,000 warrants issued in connection with certain acquisition
agreements (Note 2) with the following subsidiaries, Yueshen: 50,000, Cheer
Era:
80,000, Smartime: 50,000, Clickcom: 50,000, and Guangzhou3G:100,000 are no
longer part of the purchase consideration as more fully described in Note 5
and
therefore are not considered outstanding.
During
2005, 200,000 unexercised warrants (Excel Harbour warrants) expired, and 600,000
warrants were exercised by Sino Mart Management Ltd, a related party, at an
exercise price of $1.45 per share for total proceeds of $870,000. For the year
ended December 31, 2004, 30,864 warrants were exercised at an exercise price
of
$7.15 per share for total proceeds of $220,678.
d)
TREASURY STOCK
The
following is a summary of the movement of the Company's shares held as treasury
stock for the years ended December 31:
|
Number
of
Remarks
shares
|
|
Balance,
December 31, 2002
|
-
|
|
|
Escrowed
shares returned to treasury
|
800,000
|
|
|
Balance,
December 31, 2003
|
800,000
|
|
|
Repurchase
in the open market
|
36,154
|
|
|
Balance,
December 31, 2004
|
836,154
|
|
|
Repurchase
in the open market
|
2,000
|
|
|
Repurchase
of shares from Take 1
|
149,459
|
|
See
note 3 to the F/S
|
Cancellation
of former employee shares
|
45,000
|
|
|
Holdback
shares as contingent consideration due
to performance targets not yet met
|
298,550
|
|
Including
24,200 shares relating to Yueshen, 196,350 hares to 3G and 78,000
shares
to Clickcom
|
Share
consideration for acquisition of ChinaGoHi deemed issued under Sale
and
Purchase Agreement
|
(137,500)
|
|
Due
to share issuance in progress; actual share certificate delivered
after
the year end
|
Options
exercised but shares deemed issued
|
(24,000)
|
|
Share
issuance in progress prior to year end
|
Balance,
December 31, 2005:
|
1,169,663
|
|
|
Shares
outstanding at December 31, 2005
|
10,831,024
|
|
|
Shares
issued at December 31, 2005
|
12,000,687
|
|
|
13.
INCOME TAXES
The
Company is registered in the State of Delaware and has operations in primarily
three tax jurisdictions - the PRC, Hong Kong and the United States. For
operations in the United States of America, Hong Kong and the PRC, the Company
has incurred net accumulated operating losses for income tax purposes. The
Company believes that it is more likely than not that these net accumulated
operating losses will not be utilized in the future. Therefore, the Company
has
provided full valuation allowance for the deferred tax assets arising from
the
losses at these locations as of December 31, 2005. Accordingly, the Company
has
no net deferred tax assets.
The
components of earnings before income taxes are as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Earnings
(loss) subject to PRC
|
|
$
|
2,391,000
|
|
$
|
1,374,000
|
|
$
|
-
|
|
Earnings
(loss) subject to Hong Kong
|
|
|
1,125,000
|
|
|
388,000
|
|
|
(510,000
|
)
|
Earnings
(loss) subject to United States
|
|
|
(805,000
|
)
|
|
(915,000
|
)
|
|
(771,000
|
)
|
Earnings
(loss) before taxes
|
|
$
|
2,711,000
|
|
$
|
847,000
|
|
$
|
(1,281,000
|
)
|
United
States of America
As
of
December 31, 2005, the Company’s subsidiary in the United States of America had
approximately $4,900,000 in net operating loss carryforwards available to offset
future taxable income. Federal net operating losses can generally be carried
forward 20 years. The Tax Reform Act of 1986 limits the use of net operating
loss and tax credit carryforwards in certain situations when changes occur
in
the stock ownership of a company. In the event the Company has a change in
ownership, utilization of carryforwards could be deferred tax assets for the
United States entity at December 31, 2005 consists mainly of net operating
loss
carryforwards and were fully reserved as the management believes it is more
likely than not that these assets will not be realized in the future.
The
following table sets forth the significant components of the net deferred tax
assets for operation in the United States of America as of December 31,
2005 and 2004.
|
|
2005
|
|
2004
|
|
Net
Operating Loss Carryforwards
|
|
$
|
1,732,300
|
|
|
1,501,000
|
|
Total
Deferred Tax Assets
|
|
|
1,732,300
|
|
|
1,501,000
|
|
Less:
Valuation Allowance
|
|
|
(1,732,300
|
)
|
|
1,501,000
|
|
Net
Deferred Tax Assets
|
|
|
-
|
|
|
-
|
|
Hong
Kong
As
of
December 31, 2005, the Company’s Hong Kong subsidiary had net operating loss
carryforwards which can be carried forward indefinitely to offset future taxable
income. The deferred tax assets for the Hong Kong subsidiary at December 31,
2006 consists mainly of net operating loss carryforwards and were fully reserved
as the management believes it is more likely than not that these assets will
not
be realized in the future. The amounts were immaterial.
China
Pursuant
to the PRC Income Tax Laws, the Company’s subsidiaries and VIEs are generally
subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which
comprises 30% national income tax and 3% local income tax. Some of these
subsidiaries and VIEs are qualified new technology enterprises and under PRC
Income Tax Laws, they are subject to preferential tax rates. Additionally,
As of
December 31, 2005 and 2004, the Company had accumulated net operating loss
carryforwards for Chinese tax purposes of approximately $447,000 and $118,500,
respectively. Realization of the Chinese tax net operating loss carryforwards
is
dependent on future profitable operations, as well as a maximum five-year
carryforward period. Accordingly, management has recorded a valuation allowance
to reduce the deferred tax associated with the net operating loss carryforwards
to zero.
The
following table sets forth the significant components of the net deferred tax
assets for operation in the PRC as of December 31, 2005 and 2004.
|
|
2005
|
|
2004
|
|
Net
Operating Loss Carryforwards
|
|
$
|
86,000
|
|
|
20,000
|
|
Total
Deferred Tax Assets
|
|
|
86,000
|
|
|
20,000
|
|
Less:
Valuation Allowance
|
|
|
(86,000
|
)
|
|
(20,000
|
)
|
Net
Deferred Tax Assets
|
|
|
-
|
|
|
-
|
|
Aggregate
net deferred tax assets
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of December 31, 2005 and
2004:
|
|
2005
|
|
2004
|
|
Total
Deferred Tax Assets
|
|
|
1,818,300
|
|
|
1,521,000
|
|
Less:
Valuation Allowance
|
|
|
(1,818,300
|
)
|
|
(1,521,000
|
)
|
Net
Deferred Tax Assets
|
|
|
-
|
|
|
-
|
|
Income
tax payable was approximately $296,000 at December 31, 2005 (2004:
$10).
14.
RELATED PARTY TRANSACTIONS
Employment
Agreement
The
Company has an employment agreement with its Chief Executive Officer (CEO)
and
President. The employment agreement with the CEO provides for $100,000 cash
compensation plus $60,000 annual share compensation until April 1, 2005. The
CEO
is also eligible for an annual bonus for each fiscal year of the Company during
the term based on performance standards as the Board or compensation committee
designates. The CEO is entitled to receive a monthly housing allowance of
$2,500, monthly automobile allowance of $500, Tax Preparation expenses of $2,000
per year, and Cash Bonus based on net profit of the Company. During 2004, under
the Company's stock option plan, the CEO was granted an option to acquire 65,000
shares at an exercise price per share of $2.00 (at market price) which has
not
been exercised. During 2004, under the Company's stock option plan, the
President was granted an option to acquire 73,000 shares at an exercise price
per share of $2.00 (at market price) which has not been exercised.
Lease
Agreement
In
November 2004, the Company entered a lease agreement with EPRO for rental space
in the amount of $1,923 per month. The term of the lease was one year and
renewable by either party.
LOAN
DUE
TO AND FROM RELATED PARTIES
As
of
December 31, 2005, there was a total loan receivable of approximately.
$2,520,000 due from related parties while the loan due to related party was
$369,000.
As
at the
year end, the related party loan receivables included $769,000 due from Take
1,
an affiliated company that is 20% owned by PacificNet, $1,751,000 due from
shareholder and directors of PacificNet's subsidiaries. The loans receivable
from shareholders and directors of PacificNet's subsidiaries comprised of
$1,215,000 due from a shareholder of Yueshen, $80,000 due from a shareholder
of
EPRO, $199,000 due from a director of Soluteck, and $257,000 due from a director
of Clickcom. The terms of these three related parties loan receivables and
payables are summarized below:
LOAN
TO
TAKE 1 (CHEER ERA)
Please
refer to Note 3 of the Consolidated Financial Statements for detailed discussion
on the change of investment structure of this affiliated company which is now
20% owned by PacificNet. As of December 31, 2005, there was a Convertible Loan
of $769,000 outstanding from Take 1. The purpose of the Convertible Loan was
a
working capital loan to finance the expansion of Take 1's business in Europe
and
North America.
LOAN
TO
YUESHEN'S SHAREHOLDER
As
of
December 31, 2005, there was $1,215,000 loan receivable due from the shareholder
of Yueshen, a subsidiary of the Shanghai Classic. The purpose of the loan was
to
repay the working capital loan owed by the predecessor of Yueshen prior to
PacificNet's acquisition and to finance Yueshen shareholder's other projects.
This loan is collateralized with 106,240 PacificNet shares owned by the
shareholder of Yueshen.
LOAN
TO
SOLUTEK'S DIRECTOR
As
of
December 31, 2005, there was a loan outstanding of $199,000 receivable from
a
director of Solutek, payable in three equal installments of $72,314 each, being
principal plus interest, due on December 14 for three consecutive years ending
2007. The interest rate for the loan is 8% per annum plus 5% penalty interest
in
case it has not been timely paid. The loan is collateralized with 100,000
PacificNet's shares owned by the borrowing director and Ms Iris Lo, and the
remaining assets of Smartime Holding Ltd.
LOAN
TO
DIRECTOR OF CLICKCOM
As
of
December 31, 2005, there was a loan of $257,000 receivable from the shareholders
of Clickcom VIE. The loan was advanced by the Company to Clickcom VIE which
in
turn loaned to the shareholders of Clickcom VIE to finance the development
of
new projects. Pursuant to the loan agreement signed between the Company and
Clickcom VIE, this loan has a two year term due on August 30, 2007 and bears
a
2% interest rate and is personally and jointly guaranteed by all the three
shareholders of Clickcom VIE on top of the pledged shares up to 130,000
PacificNet's shares and all remaining assets and equity ownership of Clickcom
BVI.
LOAN
TO
SHAREHOLDER OF EPRO
As
of
December 31, 2005, a net loan receivable of $80,000 was due from a shareholder
of Epro. The loan is unsecured, interest-free and repayable on
demand.
LOAN
PAYABLE TO RELATED PARTY
As
of
December 31, 2005, a loan of $369,000 was payable to a shareholder of EPRO.
The
loan was advanced to Epro for working capital purpose expiring by August 4,
2010
at Hong Kong Prime lending rate approximately 6.5% interest per annum prevailing
in the year 2005.
15.
SEGMENT INFORMATION
SFAS
No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"), establishes standards for reporting information about operating segments
and for related disclosures about products, services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief
operating decision-maker, or decision-making group, in making decisions
regarding allocation of resources and assessing performance. PacificNet's chief
decision-makers, as defined under SFAS 131, is the Chief Executive Officer
and
Chairman. During 2005 and 2004, PacificNet had four operating
segments.
The
Company's reportable segments are operating units, which represent the
operations of the Company's significant business operations. Summarized
financial information concerning the Company's reportable segments is shown
in
the following table. The "Other" column includes the Company's other
insignificant services and corporate related items, and, as it relates to
segment profit (loss), income and expense not allocated to reportable
segments.
FOR
THE YEAR ENDED DECEMBER 31, 2005
|
Group
1.
Outsourcing
Business
($)
|
Group
2.
VAS
Business
($)
|
Group
3.
Communications
Distribution
Business
($)
|
Group
4.
Other
Business
($)
|
Total
($)
|
Revenues
|
13,505,000
|
13,834,000
|
16,201,000
|
801,000
|
44,341,000
|
(%
of Total Rev)
|
(30.5%)
|
(31.2%)
|
(36.5%)
|
(1.8%)
|
(100%)
|
Earnings
/ (Loss) from
|
|
|
|
|
|
Operations
|
1,360,000
|
3,899,000
|
558,000
|
(1,248,000)
|
4,569,000
|
(%
of Total Profit)
|
(29.8%)
|
(85.3%)
|
(12.2%)
|
(-27.3%)
|
(100%)
|
Total
Assets
|
7,335,000
|
19,363,000
|
9,493,000
|
15,012,000
|
51,203,000
|
(%
of Total Assets)
|
(14.3%)
|
(37.8%)
|
(18.6%)
|
(29.3%)
|
(100%)
|
Goodwill
|
3,936,000
|
9,788,000
|
1,100,000
|
-
|
14,824,000
|
Geographic
Area
|
HK,
PRC
|
HK,
PRC
|
HK,
PRC
|
HK,PRC
|
|
For
the year ended
December
31, 2004
|
1.Outsourcing
Business
($)
|
2.
VAS
Business
($)
|
3.
Communications
Distribution
Business($)
|
4.
Other Business
($)
|
Total
($)
|
Revenues
|
9,385,000
|
5,724,000
|
11,790,000
|
2,810,000
|
29,709,000
|
(%
of Total Rev)
|
(31.5%)
|
(19.27%)
|
(39.68%)
|
(9.55%)
|
(100%)
|
Earnings
/ (Loss) from
|
|
|
|
|
|
Operations
|
1,000,000
|
1,859,000
|
85,000
|
(1,007,000)
|
1,937,000
|
(%
of Total Profit)
|
(51.6%)
|
(96%)
|
(4.4%)
|
(-52%)
|
(100%)
|
Total
Assets
|
6,017,000
|
2,600,000
|
5,018,000
|
19,615,000
|
33,250,000
|
(%
of Total Assets)
|
(18.1%)
|
(7.8%)
|
(15.1%)
|
(59%)
|
(100%)
|
Goodwill
|
3,936,000
|
4,473,000
|
1,100,000
|
-
|
9,509,000
|
Geographic
Area
|
HK,
PRC
|
HK,
PRC
|
HK,
PRC
|
HK,PRC
|
|
For
the year ended
December
31, 2003
|
1.Outsourcing
Business
($)
|
2.
VAS
Business
($)
|
3.
Communications
Distribution
Business($)
|
4.
Other Business
($)
|
Total
($)
|
Revenues
|
1,048
|
39
|
-
|
130
|
1,217
|
(%
of Total Rev)
|
(86.1%)
|
(3.3%)
|
-
|
(10.6%)
|
(100%)
|
Earnings
/ (Loss) from
|
15
|
10
|
(18)
|
(1,344)
|
(1,337)
|
Operations
|
|
|
|
|
|
(%
of Total Profit)
|
(-1.1%)
|
(-0.7%)
|
1.3%
|
(100.5%)
|
(100%)
|
Total
Assets
|
2,830
|
365
|
3,052
|
1,523
|
7,770
|
(%
of Total Assets)
|
(36.4%)
|
(4.7%)
|
(39.3%)
|
(19.6%)
|
(100%)
|
Goodwill
|
960
|
57
|
-
|
-
|
1,017
|
Geographic
Area
|
HK
|
PRC
|
HK
|
HK,
PRC,USA
|
|
The
Company identifies and classifies its operating segments based on reporting
entities that exhibit similar long-term financial performance based on the
nature of the products and services with similar economic characteristics such
as margins, business practices and target market. The operating segments are
classified into four major segments which are summarized as
follows:
(1)
Outsourcing Services - involves human voice services such as Business Process
Outsourcing, CRM, call center, IT Outsourcing and software development services.
These types of services are conducted through our subsidiaries EPRO,
Smartime/Soluteck and PacificNet Solution Ltd.
(2)
Value-Added Telecom Ser vices (VAS) - primarily involves machine voice services
such as Interactive Voice Response, SMS and related VAS, which are conducted
through our subsidiaries such as ChinaGoHi, Linkhead, Clickcom and Guangzhou
3G/Sunroom. For example, Linkhead is a master reseller of NMS hardware and
software platforms in China, and its voice cards are used as an integral part
of
voice hardware using CPCI industry control machines, and also by Media Servers
to support access from PSTN and VoIP, softswitch and 3G networks.
(3)
Communication Products Distribution Services Group - primarily involves voice
products distribution such as distribution of calling cards and other products,
which are conducted through our subsidiary Yueshen and PacificNet Communication.
These calling cards differ from the phone cards in the VAS business as these
cards are geared towards the end user, and include prepaid calling cards, IDD
long distance calling cards, internet access cards, bundledcross-selling
insurance cards, and shopping discount cards.
(4)
Other
Business -other administrative, financial and investment services and non-core
businesses such as PacificNet Power Limited (PacPower), Pacific Financial
Services Limited, PacificNet Games, etc.
Product
and service revenues classified by major geographic areas are as follows (in
thousands):
2005:
|
|
Hong
Kong
|
|
PRC
|
|
United
States
|
|
Total
|
|
Product
revenue
|
|
$
|
20,131
|
|
$
|
3,216
|
|
$
|
-
|
|
$
|
23,347
|
|
Service
revenue
|
|
$
|
10,640
|
|
$
|
10,354
|
|
$
|
-
|
|
$
|
20,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
849
|
|
$
|
18,638
|
|
$
|
-
|
|
$
|
19,487
|
|
Service
revenue
|
|
$
|
9,240
|
|
$
|
982
|
|
$
|
-
|
|
$
|
10,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
revenue
|
|
$
|
97
|
|
$
|
39
|
|
$
|
15
|
|
$
|
151
|
|
Service
revenue
|
|
$
|
1,066
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,066
|
|
16.
RESTATEMENT AND CORRECTION OF ERROR
2004
Consolidated Income Statement and Consolidated Statement of Cash
Flows
The
2004
consolidated income statement has been restated to present separately revenues
and costs of revenues from product sales and services in accordance with Rule
5-03 of Regulation S-X. There was no effect on previously reported total
revenues, total costs of revenues, net earnings or earnings per share
amounts.
The
2004
consolidated statement of cash flows has been restated to properly reflect
the
changes in the balance sheet accounts resulting from minority interests
accounting. The restatement had no effect on previously reported net increase
in
cash and cash equivalents or cash balances.
The
restatement for the year ended December 31, 2004 can be summarized as
follows:
|
|
As
Previously Reported
|
|
As
Restated
|
|
Cash
Flows from operating activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
774
|
|
$
|
774
|
|
Adjustment
to reconcile net earnings to net cash provided by (used
in)
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Equity
loss (earnings) of associated company
|
|
|
-
|
|
|
(32
|
)
|
Minority
Interest
|
|
|
2,506
|
|
|
1,623
|
|
Depreciation
and amortization
|
|
|
78
|
|
|
78
|
|
Changes
in current assets and liabilities net of effects from
|
|
|
|
|
|
|
|
purchase
of subsidiaries:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(7,793
|
)
|
|
(3,584
|
)
|
Inventories
|
|
|
(1,221
|
)
|
|
(1,221
|
)
|
Accounts
payable and other accrued expenses
|
|
|
1,921
|
|
|
(2,069
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(3,718
|
)
|
|
(4,431
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
(3,289
|
)
|
|
(3,289
|
)
|
Increase
in purchase of marketable securities
|
|
|
(46
|
)
|
|
(46
|
)
|
Acquisition
of property and equipment
|
|
|
(730
|
)
|
|
(206
|
)
|
Acquisition
of subsidiaries and affiliated companies
|
|
|
(640
|
)
|
|
(724
|
)
|
|
|
As
Previously Reported
|
|
As
Restated
|
|
Net
cash used in investing activities
|
|
|
(4,705
|
)
|
|
(4,265
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayments
on under bank line of credit
|
|
|
(548
|
)
|
|
(548
|
)
|
Advances
(repayments) of amount borrowed under capital lease obligations
|
|
|
(92
|
)
|
|
(92
|
)
|
Repayments
on bank loans
|
|
|
(386
|
)
|
|
(130
|
)
|
Proceeds
from sale of common stock
|
|
|
11,773
|
|
|
11,773
|
|
Repurchase
of treasury shares
|
|
|
(99
|
)
|
|
(99
|
)
|
Proceeds
from exercise of stock options and warrants
|
|
|
716
|
|
|
716
|
|
Net
cash provided by (used in) financing activities
|
|
|
11,364
|
|
|
11,620
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE ( ON CASH AND CASH EQUIVALENTS)
|
|
|
-
|
|
|
17
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
2,941
|
|
|
2,941
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
3,823
|
|
|
3,823
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
6,764
|
|
$
|
6,764
|
|
2005
Quarterly Reviews (unaudited)
As
discussed in Note 1, the Company accounts for its VIEs in accordance with U.S.
generally accepted accounting principles which requires the consolidation of
VIEs from the date of acquisition. During 2005, the Company's quarterly
consolidated financial condition, results of operations, and reported cash
flow
did not properly reflect VIE accounting. As a result, the quarterly financial
statements have been restated.
The
restatements for the interim periods ended March 31, 2005, June 30, 2005 and
September 30, 2005 are summarized as follows:
|
March
31, 2005
|
June
30, 2005
|
September
30, 2005
|
|
Previously
reported
|
As
restated
|
Previously
reported
|
As
restated
|
Previously
reported
|
As
restated
|
BALANCE
SHEET-
|
|
|
|
|
|
|
Total
assets
|
31,012
|
31,927
|
38,986
|
43,017
|
40,232
|
43,365
|
Minority
interest
|
2,198
|
2,319
|
3,207
|
4,957
|
3,718
|
5,316
|
Total
liabilities
|
3,682
|
3,879
|
7,109
|
8,793
|
6,423
|
7,361
|
Additional
paid-in captial
|
53,919
|
53,919
|
56,865
|
56,865
|
57,653
|
57,653
|
Retained
earnings
|
(28,660)
|
(28,063)
|
(28,068)
|
(27,471)
|
(27,457)
|
(26,860)
|
Total
stockholders' equity
|
25,132
|
25,729
|
28,670
|
29,267
|
30,091
|
30,688
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
31,012
|
31,927
|
38,986
|
43,017
|
40,232
|
43,365
|
|
|
|
|
|
|
|
INCOME
STATEMENT:
|
|
|
|
|
|
|
Revenue
|
9,133
|
9,212
|
19,885
|
21,492
|
30,607
|
32,593
|
Minority
Interest
|
(443)
|
(417)
|
(1,185)
|
(1,304)
|
(1,949)
|
(1,916)
|
Net
income
|
415
|
415
|
1,008
|
1,008
|
1,619
|
1,619
|
Earnings
per share
|
|
|
|
|
|
|
Basic
|
0.04
|
0.04
|
0.10
|
0.10
|
0.16
|
0.16
|
Diluted
|
0.04
|
0.04
|
0.10
|
0.10
|
0.15
|
0.15
|
|
|
Three
months ended
March
31, 2005
|
|
Six
months ended
June
30, 2005
|
|
Nine
months ended
September
30, 2005
|
|
|
|
Previously
reported
|
|
As
restated
|
|
Previously
reported
|
|
As
restated
|
|
Previously
reported
|
|
As
restated
|
|
Statement
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
415
|
|
|
415
|
|
|
1,008
|
|
|
1,008
|
|
|
1,619
|
|
|
1,619
|
|
Adjustment
to reconcile net earnings to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
loss (profit) of associated company
|
|
|
|
|
|
-
|
|
|
(4
|
)
|
|
(4
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Provision
for income tax
|
|
|
(10
|
)
|
|
-
|
|
|
57
|
|
|
64
|
|
|
43
|
|
|
51
|
|
Minority
Interest
|
|
|
(198
|
)
|
|
417
|
|
|
811
|
|
|
1,304
|
|
|
1322
|
|
|
1,916
|
|
Depreciation
and amortization
|
|
|
43
|
|
|
43
|
|
|
141
|
|
|
141
|
|
|
274
|
|
|
274
|
|
Changes
in current assets and liabilities net of effects from purchase of
subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash*
|
|
|
|
|
|
|
|
|
2,796
|
|
|
|
|
|
|
|
|
|
|
Increase
in loan receivables*
|
|
|
|
|
|
|
|
|
(3,238
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(1976
|
)
|
|
(2,153
|
)
|
|
(975
|
)
|
|
(2,027
|
)
|
|
(2,832
|
)
|
|
(3,029
|
)
|
Inventories
|
|
|
(430
|
)
|
|
(430
|
)
|
|
(891
|
)
|
|
(891
|
)
|
|
(452
|
)
|
|
(452
|
)
|
Accounts
payable and accrued expenses
|
|
|
(1482
|
)
|
|
(2,137
|
)
|
|
221
|
|
|
295
|
|
|
338
|
|
|
(234
|
)
|
Net
cash used in operating activities
|
|
|
(3,638
|
)
|
|
(3,845
|
)
|
|
(74
|
)
|
|
(110
|
)
|
|
300
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
|
|
|
-
|
|
|
|
|
|
2,796
|
|
|
3,132
|
|
|
3,132
|
|
Increase
in purchase of marketable securities
|
|
|
(36
|
)
|
|
(36
|
)
|
|
(421
|
)
|
|
(421
|
)
|
|
(409
|
)
|
|
(409
|
)
|
Acquisition
of property and equipment
|
|
|
63
|
|
|
63
|
|
|
(1,200
|
)
|
|
(1,341
|
)
|
|
(1,346
|
)
|
|
(1,844
|
)
|
Acquisition
of subsidiaries and affiliated companies
|
|
|
(233
|
)
|
|
(233
|
)
|
|
(3,984
|
)
|
|
(1,183
|
)
|
|
(2,238
|
)
|
|
(1,183
|
)
|
Increase
in loan receivables from third parties
|
|
|
|
|
|
|
|
|
|
|
|
(2,081
|
)
|
|
|
|
|
(1,597
|
)
|
Increase
in loan receivable from related parties
|
|
|
|
|
|
|
|
|
|
|
|
(1,157
|
)
|
|
|
|
|
(1,349
|
)
|
Net
cash used in investing activities
|
|
|
(206
|
)
|
|
(206
|
)
|
|
(5,605
|
)
|
|
(3,387
|
)
|
|
(861
|
)
|
|
(3,250
|
)
|
The
nature of the revisions of the statements of cash flows can be classified into
three categories:
1.
The
effect of consolidating two variable interest entities was included per FIN
46(R) in the Statement of Cash Flows.
2.
Reclassification of change in restricted cash from operating activities to
investing activities.
3.
Reclassification of loan receivables from financing activities to investing
activities.
|
|
Three
months ended
March
31, 2005
|
|
Six
months ended
June
30, 2005
|
|
Nine
months ended
September
30, 2005
|
|
|
|
Previously
reported
|
|
As
restated
|
|
Previously
reported
|
|
As
restated
|
|
Previously
reported
|
|
As
restated
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
paid to minority interest shareholders*
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in loan receivables from third party*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,597
|
)
|
|
|
|
Increase
in loan receivable from related parties*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,349
|
)
|
|
|
|
Increase
in loan payable to related parties
|
|
|
467
|
|
|
467
|
|
|
390
|
|
|
390
|
|
|
513
|
|
|
513
|
|
Advances
(repayments) under bank line of credit
|
|
|
(836
|
)
|
|
(582
|
)
|
|
142
|
|
|
142
|
|
|
(7
|
)
|
|
(7
|
)
|
Increase
(repayment) of amount borrowed under capital lease obligations
|
|
|
|
|
|
30
|
|
|
62
|
|
|
62
|
|
|
29
|
|
|
29
|
|
Increase
in share consideration post acquisition of subsidiaries*
|
|
|
|
|
|
|
|
|
1,977
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants
|
|
|
111
|
|
|
111
|
|
|
981
|
|
|
981
|
|
|
981
|
|
|
981
|
|
Advances
under bank loans
|
|
|
|
|
|
(284
|
)
|
|
727
|
|
|
727
|
|
|
5
|
|
|
5
|
|
Net
cash provided by financing activities
|
|
|
(597
|
)
|
|
(258
|
)
|
|
4,279
|
|
|
2,302
|
|
|
(1,425
|
)
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(4,441
|
)
|
|
(4,309
|
)
|
|
(1,400
|
)
|
|
(1,195
|
)
|
|
(1,986
|
)
|
|
(1,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
6,764
|
|
|
6,764
|
|
|
6,764
|
|
|
6,764
|
|
|
6,764
|
|
|
6,764
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
|
2,323
|
|
|
2,455
|
|
|
5,364
|
|
|
5,569
|
|
|
4,778
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID (RECEIVED) FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
45
|
|
|
45
|
|
|
127
|
|
|
127
|
|
|
182
|
|
|
182
|
|
Income
taxes
|
|
|
34
|
|
|
34
|
|
|
-
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiaries acquired through issuance of common stock
|
|
|
|
|
|
|
|
|
1,977
|
|
|
1,977
|
|
|
2,762
|
|
|
2,871
|
|
The
nature of the revisions of the statements of cash flows can be classified
into
three categories:
1.
The
effect of consolidating two variable interest entities was included per FIN
46(R) in the Statement of Cash Flows.
2.
Reclassification of change in restricted cash from operating activities to
investing activities.
3.
Reclassification of loan receivables from financing activities to investing
activities.
17.
STATEMENTS OF CASH FLOWS SUPPLEMENTARY INFORMATION IN YEAR 2005:
During
2005, PACT made investments for approximately $8,196,000 in subsidiary companies
in form of cash, subscription payable and equity consideration of $1,950,000,
$2,275,000 and $3,971,000 respectively. This amount represents equity interests
in ChinaGoHi (51%), Clickcom (51%) and Sunroom 3G (51%). The details of these
acquisitions are separately disclosed in the notes of the consolidated financial
statement under Note 2 "BUSINESS ACQUISITIONS". As the consideration for these
acquisition transactions are part cash and part non-cash, the breakdown below
is
the cash portion paid or payable for the subsidiaries acquired:
|
|
2005
|
|
|
|
|
|
In
US$000s
|
|
Remark
|
|
ChinaGoHi
- subsidiary
|
|
$
|
2,275
|
|
|
|
|
Clickcom
- subsidiary
|
|
|
268
|
|
|
--
|
|
Sunroom
3G - subsidiary
|
|
|
1,683
|
|
|
--
|
|
Subtotal:
|
|
|
4,226
|
|
|
|
|
Cash
still contained within the group on consolidation Less cash acquired
in
subsidiaries
|
|
|
(768
|
)
|
|
|
|
Less:
subscription payable
|
|
|
(2,275
|
)
|
|
Note
(a
|
)
|
Net
cash paid for the acquisition:
|
|
$
|
1,183
|
|
|
|
|
Note
(a) of which $1,500 was eliminated due to inter-company
payable
IN
YEAR 2004:
During
2004, PACT made investments for approximately US$11,325,000 in subsidiary and
affiliated companies in form of cash and equity consideration of US$1,688,000
and US$9,637,000 respectively. This amount represents equity interests in EPRO
(50%), LINKHEAD (51%), SHANGHAI CLASSIC (YUESHEN) (51%), SMARTIME (51%) and
TAKE1 (CHEER ERA) (30%). The details of these acquisitions are separately
disclosed in the notes of the consolidated financial statement under Note 2
"BUSINESS ACQUISITIONS". As the consideration for these acquisition transactions
are part cash and part non-cash, the breakdown below is the cash portion paid
for the subsidiaries and affiliated company acquired:
|
|
2004
|
|
|
|
|
|
In
US$000s
|
|
Reference
|
|
EPRO
- subsidiary
|
|
$
|
500.0
|
|
|
(a)
below
|
|
LINKHEAD
- subsidiary
|
|
|
222.5
|
|
|
(b)
below
|
|
SHANGHAI
CLASSIC (YUESHEN) - subsidiary
|
|
|
579.9
|
|
|
(c)
below
|
|
SMARTIME
- subsidiary
|
|
|
--
|
|
|
|
|
CHEER
ERA - affiliated
|
|
|
385.6
|
|
|
|
|
Subtotal:
|
|
|
1,688
|
|
|
|
|
Less
cash acquired in subsidiaries (a+b+c) less US$338.3 paid to selling
shareholder of YUESHEN
|
|
|
(964
|
)
|
|
Cash
still contained within the group on consolidation
|
|
NET
CASH PAID FOR THE ACQUISITION:
|
|
$
|
724
|
|
|
|
|
18.
EVENTS SUBSEQUENT TO DECEMBER 31, 2005 (UNAUDITED)
SALE
OF
CONVERTIBLE DEBENTURES On March 13, 2006, the Registrant consummated a private
offering of $8,000,000 principal amount variable debentures due March 2009
(the
Debentures) at an initial fixed conversion price of $10.00, and warrants to
purchase up to 400,000 shares of the Registrants common stock exercisable for
a
period of 5 years at an exercise price of $12.20 per share (the Warrants) with
several institutional investors, which included Whalehaven Capital Fund Limited,
DKR Soundshore Oasis Holding Fund Ltd., Basso Fund Ltd., Basso Multi-Strategy
Holding Fund Ltd., Basso Private Opportunities Holding Fund Ltd., Iroquois
Master Fund Ltd., C.E. Unterberg, Towbin Capital Partners I, LP and Alpha
Capital AG. C.E. Unterberg, Towbin LLC advised the Registrant and acted as
lead
placement agent.
The
Registrant has agreed to file a registration statement covering the resale
of
the shares underlying the Debentures and the Warrants under the Securities
Act
of 1933, as amended, on the earlier of (i) April 30, 2006, or (ii) the 30th
calendar day following the date the Registrant files its Form 10-KSB with the
Securities and Exchange Commission.
The
Debentures and Warrants were sold in a transaction not involving a public
offering and were issued without registration in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended and Regulation D promulgated there under.
BUSINESS
ACQUISITIONS
On
Jan
31, 2006, the Company, through its subsidiary PacificNet Strategic Investment
Holdings Limited, consummated the acquisition of a 51% controlling interest
in
Guangzhou Wanrong Information Technology Co. Limited (Guangzhou Wanrong), one
of
the leading value-added telecom service providers in China, located in PRC
Guangzhou, The purchase consideration for 51% of the equity interest of
Guangzhou Wanrong was approximately US$1.75million, payable 21% in cash and
79%
in restricted shares of PacificNet common stock valued at $8 per share, or
about
173,000 restricted shares. Under the purchase agreement, Guangzhou Wanrong
has
made a guarantee to generate US$500,000 in annual net income. In the event
of a
shortfall, the purchase price will be adjusted accordingly. PacificNet will
also
invest approximately RMB 3 million (or about US$370,000) in Guangzhou Wanrong
for general corporate purposes. The purchase price is payable upon achievement
of certain quarterly earn-out targets based on net income
On
February 26, 2006, entered into an agreement to acquire a 51% majority interest
in PacificNet iMobile (Beijing) Technology Co., Ltd ("iMobile"), one of the
leading Internet information portal and e-commerce distributors for mobile
phone
a and accessories and mobile related value-added service providers in China.
iMobile operates its e-commerce business via two Internet portals,
"http://www.iMobile.com.cn" and "http://www.18900.com" and one WAP portal
"17wap.com" for mobile phone browsing. In addition, iMobile's 18900.com
operation is the designated Internet distributor for Motorola, Nokia, and NEC's
mobile products in China.
The
purchase consideration for 51% of the equity interest of iMobile is
approximately US$1.8 million, which represents approximately seven times the
anticipated future annual net income of iMobile. The purchase consideration
is
payable 14% in cash and 86% in restricted shares of PacificNet valued at $8
per
share, or about 191,875 restricted shares. Under the purchase agreement, iMobile
has committed to generate US$500,000 in annual net income. In the event of
a
shortfall, the purchase price will be adjusted accordingly. PacificNet will
also
invest approximately RMB2 million (about US$250,000) in iMobile for general
corporate and working capital purposes to support growth. The purchase price
is
payable upon achievement of certain quarterly earn-out targets based on net
income.
[END
OF FINANCIAL STATEMENTS]
__________________________
3,152,228
Shares
Common
Stock
PACIFICNET
INC.
__________________________
Prospectus
__________________________
November __,
2006
You
should rely only on the information contained in this prospectus. We have
not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. This prospectus is not an
offer
of these securities in any jurisdiction where an offer and sale is not
permitted. The information contained in this prospectus is accurate only
as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with
the
issuance and distribution of the common stock being registered. All amounts
other than the SEC registration fee are estimates.
SEC
Registration Fee
|
$
2,286.33*
|
Printing
and Engraving Expenses
|
$
0.00
|
Legal
Fees and Expenses
|
$75,000.00
|
Accounting
Fees and Expenses
|
$18,800.00
|
Miscellaneous
|
$
0.00
|
Total
|
$96,086.33
|
*
Previously paid
Item
14. Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law authorizes a court to award,
or a
corporations board of directors to grant, indemnity to directors and officers
in
terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act").
The
Certificate of Incorporation and By-Laws of the Registrant provide that the
registrant shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL,
relating to indemnification, is hereby incorporated herein by reference.
In
accordance with Section 102(a)(7) of the DGCL, the Certificate of
Incorporation of the registrant eliminates the personal liability of directors
to the registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
In
addition, the registrant currently maintains an officers’ and directors’
liability insurance policy which insures, subject to the exclusions and
limitations of the policy, officers and directors of the Registrant against
certain liabilities which might be incurred by them solely in such capacities.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling the registrant,
pursuant to the foregoing provisions, the Registrant has been informed that
in
the opinion of the Securities and Exchange Commission such indemnification
is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Item
15. Recent Sales of Unregistered Securities
The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities
Act of
1933, as amended, and/or, Rule 506 of Regulation D or Regulation S, promulgated
under the Securities Act. The Company did not use underwriters in any of
the
following private placements.
On
March
13, 2006, we consummated a private placement of $8,000,000 in convertible
debentures to a group of institutional investors. The debentures are convertible
at an initial fixed conversion price of $10.00, subject to adjustment. In
connection with the debenture financing, we issued to the investors warrants
to
purchase 400,000 shares of our Common Stock in the aggregate and to the
placement agent a warrant to purchase 16,000 shares of our Common Stock.
The
exercise price of the warrants are $12.20 and they are exercisable for a
period
of five years from the date of issuance. The shares underlying the debentures
and the warrants are being registered resale on this registration
statement.
On
June
8, 2005, we entered into a consulting agreement with CEOCast, Inc., our current
investor relations and public relations firm. Pursuant to the terms of the
agreement, part of the compensation to CEOCast consisted of the issuance
of
26,000 shares of our Common Stock. We granted CEOCast piggyback registration
rights with respect to those shares.
On
December 16, 2004, we consummated a private placement (the “December Private
Placement”) for the sale of 1,000,002 restricted shares of our Common Stock to a
group of institutional investors. The aggregate proceeds from the sale of
the
shares in the December Private Placement was $7,500,000. In connection with
the
December Private Placement we issued warrants to purchase 350,000 shares
of our
Common Stock in the aggregate. The exercise price of the warrants
are $12.21 and they are exercisable for a period of five years from the
date of issuance. All of the shares issued and shares underlying the warrants
were registered on a Registration Statement on Form SB-2 that was declared
effective by the Securities and Exchange Commission on February 4, 2005.
On
November 17, 2004, we consummated a private placement (the “November Private
Placement”) for the sale of 588,410 restricted shares of our Common Stock to
accredited investors. The aggregate proceeds from the sale of the shares
in the
November Private Placement was $1,829,955. In connection with the November
Private Placement we issued warrants to purchase 117,852 shares of our Common
Stock in the aggregate. The exercise price of the warrants are $3.89 and
they
are exercisable for a period of five years from the date of issuance.
In
January 2004, we closed a $3 million equity private placement in which an
aggregate of 617,285 shares of common stock and warrants to purchase up to
an
aggregate of 154,320 shares of common stock of the Company were issued to
a
group of institutional investors. The warrants are exercisable until January
15,
2009 at an exercise price of $7.15 per share.
Item
16. Exhibits and Financial Statement Schedules
EXHIBITS
The
following exhibits are filed as part of this registration
statement:
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
2.1
|
|
Share
Exchange Agreement by and among Davin Enterprises, Inc., Carl Tong,
Leo
Kwok and Acma Strategic Holdings Limited dated December 15, 1997.
(1)
|
2.2
|
|
Share
Exchange Agreement dated February 17, 2000, between Registrant
and holders
of membership interests in PacificNet.com LLC. (2)
|
2.3
|
|
Supplement
to Share Exchange Agreement dated April 29, 2000, between Registrant
and
holders of membership interests in PacificNet.com LLC.
(2)
|
2.4
|
|
Agreement
dated September 30, 2000, among the Company and the “Purchasers” named
therein. (3)
|
2.5
|
|
Supplemental
Agreement dated October 3, 2000, among the Company and the “Purchasers”
named therein. (3)
|
2.6
|
|
Deed
of Waiver, dated October 3, 2000, by Creative Master Limited in
favor of
the Company. (3)
|
3.1
|
|
Certificate
of Incorporation, as amended. (4)
|
3.2
|
|
Form
of Amended By Laws of the Company. (4)
|
4 |
|
Specimen
Stock Certificate |
4.1
|
|
Securities
Purchase Agreement, dated as of January 15, 2004, among PacificNet
Inc.
and the purchasers identified therein (5)
|
4.2
|
|
Form
of Common Stock Warrant issued to each of the purchasers
(5)
|
4.3
|
|
Form
of Common Stock Warrant issued to each of the purchasers, dated
December
9, 2004 (10)
|
4.4
|
|
Form
of Common Stock Warrant issued to each of the purchasers, dated
November
17, 2004 (10)
|
4.5
|
|
Securities
Purchase Agreement, dated February 28, 2006, among PacificNet Inc.
and the
purchasers identified therein (13)
|
4.6
|
|
Form
of Variable Rate Convertible Debenture Due March 2009, issued March
13,
2006 (13)
|
4.7
|
|
Form
of Common Stock Purchase Warrant issued March 31, 2006
(13)
|
4.8
|
|
Registration
Rights Agreement, dated February 28, 2006 (17)
|
5.1+
|
|
Opinion
of Loeb & Loeb LLP regarding legality of the
securities
|
10.1
|
|
Form
of Indemnification Agreement with officers and directors.
(1)
|
10.2
|
|
Amendment
to 1998 Stock Option Plan. (8)
|
10.3
|
|
Form
of Notice of Stock Option Grant and Stock Option Agreement under
the 1998
Stock Option Plan. (2)
|
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)
|
10.6
|
|
Sub-Lease
Agreement dated August 30, 2002.
(8)
|
10.7
|
|
Agreement
dated on December 1, 2003 for the Sale and Purchase and Subscription
of
Shares in Epro Telecom Holdings Limited (9)
|
10.8
|
|
Agreement
dated on December 15, 2003 for the Sale and Purchase of Shares
in Beijing
Linkhead Technologies Co., Ltd. (9)
|
10.9
|
|
Securities
Purchase Agreement, dated as of December 9, 2004, among PacificNet
Inc.
and the purchasers identified therein (10)
|
10.10
|
|
Securities
Purchase Agreement, dated as of November 17, 2004, among PacificNet
Inc.
and the purchasers identified therein (10)
|
10.11
|
|
Agreement
for the Sale and Purchase of Shares in Shanghai Classic Group Limited
(4)
|
10.12
|
|
Agreement
for the Sale and Purchase of Shares of Cheer Era Limited
(11)
|
10.13
|
|
Agreement
for the Sale and Purchase of Shares in Pacific Smartime Solutions
Limited
|
10.14
|
|
Agreement
for the Sale and Purchase of Shares in Guangzhou Clickcom Digit-net
Science and Technology Ltd (16)
|
10.15
|
|
PacificNet
Inc. 2005 Stock Option Plan (15)
|
10.16
|
|
Agreement
for the Sale and Purchase of Shares in GuangZhou 3G Information
Technology
Co., Ltd. (16)
|
10.17 |
|
Agreements
of Consulting, Pledge and Power of Attorney of Clickcom and Sunroom
(14)
|
10.18 |
|
Agreement
of Sale and Purchase of Shares in Lion Zone Holdings
(13)
|
10.19
|
|
Form
of Lock-Up Agreement, dated March 13, 2006 (17)
|
10.20
|
|
Form
of Voting Agreement, dated March 13, 2006 (17)
|
14 |
|
Code
of Ethics (9)
|
21
|
|
List
of Subsidiaries (12)
|
23.1+
|
|
Consent
of Clancy and Co., P.L.L.C
|
23.2+
|
|
Consent
of Loeb & Loeb LLP (Included in the opinion filed as Exhibit
5.1)
|
24.1
|
|
Power
of Attorney (Included on signature page of Registration
Statement)
|
99.1
|
|
PacificNet
Organizational Group Chart (12)
|
99.2
|
|
Subscription
Agreement by and between the Company and Sino Mart Management Ltd.,
dated
as of December 9, 2001 (6)
|
99.3
|
|
19.9%
Private Placement Agreement and Amendments between Ho Shu-Jen and
PacificNet.com Inc. (7)
|
________________
+
Filed herewith.
(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 8-K filed on August 11, 2000.
(3) Incorporated
by reference to the Company’s Form 8-K filed on October 17, 2000.
(4) Incorporated
by reference to the Amendment to Registration Statement on Form S-3 on Form
SB-2/A (Registration No. 333-113209) filed on April 21, 2004.
(5) Incorporated
by reference to the Amendment No. 2 to Form S-3, initially filed on March
2,
2004.
(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 10-KSB filed on March 31, 2003.
(9) Incorporated
by referenced to the Company’s Form 10-KSB filed on April 2, 2004.
(10) Previously
filed as an exhibit to the Form SB-2 Registration Statement filed on December
30, 2004.
(11) Incorporated
by reference to the Company’s Form 8-K filed on April 19, 2004.
(12)
Incorporated by reference to the Company’s Form 8-K filed on March 6,
2006.
(13)
Incorporated by reference to the Company’s Form 8-K filed on December 20,
2005.
(14)
Incorporated by reference to the Company’s Form 10-KSB filed on April 28,
2006.
(15)
Incorporated by reference to the Company’s Definitive Proxy Statement filed
on November 19, 2006.
(16)
Incorporated by reference to the Company’s Form 10-KSB filed on April 19,
2005.
(17)
Incorporated by reference to the Company’s Form 10-KSB/A filed on November 3,
2006.
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file,
during any period in which offers or sales are being made pursuant to this
Registration Statement, a post-effective amendment to this registration
statement:
(i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of
1933.
(ii) to
reflect in the prospectus any facts or events arising after the effective
date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
(iii) to
include any material information with respect to the plan of distribution
not
previously disclosed in this Registration Statement or any material change
to
such information in this Registration Statement.
(2) That,
for
the purpose of determining any liability under the Securities Act of 1933,
each
such post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To
remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
(4) Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that
a
claim for indemnification against such liabilities (other than the payment
by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person
in connection with the securities being registered, the Registrant will,
unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing this Amendment No. 1 to Form S-1 and has authorized
this
Amendment No. 1 to Form S-1 to be signed on its behalf by the undersigned
in the
City of Hong Kong, on November 13, 2006.
|
|
|
|
PACIFICNET
INC. |
|
|
|
|
By: |
/s/ Tony
Tong |
|
|
|
Tony
Tong, Chairman and
Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Tony Tong and Victor Tong, and each of them (with
full
power of each to act alone), severally, as his or her true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments,
exhibits thereto and other documents in connection therewith) to this
Registration Statement and any subsequent registration statement filed by
the
registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended,
which relates to this Registration Statement, and to file the same, with
all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying
and
confirming all that said attorneys-in-fact and agent, or any of them, or
their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and
on the
dates indicated:
Signature
|
Title
|
Date
|
|
|
|
/s/
Tony Tong
Tony
Tong
|
Chairman
and Chief Executive Officer
|
November
13, 2006
|
|
|
|
/s/
Victor Tong
|
President
and Director
|
November
13, 2006
|
|
|
|
|
Director
|
November
13, 2006
|
|
|
|
|
Director
|
November
13, 2006
|
|
|
|
|
Director
|
November
13, 2006
|
|
|
|
|
Director
|
November
13, 2006
|
|
|
|
|
Director
|
November
13, 2006
|
|
|
|
|
|
|
*/s/
Victor Tong
|
|
|
Attorney-in-fact
|
|
|
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
|
DESCRIPTION
|
2.1
|
|
Share
Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo
Kwok and Acma Strategic Holdings Limited dated December 15, 1997.
(1)
|
2.2
|
|
Share
Exchange Agreement dated February 17, 2000, between Registrant
and holders
of membership interests in PacificNet.com LLC. (2)
|
2.3
|
|
Supplement
to Share Exchange Agreement dated April 29, 2000, between Registrant
and
holders of membership interests in PacificNet.com LLC.
(2)
|
2.4
|
|
Agreement
dated September 30, 2000, among the Company and the “Purchasers” named
therein. (3)
|
2.5
|
|
Supplemental
Agreement dated October 3, 2000, among the Company and the “Purchasers”
named therein. (3)
|
2.6
|
|
Deed
of Waiver, dated October 3, 2000, by Creative Master Limited
in favor of
the Company. (3)
|
3.1
|
|
Certificate
of Incorporation, as amended. (4)
|
3.2
|
|
Form
of Amended By Laws of the Company. (4)
|
4 |
|
Specimen
Stock Certificate |
4.1
|
|
Securities
Purchase Agreement, dated as of January 15, 2004, among PacificNet
Inc.
and the purchasers identified therein (5)
|
4.2
|
|
Form
of Common Stock Warrant issued to each of the purchasers
(5)
|
4.3
|
|
Form
of Common Stock Warrant issued to each of the purchasers, dated
December
9, 2004 (10)
|
4.4
|
|
Form
of Common Stock Warrant issued to each of the purchasers, dated
November
17, 2004 (10)
|
4.5
|
|
Securities
Purchase Agreement, dated February 28, 2006, among PacificNet
Inc. and the
purchasers identified therein (13)
|
4.6
|
|
Form
of Variable Rate Convertible Debenture Due March 2009, issued
March 13,
2006 (13)
|
4.7
|
|
Form
of Common Stock Purchase Warrant issued March 31, 2006
(13)
|
4.8
|
|
Registration
Rights Agreement, dated February 28, 2006 (17)
|
5.1+
|
|
Opinion
of Loeb & Loeb LLP regarding legality of the
securities
|
10.1
|
|
Form
of Indemnification Agreement with officers and directors.
(1)
|
10.2
|
|
Amendment
to 1998 Stock Option Plan. (8)
|
10.3
|
|
Form
of Notice of Stock Option Grant and Stock Option Agreement under
the 1998
Stock Option Plan. (2)
|
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)
|
10.6
|
|
Sub-Lease
Agreement dated August 30, 2002.
(8)
|
10.7
|
|
Agreement
dated on December 1, 2003 for the Sale and Purchase and Subscription
of
Shares in Epro Telecom Holdings Limited (9)
|
10.8
|
|
Agreement
dated on December 15, 2003 for the Sale and Purchase of Shares
in Beijing
Linkhead Technologies Co., Ltd. (9)
|
10.9
|
|
Securities
Purchase Agreement, dated as of December 9, 2004, among PacificNet
Inc.
and the purchasers identified therein (10)
|
10.10
|
|
Securities
Purchase Agreement, dated as of November 17, 2004, among PacificNet
Inc.
and the purchasers identified therein (10)
|
10.11
|
|
Agreement
for the Sale and Purchase of Shares in Shanghai Classic Group
Limited
(4)
|
10.12
|
|
Agreement
for the Sale and Purchase of Shares of Cheer Era Limited
(11)
|
10.13
|
|
Agreement
for the Sale and Purchase of Shares in Pacific Smartime Solutions
Limited
|
10.14
|
|
Agreement
for the Sale and Purchase of Shares in Guangzhou Clickcom Digit-net
Science and Technology Ltd (16)
|
10.15
|
|
PacificNet
Inc. 2005 Stock Option Plan (15)
|
10.16
|
|
Agreement
for the Sale and Purchase of Shares in GuangZhou 3G Information
Technology
Co., Ltd. (16)
|
10.17 |
|
Agreements
of Consulting, Pledge and Power of Attorney of Clickcom and Sunroom
(14)
|
10.18 |
|
Agreement
of Sale and Purchase of Shares in Lion Zone Holdings
(13)
|
10.19
|
|
Form
of Lock-Up Agreement, dated March 13, 2006 (17)
|
10.20
|
|
Form
of Voting Agreement, dated March 13, 2006 (17)
|
14 |
|
Code
of Ethics (9)
|
21
|
|
List
of Subsidiaries (12)
|
23.1+
|
|
Consent
of Clancy and Co., P.L.L.C
|
23.2+
|
|
Consent
of Loeb & Loeb LLP (Included in the opinion filed as Exhibit
5.1)
|
24.1
|
|
Power
of Attorney (Included on signature page of Registration
Statement)
|
99.1
|
|
PacificNet
Organizational Group Chart (12)
|
99.2
|
|
Subscription
Agreement by and between the Company and Sino Mart Management
Ltd., dated
as of December 9, 2001 (6)
|
99.3
|
|
19.9%
Private Placement Agreement and Amendments between Ho Shu-Jen
and
PacificNet.com Inc. (7)
|
________________
+
Filed herewith.
(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 8-K filed on August 11, 2000.
(3) Incorporated
by reference to the Company’s Form 8-K filed on October 17, 2000.
(4) Incorporated
by reference to the Amendment to Registration Statement on Form S-3 on
Form
SB-2/A (Registration No. 333-113209) filed on April 21, 2004.
(5) Incorporated
by reference to the Amendment No. 2 to Form S-3, initially filed on March
2,
2004.
(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 10-KSB filed on March 31, 2003.
(9) Incorporated
by referenced to the Company’s Form 10-KSB filed on April 2, 2004.
(10) Previously
filed as an exhibit to the Form SB-2 Registration Statement filed on December
30, 2004.
(11) Incorporated
by reference to the Company’s Form 8-K filed on April 19, 2004.
(12)
Incorporated by reference to the Company’s Form 8-K filed on March 6,
2006.
(13)
Incorporated by reference to the Company’s Form 8-K filed on December 20,
2005.
(14)
Incorporated by reference to the Company’s Form 10-KSB filed on April 28,
2006.
(15)
Incorporated by reference to the Company’s Definitive Proxy Statement filed
on November 19, 2006.
(16)
Incorporated by reference to the Company’s Form 10-KSB filed on April 19,
2005.
(17)
Incorporated by reference to the Company’s Form 10-KSB/A filed on November 3,
2006.
II-7