pacificnet_10k-123107.htm
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment No. 1
FORM
10-K/A
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION
FILE NUMBER: 000-24985
PACIFICNET
INC.
(Exact
name of registrant in its charter)
DELAWARE
|
91-2118007
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
23/F,
TOWER A, TIMECOURT, NO.6 SHUGUANG XILI,
CHAOYANG
DISTRICT, BEIJING, CHINA 100028
|
N/A
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
Telephone Number: 0086-10-59225000
Room
4203, Jinzhonghuan Business Building, Futian District, Shenzhen, China. Postal
Code: 518040
(Former
Name and Address)
Securities
Registered under Section 12(b) of the Exchange Act: NONE
Securities
Registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.0001
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act YES o NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act YES o NO x
Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days YES x NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is contained herein, and will not be contained, to the best of
the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer or a non- accelerated filer.
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer x
|
Small
Reporting Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12(b) of the Exchange Act). Yes o No x
TABLE
OF CONTENTS
Explanatory
Note:
This
Annual Report on Form 10K/A ("Form 10K/A") is being filed as Amendment No. 1 to
our Annual Report on Form 10K/A for the year ended December 31, 2007, which was
originally filed with the Securities and Exchange Commission (the "SEC") on May
13, 2008. We are amending the following items in this Amendment No.
1:
(i)
|
Part
II. Item 6. Selected Financial Data
|
(ii)
|
Part
II. Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations
|
(iii)
|
Part
IV. Item 15. Exhibits and Financial Statements
Schedules
|
[Missing Graphic Reference]
TABLE
OF CONTENTS
PART
II
|
|
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
|
ITEM
7.
|
MANAGEMENT
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
PART
IV
|
|
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENTS SCHEDULES
|
|
This
annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"the Company believes," "management believes" and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the discussion under "Description of Business," including the "Risk Factors"
described in that section, and "Management's Discussion and Analysis or Plan of
Operation." Our actual results may differ materially from results anticipated in
these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to
update them.
The
following selected financial data should be read in conjunction with our
consolidated financial statements and related notes and the following subsection
- Results of Operations as set out in this Annual Report on Form
10-K.
The table
below sets forth a summary of our selected financial data for each of the five
years ended December 31, (amounts in thousands except per share
amounts):
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Audited
|
|
|
restated
|
|
|
restated
|
|
|
restated
|
|
|
restated
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
18,994 |
|
|
$ |
29,073 |
|
|
$ |
7,081 |
|
|
$ |
10,857 |
|
|
$ |
1,217 |
|
Cost
of revenues
|
|
|
15,292 |
|
|
|
25,529 |
|
|
|
5,722 |
|
|
|
(7,887 |
) |
|
|
698 |
|
Operating
expenses
|
|
|
20,129 |
|
|
|
10,979 |
|
|
|
7,578 |
|
|
|
9,212 |
|
|
|
3,042 |
|
Loss
from operations
|
|
|
(16,427 |
) |
|
|
(7,435 |
) |
|
|
(6,219 |
) |
|
|
(6,242 |
) |
|
|
(2,523 |
) |
Loss
available to common stockholders
|
|
|
(14,195 |
) |
|
|
(12,415 |
) |
|
|
(5,145 |
) |
|
|
(5,446 |
) |
|
|
(1,878 |
) |
Basic
& Diluted Loss Per Share
|
|
$ |
( 1.19 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.78 |
) |
|
$ |
(0.36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares-Basic & Diluted
|
|
|
11,895,525 |
|
|
|
11,538,664 |
|
|
|
21,695,473 |
|
|
|
7,015,907 |
|
|
|
5,234,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (excludes restricted cash)
|
|
$ |
3,750 |
|
|
$ |
1,778 |
|
|
$ |
3,331 |
|
|
$ |
9,433 |
|
|
$ |
3,823 |
|
Working
capital
|
|
|
3,178 |
|
|
|
6,925 |
|
|
|
7,965 |
|
|
|
12,711 |
|
|
|
1,442 |
|
Total
assets
|
|
|
24,720 |
|
|
|
32,671 |
|
|
|
25,225 |
|
|
|
29,442 |
|
|
|
7,173 |
|
Total
stockholders’ equity
|
|
$ |
2,792 |
|
|
$ |
13,977 |
|
|
$ |
23,205 |
|
|
$ |
24,108 |
|
|
$ |
1,912 |
|
ITEM
7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS This annual report on Form 10-K, contains forward-looking
statements within the meaning of the federal securities laws. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which we indicate by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "we believe," "management believes" and similar
language. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Description of Business," including the "Risk
Factors" described in that section, and "Management's Discussion and Analysis or
Plan of Operation." Our actual results may differ materially from results
anticipated in these forward-looking statements.
FACTORS
THAT COULD AFFECT FUTURE RESULTS
Factors
that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things:
• The
impact of competitive products
• Changes
in laws and regulations
• 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 litigation
• Consumer
acceptance of the Company's products
• Managing
and maintaining growth
• Customer
demands
• Market
and industry conditions
• The
success of product development and new product introductions into the
marketplace
• The
departure of key members of management
• 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
Our
discussion and analysis or plan of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.
On an
on-going basis, we evaluate our estimates, including those related to accounts
receivable reserves, provisions for impairment losses of affiliated companies
and other intangible assets, income taxes and contingencies. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management
believes the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements:
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 earnings, thereby reducing our net
earnings. 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.
In the
beginning of the third quarter of 2006, the Chinese government announced that it
would implement several new policies regarding mobile phone value-added service
providers effective from July 10, 2006. These policies include a “double
confirmation” policy and the requirement that value-added service providers
provide one-month trial subscriptions. By requiring that mobile phone customers
“double-confirm” their intention to purchase services, and by requiring free
subscriptions, these policies have negatively affected value-added service
providers.
Inventory
Our
inventory purchases and commitments are made in order to build inventory to meet
forecasted demand for our products. We perform a detailed assessment of
inventory for each period, which includes a review of, among other factors,
demand requirements, product life cycle and development plans, component cost
trends, product pricing and quality issues. Based on this analysis, we record
adjustments to inventory for excess, obsolescence or impairment, when
appropriate, to reflect inventory at net realizable value. Revisions to our
inventory adjustments may be required if actual demand, component costs or
product life cycles differ from our estimates. In the event we were unable to
sell our products, the demand for our products diminished, and/or other
competitors offered similar or better products, we would be forced to record an
adjustment to inventory for impairment or obsolescence to reflect inventory at
net realizable value. The accounting effect of this entry would be a charge to
earnings, thereby reducing our net earnings.
Income
Taxes
We record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. We have considered future market growth,
forecasted earnings, future taxable income, and 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. We currently have
recorded a full valuation allowance against net deferred tax assets as we
currently believe it is more likely than not that the deferred tax assets will
not be realized. 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.
Contingencies
We may be
subject to certain asserted and unasserted claims encountered in the normal
course of business. It is our belief that the resolution of these matters will
not have a material adverse effect on our financial position or results of
operations, however, we cannot provide assurance that damages that result in a
material adverse effect on our financial position or results of operations will
not be imposed in these matters. We account for contingent liabilities when it
is probable that future expenditures will be made and such expenditures can be
reasonably estimated.
Valuation of Long-Lived Assets
Including Goodwill and Purchased Intangible Assets
We review
property, plant and equipment, goodwill and purchased intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. Our asset impairment review assesses
the fair value of the assets based on the future cash flows the assets are
expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from disposition of the asset (if any) are less than the
carrying value of the asset. This approach uses our estimates of future market
growth, forecasted revenue and costs, expected periods the assets will be
utilized and appropriate discount rates. Such evaluations of impairment of
long-lived assets including goodwill 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 earnings, thereby reducing our net
earnings.
Convertible
debt
In
accordance with recent FASB accounting guidance, due to certain factors,
including a liquidated damages provision in the registration rights agreement
and an indeterminate amount of shares to be issued upon conversion of the
debentures, the Company values and accounts for the embedded conversion feature
related to the Debentures, the Investors’ warrants, and the registration rights
as derivative liabilities. 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.
The fair
value of these derivative instruments, as determined by applying the
Black-Scholes valuation model, is adjusted quarterly. The Black-Scholes
valuation model requires the input of highly subjective assumptions, including
the expected stock price volatility. Additionally, although the Black-Scholes
model meets the requirements of SFAS 133, the fair values generated by the model
may not be indicative of the actual fair values as our derivative instruments
have characteristics significantly different from traded options. Accordingly,
the results obtained could be significantly different if other assumptions were
used. The effect of this entry would be a charge to net earnings, thereby either
increasing or reducing our net earnings based upon the assumptions used and the
results obtained.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on
issue number 06-10, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements,” (“EITF 06-10”). EITF 06-10 provides guidance to help companies
determine whether a liability for the postretirement benefit associated with a
collateral assignment split-dollar life insurance arrangement should be recorded
in accordance with either SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (if, in substance, a postretirement
benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract).
EITF 06-10 also provides guidance on how a company should recognize and measure
the asset in a collateral assignment split-dollar life insurance contract. EITF
06-10 is effective for fiscal years beginning after December 15, 2007,
though early adoption is permitted. The management is currently evaluating the
effect of this pronouncement on financial statements.
In March
19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Currently
the Company does not carry any derivative instruments and the adoption of this
statement may not have any effect on the financial statements.
In December 2007, FASB issued FASB Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statements—an amendment of
ARB No. 51. This Statement applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. Not-for-profit organizations
should continue to apply the guidance in Accounting Research Bulletin No. 51,
Consolidated Financial Statements, before the amendments made by this Statement,
and any other applicable standards, until the Board issues interpretative
guidance. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 (that is,
January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The effective date of this Statement is the same as that of the
related Statement 141(R). This Statement shall be applied prospectively as of
the beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements. The presentation and
disclosure requirements shall be applied retrospectively for all periods
presented. Management is currently evaluating the effect of this pronouncement
on financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company's fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their second quarter 2007 financial
statements.
The new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. The management is currently evaluating the effect of this
pronouncement on financial statements.
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. The requirement to measure plan assets and benefit obligations as
of the date of the employer’s fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The Company currently
does not have any defined benefit plan and so FAS 158 will not affect the
financial statements.
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.
RESULTS
OF OPERATIONS
REVENUES
Revenues
for the year ended December 31, 2007 were $18,994,000, representing a
significant year-over-year decline of 35% as compared to $29,073,000 for the
year ended December 31, 2006.
The
decrease in revenues was mainly due to a lower contribution of the low-margin
mobile phone wholesaling and distribution business in Greater China and the
disposal of major legacy CRM and call center unit during 2007. However, the
company has great growth in Gaming Products business revenues that increased to
$2,859,000 (2006: $364,000) due to the emphasis on Gaming technology development
through newly acquired gaming subsidiaries during 2007. Segmented financial
information of the four business operating groups is set out below followed by a
brief discussion of each business group.
For
the year ended December 31, 2007 (in
|
Group
1.
Outsourcing
Services
|
Group
2.
Telecom
Value-Added
Services
|
Group
3.
Products
(Telecom
&
Gaming)
|
Group
4.
Other
Business
|
Total
|
thousands
of US Dollars, except percentages) |
|
|
|
|
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
Revenues
|
2,310
|
1,839
|
14,528
|
317
|
18,994
|
(%
of Total Revenues)
|
12%
|
10%
|
76%
|
2%
|
100%
|
Earnings
/ (Loss) from Operations
|
(544)
|
737
|
(6,133)
|
(10,487)
|
(16,427)
|
|
Group
1.
Outsourcing
Services
|
Group
2.
Telecom
Value-Added
Services
|
Group
3.
Products
(Telecom
&
Gaming)
|
Group
4.
Other
Business
|
Total
|
For
the year ended December 31, 2006 (in |
|
|
|
|
|
thousands
of US Dollars, except percentages) |
Restated
|
Restated
|
Restated
|
Restated
|
Restated
|
|
($)
|
($)
|
($)
|
($)
|
($)
|
Revenues
|
1,813
|
2,784
|
23,385
|
1,091
|
29,073
|
(%
of Total Revenues)
|
6%
|
5%
|
77%
|
12%
|
100%
|
Earnings
/ (Loss) from Operations
|
(67)
|
(1,054)
|
(1,345)
|
(4,969)
|
(7,435)
|
(1) OUTSOURCING
SERVICES
Revenues
for the year ended December 31, 2007 were $2,310,000, a significant
year-over-year increase of 28% as compared to $1,813,000 for the year ended
December 31, 2006. Outsourcing services revenues made up 12% of the
Company’s total revenues for the FY 2007 which was mainly derived from software
development, R&D, and project management services.
(2) TELECOM VALUE-ADDED
SERVICES (VAS)
Revenues
for the year ended December 31, 2007 were $1,839,000, a year-over-year increase
of 34% as compared to $2,784,000 for the same period last year. The increase was
mainly due to the sales revenues from WAP-based mobile phone games and
traditional SP businesses, from which revenues accounted for 10% of the
Company’s total VAS revenues for FY2007.
(3) PRODUCTS (TELECOM &
GAMING)
Revenues
for the year ended December 31, 2007 were $14,528,000, a year-over-year decrease
of 38% from $23,385,000 for the year ended December 31, 2006. Decrease in
Products revenues, which accounted for 76 % of the Company's total
revenues for FY2007, is largely due to contraction of the Company’s mobile phone
wholesaling and distribution businesses in Greater China.
Gaming
technology revenues derived from selling Multi-player Electronic Gaming Machine
to casino operators amounted to $2,311,000 and accounted for 16% of total
revenues for FY2007.
As
planned, the company continues to scale down its low-margin mobile phone
wholesaling business and distribution business in Greater China. Revenues from
sales and distribution of mobile communication products, accessories, phone
cards and mobile SIM cards, and telecom related services in Hong Kong and
Greater China amounted to $11,669,000, a significant year-over-year decline of
33% as compared to $17,268,000 for the same periods in 2006.
(4) OTHER
BUSINESS
Revenues
for other business for the year ended December 31, 2007 was $317,000, a
significant decrease of 71% as compared to $1,091,000 for the year ended
December 31, 2006 due to the disposal of certain subsidiaries during
2007.
COST
OF REVENUES
Cost of
revenues for the year ended December 31, 2007 were $15,292,000, representing a
year-over-year decrease of 40% as compared to $25,529,000 for the same period of
prior year. Cost of revenues as a percentage of the corresponding revenues was
approximately 81% for FY2007 as compared to 88% for the same period of prior
year.
(1) OUTSOURCING
SERVICES
Cost of
revenues from outsourcing services for FY2007 amounted to $2,199,000, a
year-over-year increase of 55% as compared with 2006. Increase in cost of
revenues was largely due to headcount increase at service staff
level.
(2) TELECOM VALUE-ADDED
SERVICES (VAS)
Cost of
revenues from VAS for FY2007 was $508,000, a decrease of 75% as compared with
2006 due to the sale of a major telecom CRM unit during 2007.
(3) PRODUCTS (TELECOM &
GAMING)
Cost of
revenues derived from Products for FY2007 amounted to $12,538,000, a reduction
of 43% as compared with the same periods in 2006. Approximately 87%
of the cost of revenues related to Products for the third quarter of FY2007 was
derived from the sales of mobile phones and 13% was derived from the sales of
electronic gaming machines.
GROSS
PROFIT
Gross
profit for FY2007 was $3,702,000 (2006: $3,544,000). Gross margin was 20% for
FY2007 as compared to 13% for the same period of prior
year. Improvement in gross margin was attributed to higher margin for
Multiplayer Gaming Machines (39%) and Electronic Slot Machines
(60%).
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
Selling,
general and administrative expenses (SG&A) totaled $13,480,000 for FY2007, a
year-over-year increase of 69% as compared to $7,968,000 for the same periods of
prior year. The increased SG&A was mainly due to the provision
for captioned USD5 million against 3G receivables during 2007. SG&A consists
primarily of indirect staff salaries, office rental, insurance, advertising
expenditures and traveling costs.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31,2006
|
|
Percentage
Change
|
|
|
|
Audited
|
|
Restated
|
|
|
|
|
Remuneration
and related expenses
|
|
$ |
4,498 |
|
$ |
2,293 |
|
%
|
96 |
|
Office
(majority is rental and utilities)
|
|
|
821 |
|
|
599 |
|
|
37 |
|
Travel
|
|
|
440 |
|
|
302 |
|
|
46 |
|
Entertainment
|
|
|
158 |
|
|
103 |
|
|
54 |
|
Professional
(legal and consultant)
|
|
|
600 |
|
|
357 |
|
|
68 |
|
Audit
|
|
|
697 |
|
|
156 |
|
|
346 |
|
Selling
|
|
|
470 |
|
|
215 |
|
|
118 |
|
Bad
Debts
|
|
|
5,319 |
|
|
4,537 |
|
|
17 |
|
Other
|
|
|
475 |
|
|
(595 |
) |
% |
(180 |
) |
Total
|
|
$ |
13,480 |
|
$ |
7,968 |
|
|
69 |
|
(1) OUTSOURCING
SERVICES
Selling,
General and Administrative expenses for outsourcing services were $757,000 for
the year ended December 31, 2007, an increase of 67% from $453,000 for the year
ended December 31, 2006.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
Group
1. Outsourcing Services
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year ended December 31, 2007
|
|
For
the year ended December 31, 2006
|
|
Percentage
Change
|
|
|
|
Audited
|
|
Restated
|
|
|
|
|
Remuneration
and related expenses
|
|
$ |
463 |
|
$ |
317 |
|
% |
46 |
|
Office
(majority is rental and utilities)
|
|
|
65 |
|
|
35 |
|
|
83 |
|
Travel
|
|
|
87 |
|
|
12 |
|
|
653 |
|
Entertainment
|
|
|
13 |
|
|
5 |
|
|
191 |
|
Professional
(legal and consultant)
|
|
|
7 |
|
|
9 |
|
|
(28 |
) |
Audit
|
|
|
4 |
|
|
3 |
|
|
44 |
|
Selling
|
|
|
11 |
|
|
0 |
|
|
2,225 |
|
Bad
Debts
|
|
|
100 |
|
|
49 |
|
|
103 |
|
Other
|
|
|
7 |
|
|
23 |
|
%
|
(70 |
) |
Total
|
|
$ |
757 |
|
$ |
453 |
|
|
67 |
|
(2) TELECOM VALUE-ADDED
SERVICES (VAS)
Selling,
General and Administrative expenses for VAS were $471,000 for the year ended
December 31, 2007 as compared to $603,000 in 2006.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
Group
2. Telecom Value-Added Services
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31, 2006
|
|
Percentage
Change
|
|
|
|
Audited
|
|
Restated
|
|
|
|
|
Remuneration
and related expenses
|
|
$ |
255 |
|
$ |
337 |
|
%
|
(24 |
) |
Office
(majority is rental and utilities)
|
|
|
66 |
|
|
122 |
|
|
(46 |
) |
Travel
|
|
|
42 |
|
|
72 |
|
|
(41 |
) |
Entertainment
|
|
|
26 |
|
|
38 |
|
|
(32 |
) |
Professional
(legal and consultant)
|
|
|
|
|
|
|
|
|
n/a |
|
Audit
|
|
|
3 |
|
|
|
|
|
n/a |
|
Selling
|
|
|
11 |
|
|
10 |
|
|
12 |
|
Bad
Debts
|
|
|
46 |
|
|
3 |
|
|
1,693 |
|
Other
|
|
|
23 |
|
|
23 |
|
|
1 |
|
Total
|
|
$ |
471 |
|
$ |
603 |
|
% |
(22 |
) |
(3) PRODUCTS (TELECOM &
GAMING)
Selling,
General and Administrative expenses for products (telecom & gaming) were
$2,548,000 for the year ended December 31, 2007, a year-over-year increase of 7%
as compared to $2,370,000 for the year ended December 31, 2006.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
Group
3. Products (Telecom & Gaming)
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31, 2006
|
|
Percentage
Change
|
|
|
|
Audited
|
|
Restated
|
|
|
|
|
Remuneration
and related expenses
|
|
$ |
1,227 |
|
$ |
315 |
|
% |
289 |
|
Office
(majority is rental and utilities)
|
|
|
455 |
|
|
158 |
|
|
189 |
|
Travel
|
|
|
146 |
|
|
47 |
|
|
208 |
|
Entertainment
|
|
|
99 |
|
|
40 |
|
|
147 |
|
Professional
(legal and consultant)
|
|
|
104 |
|
|
19 |
|
|
437 |
|
Audit
|
|
|
43 |
|
|
0 |
|
|
25,576 |
|
Selling
|
|
|
344 |
|
|
95 |
|
|
264 |
|
Bad
Debts
|
|
|
(126 |
) |
|
1,627 |
|
|
(108 |
) |
Other
|
|
|
256 |
|
|
69 |
|
% |
272 |
|
Total
|
|
$ |
2,548 |
|
$ |
2,370 |
|
|
7 |
|
(4) OTHER
BUSINESS
Selling,
General and Administrative expenses were $9,703,000 for the year ended December
31, 2007, a substantial increase of 114% as compared to $4,542,000 for 2006. The
substantial increase was mainly due to the provision for bad debts for USD$5
million from the sale and disposal of Gz3G during 2007.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
Group
4. Other Business
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31, 2006
|
|
Percentage
Change
|
|
|
|
Audited
|
|
Restated
|
|
|
|
|
Remuneration
and related expenses
|
|
$ |
2,554 |
|
$ |
1,325 |
|
% |
99 |
|
Office
(majority is rental and utilities)
|
|
|
235 |
|
|
284 |
|
|
(17 |
) |
Travel
|
|
|
165 |
|
|
172 |
|
|
(4 |
) |
Entertainment
|
|
|
20 |
|
|
21 |
|
|
(4 |
) |
Professional
(legal and consultant)
|
|
|
489 |
|
|
328 |
|
|
49 |
|
Audit
|
|
|
648 |
|
|
153 |
|
|
322 |
|
Selling
|
|
|
104 |
|
|
110 |
|
|
(6 |
) |
Bad
Debts
|
|
|
5,299 |
|
|
2,858 |
|
|
85 |
|
Other
|
|
|
189 |
|
|
(709 |
) |
% |
(127 |
) |
Total
|
|
$ |
9,703 |
|
$ |
4,542 |
|
|
114 |
|
DEPRECIATION
AND AMORTIZATION EXPENSES
Depreciation
and amortization expenses were $752,000 for the year ended December 31, 2007,
representing a year-over-year decrease of 51% as compared $1,536,000 for the
same periods of the prior year. Decrease in depreciation and amortization was
mainly due to the amortize issuance cost of $835,000 carry forward in the 2006
re-audit.
Depreciation
|
|
|
|
|
|
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31, 2006
|
|
|
Percentage
Change
|
|
Audited
|
|
Restated
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
(2 |
) |
|
$ |
6 |
|
|
% |
(137 |
) |
Group
2. Telecom Value-Added Services
|
|
|
167 |
|
|
|
268 |
|
|
|
(38 |
) |
Group
3. Products (Telecom & Gaming)
|
|
|
116 |
|
|
|
38 |
|
|
|
205 |
|
Group
4. Other Business
|
|
|
159 |
|
|
|
89 |
|
|
|
79 |
|
Total
|
|
$ |
440 |
|
|
$ |
401 |
|
|
% |
10 |
|
Amortization
|
|
|
|
|
|
|
(in
thousands of US Dollars, except percentages)
|
For
the year
ended
December
31, 2007
|
|
For
the year
ended
December
31, 2006
|
|
Percentage
Change
|
|
|
Audited
|
|
|
Restated
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
|
|
|
$ |
- |
|
|
% |
n/a |
|
Group
2. Telecom Value-Added Services
|
|
|
1 |
|
|
|
- |
|
|
|
n/a |
|
Group
3. Products (Telecom & Gaming)
|
|
|
311 |
|
|
|
29 |
|
|
|
972 |
|
Group
4. Other Business
|
|
|
|
|
|
1,106 |
|
|
|
(100 |
) |
Total
|
|
$ |
312 |
|
|
$ |
1,135 |
|
|
% |
(72 |
) |
LOSS
FROM OPERATIONS
On a
year-over-year basis, Loss from operations amounted to $16,427,000 for FY2007,
as compared to $7,434,000 for FY2006. During this year, provision of
$3.5 million against receivable from 3G purchaser and extra goodwill impairment
of approximately $5,461,000 resulted in and reduced the Operating Loss directly
for the fiscal year ended December 31, 2007.
(in
thousands of US Dollars, except percentages)
|
|
Group
1.
Outsourcing
Services
|
|
|
Group
2.
Telecom
Value-Added
Services
|
|
|
Group
3.
Products
(Telecom
& Gaming)
|
|
|
Group
4.
Other
Business
|
|
|
For
the year
ended
December
31, 2007
|
|
|
For
the year
ended
December
31, 2006
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Operating
profits (Loss) before non-cash accounting provisions
|
|
|
3,520 |
|
|
|
783 |
|
|
|
(6,408 |
) |
|
|
(3,491 |
) |
|
|
(5,596 |
) |
|
|
2,945 |
|
Allowance
for doubtful accounts (1)
|
|
|
(100 |
) |
|
|
(46 |
) |
|
|
1,772 |
|
|
|
(6,945 |
) |
|
|
(5,319 |
) |
|
|
(4,537 |
) |
Goodwill
impairment (2)
|
|
|
(3,964 |
) |
|
|
|
|
|
|
(1,497 |
) |
|
|
|
|
|
|
(5,461 |
) |
|
|
(5,601 |
) |
Stock-based
compensation expenses (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
(51 |
) |
|
|
(242 |
) |
Operating
profits (Loss)
|
|
|
(544 |
) |
|
|
737 |
|
|
|
(6,133 |
) |
|
|
(10,487 |
) |
|
|
(16,427 |
) |
|
|
(7,435 |
) |
INTEREST
INCOME / (EXPENSES), NET
(in
thousands of US Dollars, except percentages) |
|
For
the year ended December
31, 2007
|
|
|
For
the year ended
December
31, 2006
|
|
|
Percentage
Change
|
|
|
|
|
Audited
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
37 |
|
|
$ |
162 |
|
|
% |
(77 |
) |
Interest
expenses
|
|
|
859 |
|
|
|
1,058 |
|
|
|
(19 |
) |
Interest
income / (expenses), net
|
|
$ |
(822 |
) |
|
$ |
(896 |
) |
|
% |
(8 |
) |
Interest
income was $37,000 for the year ended December 31, 2007, a decrease of 77% as
compared to $162,000 for the year ended December 31, 2006. Interest expenses
were $859,000 for the year ended December 31, 2007, a decrease of 19% as
compared to $1,058,000 for the year ended December 31, 2006. The Decrease in
Interest Income (Expenses) was mainly due to the divestiture of telecom CRM
units during 2007, and most of the interest expenses of this year were
attributed to the interest accrual of $499,000 for Five Million Convertible
Note.
Interest
Expenses (in thousands of US
Dollars, except percentages)
|
|
For
the year ended December 31, 2007
|
|
|
For
the year ended December 31, 2006
|
|
|
Percentage
Change
|
|
|
|
Audited
|
|
|
Restated
|
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
6 |
|
|
$ |
22 |
|
|
% |
n/a |
|
Group
2. Telecom Value-Added Services
|
|
|
2 |
|
|
|
|
|
|
|
n/a |
|
Group
3. Products (Telecom & Gaming)
|
|
|
445 |
|
|
|
56 |
|
|
|
695 |
|
Group
4. Other Business
|
|
|
406 |
|
|
|
980 |
|
|
|
(59 |
|
Total
|
|
$ |
859 |
|
|
$ |
1,058 |
|
|
% |
(19 |
|
Interest
Income
(in
thousands of US Dollars, except percentages)
|
|
For
the year ended December 31, 2007
|
|
|
For
the year ended December 31, 2006
|
|
|
Percentage
Change
|
|
|
|
Audited
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
|
|
|
$ |
- |
|
|
%
|
n/a |
|
Group
2. Telecom Value-Added Services
|
|
|
2 |
|
|
|
- |
|
|
|
n/a |
|
Group
3. Products (Telecom & Gaming)
|
|
|
18 |
|
|
|
140 |
|
|
|
(87 |
) |
Group
4. Other Business
|
|
|
17 |
|
|
|
22 |
|
|
|
(23 |
) |
Total
|
|
$ |
37 |
|
|
$ |
162 |
|
|
%
|
(77 |
) |
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 relate to each subsidiary’s 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, 2007, the non-operating income or sundry income of
$1,339,000 included in Statement of Operations was mainly derived from
the investment income of $561,000, leasehold income $65,000, software service
income $78,000 and various other income totaling $635,000 .
For the
year ended December 31, 2006, the non-operating income or sundry income was
$108,000 mainly derived from leasehold income of $79,000 and various other
incomes totaling $29,000.
(in
thousands of US Dollars, except percentages)
|
|
For
the year ended December 31, 2007
|
|
|
For
the year ended December 31, 2006
|
|
|
Percentage
Change
|
|
|
|
Audited
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
1 |
|
|
$ |
- |
|
|
%
|
n/a |
|
Group
2. Telecom Value-Added Services
|
|
|
42 |
|
|
|
- |
|
|
|
n/a |
|
Group
3. Products (Telecom & Gaming)
|
|
|
115 |
|
|
|
- |
|
|
|
n/a
|
|
Group
4. Other Business
|
|
|
1,181 |
|
|
|
108 |
|
|
|
994
|
|
Total
|
|
$ |
1,339 |
|
|
$ |
108 |
|
|
%
|
1,140
|
|
SHARE
OF PROFIT OF ASSOCIATED COMPANIES
An
aggregate of $77,000 in loss from investment has been recognized for the year
ended December 31, 2007 as a result of sharing loss of our 40% ownership
interest in Bell-Pact Shanghai, acquired in January 2007.
An
aggregate of $17,000 in earnings from investment has been recognized for the
year ended December 31, 2006 as a result of sharing profits and loss of our 20%
ownership interest in Take1 Technology – ($295,000), acquired in April 2004; 20%
ownership in MOABC – ($19,000), acquired in October 2006; and, 45% ownership
interest in PactGames – $331,000, acquired in September 2006 (ownership has been
increased to 51% interest as of December 31, 2007).
INCOME
TAXES
The
income taxes expenses for the Company’s subsidiaries were $7,000 and $18,000 for
the years ended December 31, 2007 and 2006 respectively. The provision of income
taxes depends on the tax rate and tax exemption. 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. Certain subsidiaries and VIEs are qualified
for preferred high technology or software enterprise tax status, and they are
subject to preferential tax rate of 15% under PRC Income Tax Rules.
(in
thousands of US Dollars, except percentages)
|
|
For
the year ended December 31, 2007
|
|
|
For
the year ended December 31, 2006
|
|
|
Percentage
Change
|
|
|
|
Audited
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
1. Outsourcing Services
|
|
$ |
|
|
|
$ |
|
|
|
%
|
n/a |
|
Group
2. Telecom Value-Added Services
|
|
|
3 |
|
|
|
|
|
|
|
n/a |
|
Group
3. Products (Telecom & Gaming)
|
|
|
4 |
|
|
|
|
|
|
|
n/a
|
|
Group
4. Other Business
|
|
|
|
|
|
|
18 |
|
|
|
(100
|
) |
Total
|
|
$ |
7 |
|
|
$ |
18 |
|
|
%
|
(61
|
) |
MINORITY
INTERESTS
Minority
interests for the year ended December 31, 2007 and 2006 was $37,000 and $58,000
respectively. Minority interests represented minority ownership interests in
subsidiaries consolidated in the Company’s consolidated financial
statement.
NET
LOSS
On a
year-over-year basis, Net Loss amounted to $14,195,000 for FY2007, a
year-over-year decrease of 15% as compared to $12,415,000 for the same period of
prior year. Net Loss incurred in FY 2007 was mainly due the
substantial provision $3.5 million against receivable from 3G purchaser, $5.5
million of goodwill impairment, and certain write-offs, compensation costs and
provisions for bad debt related to our legacy telecom operation. Segmented
details are set out below:
(in
thousands of US Dollars, except percentages)
|
|
Group
1.
Outsourcing
Services
|
|
|
Group
2. Telecom
Value-Added
Services
|
|
|
Group
3. Products (Telecom & Gaming)
|
|
|
Group
4.
Other
Business
|
|
|
For
the year ended
December
31, 2007
|
|
|
For
the year ended
December
31, 2006
|
|
|
Percentage
Change
|
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
($)
|
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profits (Loss)
|
|
|
(544 |
) |
|
|
737 |
|
|
|
(6,133 |
) |
|
|
(10,487 |
) |
|
|
(16,427 |
) |
|
|
(7,435 |
) |
|
|
121 |
|
Interest
income / (expenses), net
|
|
|
(6 |
) |
|
|
1 |
|
|
|
(430 |
) |
|
|
(387 |
) |
|
|
(822 |
) |
|
|
(896 |
) |
|
|
(8 |
) |
Loss
in change in fair value of warrants
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(214 |
) |
|
|
(100 |
) |
Liquidated
damages
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,817 |
) |
|
|
(100 |
) |
Sundry
income
|
|
|
1 |
|
|
|
42 |
|
|
|
115 |
|
|
|
1,181 |
|
|
|
1,339 |
|
|
|
108 |
|
|
|
1,140 |
|
Shares
of earning from investment on equity method
|
|
|
|
|
|
|
|
|
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
|
|
17 |
|
|
|
(553 |
) |
Earnings
before Income Taxes, Minority Interest and Discontinued
Operations
|
|
|
(549 |
) |
|
|
780 |
|
|
|
(6,525 |
) |
|
|
( 9,693 |
) |
|
|
( 15,987 |
) |
|
|
(12,237 |
) |
|
|
31 |
|
CONTRACTUAL
OBLIGATIONS
CONTRACTUAL
OBLIGATIONS
Cash
resources required to satisfy short and long term contractual obligations as of
December 31, 2007 are tabulated below:
Payments
Due by Period
Contractual
Obligations (in thousands)
|
|
Total
|
|
Less
than
1
year
|
|
1-5
years
|
|
After
5
years
|
|
Line
of credit
|
|
$ |
100 |
|
|
100 |
|
|
- |
|
|
- |
|
Bank
Loans
|
|
|
1,824 |
|
|
80 |
|
|
370 |
|
|
1,374 |
|
Operating
leases
|
|
|
404 |
|
|
210 |
|
|
194 |
|
|
- |
|
Capital
leases
|
|
|
N/A |
|
|
- |
|
|
- |
|
|
|
Total
cash contractual obligations
|
|
$ |
2,328 |
|
|
390 |
|
|
564 |
|
|
1,374 |
|
OFF-BALANCE
SHEET ARRANGEMENTS
There
were no off-balance sheet guarantees, interest rate swap transactions, foreign
currency forward contracts or long term purchase commitments outstanding as of
December 31, 2007. Further, the Company had not engaged in any non-exchange
trading activities during 2007.
LIQUIDITY
AND CAPITAL RESOURCES
OVERVIEW
Net cash
and cash equivalents at December 31, 2007 were approximately $3.75million,
an increase of approximately $1.97 million compared to December 31, 2006.
This change resulted from cash used in operations of $1.08 million, cash
provided by investing activities of $0.52 million and cash provided by financing
activities of $2.29 million.
Significant
components of cash flows from operations are as follows:
(Amounts
in millions of US Dollars)
|
|
|
|
Net
loss
|
|
$ |
(14,195 |
) |
Non-cash
and/or nonrecurring items
|
|
|
12,008 |
|
Other
changes in assets and liabilities
|
|
|
1,108 |
|
Net
cash used in operations
|
|
$ |
(1,079 |
) |
Other
significant sources (uses) of cash during 2007 were mainly attribute to $3.5
million of provision against receivables from 3G purchaser, $2.95 million
proceeds from issuance of convertible debenture, $5.5 million of Goodwill
impairment and $1.5 million of accounts receivable and other current assets,
..
WORKING
CAPITAL
The
Company’s working capital decreased to $3,205,000 at December 31, 2007, as
compared to $6,925,000 at December 31, 2006. The decreased working capital
primarily resulted from the decreased $6,865,000 in net assets held for
dispositions, and the decreased $2,311,000 in other current assets.
ISSUANCE
OF COMMON STOCK
During
the year ended December 31, 2007, the Company had the following equity
transactions (i) 199,444 shares of common stock were issued as the monthly
principal redemption shares for 8 million convertible debentures from January to
March, such shares are valued at $1,090,914; (ii) 41,426 treasury shares were
sold to the open market with total consideration $127,000; (iii) 202,000 shares
as a results of exercise of stock options with cash consideration of $406,000.
As of December 31, 2007, the Company received $196,000 from exercise of stock
options.
CAPITAL
RESOURCES
As of
December 31, 2007, we had approximately $3,750,000 in cash. We regularly review
our cash funding requirements and attempt to meet those requirements through a
combination of cash on hand; cash provided by operations, available borrowings
under bank lines of credit and possible future public or private equity
offerings. We evaluate possible acquisitions of, or investments in, businesses
that are complementary to ours, which transactions may require the use of cash.
We believe that our cash, other liquid assets, operating cash flows, credit
arrangements, access to equity capital markets, taken together, provide adequate
resources to fund ongoing operating expenditures. In the event that they do not,
we may require additional funds in the future to support our working capital
requirements or for other purposes and may seek to raise such additional funds
through the sale of public or private equity as well as from other
sources.
On
February 6, 2007, our subsidiary, PacificNet Games Limited (PactGames) entered
into a definitive agreement for a $5 million financing in the form of secured
convertible debt with Pope Asset Management, LLC (Pope), an institutional
investor. Proceeds from the financing was be used to provide PactGames with
additional working capital in expanding its gaming technology operations,
funding for strategic acquisitions in China and funding for general corporate
purposes.
The $5
million convertible debt issued by PactGames to Pope, matures on February 6,
2010, and may be converted into 26% to 32% ownership interest in PactGames based
on reaching certain net income milestones during fiscal year 2007 The interest
rate on the convertible debt will initially be set at 8%, and shall increase to
15% if the note is not converted prior to maturity.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
The
following exhibits are filed as part of this report:
EXHIBIT
NUMBER
|
DESCRIPTION
|
3.1
|
Certificate
of Incorporation, as amended. (1)
|
3.2
|
Form
of Amended By Laws of the Company.(1)
|
4.0
|
Specimen
Stock Certificate of the Company (3)
|
4.1
|
Securities
Purchase Agreement, dated as of January 15, 2004, among PacificNet Inc.
and the purchasers identified therein (2)
|
4.2
|
Form
of Common Stock Warrant issued to each of the purchasers
(2)
|
4.3
|
Form
of Common Stock Warrant issued to each of the purchasers, dated December
9, 2004 (3)
|
4.4
|
Form
of Common Stock Warrant issued to each of the purchasers, dated November
17, 2004 (3)
|
4.5
|
Securities
Purchase Agreement, dated February 28, 2006, among PacificNet Inc. and the
Holders identified therein (4)
|
4.6
|
Form
of Variable Rate Convertible Debenture due March 2009 issued to each of
the Holders (4)
|
4.6(a)
|
Form
of Amended and Restated Variable Rate Convertible Debenture due March 2009
issued to each of the Holders
|
4.7
|
Form
of Common Stock Purchase Warrant issued to each of the holders
(4)
|
4.8
|
Form
of Registration Rights Agreement, dated February 28,
2006(5)
|
4.9
|
Form
of Variable Rate Convertible Debenture due February
2009
|
10.1
|
Form
of Indemnification Agreement with officers and directors.
(6)
|
10.2
|
Amendment
to 1998 Stock Option Plan. (7)
|
10.3
|
Agreement
dated on December 1, 2003 for the Sale and Purchase and Subscription of
Shares in Epro Telecom Holdings Limited (8)
|
10.4
|
Agreement
dated on December 15, 2003 for the Sale and Purchase of Shares in Beijing
Linkhead Technologies Co., Ltd. (8)
|
10.5
|
Securities
Purchase Agreement, dated as of December 9, 2004, among PacificNet Inc.
and the purchasers identified therein (3)
|
10.6
|
Securities
Purchase Agreement, dated as of November 17, 2004, among PacificNet Inc.
and the purchasers identified therein (3)
|
10.7
|
Agreement
for the Sale and Purchase of Shares in Shanghai Classic Group Limited
(4)
|
10.8
|
Agreement
for the Sale and Purchase of Shares of Cheer Era Limited
(9)
|
10.9
|
Agreement
for the Sale and Purchase of Shares in Pacific Smartime Solutions
Limited
|
10.10
|
Agreement
for the Sale and Purchase of Shares in Guangzhou Clickcom Digit-net
Science and Technology Ltd. (11)
|
10.11
|
PacificNet
Inc. Amended and Restated 2005 Stock Option Plan (10)
|
10.12
|
Agreement
for the Sale and Purchase of Shares in GuangZhou 3G Information Technology
Co., Ltd. (11)
|
10.13
|
Agreements
of Consulting, Pledge, and Power of Attorney of Clickcom and Sunroom
(11
|
10.14
|
Agreement
for the Sale and Purchase of Shares in Lion Zone Holdings
(12)
|
10.15
|
Form
of Lock-Up Agreement, dated March 13, 2006(5)
|
10.16
|
Form
of Voting Agreement, dated March 13, 2006(5)
|
10.17
|
Agreement
among PacificNet Strategic Investment Holdings LimiteD, Shenzhen
GuHaiGuanChao Investment Consultant Co., Ltd., Lion Zone Holdings Limited
and Mr. Wang Wenming for the termination of “the Agreement for the Sale
and Purchase 51% Shares of Lion Zone Holdings Limited”
(13)
|
10.18+
|
Tony
Tong Employment Agreement
|
10.19+
|
Victor
Tong Employment Agreement
|
10.20
|
Consulting
Service Agreement with Daniel Howing Lui (14)
|
14
|
Code
of Ethics (8)
|
21
|
List
of Subsidiaries (Included in Exhibit 99.1)
|
|
Corporate
structure chart of our corporate and share ownership
structure
|
+ Filed
herewith.
(1)
|
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.
|
(2)
|
Incorporated
by reference to the Registration Statement on Form S-3 filed on March 2,
2004
|
(3)
|
Incorporated
by reference to the Form SB-2 Registration Statement filed on December 31,
2004.
|
(4)
|
Incorporated
by reference to the Company's Form 8-K filed on March 6,
2006
|
(5)
|
Incorporated
by reference to the Company’s Form 10-KSB/A filed on November 3,
2006.
|
(6)
|
Incorporated
by reference to the Company's Form SB-2 filed on October 21,
1998.
|
(7)
|
Incorporated
by reference to the Company's 10-KSB filed on March 31,
2003.
|
(8)
|
Incorporated
by referenced to the Company's Form 10-KSB filed on April 2,
2004.
|
(9)
|
Incorporated
by reference to the Company's Form 8-K filed on April 19,
2004.
|
(10)
|
Incorporated
by reference to the Company’s Definitive Proxy Statement filed on October
26, 2006.
|
(11)
|
Incorporated
by reference to the Company’s Form 10-KSB filed on April 19,
2005.
|
(12)
|
Incorporated
by reference to the Company's Form 8-K filed on December 20,
2005.
|
(13)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 27,
2006.
|
(14)
|
Incorporated
by reference to the Company’s Form 8-K filed on February 23,
2007.
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
PACIFICNET
INC.
|
|
|
|
|
|
|
Date:
July 3, 2008
|
BY:
/S/ TONY TONG
|
|
|
|
Tony
Tong
Chief
Executive Officer (Principal Executive Officer)
|
|
|
|
|
|
|
Date:
July 3, 2008
|
BY:
/S/ PHILLIP WONG
|
|
|
|
Phillip
Wong
Chief
Financial Officer (Principal Financial Officer)
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
TONY TONG
|
|
Director,
Chairman and CEO
|
|
July 3,
2008
|
Tony
Tong
|
|
|
|
|
|
|
|
|
|
/s/
VICTOR TONG
|
|
Director,
President
|
|
July 3,
2008
|
Victor
Tong
|
|
|
|
|
|
|
|
|
|
/s/
PHILLIP WONG
|
|
Chief
Financial Officer
|
|
|
Phillip
Wong
|
|
|
|
|
/s/
SHAO JIAN WANG
|
|
Director
|
|
July
3, 2008
|
Shao
Jian Wang
|
|
|
|
|
|
|
|
|
|
/S/
SU GUO JING
|
|
Director
|
|
July
3, 2008
|
Su
Guo Jing
|
|
|
|
|
|
|
|
|
|
/S/
TAO JIN
|
|
Director
|
|
July
3, 2008
|
Tao
Jin
|
|
|
|
|
|
|
|
|
|
/S/
JEREMY GOODWIN
|
|
Director
|
|
July
3, 2008
|
Jeremy
Goodwin
|
|
|
|
|
|
|
|
|
|
/S/
STEPHEN CRYSTAL
|
|
Director
|
|
July
3, 2008
|
Stephen
Crystal
|
|
|
|
|
|
|
|
|
|
EXHIBITS
EXHIBIT
NUMBER
|
DESCRIPTION
|
3.1
|
Certificate
of Incorporation, as amended. (1)
|
3.2
|
Form
of Amended By Laws of the Company.(1)
|
4.0
|
Specimen
Stock Certificate of the Company (3)
|
4.1
|
Securities
Purchase Agreement, dated as of January 15, 2004, among PacificNet Inc.
and the purchasers identified therein (2)
|
4.2
|
Form
of Common Stock Warrant issued to each of the purchasers
(2)
|
4.3
|
Form
of Common Stock Warrant issued to each of the purchasers, dated December
9, 2004 (3)
|
4.4
|
Form
of Common Stock Warrant issued to each of the purchasers, dated November
17, 2004 (3)
|
4.5
|
Securities
Purchase Agreement, dated February 28, 2006, among PacificNet Inc. and the
Holders identified therein (4)
|
4.6
|
Form
of Variable Rate Convertible Debenture due March 2009 issued to each of
the Holders (4)
|
4.6(a)+
|
Form
of Amended and Restated Variable Rate Convertible Debenture due March 2009
issued to each of the Holders
|
4.7
|
Form
of Common Stock Purchase Warrant issued to each of the holders
(4)
|
4.8
|
Form
of Registration Rights Agreement, dated February 28,
2006(5)
|
4.9+
|
Form
of Variable Rate Convertible Debenture due February
2009
|
10.1
|
Form
of Indemnification Agreement with officers and directors.
(6)
|
10.2
|
Amendment
to 1998 Stock Option Plan. (7)
|
10.3
|
Agreement
dated on December 1, 2003 for the Sale and Purchase and Subscription of
Shares in Epro Telecom Holdings Limited (8)
|
10.4
|
Agreement
dated on December 15, 2003 for the Sale and Purchase of Shares in Beijing
Linkhead Technologies Co., Ltd. (8)
|
10.5
|
Securities
Purchase Agreement, dated as of December 9, 2004, among PacificNet Inc.
and the purchasers identified therein (3)
|
10.6
|
Securities
Purchase Agreement, dated as of November 17, 2004, among PacificNet Inc.
and the purchasers identified therein (3)
|
10.7
|
Agreement
for the Sale and Purchase of Shares in Shanghai Classic Group Limited
(4)
|
10.8
|
Agreement
for the Sale and Purchase of Shares of Cheer Era Limited
(9)
|
10.9
|
Agreement
for the Sale and Purchase of Shares in Pacific Smartime Solutions
Limited
|
10.10
|
Agreement
for the Sale and Purchase of Shares in Guangzhou Clickcom Digit-net
Science and Technology Ltd. (11)
|
10.11
|
PacificNet
Inc. Amended and Restated 2005 Stock Option Plan (10)
|
10.12
|
Agreement
for the Sale and Purchase of Shares in GuangZhou 3G Information Technology
Co., Ltd. (11)
|
10.13
|
Agreements
of Consulting, Pledge, and Power of Attorney of Clickcom and Sunroom
(11
|
10.14
|
Agreement
for the Sale and Purchase of Shares in Lion Zone Holdings
(12)
|
10.15
|
Form
of Lock-Up Agreement, dated March 13, 2006(5)
|
10.16
|
Form
of Voting Agreement, dated March 13, 2006(5)
|
10.17
|
Agreement
among PacificNet Strategic Investment Holdings Limited, Shenzhen
GuHaiGuanChao Investment Consultant Co., Ltd., Lion Zone Holdings Limited
and Mr. Wang Wenming for the termination of “the Agreement for the Sale
and Purchase 51% Shares of Lion Zone Holdings Limited”
(13)
|
10.18+
|
Tony
Tong Employment Agreement
|
10.19+
|
Victor
Tong Employment Agreement
|
10.20
|
Consulting
Service Agreement with Daniel Howing Lui (14)
|
14
|
Code
of Ethics (8)
|
21
|
List
of Subsidiaries (Included in Exhibit 99.1)
|
99.1+
|
Corporate
structure chart of our corporate and share ownership
structure
|
(1)
|
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.
|
(2)
|
Incorporated
by reference to the Registration Statement on Form S-3 filed on March 2,
2004
|
(3)
|
Incorporated
by reference to the Form SB-2 Registration Statement filed on December 31,
2004.
|
(4)
|
Incorporated
by reference to the Company's Form 8-K filed on March 6,
2006
|
(5)
|
Incorporated
by reference to the Company’s Form 10-KSB/A filed on November 3,
2006.
|
(6)
|
Incorporated
by reference to the Company's Form SB-2 filed on October 21,
1998.
|
(7)
|
Incorporated
by reference to the Company's 10-KSB filed on March 31,
2003.
|
(8)
|
Incorporated
by referenced to the Company's Form 10-KSB filed on April 2,
2004.
|
(9)
|
Incorporated
by reference to the Company's Form 8-K filed on April 19,
2004.
|
(10)
|
Incorporated
by reference to the Company’s Definitive Proxy Statement filed on October
26, 2006.
|
(11)
|
Incorporated
by reference to the Company’s Form 10-KSB filed on April 19,
2005.
|
(12)
|
Incorporated
by reference to the Company's Form 8-K filed on December 20,
2005.
|
(13)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 27,
2006.
|
(14)
|
Incorporated
by reference to the Company’s Form 8-K filed on February 23,
2007.
|
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting
Firm
|
F-2
|
Consolidated
Balance Sheets - As of December 31, 2007 and 2006
(restated)
|
F-3
|
Consolidated
Statements of Operations - For the Years Ended December 31,
2007, December 31, 2006 (restated) and December 31, 2005
(restated)
|
F-4
|
Consolidated
Statements of Changes in Stockholders' Equity - For the Years Ended
December 31, 2007, December 31, 2006 (restated) and December 31, 2005
(restated)
|
F-5
|
Consolidated
Statements of Cash Flows - For the Years Ended December 31,
2007, December 31, 2006 (restated) and December 31, 2005
(restated)
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Pacific Net Inc.
We
have audited the accompanying consolidated balance sheets of PacificNet Inc. (a
Delaware Corporation) and Subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2007. 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, 2007 and 2006, and the results of their
consolidated operations and cash flows for each of the three years in the period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. During the year ended
December 31, 2007, the Company incurred net losses of $14,195,000. In
addition, the Company had a negative cash flow in operating activities amounting
to negative $1,079,000 in the year ended December 31, 2007, and the Company’s
accumulated deficit was $65,070,000 as of December 31, 2007. In addition, the
Company is in default on its convertible debenture obligation and three holders
of Convertible Subordinated Debentures filed an involuntary petition for Chapter
11 relief in federal bankruptcy court on Saturday, March 22, 2008 in Wilmington,
DE. These factors, among others, as discussed in Note 1 to the consolidated
financial statements, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/s/
KABANI & COMPANY, INC.
LOS
ANGELES, CA
April
28, 2008
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
AT DECEMBER 31, 2007 AND 2006
(In
thousands of United States dollars, except par values and share
numbers)
|
As
at December 31,
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
(Restated)
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3,750 |
|
|
$ |
1,778 |
|
Accounts
receivables, net
|
|
|
5,241 |
|
|
|
4,774 |
|
Inventories,
net
|
|
|
693 |
|
|
|
188 |
|
Loan
receivable from related parties
|
|
|
2,273 |
|
|
|
2,991 |
|
Loan
receivable from third parties
|
|
|
815 |
|
|
|
128 |
|
Marketable
equity securities - available for sale
|
|
|
547 |
|
|
|
18 |
|
Net
assets held for disposition
|
|
|
2,692 |
|
|
|
9,557 |
|
Other
current assets
|
|
|
408 |
|
|
|
2,719 |
|
Total
Current Assets
|
|
|
16,419 |
|
|
|
22,153 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,285 |
|
|
|
4,008 |
|
Intangible
assets, net
|
|
|
343 |
|
|
|
323 |
|
Investments
- cost basis
|
|
|
120 |
|
|
|
15 |
|
Investment
- equity method
|
|
|
13 |
|
|
|
100 |
|
Goodwill
|
|
|
870 |
|
|
|
5,601 |
|
Other
receivables
|
|
|
1,670 |
|
|
|
471 |
|
TOTAL
ASSETS
|
|
$ |
24,720 |
|
|
$ |
32,671 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Bank
line of Credit
|
|
$ |
100 |
|
|
$ |
111 |
|
Bank
loans-current portion
|
|
|
80 |
|
|
|
411 |
|
Accounts
payable
|
|
|
414 |
|
|
|
225 |
|
Accrued
expenses
|
|
|
3,500 |
|
|
|
1,270 |
|
Customer
deposits
|
|
|
514 |
|
|
|
243 |
|
Convertible
debenture
|
|
|
5,809 |
|
|
|
8,945 |
|
Warrant
liability
|
|
|
|
|
|
|
904 |
|
Liquidated
damages liability
|
|
|
2,697 |
|
|
|
2,837 |
|
Loan
payable to related party
|
|
|
- |
|
|
|
282 |
|
Shares
to be issued
|
|
|
127 |
|
|
|
- |
|
Total
Current Liabilities
|
|
|
13,241 |
|
|
|
15,228 |
|
|
|
|
|
|
|
|
|
|
Bank
loans - non current portion
|
|
|
1,743 |
|
|
|
637 |
|
Convertible
debenture-non current portion
|
|
|
5,224 |
|
|
|
- |
|
Total
long-term liabilities
|
|
|
6,967 |
|
|
|
637 |
|
Total
liabilities
|
|
|
20,208 |
|
|
|
15,865 |
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,720 |
|
|
|
2,829 |
|
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, 2007: 16,887,041 issued, 14,314,072 outstanding
|
|
|
|
|
|
|
|
|
December
31, 2006: 14,155,597 issued, 11,541,202 outstanding
|
|
|
1 |
|
|
|
1 |
|
Treasury
stock, at cost (2007: 2,572,969 shares ;2006: 2,614,395
shares)
|
|
|
(145 |
) |
|
|
(272 |
) |
Additional
paid-in capital
|
|
|
79,125 |
|
|
|
65,757 |
|
Shares
issued as deposit
|
|
|
(10,974 |
) |
|
|
- |
|
Cumulative
other comprehensive income
|
|
|
200 |
|
|
|
(42 |
) |
Accumulated
deficit
|
|
|
(65,070 |
) |
|
|
(51,090 |
) |
Stock
subscription receivable
|
|
|
(345 |
) |
|
|
(377 |
) |
Total
Stockholders' Equity
|
|
|
2,792 |
|
|
|
13,977 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
24,720 |
|
|
$ |
32,671 |
|
The
accompanying notes form an integral part of these consolidated financial
statements
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(In
thousands of United States dollars, except loss per share and share
amounts)
|
For
The Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Restated
|
|
Restated
|
|
Net
Revenues
|
|
|
|
|
|
|
|
|
|
Services
|
|
$ |
4,466 |
|
|
$ |
5,720 |
|
|
$ |
4,242 |
|
Product
sales
|
|
|
14,528 |
|
|
|
23,353 |
|
|
|
2,839 |
|
Total
net revenue
|
|
|
18,994 |
|
|
|
29,073 |
|
|
|
7,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
2,754 |
|
|
|
3,562 |
|
|
|
3,160 |
|
Product
sales
|
|
|
12,538 |
|
|
|
21,967 |
|
|
|
2,562 |
|
Total
cost of revenue
|
|
|
15,292 |
|
|
|
25,529 |
|
|
|
5,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
3,702 |
|
|
|
3,544 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and Administrative expenses
|
|
|
13,480 |
|
|
|
7,968 |
|
|
|
3,576 |
|
Stock-based
compensation expenses
|
|
|
51 |
|
|
|
242 |
|
|
|
282 |
|
Depreciation
and amortization
|
|
|
752 |
|
|
|
1,536 |
|
|
|
31 |
|
Impairment
of Goodwill
|
|
|
5,461 |
|
|
|
- |
|
|
|
3,689 |
|
Impairment
of Investment
|
|
|
385 |
|
|
|
1,233 |
|
|
|
- |
|
Total
Operating expenses
|
|
|
20,129 |
|
|
|
10,979 |
|
|
|
7,578 |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continued operations
|
|
|
(16,427 |
) |
|
|
(7,435 |
) |
|
|
(6,219 |
) |
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income /(expense), net
|
|
|
(822 |
) |
|
|
(896 |
) |
|
|
194 |
|
Gain
/ (Loss) in change in fair value of derivatives
|
|
|
- |
|
|
|
(214 |
) |
|
|
- |
|
Liquidated
damages expense
|
|
|
- |
|
|
|
(3,817 |
) |
|
|
- |
|
Share
of earnings from investment on equity method
|
|
|
(77 |
) |
|
|
17 |
|
|
|
855 |
|
Sundry
income, net
|
|
|
1,339 |
|
|
|
108 |
|
|
|
266 |
|
Total
other income (expense)
|
|
|
440 |
|
|
|
(4,803 |
) |
|
|
1,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continued operations before Income Taxes and Minority
Interests
|
|
|
(15,987 |
) |
|
|
(12,238 |
) |
|
|
(4,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(7 |
) |
|
|
(18 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interests
|
|
|
37 |
|
|
|
(58 |
) |
|
|
(1,203 |
) |
Loss
from continued operations
|
|
|
(15,957 |
) |
|
|
(12,314 |
) |
|
|
(6,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
/ (Loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain on disposal
|
|
|
2,181 |
|
|
|
- |
|
|
|
- |
|
Net
loss on disposal
|
|
|
- |
|
|
|
26 |
|
|
|
- |
|
Income
/ (Loss) from discontinued operations
|
|
|
(419 |
) |
|
|
(127 |
) |
|
|
989 |
|
Total
income / (Loss) from discontinued operations
|
|
|
1,762 |
|
|
|
(101 |
) |
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(14,195 |
) |
|
|
(12,415 |
) |
|
|
(5,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange gain (loss)
|
|
|
242 |
|
|
|
(27 |
) |
|
|
7 |
|
Net
comprehensive loss
|
|
$ |
(13,953 |
) |
|
$ |
(12,442 |
) |
|
$ |
(5,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
& DILUTED LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share-Continued Operations
|
|
$ |
(1.34 |
) |
|
$ |
(1.07 |
) |
|
$ |
(0.28 |
) |
Loss
per share-Discontinued Operations
|
|
$ |
0.15 |
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
Basic
& Diluted Loss Per Share
|
|
$ |
(1.19 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Weighted average number of shares-Basic & Diluted
|
|
|
11,895,525 |
|
|
|
11,538,664 |
|
|
|
21,695,473 |
|
* Basic
and diluted weighted average number of shares are considered equivalent as the
effect of dilutive securities is anti-dilution.
The
accompanying notes form an integral part of these consolidated financial
statements
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
(In
thousands of United States dollars, except number of shares)
|
|
Common
Stock
|
|
|
Additional
Paid-in |
|
|
Issuance of shares as |
|
|
Stock
Subscription
|
|
|
Cumulative Other Comprehensive
|
|
|
Accumulated
Deficit |
|
|
Treasury
Stock
|
|
|
Total
Stockholders’ Equity |
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deposit
|
|
|
Receivable |
|
|
Income/(loss) |
|
|
(Restated) |
|
|
Shares
|
|
|
Amount
|
|
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT DECEMBER 31, 2004 - Restated
|
|
|
9,794,121 |
|
|
|
1 |
|
|
$ |
57,729 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(22 |
) |
|
$ |
(33,482 |
) |
|
|
833,616 |
|
|
|
(119 |
) |
|
$ |
24,107 |
|
Issuance
of common stock for acquisition of subsidiaries
|
|
|
515,900 |
|
|
|
- |
|
|
|
3,971 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,971 |
|
Stock Issued
for services
|
|
|
20,000 |
|
|
|
- |
|
|
|
63 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
63 |
|
Repurchase
of common shares for acquisition of Cheer Era
|
|
|
(149,459 |
) |
|
|
- |
|
|
|
(1,547 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
149,459 |
|
|
|
- |
|
|
|
(1,547 |
) |
Cancellation
of common shares
|
|
|
(45,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
45,000 |
|
|
|
- |
|
|
|
- |
|
Repurchase
of common shares
|
|
|
(2,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,000 |
|
|
|
(15 |
) |
|
|
(15 |
) |
Options
granted
|
|
|
- |
|
|
|
- |
|
|
|
282 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
282 |
|
Exercise
of stock options and warrants for cash
|
|
|
676,000 |
|
|
|
- |
|
|
|
966 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
966 |
|
Holdback
shares as contingent consideration due to performance targets not yet
met
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
298,550 |
|
|
|
- |
|
|
|
- |
|
Share
consideration for acquisition of ChinaGoHi deemed issued under
S&P
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(137,500 |
) |
|
|
- |
|
|
|
- |
|
To
record the correction for the excess finders fee adjusted to
Apic
|
|
|
- |
|
|
|
- |
|
|
|
455 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
455 |
|
To
correctly record the option exercise price
|
|
|
- |
|
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
60 |
|
Foreign
currency translation gain/(loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,145 |
) |
|
|
- |
|
|
|
- |
|
|
|
(5,145 |
) |
BALANCE
AT DECEMBER 31, 2005 - Restated
|
|
|
10,809,562 |
|
|
|
1 |
|
|
|
61,980 |
|
|
|
- |
|
|
|
- |
|
|
|
(15 |
) |
|
|
(38,627 |
) |
|
|
1,191,125 |
|
|
|
(134 |
) |
|
$ |
23,205 |
|
Exercise
of stock options for cash and receivable
|
|
|
418,000 |
|
|
|
- |
|
|
|
834 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
834 |
|
Issuance
of common stock for acquisition of subsidiaries
|
|
|
618,112 |
|
|
|
- |
|
|
|
4,346 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,142,798 |
|
|
|
- |
|
|
|
4,346 |
|
Cancellation
of common stock for acquisition of subsidiaries
|
|
|
(275,000 |
) |
|
$ |
- |
|
|
$ |
(1,672 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
275,000 |
|
|
$ |
- |
|
|
$ |
(1,672 |
) |
Repurchase
of common shares - Treasury shares
|
|
|
(29,472 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
29,472 |
|
|
|
(138 |
) |
|
|
(138 |
) |
Foreign
currency translation gain/(loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27 |
) |
Issuance
of stock options
|
|
|
- |
|
|
|
- |
|
|
|
242 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
242 |
|
Issuance
of warrants for issuing fee of convertible debts
|
|
|
- |
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28 |
|
Stock
subscription receivable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(377 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(377 |
) |
Goodwill
opening balance adjust
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(48 |
) |
|
|
- |
|
|
|
- |
|
|
|
(48 |
) |
Net
income/(loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,415 |
) |
|
|
- |
|
|
|
- |
|
|
|
(12,415 |
) |
BALANCE
AT DECEMBER 31, 2006 - Restated
|
|
|
11,541,202 |
|
|
|
1 |
|
|
|
65,758 |
|
|
|
- |
|
|
|
(377 |
) |
|
|
(42 |
) |
|
|
(51,090 |
) |
|
|
2,614,395 |
|
|
|
(272 |
) |
|
|
13,978 |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
690 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
213 |
|
|
|
- |
|
|
|
- |
|
|
|
903 |
|
Issuance
of common stock for repayment of convertible debenture
|
|
|
199,444 |
|
|
|
- |
|
|
|
1,091 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,091 |
|
Sale
of treasury shares
|
|
|
41,426 |
|
|
|
- |
|
|
|
155 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(41,426 |
) |
|
|
127 |
|
|
|
282 |
|
Issuance
of common stock in escrow - restricted
|
|
|
2,330,000 |
|
|
|
|
|
|
|
10,974 |
|
|
|
(10,974 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Exercise
of stock options for cash
|
|
|
202,000 |
|
|
|
- |
|
|
|
406 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
406 |
|
Stock
option expense
|
|
|
- |
|
|
|
- |
|
|
|
51 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
51 |
|
Foreign
currency translation gain/(loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
242 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
242 |
|
Stock
subscription receivable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,195 |
) |
|
|
- |
|
|
|
- |
|
|
|
(14,195 |
) |
BALANCE
AT December 31, 2007
|
|
|
14,314,072 |
|
|
$ |
1 |
|
|
$ |
79,125 |
|
|
$ |
(10,974 |
) |
|
|
(345 |
) |
|
$ |
200 |
|
|
$ |
(65,070 |
) |
|
|
2,572,969 |
|
|
$ |
(145 |
) |
|
$ |
2,792 |
|
The
accompanying notes form an integral part of these consolidated financial
statements
PACIFICNET
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands of United States dollars)
|
For
The Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Restated
|
|
Restated
|
|
Cash
Flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(14,195 |
) |
|
$ |
(12,415 |
) |
|
$ |
(5,145 |
) |
Adjustment
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for allowance for doubtful accounts
|
|
|
5,319 |
|
|
|
4,537 |
|
|
|
2,739 |
|
Minority
Interest
|
|
|
(37 |
) |
|
|
58 |
|
|
|
1,203 |
|
Depreciation
and amortization
|
|
|
752 |
|
|
|
1,536 |
|
|
|
31 |
|
Share
of earnings from investment on equity method
|
|
|
77 |
|
|
|
(17 |
) |
|
|
(855 |
) |
Goodwill
impairment
|
|
|
5,461 |
|
|
|
- |
|
|
|
3,689 |
|
Investment
impairment
|
|
|
385 |
|
|
|
1,233 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
51 |
|
|
|
242 |
|
|
|
282 |
|
Issuance
of shares for services
|
|
|
- |
|
|
|
- |
|
|
|
63 |
|
Change
in fair value of derivatives
|
|
|
- |
|
|
|
214 |
|
|
|
- |
|
Amortization
of interest discount
|
|
|
- |
|
|
|
690 |
|
|
|
- |
|
Liquidated
damages expense
|
|
|
- |
|
|
|
3,817 |
|
|
|
- |
|
Changes
in current assets & liabilities net of effects from purchase of
subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
1,544 |
|
|
|
(7,098 |
) |
|
|
(297 |
) |
Inventories
|
|
|
(505 |
) |
|
|
2 |
|
|
|
(55 |
) |
Accounts
payable and other accrued expenses
|
|
|
1,345 |
|
|
|
(2,202 |
) |
|
|
3,526 |
|
Net
cash provided by (used in) operating activities of continued
operations
|
|
|
197 |
|
|
|
(9,403 |
) |
|
|
5,182 |
|
Net
cash provided by (used in) operating activities of discontinued
operations
|
|
|
(1,276 |
) |
|
|
28 |
|
|
|
(988 |
) |
Net
cash provided by (used in) operating activities
|
|
|
(1,079 |
) |
|
|
(9,375 |
) |
|
|
4,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
- |
|
|
|
(71 |
) |
|
|
- |
|
Increase
in purchase of marketable securities
|
|
|
(529 |
) |
|
|
(19 |
) |
|
|
11 |
|
Acquisition
of property and equipment
|
|
|
(1,033 |
) |
|
|
(2,608 |
) |
|
|
(2,966 |
) |
Acquisition
of subsidiaries and affiliated companies
|
|
|
- |
|
|
|
(667 |
) |
|
|
(3,958 |
) |
Repurchase
of treasury shares
|
|
|
282 |
|
|
|
(138 |
) |
|
|
(15 |
) |
Net
cash used in investing activities of continued operations
|
|
|
(1,280 |
) |
|
|
(3,503 |
) |
|
|
(6,928 |
) |
Net
cash provided by (used in) investing activities of discontinued
operations
|
|
|
1,801 |
|
|
|
1,408 |
|
|
|
(2,678 |
) |
Net
cash provided by (used in) investing activities
|
|
|
521 |
|
|
|
(2,095 |
) |
|
|
(9,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable from third parties
|
|
|
(237 |
) |
|
|
934 |
|
|
|
(1,024 |
) |
Loans
receivable from related parties
|
|
|
(564 |
) |
|
|
622 |
|
|
|
(868 |
) |
Loan
payable to related party
|
|
|
(282 |
) |
|
|
(121 |
) |
|
|
575 |
|
Advances
(repayments) under bank line of credit
|
|
|
(11 |
) |
|
|
(204 |
) |
|
|
1,113 |
|
Repayments
of amount borrowed under capital lease obligations
|
|
|
- |
|
|
|
41 |
|
|
|
(5 |
) |
Proceeds
from exercise of stock options and subscription
|
|
|
438 |
|
|
|
237 |
|
|
|
966 |
|
Advances
under bank loans
|
|
|
(10 |
) |
|
|
935 |
|
|
|
(1,453 |
) |
Net
proceeds from issuance of convertible debenture
|
|
|
2,954 |
|
|
|
7,500 |
|
|
|
- |
|
Net
cash provided by (used in) financing activities of continued
operations
|
|
|
2,288 |
|
|
|
9,944 |
|
|
|
(696 |
) |
Net
cash provided by (used in) financing activities of discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in)financing activities
|
|
|
2,288 |
|
|
|
9,944 |
|
|
|
(696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate change on cash and cash equivalents
|
|
|
242 |
|
|
|
(27 |
) |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,972 |
|
|
|
(1,553 |
) |
|
|
(6,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
1,778 |
|
|
|
3,331 |
|
|
|
9,433 |
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
3,750 |
|
|
$ |
1,778 |
|
|
$ |
3,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
(822 |
) |
|
$ |
664 |
|
|
$ |
229 |
|
Income
taxes paid
|
|
$ |
(7 |
) |
|
$ |
5 |
|
|
$ |
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
& Equipment acquired under bank loans
|
|
$ |
785 |
|
|
$ |
1,082 |
|
|
$ |
- |
|
Investments
in subsidiaries and affiliate through issuance of common
stock
|
|
$ |
- |
|
|
$ |
4,346 |
|
|
$ |
3,971 |
|
Issuance
of common stock for payment of convertible debenture
|
|
$ |
1,091 |
|
|
$ |
- |
|
|
$ |
- |
|
Cumulative
effect of change in accounting principle (note 10)
|
|
$ |
213 |
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes form an integral part of these consolidated financial
statements
PACIFICNET
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – RESTATED
(Amounts
expressed in United States dollars unless otherwise stated)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PacificNet
Inc. (referred to herein as “PacificNet” or the “Company”) was originally
incorporated in the State of Delaware on April 8, 1987. PacificNet (PACT) is a
leading provider of gaming and mobile game technology worldwide with a focus on
emerging markets in Asia. PacificNet's gaming products are localized to their
specific markets creating an enhanced user experience for players and larger
profits for operators. PacificNet's gaming clients include the leading hotels,
casinos, and gaming operators in Macau, Europe and elsewhere around the world.
PacificNet also maintains legacy subsidiaries in the call center and ecommerce
business in China. PacificNet employs about 500 staff in its various
subsidiaries with offices in the US, Hong Kong, Macau, China. Through our
subsidiaries we provide outsourcing services, value-added telecom services (VAS)
and products (telecom and gaming) 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. Our products (telecom and
gaming) include gaming technology and communication products distribution. The
Company’s operations are primarily targeted in Greater China and certain Asian
country markets.
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
|
|
●
|
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 Beijing Xing Chang Xin Sci-tech
Development Co. Ltd (IMOBILE-DE) that hold operating licenses to engage in
domestic online ecommerce and telecom value-added services in China. As a
result, we conduct substantially all of our operations through Beijing
PacificNet IMOBILE Technology Co., Ltd (WOFE). We own 51% of the shares in each
of the WOFEs and each WOFE signed Consulting and Services Agreements with
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, 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 based on
the contractual arrangements from these companies. Accordingly, we bear the
risks of and enjoy the rewards associated with the investments in the
WOFEs.
The
operations of DE 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 DE and WOFE. 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 based on the contractual
arrangements and on management’s decision 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.
(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 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 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:
Beijing Xing Chang Xin Sci-tech
Development Co. Ltd (the “iMobile-VIE”), is a China company controlled through
business agreement. ThroughiMobile -VIE, a variable interest entity, PacificNet
is able to engage in the business of ICP, and operates mobile distribution and
value-added service in the PRC. The business of the VIE is managed by their
original management teams. iMobile -VIE is owned by Gao Chunhui, CEO 51% and Liu
Lei, COO 49%, of the Company. The registered capital of the VIE is RMB
2,000,000. 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 ,however, it does have the power to change the management, if needed,
because PacificNet is directly or indirectly controlling the board of this
VIE.
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 of 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
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. Fair market value of the
identifiable assets and liabilities, including tangible and intangible, is
primarily ascertained with the replacement cost method. At time of acquisition,
based on market research and discussion with management, a benchmark is
established with reference to comparable replacement cost in the open market.
Occasionally, net book value is used as a fair market value equivalent if the
assets and liabilities of the newly acquired subsidiaries and/or VIEs were
either current in nature or newly established.
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 annually in accordance
with SFAS 142. The assessment includes first comparing implied P/E valuation of
the goodwill carrying subsidiaries (adjusted by R&D expenses written off) to
benchmarks as found in comparable publicly traded companies. If a comfortable
buffer over the public benchmark does not exist, more sophisticated DCF
analysis, based on 5 year cash flows forecasts, will follow to ascertain if
goodwill impairment is warranted.
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 six reporting units: EPRO (assets held for
disposition), Smartime/Soluteck, iMobile-WOFE, Wanrong, PacificNet Games, and
Take 1, but those that are marked either assets held for disposition or
discontinued are excluded for the purposes 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.
The total
carrying amount of goodwill recorded on the balance sheets at December 31, 2007
is $870,000 and the changes in the carrying amount of goodwill for the following
reporting periods are summarized below:
|
|
Group
1.
Outsourcing
Services
|
|
|
Group
2.
Telecom
Value-Added
Services
|
|
|
Group
3.
Products
(Telecom
&
Gaming)
|
|
|
Total
goodwill
on
the
restated
balance
sheet
|
|
Balance
as of December 31, 2004-Restated
|
|
$ |
3,964 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,964 |
|
Goodwill
acquired during the year
|
|
|
- |
|
|
|
5,183 |
|
|
|
- |
|
|
|
5,183 |
|
Goodwill
reclassified to net assets held for disposition
|
|
|
- |
|
|
|
(1,494 |
) |
|
|
- |
|
|
|
(1,494 |
) |
Goodwill
impaired during the year
|
|
|
- |
|
|
|
(3,689 |
) |
|
|
- |
|
|
|
(3,689 |
) |
Balance
as of December 31, 2005-Restated
|
|
|
3,964 |
|
|
|
- |
|
|
|
- |
|
|
|
3,964 |
|
Goodwill
acquired during the year
|
|
|
- |
|
|
|
461 |
|
|
|
1,176 |
|
|
|
1,637 |
|
Balance
as of December 31, 2006-Restated
|
|
|
3,964 |
|
|
|
461 |
|
|
|
1,176 |
|
|
|
5,601 |
|
Goodwill
acquired during the year
|
|
|
- |
|
|
|
- |
|
|
|
730 |
|
|
|
730 |
|
Goodwill
impaired during the year
|
|
|
(3,964 |
) |
|
|
- |
|
|
|
(1,497 |
) |
|
|
(5,461 |
) |
Balance
as of December 31, 2007
|
|
-
|
|
|
$ |
461 |
|
|
$ |
409 |
|
|
$ |
870 |
|
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 during 2007
and 2006:
|
|
For
the Years ended December 31,
|
|
(US$'000s)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Restated
|
|
Epro
|
|
$ |
- |
|
|
$ |
3,949 |
|
Smartime
(Soluteck)
|
|
|
- |
|
|
|
15 |
|
iMobile
|
|
|
- |
|
|
|
430 |
|
Wanrong
|
|
|
461 |
|
|
|
461 |
|
Take
1
|
|
|
141 |
|
|
|
- |
|
PacificNet
Games
|
|
|
268 |
|
|
|
746 |
|
Total
|
|
$ |
870 |
|
|
$ |
5,601 |
|
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.
There was
$5,461,000 impairment of goodwill in the year ended December 31,
2007.
(US$'000s)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Restated
|
|
Epro
|
|
$ |
3,949 |
|
|
$ |
- |
|
Smartime
(Soluteck PactSo)
|
|
|
15 |
|
|
|
- |
|
iMobile
|
|
|
430 |
|
|
|
- |
|
PacificNet
Games
|
|
|
478 |
|
|
|
- |
|
Take
1
|
|
|
589 |
|
|
|
- |
|
Total
|
|
$ |
5,461 |
|
|
$ |
N/A- |
|
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.
Following
is the summary of the entities accounted under the equity method:
|
|
2007
|
|
2006
|
|
Total
assets
|
|
|
$131,210 |
|
|
$1,987,498 |
|
Total
liabilities
|
|
|
14,393 |
|
|
1,312,445 |
|
Net
assets
|
|
|
116,817 |
|
|
675,053 |
|
Income
(loss) from operation
|
|
|
(180,083 |
) |
|
292,598 |
|
Net
income (loss)
|
|
|
$(191,558 |
) |
|
$292,463 |
|
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) Telecom Value-Added Telecom Services (VAS) including Content
Providing (CP), Interactive Voice Response (IVR), Platform Providing (PP) and
Service Providing (SP); and (3) Products (telecom & gaming) 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 collectability 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, collectability 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 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 Gross Revenues 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.
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 doubtful accounts 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, 2007 was approximately $5,365,000
(2006: $4,536,000).
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 gaming and telecommunication
products such as electronic gaming machines, gaming systems, AWP, VLT, slot and
bingo machines, mobile phone, rechargeable phone cards, smart chip, and
interactive voice response cards.
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, 2007 and 2006, the Company did
not capitalize any costs related to the purchase of software and related
technologies and content.
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. Compensation expense,
if any, is 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 Item 6 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.
On July
3, 2007 the board extended the grant of previously expired options. Total
options for which the grant was extended were 15,000 and 3,000 on two different
grants. The Company recorded $51,400 as stock based compensation expense
utilizing Black Scholes Options Pricing Model by using the following
assumptions: exercise price of $2.20 and $1.75, risk free interest rate of
4.76%, volatility of 70.88% and dividend yield of 0%.
As of
December 31, 2007 we had no stock options exercisable, 202,000 options were
exercised during FY2007.
Additional
information on options outstanding as of December 31, 2007 is as
follows:
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
|
OPTIONS
|
|
|
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
LIFE
|
|
Options
outstanding
|
|
$ |
4.31 |
|
|
|
33,000 |
|
|
5.62years
|
|
Options
exercisable
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
On April
28, 2008 the Company’s Board of Directors approved the grant of up to 2,000,000
in bonus shares to the directors, employees and consultants of the Company as
compensation. The Company issued 1,086,000 shares against 2007 compensation and
accrued $1,086,000 in expenses at the fair market value at the approval
date.
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 $23,341 in 2007 (2006:
$31,052).
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 14)
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 $3,750,000 in 2007.
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 Variable Interest Entities (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, 2007.
|
Cost
|
Market
Value
|
UnrealizedGain/(Loss)
|
December
31, 2007
|
$369,000
|
$547,000
|
$178,000
|
December
31, 2006
|
$19,000
|
$18,000
|
$(1,000)
|
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. During the year ended December 31, 2007,
the foreign currency translation adjustments to the Company's comprehensive
income was $242,000 and the currency translation gain was approximately
$118,000, primarily as a result of the Hong Kong dollars appreciating against
the U.S. dollar.
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.
GOING
CONCERN
As shown
in the accompanying consolidated financial statements, the Company incurred
accumulated losses of $65 million and $51 million as of December 31, 2007 and
2006 respectively. Negative cash flows from the operations was $1.1 million for
the year ended December 31, 2007. These matters raise substantial doubt about
the Company’s ability to continue as a going concern.
In view
of the matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company’s ability to raise additional capital, obtain financing and to
succeed in its future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The
Company has taken certain restructuring steps to provide the necessary capital
to continue its operations. These steps included, but not limited to: 1)
accelerate disposal and spin-off of unprofitable or unfavorable
return-on-investment non-gaming operations; 2) focus on execution of the new
high potential gaming business initiatives; 3) acquisition of profitable and/or
strategic operations through issuance of equity instruments; 4) formation of
strategic relationship with key gaming operators in Asia; 5) issuance and/or
restructure of new long-term convertible debentures.
On April
30, 2007, the Company entered into a sale and purchase agreement to dispose of
its interest in Guangzhou3G for a consideration of US$6 million. The deal was
subsequently reopened for renegotiation in November 2007 (See note
14).
On May
15 & 20, 2007, the Company entered into various definitive agreements to
divest and reduce its equity interests in certain unprofitable subsidiaries to
below 20% equity interest, namely: Linkhead, PacTelso, PacSo and PacPower
(See note 14).
On
December 18, 2007, the Company entered into a definitive agreement to sell its
36% equity interest in PacificNet Clickcom Limited ("Clickcom") (See Note
14).
On March
27, 2008, three holders of PACT's Convertible Subordinated Debentures filed an
involuntary petition for Chapter 11 relief in federal bankruptcy court late
Saturday, March 22, 2008 in Wilmington, DE. The Company has retained counsel to
oppose the filing because the petition fails to meet the standard for invoking
an involuntary bankruptcy and fails to take into consideration other agreements
between the Company and the petitioning creditors. The Company intends to
vigorously oppose the petition and move for dismissal of the filing, and if
successful will seek damages and attorney fees. Subsequently, PACT also received
default notice from all but one of the debenture holders including Iroquois
Master Fund Ltd., Alpha Capital AG, Whalehaven Capital Fund Limited, DKR
Soundshore Oasis Holding Fund Ltd., Basso Fund Ltd., Basso Multi-Strategy
Holding Fund Ltd., and Basso Private Opportunities Holding Fund Ltd. from the
same Convertible Subordinated Debentures related to the private offering of
$8,000,000 principal amount variable debentures consummated on March 13, 2006,
and due March 2009.
PACT has
retained counsel to oppose the above petition. The amount of the debt
in question is as follows: Iroquois Master Fund Ltd. $2.5 million,
Whalehaven Capital Fund Limited $958,000, Alpha Capital AG $685,000 DKR
Soundshore Oasis Holding Fund Ltd $960,000, and Basso Fund Ltd., Basso Multi-
Strategy Holding Fund Ltd., and Basso Private Opportunities Holding Fund Ltd., a
combined amount of $500,000.
RECENT
PRONOUNCEMENTS
In March
19, 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial reporting
about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an
entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Currently
the Company does not carry any derivative instruments and the adoption of this
statement may not have any effect on the financial statements.
In
December 2007, FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This Statement
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. Not-for-profit organizations should continue to
apply the guidance in Accounting Research Bulletin No. 51, Consolidated
Financial Statements, before the amendments made by this Statement, and any
other applicable standards, until the Board issues interpretative guidance. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008 (that is, January 1, 2009, for
entities with calendar year-ends). Earlier adoption is prohibited. The effective
date of this Statement is the same as that of the related Statement 141(R). This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. Management is currently
evaluating the effect of this pronouncement on financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company's fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.
In
February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007. Early adoption is permitted subject to
specific requirements outlined in the new Statement. Therefore, calendar-year
companies may be able to adopt FAS 159 for their first quarter 2007 financial
statements.
The new
Statement allows entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item's fair value in subsequent reporting
periods must be recognized in current earnings. FAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. The management is currently evaluating the effect of this
pronouncement on financial statements.
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. The Company currently does not have any defined benefit plan and
so FAS 158 will not affect the financial statements.
In
September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.
2.
BUSINESS ACQUISITIONS
TAKE 1 TECHNOLOGIES GROUP
LIMITED
On
January 05, 2007, we entered into an agreement for PacificNet to exercise the
option to acquire an additional 31% interest in Take 1. The completion date for
the new Securities Subscription Agreement was January 05, 2007, with a
contingent consideration to be paid entirely with shares of PacificNet: 149,459
PACT Shares. As a result, PacificNet has become the majority and controlling
shareholder of Take1 with our ownership percentage increasing from 20% to
51%.
An
initial equity investment of 30% in Take 1 was made in April 2004 by the
Company, through its subsidiary PacificNet Strategic Investment Holdings
Limited, for a consideration of 149,459 PacificNet shares. PacificNet’s interest
in Take 1 was reduced to 20% in the year 2005 from 30% as a result of PacificNet
repurchasing an aggregate of 149,459 at nominal value.
Summarized
below were the assets acquired and liabilities assumed for Take 1 in the
acquisition: (In
thousands of US Dollars)
Estimated
fair values:
|
|
Current
assets
|
106,422
|
Current
liabilities
|
(728,156)
|
Net
assets (liabilities) acquired
|
(621,734)
|
Total
Consideration Paid
|
217,247
|
Goodwill
and Identified Intangibles
|
838,981
|
Allocation:
|
|
Customer
Relations
|
88,805
|
Product
Design
|
7,990
|
Proprietary
Technology
|
11,325
|
Goodwill
|
730,860
|
In accordance with SFAS 142, goodwill
is not amortized but is tested for impairment at least annually. The purchase
price allocation for Take 1 acquisition is based on a management's estimates and
overall industry experience. During the year ended December 31, 2007
the Company impaired goodwill amounting to $590,000.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE YEAR ENDED
December 31, 2007 AND 2006
The
following is an un-audited pro forma consolidated financial information for the
year ended December
31, 2006 and 2007, as presented below, reflects the results of operations
of the Company assuming the acquisition occurred on January 1, 2006 and
2007, 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, 2006 and 2007,
respectively, and may not be indicative of future operating
results.
Take
1
|
Years
ended December 31.
|
(In
thousands of U.S Dollars, except for loss per share)
|
2007
|
2006
|
Revenue
|
$
|
18,994
|
$
|
30,412
|
Operating
income
|
|
(16,427)
|
|
(7,144)
|
Net
Loss
|
$
|
(14,195)
|
$
|
(12,325)
|
Basic
& Diluted Loss Per Share
|
$
|
(1.19)
|
$
|
(1.07)
|
Accordingly,
PacificNet included the financial results of Take 1 in its consolidated 2007
financial results from January 5, 2007 to December 31, 2007.
3.
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 plus
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. Diluted EPS
is calculated by dividing net earnings by the weighted average number of common
shares outstanding and other dilutive securities. Dilutive earnings
per share for the period ended December 31, 2007 exclude the potential dilutive
effect of 889,456 warrants because their impact would be anti-dilutive based on
current market prices. 445,455 convertible debentures are tested by using
if-converted method. The result shows when convertible debentures are included
in the computation, diluted EPS increases. According to SFAS No.128, those
convertible debentures are ignored in the computation of diluted EPS. 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:
|
|
FY
2007
|
|
|
FY
2006
|
|
(In
thousands of US Dollars, except weighted shares and per share
amounts.)
|
|
|
|
|
Restated
|
|
Numerator:
Net Loss
|
|
$ |
(14,195 |
) |
|
$ |
(12,415 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of shares-Basic & Diluted
|
|
|
11,895,525 |
|
|
|
11,538,664 |
|
Basic
& Diluted Loss Per Share
|
|
$ |
(1.19 |
) |
|
$ |
(1.08 |
) |
4.
INVESTMENT IN AFFILIATED COMPANIES
Investments
in affiliated companies consist of the following as of December 31, 2007
and 2006:
Under
Cost Method:
Investments
that are recorded at cost are evaluated for certain impairments that are not
temporary in nature and are adjusted for impairment.
(USD
' 000s)
|
|
2007
|
|
2006
(Restated)
|
|
DESCRIPTION
|
Glad
Smart
|
|
$ |
30 |
|
$ |
30 |
|
15%
ownership interest
|
Linkhead
|
|
$ |
65 |
|
|
- |
|
15%
ownership interest
|
Clickcom
|
|
$ |
25 |
|
|
- |
|
15%
ownership interest
|
Community
Media
|
|
|
- |
|
$ |
4 |
|
5%
ownership interest
|
MOABC
|
|
|
- |
|
$ |
(19 |
) |
15%
ownership interest
|
Total
|
|
$ |
120 |
|
$ |
15 |
|
|
Under
Equity Method:
Investments
accounted for under the equity method are carried at cost and adjusted for the
Company’s proportionate share of undistributed earnings and losses.
(USD
' 000s)
|
|
2007
|
|
2006
(Restated)
|
|
DESCRIPTION
|
Take
1
|
|
|
|
$ |
100 |
|
20%
ownership interest
|
Bell-Pact
Shanghai JV
|
|
$ |
13 |
|
|
- |
|
40%
ownership interest
|
Total
|
|
$ |
13 |
|
$ |
100 |
|
|
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consists of the following as of December 31 (in thousands of US
Dollars):
|
|
FY2007
|
|
|
FY2006
|
|
(In
thousands of US Dollars)
|
|
|
|
|
Restated
|
|
Office
furniture, fixtures and leasehold improvements
|
|
$ |
548 |
|
|
$ |
505 |
|
Computers
and office equipment
|
|
|
1,875 |
|
|
|
1,212 |
|
Motor
Vehicles
|
|
|
132 |
|
|
|
56 |
|
Software
|
|
|
21 |
|
|
|
27 |
|
Electronic
Equipment
|
|
|
854 |
|
|
|
19 |
|
Land
and buildings
|
|
|
2,896 |
|
|
|
2,805 |
|
Less:
Accumulated depreciation
|
|
|
1,040 |
|
|
|
615 |
|
Net
Property and Equipment, Net
|
|
$ |
5,285 |
|
|
$ |
4,008 |
|
For the
years ended December 31, 2007 and 2006, the total depreciation and amortization
expenses were $752,000 and $1,536,000 respectively.
The
significant increase of the office furniture, fixtures and leasehold
improvements was mainly due to the computers, office, software and electronic
equipment in 2007 as the expansion of our business including Games ($820,000)
and Wanrong ($532,000). Additionally, Shenzhen office purchased through Inc
($1,301,000) during 2007.
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 2007 amounted to $466,000 (2006:
$571,000). Future minimum lease payments under non-cancelable operating leases
are $210,000 for 2008, $194,000 for 2009 to 2012.
BANK LINE
OF CREDIT (2007): As of December 31, 2007, Smartime has an overdraft banking
facility with a large Hong Kong bank in the aggregate amount of $100,000. This
overdraft facility is personally pledged by the deposit account of a director of
Smartime.
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.
6.
OTHER CURRENT ASSETS
Other
current assets comprises of the following as at December 31 (in thousands of US
Dollars):
|
|
2007
|
|
|
2006
|
|
(USD
' 000s)
|
|
|
|
|
Restated
|
|
Prepayment
to suppliers
|
|
$ |
346 |
|
|
$ |
886 |
|
Deposit
|
|
|
237 |
|
|
|
- |
|
Receivable
from Lion Zone Holdings Ltd
|
|
|
- |
|
|
|
485 |
|
Loans
to employees
|
|
|
273 |
|
|
|
412 |
|
Prepaid
expenses
|
|
|
129 |
|
|
|
347 |
|
loan
to Golden Charpel
|
|
|
517 |
|
|
|
- |
|
Others
receivable
|
|
|
525 |
|
|
|
361 |
|
WeiDa
for disposal Linkhead
|
|
|
150 |
|
|
|
- |
|
Loan
to Webplus
|
|
|
237 |
|
|
|
- |
|
loan
to Mou Yi Liang
|
|
|
244 |
|
|
|
- |
|
loan
to Bell-Pact Shanghai JV
|
|
|
102 |
|
|
|
- |
|
loan
to UASIT
|
|
|
96 |
|
|
|
- |
|
Advances
to sales reps
|
|
|
- |
|
|
|
228 |
|
Provision
for doubtful account
|
|
|
(2,448 |
) |
|
|
- |
|
Total
|
|
$ |
408 |
|
|
$ |
2,719 |
|
Bank
loans represent the following at December 31 (in thousands):
|
|
2007
|
|
|
2006
|
|
Unsecured
|
|
|
1,823 |
|
|
|
1,048 |
|
Less:
current portion
|
|
|
80 |
|
|
|
411 |
|
Non
current portion
|
|
$ |
1,743 |
|
|
$ |
637 |
|
Aggregate
future maturities of borrowing for the next five years are as
follows:
(As at
December 31, 2007, the aggregate future maturities of borrowing for the next
five years were as follows: 2008: $80,000, 2009: $85,000, 2010: $88,000, 2011:
$95,000, 2012: $101,000 thereafter: $1,374,000)
(US$000s)
|
|
January
2008
to
December
2008
|
|
|
January
2009
to
December
2009
|
|
|
January
2010
to
December
2010
|
|
|
January
2011to
December
2011
|
|
|
January
2012
to
December
2012
|
|
|
Thereafter
|
|
|
TOTAL
|
|
Beijing
PACT office mortgage (1)
|
|
|
56 |
|
|
|
59 |
|
|
|
61 |
|
|
|
66 |
|
|
|
70 |
|
|
|
755 |
|
|
|
1,067 |
|
Shenzhen
PACT office mortgage (2)
|
|
|
24 |
|
|
|
26 |
|
|
|
27 |
|
|
|
29 |
|
|
|
31 |
|
|
|
619 |
|
|
|
756 |
|
TOTAL
|
|
|
80 |
|
|
|
85 |
|
|
|
88 |
|
|
|
95 |
|
|
|
101 |
|
|
|
1,374 |
|
|
|
1,823 |
|
|
(1)
|
Fixed
mortgages expiring in 2012 at interest rate of 5.5% per
annum.
|
|
(2)
|
Fixed
mortgage expiring in 2012 at interest rate of 6.2% per
annum.
|
Accrued
expenses consist of the following at December 31 (in thousands of US
Dollars):
|
|
2007
|
|
|
2006
(Restated)
|
|
Professional
fee
|
|
$ |
480 |
|
|
$ |
221 |
|
Director
fee
|
|
|
111 |
|
|
|
100 |
|
Salaries
and benefit payable
|
|
|
1,042 |
|
|
|
535 |
|
Marketing
expense
|
|
|
973 |
|
|
|
341 |
|
Income
tax payable
|
|
|
7 |
|
|
|
(53 |
) |
Others
|
|
|
887 |
|
|
|
126 |
|
Total
|
|
$ |
3,500 |
|
|
$ |
1,270 |
|
9.
STOCKHOLDERS' EQUITY
a) COMMON
STOCK
During
the year ended December 31, 2007, the Company had the following equity
transactions (i) 199,444 shares of common stock were issued as the monthly
principal redemption shares for 8 million convertible debentures from January to
March, such shares are valued at $1,090,914; (ii) 41,426 treasury shares were
sold to the open market with total consideration $127,000; (iii) 202,000 shares
as a results of exercise of stock options with cash consideration of $406,000;
(iv) 2,330,000 shares issued for the purpose of acquisition of Octavian
International Ltd recorded as a deposit amounting to $10,974,300 (note 17). As
of December 31, 2007, the Company received $196,000 from exercise of stock
options.
During the year ended December 31, 2006, the
Company had the following equity transactions (i) 394,000 shares as a result of
exercise of stock options with cash consideration of $237,000; (ii) 618,112
shares for acquisition of subsidiaries valued at $4,346,000; and (iii) 275,000
shares returned by ChinaGoHi valued at $1,672,000, due to a termination
agreement signed with ChinaGoHi in November 2006 (as filed in an 8K dated Nov
28, 2006); (iv) repurchase of 24,200 shares from Yueshen with a market value of
$124,223.
b) STOCK
OPTION PLAN
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 prices 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 valuation provisions of SFAS 123(R)
apply to new grants and unvested grants that were outstanding as of the
effective date. For the year ended December 31, 2007, 33,000 new options were
granted and no options were vested, thus the option-related compensation cost is
zero. PacificNet elected the modified prospective method and therefore has not
restated results for prior periods due to 123R.
The
status of the Stock Option Plan as of December 31, 2007, is as
follows:
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
Options
|
|
|
EXERCISE
|
|
|
|
outstanding
|
|
|
PRICE
|
|
OUTSTANDING,
DECEMBER 31, 2005
|
|
|
756,100 |
|
|
$ |
3.99 |
|
Granted
|
|
|
500,000 |
|
|
$ |
4.75 |
|
Cancelled
|
|
|
(491,600 |
) |
|
$ |
4.75 |
|
Exercised
|
|
|
(394,000 |
) |
|
$ |
2.12 |
|
OUTSTANDING,
DECEMBER 31, 2006
|
|
|
370,500 |
|
|
$ |
2.00 |
|
*Granted
|
|
|
806,000 |
|
|
|
4.26 |
|
Cancelled
|
|
|
(941,500 |
) |
|
|
2.00 |
|
Exercised
|
|
|
(202,000 |
) |
|
|
2.00 |
|
OUTSTANDING,
DECEMBER 31, 2007
|
|
|
33,000 |
|
|
|
4.31 |
|
*This
includes 18,000 options expired in 2006 and extended in 2007.
Following
is a summary of the status of options outstanding at December 31,
2007:
Grant
Date
|
Total
Options
Outstanding
|
Aggregate
Intrinsic
Value
|
Weighted
Average Remaining
Life
(Years)
|
Total
Weighted
Average
Exercise
Price
|
Option
Exercisable
|
Weighted
Average
Exercise
Price
|
2007-8-13
|
33,000
|
$0
|
5.62
|
$4.31
|
-
|
$4.31
|
PacificNet
originally granted 788,000 options on August 11, 2007; however, as the optionees
did not sign the option agreements before December 31, 2007, most of the options
have been forfeited except for 33,000 options. These options will be vested
commencing August 8, 2008 with a 5% per quarter vesting schedule, and the
corresponding compensation costs will be recorded within the vesting period. The
weighted-average fair value of such options was $2.75.The assumptions used in
calculating the fair value of options granted using the Black-Scholes
option-pricing model are as follows:
|
|
Risk-free
interest rate
|
4.51%
|
Expected
life of the options
|
5.86
years
|
Expected
volatility
|
67.44%
|
Expected
dividend yield
|
0%
|
33,000
options were granted and 202,000 were exercised during the fiscal year ended
December 31, 2007.
Among the
202,000 options exercised, 184,000 were included in the ending balance of
370,500 options per the 2006 annual report; these 184,000 options were exercised
on July 26, 2007. The other 18,000 were exercised on July 5, 2007.
On July
3, 2007 the board extended the grant of previously expired options to a former
director as a result of legal settlement. Total options for which the grant was
extended were 15,000 and 3,000 on two different grants. The Company recorded
$51,400 as stock based compensation expense utilizing Black Scholes Options
Pricing Model by using the following assumptions: exercise price of $2.20 and
$1.75, risk free interest rate of 4.76%, volatility of 70.88% and dividend yield
of 0%.
The
information is as below:
Option
Certificate
Number
|
Grant
Date
according
to (d)
|
Options
Approved
|
Option
Price(A)
|
Option
Shares
Exercised(B)
|
Date
Exercised
|
2104
|
12-30-2002
|
3,000
|
$1.75
|
3,000
|
7-5-2007
|
2300
|
6-23-2003
|
15,000
|
$2.20
|
15,000
|
7-5-2007
|
No other
options were vested during the fiscal year ended December 31, 2007.
c)
WARRANTS
At December 31, 2007, 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 2.34 years and
the weighted average price per share is $10.61 per
share.
Following
is a summary of the warrant activity:
|
|
|
Warrants
outstanding
|
|
|
|
WEIGHTED
AVERAGE
EXERCISE
PRICE
|
|
|
|
Aggregate
Intrinsic
Value
|
|
OUTSTANDING,
DECEMBER 31, 2005 |
|
|
591,138 |
|
|
$ |
9.50 |
|
|
$ |
|
|
Granted
|
|
|
416,000 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING,
DECEMBER 31, 2006
|
|
|
1,007,138 |
|
|
$ |
10.61 |
|
|
$ |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING,
DECEMBER 31, 2007
|
|
|
1,007,138 |
|
|
$ |
10.61 |
|
|
$ |
|
|
Following
is a summary of the status of warrants outstanding at December 31,
2007:
|
Total
warrants
Outstanding
|
Weighted
Average
Remaining
Life
(Years)
|
Total
Weighted
Average
Exercise
Price
|
Warrants
Exercisable
|
Weighted
Average
Exercise
Price
|
2004-1-15
|
123,456
|
1.04
|
$7.15
|
123,456
|
$7.15
|
2004-11-15
|
117,682
|
1.88
|
$3.89
|
117,682
|
$3.89
|
2004-12-9
|
350,000
|
1.94
|
$12.21
|
350,000
|
$12.21
|
2006-3-13
|
416,000
|
3.20
|
$12.20
|
416,000
|
$12.20
|
On March
13, 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 another 16,000 warrants to our placement agent for the
transaction. Those warrants have a term of 5 years and immediately vesting. The
assumptions used in calculating the fair value of such warrants granted using
the Black-Scholes option- pricing model are as follows:
Risk-free
interest rate
|
4.78%
|
Expected
life of the options
|
5.00
years
|
Expected
volatility
|
37.08%
|
Expected
dividend yield
|
0%
|
No
warrants were granted, cancelled and exercised during the years ended December
31, 2007.
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, 2007.
|
|
Number
of shares
|
|
|
Note
|
|
Escrow
shares returned to treasury on
|
|
|
800,000 |
|
|
|
|
Repurchase
in the open market
|
|
|
40,888 |
|
|
|
|
Repurchase
of shares from Take1
|
|
|
149,459 |
|
|
|
|
Cancellation
of former employee shares
|
|
|
45,000 |
|
|
|
|
Holdback
shares as contingent consideration due to performance targets not yet
met
|
|
|
529,848 |
|
|
|
(1 |
) |
Termination
with ChinaGoHi
|
|
|
825,000 |
|
|
|
|
|
Incomplete
acquisition of Allink
|
|
|
200,000 |
|
|
|
|
|
Repurchase
of shares from Yueshen
|
|
|
24,200 |
|
|
|
|
|
Shares
sold to the open market
|
|
|
(41,426 |
) |
|
|
|
|
Balance,
December 31, 2007
|
|
|
2,572,969 |
|
|
|
|
|
Shares
outstanding at December 31, 2007
|
|
|
14,314,072 |
|
|
|
|
|
Shares
issued at December 31, 2007
|
|
|
16,887,041 |
|
|
|
|
|
(1) Includes
shares related to Clickcom acquisition: 78,000 PACT shares; Guangzhou Wanrong
acquisition: 138,348 PACT shares; iMobile acquisition: 153,500 PACT Shares; and
Pacificnet Games: 160,000 PACT shares.
10.
CONVERTIBLE DEBENTURES
10.1
Eight Million 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 nine months 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.
Under the
terms of a registration rights agreement entered into at the time of the private
placement, the Company was obligated to file a registration statement with
respect to the shares issuable under the debenture and the warrants by April 30,
2006, and have the registration statement declared effective by the SEC no later
than June 28, 2006. Due to various factors, the Company did not file the
registration statement until May 15, 2006, and it was not declared effective
until December 8, 2006. Therefore, under the terms of the registration rights
agreement, the Company was obligated to pay liquidated damages to the investors
at the rate of 2% of the principal amount of the debenture each month beginning
on June 28, 2006 until the effectiveness of the registration statement, which
was equal to $1,120,000, in the aggregate.
In
February 2007, upon reaching an agreement on the amount and payment of accrued
liquidated damages, the Company signed a Settlement and Release Agreement with
each of the investors. Under the terms of the Settlement and Release Agreements,
the Company paid an aggregate $140,000 in cash as satisfaction in full of
liquidated damages owed to Basso Fund Ltd., Basso Multi-Strategy Holding Fund
Ltd., and Basso Private Opportunities Holding Fund Ltd. Partial liquidated
damages owed to Whalehaven Capital Fund Ltd. were paid in the amount of $35,000
in cash, with the remaining liquidated damages in the amount of $105,000 paid in
the form of a new convertible debenture due February 2009, on substantially the
same terms as the original debentures, except that interest only is paid on the
new debentures until October 2008 and beginning in November 2008 until February
2009, when the new debentures are due, the monthly redemption amount under the
new debentures shall be equal to $315,000. The remaining investors also agreed
to accept the aggregate $840,000 in liquidated damages owed to them in the form
of the new convertible debentures for the amount of their respective portion of
the liquidated damages. The Company also agreed to amend the original debentures
to shorten the term for payment of the original principal amount to a 22 month
term. As a result the monthly redemption amount for the original debenture
increased from $320,000 to $ 363,638. All other terms and conditions of the
original debenture remain in full force and effect.
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 $28,141. Such amount was
charged to other assets, net, and credited to additional paid-in capital and
will be amortized over the life of the debentures. 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 $1,106,135
of issuance costs, which primarily consisted of investment banker fees, legal
and other professional fees. These costs have been recorded as additional
expense during year 2006.
CHANGE IN
ACCOUNTING PRINCIPLE: On January 1, 2007, the Company adopted FSP EITF 00-19-2
and reclassified warranty liability to equity thru cumulative – effect
adjustment to the opening balance of retained earnings/loss by
$213,000.
The FSP
states that for registration payment arrangements and financial instruments
subject to those arrangements that were entered into prior to the issuance of
the FSP and that continue to be outstanding at the beginning of the period of
adoption, transition shall be achieved by reporting a change in accounting
principle through a cumulative effect adjustment to the opening balance of
retained earnings, or other appropriate component of equity or net assets in the
statement of financial position, in the first interim period of the fiscal year
in which this FSP is initially applied. No prior period information is
retrospectively adjusted following the transition provisions of
FSP.
EVENT OF
DEFAULT
On March
16, 2007 our predecessor auditor withdrew their opinion on our previously filed
financial statements for the years ended December 31, 2005, December 31, 2004
and December 31, 2003. As a result, on March 27, 2007, we notified the holders
of the outstanding convertible debenture that we suspended use of the prospectus
contained in our Registration Statement on Form S-1 (File No. 333-134127) that
was declared effective on December 8, 2006, due to the lack of fiscal year end
2005 and 2004 audited financial statements and that they must cease selling
under the prospectus. The suspension of the use of the prospectus after April
17, 2007, triggered an event of default under the registration rights agreement
and the convertible debentures, and if any of the holders so elect, they could
accelerate and demand payment under the debentures, in accordance with the
registration rights agreement based on the following provisions.
a)
|
"If,
during the Effectiveness Period, either the effectiveness of the
Registration Statement lapses for any reason or the Holder shall not be
permitted to resell Registerable Securities under the Registration
Statement for a period of more than 20 consecutive Trading Days or 60
non-consecutive Trading Days during any 12 month period, the Company has
to pay ‘Mandatory Default Amount’ as the sum of (i) the greater of (A)
130% of the outstanding principal amount of this Debenture, plus all
accrued and unpaid interest hereon, or (B) the outstanding principal
amount of this Debenture, plus all accrued and unpaid interest hereon,
divided by the Conversion Price on the date the Mandatory Default Amount
is either (a) demanded (if demand or notice is required to create an Event
of Default) or otherwise due or (b) paid in full, whichever has a lower
Conversion Price, multiplied by the VWAP on the date the Mandatory Default
Amount is either (x) demanded or otherwise due or (y) paid in full,
whichever has a higher VWAP, and (ii) all other amounts, costs, expenses
and liquidated damages due in respect of this
Debenture."
|
b)
|
"If
any Event of Default occurs, the outstanding principal amount of this
Debenture plus accrued but unpaid interest, liquidated damages and other
amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s selection, immediately due and payable in cash at
the Mandatory Default Amount. Commencing 5 days after the occurrence of
any Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at an interest
rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law."
|
Due to
the provisions mentioned above and as per the terms of the Debenture, the
Company has reclassified the principal amount of the Debenture of $8,000,000
(remaining balance: $4,864,000) and the principal amount of the new Debenture of
$945,000 and the interest accrued thereon to current liabilities.
The
Company accrued 2% as liquidated damages and 30% as mandatory default amount
from the date of ineffectiveness of registration statement as
follows:
($,000) |
|
|
December
31, 2007
|
|
Liquidated
damages
|
|
|
2 |
% |
|
$ |
450 |
|
Mandatory
default
|
|
|
30 |
% |
|
|
2,247 |
|
Total
|
|
|
|
|
|
$ |
2,697 |
|
Such
amounts have been recorded as liquidated damages liability as of December 31,
2007.
Following
is the summary of convertible debenture:
($,000) |
|
|
$8
Million convertible debenture
|
|
|
|
$945,000
convertible debenture
|
|
|
|
Total
|
|
Balance
December 31, 2006
|
|
$ |
8,000 |
|
|
$ |
945 |
|
|
$ |
8,945 |
|
Principal
payment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
through shares
|
|
|
(1,091 |
) |
|
|
- |
|
|
|
(1,091 |
) |
Cash
payment
|
|
|
(2,045 |
) |
|
|
|
|
|
|
(2,045 |
) |
Balance
December 31, 2007
|
|
$ |
4,864 |
|
|
$ |
945 |
|
|
$ |
5,809 |
|
The
Company issued 199,444 shares to redeem $1,090,909 of convertible note as of
December 31, 2007.
10.2
Five Million Convertible Note
On
February 7, 2007, PacificNet Games Limited (PactGames), a 51% owned subsidiary
of the Company, entered into a definitive $5 million convertible secured note
financing agreement with Pope Asset Management, LLC (Pope), an institutional
investor. Proceeds of the financing are to provide PactGames with additional
working capital to expand its gaming technology operations, to make further
synergistic acquisitions in China and for general corporate
purposes.
The $5
million convertible secured note issued to Pope matures on February 6, 2010.
Subject to reaching certain net income milestones during fiscal year 2007, the
note is convertible into an equity interest of PactGames ranging between 26% and
32%. The interest rate of the convertible note has initially been set at 8%, and
shall increase to 15% if the note is not converted prior to
maturity.
In
connection with the issuance of the note, PactGames incurred issuance costs of
$274,667, which primarily consisted of investment banker fees, legal and other
professional fees. These costs have been capitalized and will be amortized over
three years, the life of the note. Interest accrual as of December 31, 2007
amounted to $498,288.
Following
is the summary of convertible debenture:
($,000) |
|
December
31, 2007 |
|
Convertible
debenture
|
|
$ |
5,000 |
|
Accrued
interest
|
|
|
499 |
|
Unamortized
financing cost
|
|
|
(275 |
) |
Balance
December 31, 2007
|
|
$ |
5,224 |
|
11.
INCOME TAXES
The
components of income before income taxes are as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income
subject to PRC
|
|
$ |
(353 |
) |
|
$ |
1,620 |
|
|
$ |
1,308 |
|
Income
(Loss) subject to Hong Kong
|
|
|
(8,743 |
) |
|
|
(8,098 |
) |
|
|
(4,451 |
) |
Income
(Loss) subject to United States
|
|
|
(5,092 |
) |
|
|
(5,961 |
) |
|
|
(1,947 |
) |
Income
(Loss) before taxesx
|
|
|
(14,188 |
) |
|
|
(12,439 |
) |
|
|
(5,090 |
) |
Less:
income taxes
|
|
|
(7 |
) |
|
|
(18 |
) |
|
|
(55 |
) |
Net
Income (Loss) available to common stockholders
|
|
$ |
(14,195 |
) |
|
$ |
(12,457 |
) |
|
$ |
(5,145 |
) |
United States of
America
For
operations in the USA, the Company is subject to United States federal income
tax at a rate of 34%. The Company has incurred net accumulated operating losses
for income tax purposes and there is no provision for U.S. federal income tax
for 2007, 2006 and 2005 due to the Company's loss position. The Company believes
that it is more likely than not that these net accumulated operating losses will
not be utilized in the future because the Parent company is a holding company
with foreign subsidiaries and does not generate income. Therefore, the Company
has provided full valuation allowance for the deferred tax assets arising from
the losses as of December 31, 2007, 2006 and 2005.
The
following table sets forth the significant components of the deferred tax assets
for operation in the United States of America as of December 31, 2007, 2006
and 2005.
|
2007
|
|
2007
|
|
2005
|
Deferred
tax asset credit:
|
|
|
|
|
|
Federal
|
34%
|
|
34%
|
|
34%
|
State
|
6%
|
|
6%
|
|
6%
|
Valuation
allowance
|
(40)%
|
|
(40)%
|
|
(40)%
|
|
0%
|
|
0%
|
|
0%
|
Hong
Kong
Hong Kong
profits tax has been provided at a rate of 17.5% on the estimated assessable
profits arising in Hong Kong for each of the years ended December 31, 2007, 2006
and 2005. Provision for Hong Kong profits tax for 2007, 2006 and 2005 was
approximately $4,000, $18,000 and $0 respectively.
PEOPLE'S REPUBLIC OF CHINA
(PRC)
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 a preferential tax rate of 15%. In
addition, some of the Company's subsidiaries are Foreign Investment Enterprises
and under PRC Income Tax Laws, they are entitled to either a three-year tax
exemption followed by three years with a 50% reduction in the tax rate,
commencing the first operating year, or a two-year tax exemption followed by
three years with a 50% reduction in the tax rate, commencing the first
profitable year. Provision for PRC business tax expense for 2007 was $3,000,
2006 was zero (reclassified to discontinued operations) and 2005 was
$28,000.
No
provision for deferred tax liabilities has been made, since the Company had no
material temporary differences between the tax bases of assets and liabilities
and their carrying amounts.
12.
RELATED PARTY TRANSACTIONS
LOAN DUE TO AND FROM RELATED
PARTIES
As at the
years ended December 31, 2007 and 2006, there was a total loan receivable of
approximately $2,273,000 and $2,991,000 respectively due from related parties
while the loan due to related party was $0 and $282,000.
As of
December 31, 2006, the related party loan receivables included $1,026,000 due
from Take 1, $196,000 due from MOABC, $1,101,000 due fro m PACT Power, $159,000
due from PactSo-HK, $25,000 due from PACT AD, and $484,000 due from shareholders
and directors of certain of the Company’s subsidiaries in connection with the
acquisition of these subsidiaries. The loans receivable from shareholders and
directors of these subsidiaries is comprised of $356,000 due from a shareholder
of Yueshen and $128,000 due from a director of Soluteck.
As of
December 31, 2007 the related party loans receivable included $781,000 due from
PACT Power, $523,000 due from MOABC, $625,000 due from PACT Linkhead, $15,000
due form PACT AD, $150,000 due from PACT Solution, and $179,000 due from
shareholders and directors of certain of the Company’s subsidiaries in
connection with the acquisition of these subsidiaries. The loans receivable from
shareholders and directors of these subsidiaries are comprised of $115,000 due
from a shareholder of Victor Choi and $64,000 due from a director of
Soluteck.
The terms
of these related parties loan receivables and payables are summarized
below:
LOAN TO
POWER
PactPower is an affiliated company, 15%
owned by PacificNet, as of December 31, 2007. A convertible loan of $781,000 is
outstanding from PactPower. The maturity date of loan was September 9, 2007.
Within ninety (90) days overdue, an additional interest charge of 5% per annum
will be levied as a penalty. The loan is received approximately $128,000 on
January 2008.
LOAN TO
MOABC
MOABC is
an affiliated company and is 15% owned by PacificNet as of December 31, 2007. A
convertible loan of $523,000 is outstanding from MOABC as of December 31, 2007.
The maturity date of loan is January 1, 2009.
LOAN TO
LINKHEAD
Linkhead
is an affiliated company, 15% owned by PacificNet, as of December 31, 2007. A
convertible loan of $625,000 is outstanding from Linkhead. The maturity date of
loan is January 1, 2008.
LOAN TO PACIFICNET
AD
PACIFICNET
AD is an affiliated company, 19% owned by PacificNet as of December 31, 2007. A
convertible loan of $15,000 is outstanding from AD and is received on March
2008.
LOAN TO PACIFICNET SOLUTION
LIMITED (PacSo-HK)
PacSo-HK
is an affiliated company, 15% owned by PacificNet, as of December 31, 2007. A
convertible loan of $150,000 is outstanding from PactSo-HK. The maturity date of
loan was January 6,2007. The loan is
currently due on demand, non-interest bearing and unsecured.
LOAN TO VICTOR CHOI
SHAREHOLDER
As of
December 31, 2007, there was a loan outstanding of $115,000 receivable from the
shareholder of Victor Choi. This loan is secured by 30,000 PacificNet shares.
The maturity date of loan was August 31, 2007. The loan is currently due on
demand and non-interest bearing.
LOAN TO SOLUTECK’S
DIRECTOR
As of
December 31, 2007, there was a loan outstanding of $64,000 receivable from a
director of Soluteck, due on January 17 for three consecutive years ending 2008.
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 PAYABLE TO RELATED
PARTY
As of
December 31, 2007, there was no outstanding loan payable to related
parties.
As of
December 31, 2006, a loan of $282,000 was payable to a shareholder of Smartime.
The loan was advanced to Smartime for working capital purposes.
13.
SEGMENT INFORMATION
SFAS No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"), establishes standards for reporting information about operating segments
and for related disclosures about products, services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision-maker, or decision-making group, in making decisions
regarding allocation of resources and assessing performance. PacificNet’s chief
decision-makers, as defined under SFAS 131, are the Chief Executive Officer and
Chairman. During 2007 and 2006, PacificNet had four operating
segments.
The
Company’s reportable segments are operating units, which represent the
operations of the Company’s significant business operations. Summarized
financial information concerning the Company’s reportable segments is shown in
the following table. The “Other” column includes the Company’s other
insignificant services and corporate related items, and, as it relates to
segment profit (loss), income and expense not allocated to reportable
segments.
For
the year ended December 31, 2007
|
|
Group
1.
Outsourcing
Services
|
|
|
Group
2.
Telecom
Value-Added
Services
|
|
|
Group
3.
Products
(Telecom
&
Gaming)
|
|
|
Group
4.
Other
Business
|
|
|
Total
|
|
(in
thousands of US Dollars, except percentages)
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Revenues
|
|
|
2,310 |
|
|
|
1,839 |
|
|
|
14,528 |
|
|
|
317 |
|
|
|
18,994 |
|
(%
of Total Revenues)
|
|
|
12 |
% |
|
|
10 |
% |
|
|
76 |
% |
|
|
2 |
% |
|
|
100 |
% |
Earnings
/ (Loss) from Operations
|
|
|
(544 |
) |
|
|
737 |
|
|
|
(6,133 |
) |
|
|
(10,487 |
) |
|
|
(16,427 |
) |
(%
of Total Profit)
|
|
|
3 |
% |
|
|
(4 |
)% |
|
|
37 |
% |
|
|
64 |
% |
|
|
100 |
% |
Total
Assets
|
|
|
1,490 |
|
|
|
2,516 |
|
|
|
16,512 |
|
|
|
4,202 |
|
|
|
24,720 |
|
(%
of Total Assets)
|
|
|
6 |
% |
|
|
10 |
% |
|
|
67 |
% |
|
|
17 |
% |
|
|
100 |
% |
Goodwill
|
|
|
- |
|
|
|
461 |
|
|
|
409 |
|
|
|
- |
|
|
|
870 |
|
Geographic
Area
|
|
HK,PRC
|
|
|
HK,
PRC
|
|
|
HK,PRC,Macau
|
|
|
HK,PRC
|
|
|
|
|
|
For
the year ended December 31, 2006
|
|
Group
1.
Outsourcing
Services
|
|
|
Group
2.
Telecom
Value-Added
Services
|
|
|
Group
3.
Products
(Telecom
&
Gaming)
|
|
|
Group
4.
Other
Business
|
|
|
Total
|
|
(in
thousands of US Dollars, except percentages)
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Revenues
|
|
|
1,813 |
|
|
|
2,784 |
|
|
|
23,385 |
|
|
|
1,091 |
|
|
|
29,073 |
|
(%
of Total Revenues)
|
|
|
6 |
% |
|
|
10 |
% |
|
|
80 |
% |
|
|
4 |
% |
|
|
100 |
% |
Earnings
/ (Loss) from Operations
|
|
|
(67 |
) |
|
|
(1,054 |
) |
|
|
(1,345 |
) |
|
|
(4,969 |
) |
|
|
(7,435 |
) |
(%
of Total Profit)
|
|
|
1 |
% |
|
|
14 |
% |
|
|
18 |
% |
|
|
67 |
% |
|
|
100 |
% |
Total
Assets
|
|
|
3,413 |
|
|
|
12,673 |
|
|
|
(1,570 |
) |
|
|
18,155 |
|
|
|
32,671 |
|
(%
of Total Assets)
|
|
|
10 |
% |
|
|
39 |
% |
|
|
(5 |
)% |
|
|
56 |
% |
|
|
100 |
% |
Goodwill
|
|
|
3,964 |
|
|
|
461 |
|
|
|
1,176 |
|
|
|
- |
|
|
|
5,601 |
|
Geographic
Area
|
|
HK,PRC
|
|
|
HK,
PRC
|
|
|
HK,PRC,Macau
|
|
|
HK,PRC
|
|
|
|
|
|
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
Smartime/Soluteck-PactSo.
(2)
Telecom Value-Added Services (VAS) - Our subsidiary, Guangzhou Wanrong
Information Technology Co., Ltd. ("Guangzhou Wanrong"), is 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.
(3)
Product (Telecom & Gaming) Services Group - involves communication and
gaming products, GSM/CDMA/3G Products, Multimedia Communication Kiosks. This
Group includes the following subsidiaries: PacificNet Communications Limited,
iMobile, Take1 and PacificNet Games. PacificNet Games Limited (PactGames) is a
leading developer of Asian electronic gaming machines, multi-player electronic
gaming technology solutions and gaming related maintenance, IT, and distribution
services for the leading hotel and casino operators based in the Macau and other
Asian gaming markets. Take1 Technologies (Take 1), is in the business of
designing and manufacturing electronic multimedia entertainment kiosks, coin-op
kiosks and machines, Electronic Gaming Machines (EGM), bingo and slot machines,
AWP (Amusements With Prizes) games, server-based downloadable games systems, and
Video Lottery Terminals (VLT) such as Keno and Bingo machines, including
hardware, software, and cabinets.
(4) Other
Business - other administrative, financial and investment services and non-core
businesses.
Product
and service revenues classified by major geographic areas are as follows (in
thousands of US Dollars):
For
the year ended December 31, 2007
|
|
Hong
Kong
|
|
|
PRC
|
|
|
Macau
|
|
|
United
States
|
|
|
Total
|
|
Product
revenues
|
|
$ |
5,447 |
|
|
$ |
6,770 |
|
|
$ |
2,311 |
|
|
$ |
- |
|
|
$ |
14,528 |
|
Service
revenues
|
|
$ |
261 |
|
|
$ |
4,205 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,466 |
|
For
the year ended December 31, 2006
|
|
Hong
Kong
|
|
|
PRC
|
|
|
Macau
|
|
|
United
States
|
|
|
Total
|
|
Product
revenues
|
|
$ |
17,071 |
|
|
$ |
7,147 |
|
|
$ |
364 |
|
|
$ |
- |
|
|
$ |
24,582 |
|
Service
revenues
|
|
$ |
1,228 |
|
|
$ |
3,263 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,491 |
|
14.
NET ASSETS HELD FOR DISPOSITION
Sale
of Interest in Linkhead Technology Bejing Limited. ("Linkhead") and
PacificNet Telecom Solutions Inc. (“PactTelso”)
On May
20, 2007, the Company entered into a definitive agreement to sell its 36% equity
interest in Linkhead, a PRC limited liability corporation engaged in the
business of resale of VAS, IVR, NMS hardware and software platforms in China, to
Mr. Mu Yingliang, a resident of People’s Republic of China.
On May
20, 2007, the Company entered into a definitive agreement to sell its 36% equity
interest in PactTelso, an intermediate holding company registered under the laws
of British Virgin Islands, to Mr. Mu Yingliang, a resident of People’s Republic
of China.
Consideration
for the 36% interest of Linkhead and PactTelso was US$500,000, to be paid in
three installments. The Company’s interest in Linkhead and PactTelso was
decreased from 51% to 15% after the transaction. Absent any explicit closing
conditions contained in the said agreement, the disposal was completed upon
title transfer during the third quarter of 2007.
Sale of Interest in
PacificNet Solutions Limited ("PacSo-HK")
On May
18, 2007, the Company entered into a definitive agreement to sell its 45% equity
interest in PacSo-HK, a company registered under the laws of Hong Kong SAR,
China and engaged in systems integration, software application, and e-business
solutions services, to Mr. Alex Au, a resident of Hong Kong SAR, China.
Consideration for the 45% interest of PacSo-HK was HK$4,500 (or US$577), to be
paid within 90 days after signing of the agreement. The Company’s interest in
PacSo-HK decreased from 60% to 15% after the transaction. Absent any explicit
closing conditions contained in the said agreement, the disposal was completed
upon title transfer during the third quarter of 2007.
Sale
of Interest in PacificNet Power Limited ("PactPower")
On May
18, 2007, the Company entered into a definitive agreement to sell its 36% equity
interest in PactPower, a company registered under the laws of Hong Kong SAR,
China and engaged in power and energy saving contracting and consulting
businesses, to Mr. Alex Au, a resident of Hong Kong SAR, China. Consideration
for the 36% interest of PactPower was HK$3,600 (or US$462), to be paid within 90
days after signing of the agreement. The Company’s interest in PactPower
decreased from 51% to 15% after the transaction. Absent any explicit closing
conditions contained in the said agreement, the disposal was completed upon
title transfer during the third quarter of 2007.
Sale
of Interest in MOABC.com ("MOABC")
On May
20, 2007, the Company entered into a definitive agreement to sell its 5% equity
interest in MOABC, a PRC limited liability corporation engaged in the business
of value-added services platform providing, to Mr. Jack Ou, a resident of
People’s Republic of China. Consideration for the 5% interest of MOABC was
RMB5,000 (or US$647), to be paid within 90 days after signing of the agreement.
The Company’s interest in MOABC decreased from 20% to 15% after the
transaction.
Sale of Interest in
PacificNet Clickcom Limited ("Clickcom")
On
December 18, 2007, the Company entered into a definitive agreement to sell its
36% equity interest in PacificNet Clickcom Limited. ("Clickcom"), a
leading Value-Added Services (VAS) company in China, to Mr. Ou Zhenbin, a
Chinese resident. Consideration for the 36% interest of Clickcom was RMB10,000
(or US$1,314), to be paid in cash within 90 days after the agreement
signing. The Company’s interest in Clickcom decreased from 51% to 15%
after the transaction.
Sale
of Interest in Guangzhou 3G Information Technology Co., Ltd. ("Guangzhou
3G")
On April
30, 2007, through our wholly-owned subsidiary, PacificNet Strategic Investment
Holdings Limited (“PSI Holdings”), we entered into a stock purchase and sale
agreement with Heyspace International Limited to sell PSI Holdings’ 51% interest
in Guangzhou 3G's parent company, Pacific 3G Information & Technology Co.
Limited. The purchase price is $6,000,000 payable in installments over a six
month period or earlier if Heyspace completes its initial public offering prior
to October 31, 2007. Heyspace paid an initial purchase price of $1,000,000 and
the remaining balance to be paid by October 2007. Due to non payment of the
remaining balance by Heyspace as per the agreement, the Company on November 25,
2007 entered into a memorandum of understanding (“MOU”) with Heyspace. Pursuant
to the MOU, we agreed with Heyspace that for a period commencing on November 25,
2007 through March 31, 2008, we are free to seek new buyers to purchase PSI
Holdings’ share ownership in Guangzhou 3G at a consideration and term which at a
minimum will not cause any disposal loss to us. As at December 31, 2007,
Heyspace owns Pacific 3G.
Sale
of Interest in PacificNet Epro Holdings Limited ("Epro")
On April
18, 2008, PacificNet, consummated the sale of the Company's subsidiary,
PacificNet Epro Holdings Limited, a company incorporated in the Hong Kong
Special Administrative Region of the PRC ("Epro"), which is primarily engaged in
the business of providing call center telecom and customer relationship
management services as well as other business outsourcing services in China.
Pursuant to the terms of the Sales and Purchase Agreement (the "Agreement")
entered into between the Company and Epro Group International Limited (the "Epro
Group International"), PacificNet sold its entire share ownership of 7,766,993
shares in Epro for HK$21 million. Upon execution of the Agreement, the Company
received a payment of HK$3 million. PacificNet shall receive the remaining
purchase price in installments over the next twenty-four months. Pursuant to the
terms of the Agreement, within sixty days of the closing, Epro shall repay
PacificNet HK$2 million for an interest bearing loan granted from PacificNet to
Epro. As at December 31, 2007, PacificNet Epro Holdings is classified under ‘Net
Assets Held for Disposal’ in the accompanying financial statements.
Information
relating to the operations of the subsidiaries up to the periods of
disposal/held for disposal during the year ended December 31, 2007 is as follows
(in thousands of US Dollars):
2007
(In US$ thousands)
|
|
Linkhead
+PacTelso
|
|
|
Clickcom
|
|
|
Power
|
|
|
Solutions
|
|
|
3G
|
|
|
EPRO
|
|
|
AD
|
|
|
Total
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Income
(loss) from discontinued operations
|
|
|
(84 |
) |
|
|
(60 |
) |
|
|
(478 |
) |
|
|
(10 |
) |
|
|
(228 |
) |
|
|
491 |
|
|
|
(50 |
) |
|
|
( 419 |
) |
Gain
on disposal
|
|
|
244 |
|
|
|
60 |
|
|
|
1,274 |
|
|
|
218 |
|
|
|
333 |
|
|
|
- |
|
|
|
53 |
|
|
|
2,181 |
|
Net
assets held for disposition (remaining interest)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,692 |
|
|
|
- |
|
|
|
2,692 |
|
15.
LEGAL PROCEEDINGS
1.
Johnson Controls Hong Kong Limited (JCHKL) vs. PacificNet Power
Limited
On
January 19, 2007, Johnson Controls Hong Kong Limited filed a civil claim against
PacificNet Power Limited (a 51% owned subsidiary of PacificNet) in the High
Court of the Hong Kong Special Administrative Region seeking HK$4,800,000 as
payment for services rendered to replace 3 sets of rain water-cooled chillers,
together with energy saving performance (the "Chiller System"), at the Fortress
Tower in Hong Kong.
In
connection with the claim, PacificNet Power reviewed a letter from its client,
China Weal Property Management Ltd., dated January 22, 2007 stating that the
construction work by JCHKL had not been completed as of the date of the letter,
and that certain violations itemized in a letter issued by the Hong Kong
Environment Protection Department (EPD) (Noise Abatement Notice No. N806030)
addressed to JCHKL with respect to acoustic problems with JCHKL’s equipment had
not been abated.
The board
of directors of PacificNet Power Limited has reviewed the case with its client,
China Weal Property Management Ltd., and our Hong Kong legal counsel and it is
the honest belief of the board that the project work undertaken JCHKL is
defective in numerous aspects. As a result, the board believes that
the construction work has not been completed by JCHKL, and therefore, JCHKL is
not entitled to payment for its services.
On
February 13, 2007, the board instructed the Hong Kong legal counsel to issue a
Defense and Counterclaim to JCHKL to counter-claim that ( i) JCHKL's
construction work has not complied with the applicable rules and regulations of
various government authorities in Hong Kong; (ii) the Chiller System provided by
JCHKL was defective and merchantable unfit and JCHKL has failed and/or refused
to rectify such defective works; and (iii) JCHKL shall return the work deposit
in the amount of HK$1,500,000 to PacificNet Power Limited and shall compensate
and keep PacificNet Power Limited indemnified against all the loss and damages
suffered as a result of any claims from the China Weal Property Management
Ltd..
The case
is now in the discovery stage before proceeding to the stage of fixing a date
for trial in the High Court of Hong Kong and the board intends to vigorously
defend against the allegations. We are unable to predict the outcome of these
actions, or a reasonable estimate of the range of possible loss, if
any.
2. PacificNet Power Limited vs
Johnson Controls Hong Kong Limited (JCHKL)
On or
about December 2005, Johnson Controls Hong Kong Limited approached PacificNet
Power Limited (a 51% owned subsidiary of PacificNet) and made a representation
that they had submitted a tender to “The Incorpated Owners of Nan Fung Centre,
Tsuen Wan (“the Employer”) for the “construction and replacement works of
existing air-cooled chiller plant by new water-cooled chiller plant for Tsuen
Wan Nan Fung Centre and energy saving performance contract” (“the Contract”).
JCHKL invited and induced PacificNet Power Limited to act as the main contractor
for the Contract and it would then act as a sub-contractor.
PacificNet
Power also expressly made known to JCHKL that the said construction and
replacement works and the guaranteed energy saving should meet all the tender
requirements if PacificNet Power accepted the invitation to act as the main
contractor for the Contract, and PacificNet Power further said that if there
should be any quality defects with the system and/ or the construction work, the
Employer and/ or their prospective tenants would claim against JCHKL and JCHKL
should compensate.
PacificNet
Power however received some correspondences and complaints from the Employer
about the poor and/ or sub-standard works done by JCHKL. PacificNet Power, after
separate investigation, discovered the poor workmanship and sub-standard works
done by JCHKL. Accordingly, the Employer and/ or their representatives have
delayed the monthly installments payment to PacificNet Power.
On April
23, 2007, PacificNet Power instructed the Hong Kong lawyers to issue a letter to
the Defendant requesting and demanding them, being the sub-contractor of the
Construction and Replacement Works Contract, to take immediate rectification
action within seven days from the date of the said letter to (i) rectify and
complete all outstanding defective works of the Construction and Replacement
Works Contract; (ii) replace the water-cooled chiller plant and/or equipments
which are not conformed with the requirements of the tender documents previously
submitted by the Defendant to the Employer; and (iii) improve the poor
performance of energy saving of the new water-cooled chiller plant.
Despite
the said letter, JCHKL had failed and/ or refused to rectify and complete all
outstanding works and/ or replace the defective system. And therefore PacificNet
Power claims against JCHKL for: (i) refund HK$6,414,300.00, being the Contract
Price paid by PacificNet Power to JCHKL; (ii) costs and expenses incurred by
PacificNet Power to rectify all defective works of the Contract; (iii) all
damage and loss suffered by PacificNet Power, and further and other
relief.
On July
25, 2007, JCHKL issued a Defense and Counterclaim to PacificNet Power to argue
that: (i) they had carried out the works according to the Contract terms; (ii)
the works had been approved by PKL Consultants Limited, the consultant
representative of the Employer; and (iii) a sum of HK$30,000 is still due and
owing by PacificNet Power to JCHKL.
The case
is now in the discovery stage before proceeding to the stage of fixing a date
for trial in the High Court of Hong Kong. We are unable to predict the outcome
of these actions, or a reasonable estimate of the range of possible loss, if
any.
3.
PacificNet Inc. vs. HLB Hodgson Impey Cheng (HLB or Defendant), a firm of
Chartered Accountants and Certified Public Accountants in Hong Kong
On
September 20, 2007, PacificNet Inc. filed a claim against its former auditors
HLB Hodgson Impey Cheng (HLB), a firm of Chartered Accountants and Certified
Public Accountants, in the High Court of the Hong Kong Special Administrative
Region seeking refund of the professional fees, compensation of professional
fees and expenses for Company to engage and deploy new auditors to take over the
incomplete audit works from the Defendant and returning and/or providing all
relevant accounting records, vouchers, audit program and working papers retained
by the Defendant and losses and damages incurred.
The case
is now in the pleadings stage. We are unable to predict the outcome of these
actions, or a reasonable estimate of the range of possible loss, if
any.
4.
Iroquois Master Fund, Ltd. vs. Pacificnet Inc.
On or
about October 3, 2007 Iroquois Master Fund, Ltd. filed a complaint in the
Supreme Court of the State of New York against PacificNet Inc., claiming that
the Company is in default under the Amended and Restated Convertible Debenture
due March 2009 (the Amended Debenture”) in the principal amount of $3,000,000
and the Convertible Debenture due February 2009 (the New Debenture”) in the
principal amount of $420,000.
Iroquois
Master Fund, Ltd. is seeking damages of $3,253,163.80 in the aggregate, together
with any accrued but unpaid interest through the date of
judgment. Iroquois Master Fund, Ltd. has also demanded reimbursement
of its attorney fees and other costs and expenses incurred together with costs
and disbursements of this action.
On or
about December 5, 2007, PacificNet filed its answer denies that PacificNet is in
default and assert an agreement that would enable it to bring the interest
payments up to date by the issuance of stock in the near future.
On March
27, 2008, three holders of PACT's Convertible Subordinated Debentures filed an
involuntary petition for Chapter 11 relief in federal bankruptcy court late
Saturday, March 22, 2008 in Wilmington, DE. The Company has retained counsel to
oppose the filing because the petition fails to meet the standard for invoking
an involuntary bankruptcy and fails to take into consideration other agreements
between the Company and the petitioning creditors. The Company intends to
vigorously oppose the petition and move for dismissal of the filing, and if
successful will seek damages and attorney fees. Subsequently, PACT also received
default notice from all but one of the debentureholder including Iroquois Master
Fund Ltd., Alpha Capital AG, Whalehaven Capital Fund Limited, DKR Soundshore
Oasis Holding Fund Ltd., Basso Fund Ltd., Basso Multi-Strategy Holding Fund
Ltd., and Basso Private Opportunities Holding Fund Ltd. from the same
Convertible Subordinated Debentures related to the private offering of
$8,000,000 principal amount variable debentures consummated on March 13, 2006,
and due March 2009.
PACT has
retained counsel to oppose the above petition. The amount of the debt in
question is as follows: Iroquois Master Fund Ltd. $2.5 million, Whalehaven
Capital Fund Limited $958,000, Alpha Capital AG $685,000 DKR Soundshore Oasis
Holding Fund Ltd $960,000, and Basso Fund Ltd., Basso Multi- Strategy Holding
Fund Ltd., and Basso Private Opportunities Holding Fund Ltd., a combined amount
of $500,000.
16.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC's economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
17.
EVENTS SUBSEQUENT TO DECEMBER 31, 2007
1) STATUS OF ACQUISITION OF
OCTAVIAN INTERNATIONAL LIMITED ("OCTAVIAN")
On
January 22 2008, PacificNet Inc. (NASDAQ:PACT) (the “Company” or “PacificNet”),
announced the acquisition of Octavian International Limited (“Octavian”), a
worldwide supplier of gaming technology, solutions and
systems. The Company had previously reported on a Form 8-K
filed with the Securities and Exchange Commission on December 13, 2007, the
execution of definitive agreements, including that certain Agreement among,
PacificNet Games International Corporation, Octavian, Emperor Holdings Limited,
Ziria Enterprises Limited and the Company on December 7, 2007, for the
acquisition of 100% of Octavian (the “Agreement”). PacificNet,
through its wholly-owned subsidiary, Pacificnet Games International Corporation,
signed an agreement to acquire from Ziria Enterprises Limited, a company
incorporated in Cyprus (the “Seller”), 100% of the issued and outstanding shares
(the “Shares”) of Emperor Holdings Limited, a company incorporated in Cyprus
(the “Holding Company”), which is the parent company of Octavian.
Up to
April 14, 2008, Ziria Enterprises Limited did not deliver to PacificNet the
share certificates of Emperor Holdings Limited, the legal owner of Octavian
International Limited. As a result of Ziria’s failure to deliver the
share certificates, which was a condition to closing the acquisition of
Octavian, on May 21, 2008, the Company, Ziria, PacificNet Games International
Corporation, Octavian and Emperor Holdings Limited terminated the agreement to
acquire Octavian. Under the acquisition agreement, if the transaction
had been consummated, PacificNet was obligated to issue, in the aggregate,
2,330,000 restricted shares of PACT representing approximately 19.5% of
PacificNet's outstanding shares and cash of up to $18,900,000, which would have
been paid upon the completion of certain net profit performance
targets.
All
parties involved have agreed not to complete the merger but will remain
distribution partners of complimentary products in each others respective
markets.
As a
result of the failure of the Octavian acquisition to be consummated and the
termination of the acquisition agreement, on May 21, 2008, Mr. Harmen
Brenninkmeijer, Chief Executive Officer of Octavian, resigned as a member of the
Board of Directors of PacificNet. It was a condition to the closing
of the acquisition of Octavian that Mr. Brenninkmeijer was appointed to the
Board of Directors. There was no disagreement between Mr.
Brenninkmeijer and PacificNet on any matter relating to PacificNet’s operations,
policies or practices.
2) SALE OF INTEREST IN EPRO.
("EPRO")
On April
18, 2008, PacificNet, consummated the sale of the Company's subsidiary,
PacificNet Epro Holdings Limited, a company incorporated in the Hong Kong
Special Administrative Region of the PRC ("Epro"), which is primarily engaged in
the business of providing call center telecom and customer relationship
management services as well as other business outsourcing services in China.
Pursuant to the terms of the Sales and Purchase Agreement (the "Agreement")
entered into between the Company and Epro Group International Limited (the "Epro
Group International"), PacificNet sold its entire share ownership of 7,766,993
shares in Epro for HK$21 million.
Upon
execution of the Agreement, the Company received a payment of HK$3 million.
PacificNet shall receive the remaining purchase price in installments over the
next twenty-four months.
Pursuant
to the terms of the Agreement, within sixty days of the closing, Epro shall
repay PacificNet HK$2 million for an interest bearing loan granted from
PacificNet to Epro.
3) SALE OF GUANGZHOU
3G
PacificNet
and Heyspace entered into a Supplement Agreement for 3G’s deal on 20th March,
2008. According to this supplement agreement, PacificNet will apply $500,000
received as of December 31, 2007 against the 5% ownership interest and the
remaining $500,000 will be served as a collateral along with the transfer of the
share certificates of 46% shares to PacificNet from Heyspace. If Heyspace fails
to pay the remaining USD$5,000,000 on or before 31 March, 2009, PacificNet has
right to reclaim for the unpaid 46% shares of Pacific 3G Information &
Technology Co., Limited, and demand for an annual interest rate of 12% (See note
14 for details). As at December 31, 2007, Company has made a provision of $3.5
million against receivable from Heyspace and the net amount is included under
other receivables in the accompanied financial statements.
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