U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER: 000-24985
[PACIFICNET INC. logo here]
PACIFICNET INC.
(Exact name of small business issuer in its charter)
DELAWARE 91-2118007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UNIT 3714-15, HONG KONG PLAZA, N/A
188 CONNAUGHT ROAD WEST, HONG KONG (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: 011-852-2876-2900
PACIFICNET INC., UNIT 1702, CHINACHEM CENTURY TOWER, 178 GLOUCESTER ROAD,
-------------------------------------------------------------------------
WANCHAI, HONG KONG
------------------
(Former Name and Address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES /X/ NO / /
There were 5,993,977 shares of the Company's common stock outstanding on May 8,
2003.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
1. Condensed Consolidated Balance Sheets - as of March 31, 2003
(unaudited) and December 31, 2002 (audited) 3
2. Unaudited Condensed Consolidated Statements of Operations - for
each of the three-month periods ended March 31, 2003 and 2002 4
3. Unaudited Condensed Consolidated Statements of Cash Flows - for
each of the three-month periods ended March 31, 2003 and 2002 5
4. Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 12
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5 - OTHER INFORMATION 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
2
PART I - FINANCIAL INFORMATION
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars, except par values and share numbers)
MARCH 31, 2003
(UNAUDITED) DECEMBER 31, 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,698 $ 3,694
Accounts Receivables (net of allowance for doubtful accounts
of $456 as of March 31, 2003 and $255 as of December 31, 2002) 848 220
Other Current Assets 129 97
------------ ------------
Total Current Assets 4,675 4,011
Property and Equipment, net 8 284
Goodwill 18 19
------------ ------------
TOTAL ASSETS $ 4,701 $ 4,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 803 $ 565
Accounts Payable 208 224
Accrued Expenses 103 141
------------ ------------
Total Current Liabilities 1,114 930
------------ ------------
Minority Interest in Consolidated Subsidiary 474 131
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $0.0001, Authorized - 5,000,000 shares
Issued and outstanding - none -- --
Common Stock, par value $0.0001, Authorized - 125,000,000 shares
Issued and outstanding:
March 31, 2003 - 4,985,572 shares
December 31, 2002 - 4,907,252 shares 1 1
Additional Paid-In Capital 31,370 31,248
Warrants 15 --
Cumulative Other Comprehensive Loss (24) (24)
Accumulated Deficit (28,249) (27,972)
------------ ------------
Total Stockholders' Equity 3,113 3,253
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,701 $ 4,314
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Revenues $ 1,267 $ 1,249
------------ ------------
Cost of Revenues (471) (1,098)
------------ ------------
Gross Margin 796 151
Selling, General and Administrative expenses (431) (267)
Depreciation and amortization (36) (67)
Provision for written off fixed assets (91) --
------------ ------------
PROFIT/(LOSS) FROM OPERATIONS 238 (183)
Interest Income 7 22
------------ ------------
PROFIT/(LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS 245 (161)
Provision for income taxes -- --
Minority Interests (337) (84)
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (92) (245)
LOSS FROM DISCONTINUED OPERATIONS (185) (120)
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (277) (365)
------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.02) $ (0.09)
Loss from discontinued operations $ (0.04) $ (0.04)
------------ ------------
Net loss $ (0.06) $ (0.13)
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 4,976,092 2,794,373
The accompanying notes are an integral part of these consolidated
financial statements.
4
PACIFICNET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (277) $ (365)
Adjustment to reconcile net loss to net cash
used in operating activities:
Expenses settled by issuance of warrants 15 --
Expenses settled by issuance of common shares 12 --
Provision for written off of fixed assets 241 --
Provision for impairment of losses in affiliated companies -- 8
Allowance for doubtful accounts 201 --
Minority Interest 343 76
Depreciation 35 34
Amortization 1 32
Changes in:
Accounts receivable (829) (662)
Other current assets (32) --
Accounts payable and accrued expenses (55) (17)
-------- --------
-------- --------
Net cash used in operating activities (345) (894)
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of Affiliate Company interests -- (21)
Acquisition of Company Interests -- (255)
Acquisition of Other Investments -- (32)
-------- --------
Net cash used in investing activities -- (308)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Advances under bank line of credit 238 --
Proceeds from sale of common stock -- 4,000
Proceeds from exercise of stock options 111 --
-------- --------
Net cash provided by financing activities 349 4,000
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4 2,798
CASH, BEGINNING OF PERIOD 3,694 1,344
-------- --------
CASH, END OF PERIOD $ 3,698 $ 4,142
-------- --------
CASH PAID FOR:
Interest 9 --
Income taxes -- --
The accompanying notes are an integral part of these consolidated
financial statements.
5
PACIFICNET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
all periods presented have been made. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, and expenses. Examples include provisions for
returns and impairment losses, accounting for income taxes, bad debts, and
property, plant and equipment lives for depreciation purposes. Actual results
may differ from these estimates. The results of operations for the three-month
period ended March 31, 2003 are not necessarily indicative of the operating
results that may be expected for the entire year ending December 31, 2003. These
financial statements should be read in conjunction with the Management's
Discussion and Analysis and financial statements and notes thereto included in
the Company's financial statements and accompanying notes thereto as of and for
the year ended December 31, 2002, filed with the Company's Annual Report on Form
10-KSB.
2. EARNINGS PER SHARE
Basic earnings (loss) per share are based on the weighted average number of
shares of common stock outstanding. Diluted earnings or loss per share is based
on the weighted average number of shares of common stock outstanding and
dilutive common stock equivalents. All earnings per share amounts in these
financial statements are basic earnings (loss) per share as defined by SFAS No.
128, "Earnings Per Share." Diluted weighted average shares outstanding exclude
the potential issuances of common stock upon exercise of options and warrants
because to do so would be antidilutive.
The computation of basic and diluted loss per share is as follows:
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT Three Months Ended Three Months Ended
WEIGHTED SHARES AND PER SHARE AMOUNTS) March 31, 2003 March 31, 2002
-------------- --------------
Numerator-net loss $ (277) $ (365)
Denominator-weighted average number of
shares of common stock outstanding 4,976,092 2,794,373
Basic and diluted loss per share $ (0.06) $ (0.13)
-------------- --------------
3. BUSINESS DISPOSITIONS
In May 2003, theCompany decided not to further invest in the Customer Service
Support Center in the U.S. As of March 31, 2003, all activities have
significantly slowed down due to the economic slowdown in the U.S. During the
quarter ended March 31, 2003, the Company wrote off property and equipment of
$150,000. Revenues and net loss information related to Customer Service Support
Center operations is as follows (in thousands):
For the three months ended For the three months ended
March 31, 2003 March 31, 2002
(unaudited) (audited)
----------- -----------
Revenues $ 4 $ 11
Net Loss $ (185) $ (89)
Total Net assets of the Customer Service Support Center were comprised primarily
of property equipment.
6
4. JOINT VENTURE OPERATIONS
The Company (PACT) entered into an Equity Joint Venture Contract dated December
20, 2002, between PacificNet Management Limited (PML), a British Virgin Islands
company and a wholly owned subsidiary of the PACT, and the stockholders of
International Elite Limited (IEL), a Cayman Islands company not otherwise
related to PACT or its stockholders, directors or officers. The Company owns
50.1% of the joint venture while International Elite Limited (IEL) shareholders
own 49.9%. The formation of the joint venture is intended to expand the
Company's products and services in the Greater China Region and the terms of the
equity joint venture contract are subject to shareholder approval. The business
purpose of the joint venture will be to market PACT's existing services in the
greater China region. The functional currency of the joint venture will be the
Macao Pataca, which has a current exchange rate with the U.S. dollar of 1 U.S.
dollar equals 8.28180 Macao Pataca (MOP).
PACT's accounting treatment for the investment in the joint venture is full
consolidation in accordance with SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries,"because the voting power authorizing all major
operating and financing decisions for the joint venture rests with the board of
directors. Further, the stockholders of IEL have agreed to grant PACT a proxy to
vote its shares of the joint venture. Although formal shareholder approval won't
be completed until the annual meeting scheduled for June 30, 2003, the quarterly
results for March 31, 2003, include the operations of the joint venture. The
Company does not have any reason to believe formal shareholder approval will not
be completed.
Results of operations for the Company assuming shareholder approval was not
granted are as follows (in thousands):
Revenues $ 92
Cost of Revenues 36
Gross Margin 56
Operating Loss (450)
Interest Income 7
Minority Interest 14
Loss from Discontinued Operations (185)
Net loss $ (614)
Basic and diluted loss per share: $(0.12)
=======
Continuing operations (0.09)
Discontinued Operations (0.03)
In March 2003, the Company announced that it had completed the company
registration and received government approval from the Macao Special
Administrative Region of China, for the formation of the joint venture named
"PacificNet Communications Limited -- Macao Commercial Offshore. Within 30 days
of the formation of the joint venture, PACT is obligated to transfer to the
joint venture 800,000 of its shares of common stock. However, the shares are to
be returned to PACT if the joint venture does not obtain the regulatory
approval, fails to receive the approval of its stockholders to enter into this
transaction or the joint venture is otherwise rescinded as provided for in the
joint venture agreement. The shares were issued on April 11, 2003.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
CONTAINED IN THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
APPEARING ELSEWHERE HEREIN AND IN CONJUNCTION WITH THE MANAGEMENT'S DISCUSSION
AND ANALYSIS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 2002.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The
forward-looking statements are based on the Company's current expectations and
are subject to certain risks, uncertainties and assumptions. The Company's
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
7
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis or plan of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to accounts receivable
reserves, provisions for impairment losses of affiliated companies and other
intangible assets, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
JOINT VENTURE OPERATIONS - THE FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH
31,2003, INCLUDE THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE JOINT VENTURE
COMPANY. Although formal shareholder approval will not be completed until the
annual meeting scheduled for June 30, 2003, the quarterly results for March 31,
2003, include the operations of the joint venture. We do not have any reason to
believe formal shareholder approval will not be completed. If for some reason
the transaction was not consummated, our results of operations, financial
condition and prospects would be materially affected. Actual results of
operations excluding the consolidation of the transaction subject to shareholder
approval would be an overstatement of revenues of $1,175,000, understatement of
net loss of $337,000, and understatement of loss per share of $0.06 per share.
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. The
allowances are calculated based on detailed review of certain individual
customer accounts, historical rates and an estimation of the overall economic
conditions affecting our customer base. We review a customer's credit history
before extending credit. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
INCOME TAXES - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have considered
future market growth, forecasted earnings, future taxable income, and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. We currently have recorded a full valuation allowance against net
deferred tax assets as we currently believe it is more likely than not that the
deferred tax assets will not be realized.
CONTINGENCIES - We may be subject to certain asserted and unasserted claims
encountered in the normal course of business. It is our belief that the
resolution of these matters will not have a material adverse effect on our
financial position or results of operations, however, we cannot provide
assurance that damages that result in a material adverse effect on our financial
position or results of operations will not be imposed in these matters. We
account for contingent liabilities when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51" (FIN 46). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. Management does not
anticipate that FIN 46 will have any effect on the on the Company.
8
NATURE OF THE OPERATIONS OF THE COMPANY
NATURE OF BUSINESS.
PacificNet Inc. (referred to herein as "PacificNet" or the "Company") is a
leading technology investment and management company that invests in systems
integration, network communications, customer relationship management (CRM)
solutions, information technology solutions, and telecommunications in Asia. The
company intends to continue to grow by acquiring and managing growing technology
and network communications businesses with established products and customers in
Asia.
The Company also engages in telecommunications, performs voice and data network
communications and value-added telecommunication products and services. The
Company's business strategy is to take a leading role into a rapidly expanding
business sector, namely the IT solution provision and network communication
businesses, in Asian and the greater PRC region. The business of PacificNet can
be classified into four main operating units:
- PacificNet Solutions Ltd. (referred to herein as "PacSo") - PacSo is a
subsidiary of PacificNet that specializes in systems integration, software
application, and e-business solutions services in Hong Kong and Greater
China. The scope of product and services include smart card solutions, web
based front-end applications and web based connections to backend
enterprise planning systems.
- PacificNet Communications Ltd. (referred to herein as "PacComm") - PacComm
is a subsidiary of PacificNet Inc. PacComm is engaged in telecommunication
product distributions, which includes the resale of PABX telephone systems,
basic switches and router equipments and mobile phone accessories targeted
for retail customers.
- PacificNet Limited - PacificNet Limited is a distributor and reseller of
telecommunication, networking and computer equipment.
- PacificNet Communications Limited - Macao Commercial Offshore (referred to
herein as "PacComm MOC"), PacComm MOC is a subsidiary of PacificNet Inc.
and a provider of value-added telecom services including call center,
customer relationship management (CRM), telemarketing, and data-mining
services, and mobile data services such as short message service (SMS),
multi-media message service (MMS), unified messaging service (UMS),
location-based service (LBS), WAP, and BREW-based CDMA applications, mobile
commerce, roaming, paging, wireless internet, virtual private network (VPN)
and voice over internet protocol (VoIP) services in the Greater China
Region.
In June 2001, the Company's management, with the Board of Directors' approval,
decided to expand its business strategy to the Greater China Region.
Subsequently, in February 2002, the Company established a subsidiary office
(registered as a Wholly Owned Foreign Enterprise, "WOFE") in Shenzhen, the
People's Republic of China ("PRC"), to expand its research, development,
marketing and distribution in the PRC.
In March 2003, the Company announced that it had completed the company
registration and received government approval from the Macao Special
Administrative Region of China, for the formation of the joint venture named
"PacificNet Communications Limited -- Macao Commercial Offshore." The Company
owns 50.1% of the joint venture while International Elite Limited (IEL)
shareholders own 49.9%. The formation of the joint venture is intended to expand
the Company's products and services in the Greater China Region and is the terms
of the equity joint venture contract are subject to shareholder approval.
Although formal shareholder approval will not be completed until the annual
meeting on June 30, 2003, the quarterly results for March 31, 2003, include the
operations of the joint venture. The Company does not have any reason to believe
that formal shareholder approval will not be completed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUES. Revenues for the three months ended March 31, 2003 were $1,267,000, an
increase of $18,000 from $1,249,000 for the three months ended March 31, 2002.
For the three months ended March 31, 2003, revenues mainly consisted of
$1,174,000 and $92,000 derived from services rendered through its PacComm MOC
subsidiary and PacSo subsidiary, respectively. The increase in revenues is due
to the revenues associated with the operations of PacComm MOC, which generated
revenue of $1,174,000 for the three months ended March 31,2003. The significant
decrease in revenues from Pacso is due to consistent economic slowdown in Hong
Kong. During the three months ended March 31, 2003, PacificNet's services
9
revenue was generated from customers in Greater China and Hong Kong. One of the
customers has accounted for 86.58% of total revenue generated during this
quarter and the company is economic dependent on this customer. The above
mentioned customer is an independent third party of PacificNet and is under
contract until late 2004.
COST OF REVENUES. Cost of revenues for the three months ended March 31, 2003 was
$471,000, a decrease of $627,000 from $1,098,000 for the three months ended
March 31, 2002. This decrease was due to providing higher margin value-added
telecom services from PacComm MOC. Cost of revenues, as a percentage of
revenues, was 37% for services rendered through value-added telecom services in
the PacComm MOC joint venture for the three months ended March 31, 2003.
Gross margin for the three months ended March 31, 2003 was $796,000, an increase
of $645,000 from $151,000 for the three months ended March 31, 2002. Gross
margins for the three months ended March 31, 2003, were comprised of 63% for
value-added telecom `services rendered.
OPERATING EXPENSES. Operating expenses totaled $431,000 for the three months
ended March 31, 2003, an increase of $164,000, from $267,000 for the three
months ended March 31, 2002, primarily representing fixed assets written off of
approximately of $91,000 and increased professional fees of approximately
$80,000 incurred in connection with securities-related issues and in the
connection with the formation of the joint venture.
INTEREST INCOME. Interest income was $7,000 for the three months ended March 31,
2003, as compared to $22,000 for the three months ended March 31, 2002. The
significant decrease is due to lower interest rates in 2003 than 2002.
INCOME TAXES. No tax provision has been recorded for the three months ended
March 31, 2003, as the result of the cumulative operating loss generated by the
Company. Interim income tax provisions are based upon management's estimate of
taxable income and the resulting consolidated effective income tax rate for the
full year. As a result, such interim estimates are subject to change as the year
progresses and more information becomes available.
MINORITY INTERESTS. Minority interests for the three months ended March 31, 2003
totaled $337,000, compared with $84,000 for the same period in the prior year,
and consisted of minority interests in the earnings of PacComm MOC and PacSo
consolidated subsidiaries that commenced operations in January 2003 and December
2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had cash, cash equivalents and investments of
$3,698,000 and working capital of $3,561,000 as compared to $3,694,000 and
$3,081,000, respectively, at December 31, 2002.
Net cash used in operating activities was $345,000 for the three months ended
March 31, 2003 as compared to net cash used in operating activities of $894,000
for the three months ended March 31, 2002. Net cash used in operating activities
in the three months ended March 31, 2003 was primarily due to a net loss of
$277,000 increased by non-cash expenses such as stock based compensation in lieu
of cash payment of $27,000, provision for doubtful accounts of $201,000,
provision for write off of fixed assets of $241,000, depreciation and
amortization of $36,000, minority interest of $343,000, and offset by an
increase in accounts receivable of $829,000, an increase in other current assets
of $32,000, a decrease in accounts payable and accrued expenses of $55,000. Net
cash used in operating activities for the same period in 2002 was primarily due
to a net loss of $365,000 increased by non-cash expenses such as depreciation
and amortization of $66,000 and minority interest of $84,000, and offset by an
increase in accounts receivable of $662,000 and a decrease in accounts payable
and accrued expenses of $17,000. Net cash flows used in investing activities was
$0 for the three months ended March 31, 2003 versus $308,000 for the same period
in 2002 primarily representing cash paid for the acquisition of investments in
other company's interests.
Net cash provided by financing activities for the three months ended March 31,
2003 was $349,000 representing advances under the company's bank line of credit
by $238,000 and proceeds from the exercise of stock options of $111,000. Net
cash provided by financing activities for the three months ended March 31, 2002
was $4,000,000 received in connection with the completion of two private
placements of 2,725,000 shares of the Company's common stock.
10
CASH. The Company's cash balance increased by $4,000 to $3,698,000 at March 31,
2003, as compared to $3,694,000 at December 31, 2002. The Company believes it
has sufficient cash, cash equivalents and investments for the next twelve months
of operations.
WORKING CAPITAL. The Company's working capital increased to $3,561,000 at March
31, 2003, as compared to $3,081,000 at December 31, 2002. When compared to
balances at December 31, 2002, the increase in working capital at March 31, 2003
reflects mainly on higher levels of net accounts receivable $628,000 offset by
higher levels of Bank Line of Credit of $238,000 and lower levels of accounts
payable and accrued expenses of $54,000. The Company anticipates that as revenue
and operating activity levels increase, working capital financing requirements
will also increase.
PROPERTY AND EQUIPMENT ADDITIONS. The Company does not anticipate material
expenditures for additions to property and equipment during fiscal year 2003.
CURRENCY EXCHANGE FLUCTUATIONS. All of PacificNet's revenues are denominated
either in United States dollars or Hong Kong dollars, while its expenses are
denominated primarily in Hong Kong dollars and Renminbi ("RMB"), the currency of
the People's Republic of China. There can be no assurance that RMB-to-United
States dollar or Hong Kong dollar-to-United States dollar exchange rates will
remain stable. Although a devaluation of the Hong Kong dollar or RMB relative to
the United States dollar would likely reduce PacificNet's expenses (as expressed
in United States dollars), any material increase in the value of the Hong Kong
dollar or RMB relative to the United States dollar would increase PacificNet's
expenses, and could have a material adverse effect on PacificNet's business,
financial condition and results of operations. PacificNet has never engaged in
currency hedging operations and has no present intention to do so.
ITEM 3. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures: Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time period specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in
the reports filed under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. Within
the 90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required.
b. Changes in Internal Controls: There were no changes in the Company's internal
controls or in other factors that could have significantly affected those
controls subsequent to the date of the Company's most recent evaluation.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal quarter ended March 31, 2003, the Company issued unregistered
shares of its common stock in the following transactions:
On January 6, 2003, the Company issued 8,320 shares of common stock to certain
employees of the Company for services rendered, valued at the fair market value
of approximately $12,563 on the date of issuance. The closing price for the
Company's stock on the date of this issuance was $1.51 per share. This issuance
was made in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
On January 29, 2003, the Company issued 55,000 shares of common stock to certain
employees of the Company upon exercise of stock options, exercised at the price
of $1.50 per share resulting in net proceeds of approximately $82,500.
On February 13, 2003, the Company issued 15,000 shares of common stock to
certain employees of the Company upon exercise of stock options, exercised at
the price of $1.90 per share resulting in net proceeds of approximately $28,500.
The Company did not use underwriters in any of the foregoing issuances.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
ITEM 5. OTHER INFORMATION
a. REVERSE STOCK SPLIT
Effective at the open of business on January 6, 2003 (the "Effective Date"),
every five (5) shares of the Company's issued and outstanding common stock was
combined into one (1) share of fully paid and non-assessable common stock of the
Company (the "Reverse Split Ratio"). No fractional shares of common stock of the
Company was issued in connection with the reverse split. A holder of common
stock, who immediately prior to the Effective Date owns a number of shares of
common stock of the Company which is not evenly divisible by the Reverse Split
Ratio was, with respect to the fractional interest, be issued a number of shares
of new common stock of the Company rounded to the nearest whole number. All per
share and per share amounts have been adjusted retroactively in these financial
statements for the reverse split.
b. INCORPORATION OF JOINT VENTURE IN MACAO SPECIAL ADMINISTRATIVE REGION
On December 20, 2002, PacificNet Inc. entered into an agreement with
International Elite Limited ("IEL"), a leading provider of value-added telecom
services in the Greater China region, to establish "PacificNet Communications
Limited - Macao Commercial Offshore," an equity joint venture company
("PacMOC"), which will be registered in the Macao Special Administrative Region
(SAR) of China. The scope of the business to be provided by PacMOC includes,
value-added telecom services including call center, CRM, telemarketing, and
data-mining services, and mobile data services such as Short Message Service
(SMS), Multimedia Message Service (MMS), unified messaging service (UMS),
location-based service (LBS), Wireless application Protocol (WAP), and Binary
Runtime Environment for Wireless based Code Division Multiple Access (BREW-based
CDMA) applications, mobile commerce, roaming, paging, wireless internet, Virtual
Private Network (VPN) and Voice over IP (VoIP) services in the Greater China
Region. PacMOC will be owned 50.1% by PacificNet and 49.9% by the shareholders
of IEL. IEL will assign and contribute to PacMOC certain telecom business
contracts, which have been valued at $23.1 million, and the Company will
contribute to PacMOC as its capital contribution, restricted shares of its
common stock valued at its closing price on December 20, 2002, which will be
held by an escrow agent to be released in tranches upon completion of certain
agreed upon milestones of PacMOC. Pursuant to the terms of the agreement, all of
the restricted shares held in escrow shall be released by the Escrow Agent
provided, that, PacMOC generates $3 million of net income for the fiscal year
December 2003 according to U.S. generally accepted accounting principles,
consistently applied. In the event less than $3 million in net income is
generated by PacMOC, the shareholders of IEL have agreed to pay the Company an
amount in cash equal to the amount of the shortfall in net income.
On February 24, 2003, PacificNet received a letter from Nasdaq stating that
Nasdaq staff has determined that the transaction with IEL would not trigger the
application of Marketplace Rule 4330(f), in that it would not constitute a
"Reverse Merger". The Company plans to seek approval of the joint venture at its
next meeting of stockholders. PacificNet will provide dates and additional
disclosure within the Company's proxy statement related to its upcoming
stockholders' meeting.
c. SUBSEQUENT CHANGES IN SECURITIES
(1) On April 11,2003, the Company issued 800,000 shares of common stock to
PacificNet Communications Limited-Macao Commercial Offshore due to the
completion of the registration of the Joint Venture in the Macao Special
Administrative Region. The closing price for the Company's stock on the
date of this issuance was $2.47 per share.
(2) On April 11, 2003, the Company issued 200,000 shares of common stock to
Tony Tong, Chief Executive Officer upon the exercise of a stock option as
compensation for services rendered between April 1, 2003 to April 30, 2004.
The closing price for the Company's stock on the date of this issuance was
$2.47 per share.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------------------------------------
2.1 Share Exchange Agreement by and among Davin Enterprises, Inc., Carl
Tong, Leo Kwok and Acma Strategic Holdings Limited dated December
15, 1997. (1)
2.2 Share Exchange Agreement dated February 17, 2000, between Registrant
and holders of membership interests in PacificNet.com LLC. (3)
2.3 Supplement to Share Exchange Agreement dated April 29, 2000, between
Registrant and holders of membership interests in PacificNet.com
LLC. (3)
2.4 Agreement dated September 30, 2000, among the Company and the
"Purchasers" named therein. (4)
2.5 Supplemental Agreement dated October 3, 2000, among the Company and
the "Purchasers" named therein. (4)
2.6 Deed of Waiver, dated October 3, 2000, by Creative Master Limited in
favor of the Company. (4)
3.1 Certificate of Incorporation, as amended. (7) Certificate of
amendment of Certificate of Incorporation.(7)
3.2 By Laws of the Company. (5)
3.3 Amendment to By Laws of the Company. (2)
4 Specimen Stock Certificate of the Company.
10.1 Form of Indemnification Agreement with officers and directors. (1)
10.2 Amendment to 1998 Stock Option Plan.
10.3 Form of Notice of Stock Option Grant and Stock Option Agreement
under the 1998 Stock Option Plan. (3)
10.4 Amendment dated January 31, 2002 to the Subscription Agreement by
and between the Company and Sino Mart Management Ltd., dated as of
December 9, 2001 (6)
10.5 19.9% Private Placement Agreement and Amendments between Ho Shu-Jen
and PacificNet.com, Inc.
10.6 Sub-Lease Agreement dated August 30, 2002.(8)
99.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Subscription Agreement by and between the Company and Sino Mart
Management Ltd., dated as of December 9, 2001 (6)
_______________
(1) Incorporated by reference to the Company's Form SB-2 filed on October 21,
1998.
(2) Incorporated by reference to the Company's Form 10-KSB filed on March 30,
1999.
(3) Incorporated by reference to the Company's Form 8-K filed on August 11,
2000.
(4) Incorporated by reference to the Company's Form 8-K filed on October 17,
2000.
(5) Incorporated by reference to the exhibits of the Company's registration
statement (file no. 33-14521-NY)
(6) Incorporated by reference to the Company's Form 8-K filed on March 20,
2002.
(7) Incorporated by reference to the Company's Form 10-KSB filed on April 16,
2002.
(8) Incorporated by reference to the Company's Form 10-KSB filed on March
31,2003.
(9) Incorporated by reference to the Company's Form 10-QSB filed on November
14,2002.
(b) Reports on Form 8-K:
There was no report on Form 8-K during the quarter ended March 31,2003.
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PACIFICNET INC.
Date: May 14, 2003 By: /s/ TONY TONG
Tony Tong
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2003 By: /s/ WANG SHAO JIAN
Wang Shao Jian
Chief Financial Officer
(Principal Financial Officer)
15