As filed with the Securities and Exchange Commission on March 2, 2004
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
PACIFICNET, INC.
(Exact name of Issuer as specified in its charter)
Delaware 91-2118007
(State or other jurisdiction (I.R.S. employer
of incorporation) identification number)
UNIT 2710, HONG KONG PLAZA
188 CONNAUGHT ROAD WEST
HONG KONG
011-852-2876-2900
-----------------
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
------------------------------
-----------------------------------------------
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
Copies to:
MITCHELL S. NUSSBAUM, ESQ.
LOEB & LOEB LLP
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(212) 407-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration If the delivery of
the prospectus is expected to be made pursuant to Rule 434, please check the
following box. [ ]
ii
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
============================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class Amount to Aggregate Price per Aggregate Offering Amount of
of Securities to be Registered be Registered Security Price Registration Fee
----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per share 617,285 $5.32 (1) $3,283,956.20 $416.08
----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per
share, issuable upon exercise of warrants 154,320 $7.15 (2) $1,103,388 $143.22
============================================================================================================================
(1) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee. The price shown is the average of the high and
low price of the Common Stock on February 25, 2004, as reported by The Nasdaq
Small Cap Market.
(2) Estimated based on the exercise price of the warrants upon exercise of which
such shares may be issued in accordance with Rule 457(g) under the Securities
Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
iii
SUBJECT TO COMPLETION, DATED MARCH 2, 2004
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
771,605 SHARES
PACIFICNET INC.
COMMON STOCK
This prospectus relates to the resale of 771,605 shares of common
stock, par value $.0001 per share of PacificNet Inc. We are registering these
shares on behalf of selling stockholders named in this prospectus to be offered
and sold by them from time to time. The selling stockholders will receive all of
the proceeds from any sales of common stock. Assuming that all of the warrants
held by selling stockholders are exercised, we will realize proceeds of
approximately $1,103,388.
Our common stock is traded on The Nasdaq Small Cap Market under the
symbol "PACT". On February 25, 2004, the closing price of the common stock was
$5.37.
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF RISKS APPLICABLE
TO US AND AN INVESTMENT IN OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March __, 2004
TABLE OF CONTENTS
THE COMPANY...................................................................3
FORWARD-LOOKING STATEMENTS....................................................4
RISK FACTORS..................................................................6
USE OF PROCEEDS..............................................................11
SELLING STOCKHOLDERS.........................................................11
PLAN OF DISTRIBUTION.........................................................13
LEGAL MATTERS................................................................14
EXPERTS......................................................................14
RECENT DEVELOPMENTS..........................................................15
SUMMARY FINANCIAL INFORMATION................................................F-1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................16
AVAILABLE INFORMATION........................................................17
INDEMNIFICATION OF DIRECTORS AND OFFICERS....................................17
2
THE COMPANY
PacificNet Inc. was incorporated in Delaware in 1999. PacificNet Inc.
(Nasdaq: PACT), through its subsidiaries, invests, operates and provides
value-added telecom services (VAS) in China including call centers,
telemarketing, CRM, interactive voice response (IVR), , short messaging services
(SMS), multimedia messaging services (MMS), VoIP, mobile applications, calling
cards, and sales and distribution of telecom services. We intend to continue to
grow by acquiring and managing growing technology and network communications
businesses with established products and customers in Asia. PacificNet's clients
include the leading telecom operators, banks, insurance, travel, marketing,
services companies and telecom consumers in Greater China, such as China Telecom
(NYSE: CHA), China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), PCCW (NYSE:
PCW), Hutchison Telecom, CSL, SmarTone, Sunday (Nasdaq: SDAY), Swire Travel,
Coca-Cola, SONY, Samsung, Dun & Bradstreet (NYSE: DNB), DBS, Hong Kong
Government, and Hongkong Post.
We also engage in telecommunications, perform voice and data network
communications and provide value-added telecommunication products and services
in China, including call center, telemarketing, database management and
data-mining services, e-commerce, mobile applications, short messaging services
(SMS), multimedia messaging services (MMS), mobile commerce, VoIP, calling
cards, and distribution of telecom services. Our business strategy is to take a
leading role in a rapidly expanding business sector, namely the information
technology solution provision and network communication businesses, in Asia and
the greater People's Republic of China region. Our business can be classified
into the following operating units:
o PacificNet Solutions Ltd., or PacSo, is a subsidiary of
PacificNet Inc. that specializes in systems integration, software
application, and e-business solutions services in Hong Kong and Greater
China. The scope of PacSo's products and services include smart card
solutions, web based front-end applications and web based connections
to backend enterprise planning systems.
o PacificNet Communications Ltd., or PacComm, is a subsidiary
of PacificNet Inc. and a leading 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. On
December 1, 2003, the Company signed an agreement to acquire a
controlling interest in Epro Telecom Holdings Limited (Epro), one of
the largest providers of value-added telecom services (VAS), interact
voice response (IVR), mobile chatting, and voice-portal services in
Greater China with over 500 employees, 1000 call center seats and
processes over 100,000 calls daily
o PacificNet Limited is a distributor and reseller of
telecommunication, networking and computer equipment. In conjunction
with our business of providing telecommunication services, PacificNet
Limited is also 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.
o PacificNet Tech (SZ) Limited - PacificNet Tech (SZ) Limited
is a subsidiary of PacificNet, Inc., registered as a Wholly Owned
Foreign Enterprise in Shenzhen, the People's Republic of China ("PRC").
SZ was established to expand PacificNet's research, development,
marketing and distribution in the PRC.
3
o PacificNet Strategic Investment Holdings Limited -
PacificNet Strategic Investment Holdings Limited (PSI) is a subsidiary
of PacificNet Inc. and an investment holding company. On December 15,
2003, PSI acquired 51% of the shares of, Beijing Linkhead Technologies
Co., Ltd (Linkhead), a private PRC company. Linkhead is a leading
provider of value-added telecom service (VAS), interactive voice
response (IVR), mobile chatting, and voice-portal services in Greater
China.
PRODUCTS AND SERVICES
We provide various services for our customers. Such services include:
CUSTOMER RELATIONSHIP MANAGEMENT. We provide experience in
call center operation and management and active involvement in
the evolution of the customer contact industry.
VOICE AND IP RELATED SERVICES. We provide voice and IP related
products in the value-added industry, as well as oriented
services for mobile users.
CONSULTING SERVICES. We consult with our customers to
establish online e-business environments. Consulting services
include the identification of specific content nature,
user-friendly interface, overall web themes and designs,
target user groups, web advertising and integrated online
solutions.
ENVIRONMENT DESIGN SERVICES. We deliver creative and
innovative results in visual layout, interactive graphics,
video and audio clips to customize websites in order to
present a certain theme, look-and-feel, or to target specific
industries or markets. We also offer web domain registration
services where customers can choose from a wide variety of
templates and themes, then fill in the blanks for company
profiles, contact details, products and services information.
PROJECT MANAGEMENT AND IMPLEMENTATION SERVICES. We provide
project management and general information technology
consulting services to our customers. We have developed and
use a structured project management and implementation
methodology for customer projects. Our technical team provides
consulting services in information procurement and
installation and unit and system testing.
EXECUTIVE OFFICES
Our corporate headquarters and development center is located at Unit
2710, Hong Kong Plaza, 188 Connaught Road West, Hong Kong. We also have a
corporate office in the United States located at 860 Blue Gentian Road, Suite
360, Eagan, MN 55121.
FORWARD-LOOKING STATEMENTS
Statements in this prospectus or in the documents incorporated by
reference herein that are not descriptions of historical facts are
forward-looking statements within the meaning of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Reference is made in
particular to the description of our plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
terminology such as "may," "expects," "believes," "anticipates," "intends,"
"expects," "projects," or similar terms, variations of such terms or the
4
negative of such terms. Forward-looking statements are based on management's
current expectations. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
under "Risk Factors."
We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations or any changes in events, conditions or
circumstances on which any such statement is based.
5
RISK FACTORS
Investing in our securities involves risk. You should carefully
consider the following factors as well as other information included or
incorporated by reference in this prospectus before deciding to purchase our
common stock. The risks and uncertainties we have described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business
operations.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY THERE MAY NOT BE SUFFICIENT
INFORMATION FOR YOU TO EVALUATE OUR FUTURE GROWTH. We were founded and commenced
operations in July 1999. We have a limited operating history from which
investors can base evaluations of our business and prospects. In addition, our
prospects must be considered in light of the risks and uncertainties inherent in
and traditionally encountered by companies in an early stage of development in
new and rapidly evolving markets. As at December 31, 2003, we had incurred
losses aggregating $1,805,000.
OUR GROWTH STRATEGY TO ACQUIRE COMPANIES AND FORM STRATEGIC ALLIANCES MAY NOT BE
SUCCESSFUL, AND IF IT IS NOT, OUR ABILITY TO GENERATE REVENUES THROUGH THESE
VEHICLES MAY BE IMPAIRED . One component of our growth strategy is to pursue
strategic acquisitions of companies in China that have services, products,
technologies, industry specializations or geographic coverage that extend or
complement our existing business. There can be no assurance that we will be able
to successfully identify, acquire on favorable terms or integrate such
companies. If any acquisition or joint venture is completed, there can be no
assurance that such acquisition will enhance our business, results of operations
or financial condition. As part of its growth strategy, the Company may also
pursue opportunities to undertake strategic alliances in the form of joint
ventures. Joint ventures involve many of the same risks as acquisitions, as well
as additional risks associated with possible lack of control of the joint
ventures. Further, in connection with these acquisitions and joint venture
transactions we plan to issue shares of our common stock. The price of our stock
has fluctuated in the past and may continue to do so. If the value of our stock
declines, or other adverse circumstances arise, we face the risk that the
parties to these acquisitions or joint ventures may seek ways to terminate the
transaction, or, may hinder or prevent us from accessing important information
regarding the financial and business operations of these companies. Any rights
we may have to specific performance, or to seek an injunction under Chinese law,
in either of these cases, are severely limited, and without a means of recourse
by virtue of the Chinese legal system, we may be unable to prevent these
situations from occurring. The occurrence of any such events could have a
material adverse effect.
The Company may in the future face increased competition for acquisition and
joint venture opportunities, which may inhibit the Company's ability to
consummate suitable acquisitions or joint ventures on terms favorable to the
Company. The Company may require additional debt or equity financing for future
acquisitions or joint ventures, which financing may not be available on terms
favorable to the Company, if at all.
The Company recently entered into agreements to acquire controlling interests in
Epro Telecom Holdings Limited and in Beijing Technologies Co., Ltd. The Company
expects the acquisitions to strengthen its position as a provider of outsourced
call center, telemarketing, customer relationship management and value added
services However, the anticipated benefits of these acquisitions may not be
achieved.
6
WE RELY ON ESTABLISHED CUSTOMER RELATIONSHIPS TO GENERATE NEW CONSULTING
SERVICES CUSTOMERS AND WITHOUT ANY ADDITIONAL MARKETING WE FACE THE RISK THAT WE
WILL NOT BE ABLE TO OBTAIN NEW CUSTOMERS. We do not have an internal marketing
team. In order to generate new consulting services customers, we rely primarily
on customer referrals from relationships established by our executive management
and business unit leaders. Without a marketing team our ability to generate new
consulting services customers will be limited to our customer referrals, and if
we are unable to successfully maintain existing relationships, and generate new
consulting services customers in a cost-effective manner, our ability to
generate revenues through our consulting services business could be severely
limited.
OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN ANY REQUIRED
ADDITIONAL FINANCING ON FAVORABLE TERMS, IF AT ALL. Since inception, our
investments and operations have been financed through sales of our common stock.
We currently have an available bank line of $3,100,000 out of a total credit
line of $3,300,000. As of December 31, 2003, we had $4,035,000 of cash.
Subsequent to December 31, 2003, we completed a private placement of our common
stock in which we received approximately $3,000,000 of net proceeds. In the
future, we may need to raise additional funds through public or private
financing, which may include the sale of equity securities. The issuance of
these equity securities could result in dilution to our stockholders. If we are
unable to raise capital when needed, our business growth strategy may slow,
which could severely limit our ability to generate revenue.
COMPETITION. The market in which we compete is highly competitive and
fragmented. We expect competition to persist and intensify in the future. Our
competitors include small firms offering specific applications, divisions of
large entities, large independent firms and, most significantly, the in-house
operations of clients or potential clients. A number of competitors have or may
develop greater capabilities and resources than ours. Similarly, there can be no
assurance that additional competitors with greater resources than ours will not
enter our market. Because our primary competitors are in-house operations of
existing or potential clients, our performance and growth could be negatively
impacted if our existing clients decide to provide in-house customer care
services that currently are outsourced or if potential clients retain or
increase their in-house customer service and product support capabilities. In
addition, competitive pressures from current or future competitors could cause
our services to lose market acceptance or result in significant price erosion,
which would have a material adverse effect upon our business, results of
operations or financial condition.
DEPENDENCE ON KEY PERSONNEL. We are highly dependent on the services of Tony
Tong, our Chairman, President and Chief Executive Officer, as well as other
principal members of our management. Our executives not only manage our day to
day business operations, but are essential to our ability to establish and
maintain relationships with our customers. Continued growth and profitability
will depend upon our ability to maintain our current leadership infrastructure
and recruit and retain qualified, and experienced executive personnel.
Competition in our industry for executive-level personnel is strong and there
can be no assurance that we will be able to hire, motivate and retain highly
effective executive employees.
RISKS RELATED TO OUR TECHNOLOGY AND EQUIPMENT
RISK OF BUSINESS INTERRUPTION. Our operations are dependent upon our ability to
protect our call centers, data centers, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, hacker attacks, natural disaster and
other similar events. In the event we experience a temporary or permanent
interruption at one or more of our Call Centers, through casualty, operating
malfunction or otherwise, our business could be materially adversely affected
and we may be required to pay contractual damages to some clients or allow some
clients to terminate or renegotiate their contracts with us. While we maintain
certain property and business interruption insurance, such insurance may not
adequately compensate us for all losses that it may incur.
7
RISKS ASSOCIATED WITH TECHNOLOGY. Our business is highly dependent on our
computer and telecommunications equipment and software systems. Our failure to
maintain the superiority of our technological capabilities or to respond
effectively to technological changes could have a material adverse effect on our
business, results of operations or financial condition. Our future success also
will be highly dependent upon our ability to enhance existing services and
introduce new services or products to respond to changing technological
developments. There can be no assurance that we can successfully develop and
bring to market any new services or products in a timely manner, that such
services or products will be commercially successful or that competitors'
technologies or services will not render our products or services noncompetitive
or obsolete.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES
RELIANCE ON MAJOR CLIENTS. We have strategically focused our marketing efforts
on developing long-term relationships with major clients in targeted industries
in the Greater China Region. As a result, a substantial portion of our revenues
is derived from relatively few clients. Collectively, our 10 largest clients in
2003 accounted for over 80% of our 2003 revenue. There can be no assurance that
we will be able to retain our significant clients or that, if we were to lose
one or more of our significant clients, we would be able to replace such clients
with clients that generate a comparable amount of revenues. Consequently, the
loss of one or more of our significant clients could have a material adverse
effect on our business, results of operations or financial condition.
A significant number of our arrangements with clients generate revenues based,
in large part, on the amount of time which our personnel devote to such clients'
customers. Consequently, and due to the primarily inbound nature of our
business, the amount of revenues generated from any particular client is
generally dependent upon consumers' interest in, and use of, the client's
products and/or services. Furthermore, a significant portion of our expected
revenues for 2004 relate to recently-introduced, unproven product or service
offerings for our clients. There can be no assurance as to the number of
consumers who will be attracted to the products and services of our clients and
who will therefore need our services, or that our clients will develop new
products or services that will require our services.
DEPENDENCE ON KEY INDUSTRIES. Our clients are concentrated primarily in the
telecommunications, telemarketing, technology, travel, and transportation
industries and, to a lesser extent, the insurance and financial services
industries. Our business and growth is largely dependent on the continued demand
for our services from these industries and current trends in such industries to
outsource certain customer care services. A general economic downturn in any of
these industries or a slowdown or reversal of the trend in any of these
industries to outsource certain customer care services could have a material
adverse effect on our business, results of operations or financial condition.
RISKS ASSOCIATED WITH DOING BUSINESS IN ASIA
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH OUR ASIAN OPERATIONS. The
establishment and expansion of international operations has required significant
management attention and resources since our founding. All of our current and
anticipated future revenues are or are expected to be derived from Asia. Our
international operations are subject to additional risks, including the
following, which, if not planned and managed properly, could materially
adversely affect our business, financial condition and operating results:
o language barriers and other difficulties in staffing and
managing foreign operations;
o legal uncertainties or unanticipated changes regarding
regulatory requirements, liability, export and import
restrictions, tariffs and other trade barriers;
o longer customer payment cycles and greater difficulties in
collecting accounts receivable;
8
o uncertainties of laws and enforcement relating to the
protection of intellectual property;
o seasonal reductions in business activity; and
o potentially uncertain or adverse tax consequences.
In addition, changes in the political and overall economic conditions of the
Asian region, which are outside the control of management, could have a material
adverse effect on our business, operating results and financial condition. We
have historically conducted transactions with customers outside the United
States in United States dollars. Payroll and other costs of foreign operations
are payable in foreign currencies, primarily Hong Kong dollars and Chinese
Renminbi. To the extent future revenue is denominated in foreign currencies, we
would be subject to increased risks relating to foreign currency exchange rate
fluctuations that could have a material adverse affect on its business,
financial condition and operating results. To date, we have not engaged in any
hedging transactions in connection with its international operations.
INTERNAL POLITICAL RISKS. Our operations and assets in China are subject to
significant political and economic uncertainties. Changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business,
results of operations and financial condition. Under its current leadership, the
Chinese government has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.
NON-RENEWAL OF BUSINESS LICENSES. In order to expand our business into mainland
China our activities will require business licenses. This requires a review and
approval of our activities by various national and local agencies of the Chinese
government. There can be no assurance that the current Chinese government, or
successors, will continue to approve of our activities or grant or renew our
licenses. Our inability to obtain needed approvals or licenses would have a
material adverse effect on our business, financial condition and results of
operations.
LACK OF REMEDIES AND IMPARTIALITY UNDER CHINESE LEGAL SYSTEM. Unlike the United
States, China has a civil law system based on written statutes in which judicial
decisions have little precedence value. The Chinese government has enacted some
laws and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. However, their
experience in implementing, interpreting and enforcing these laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. These matters may be subject to
the exercise of considerable discretion by agencies of the Chinese government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination.
FOREIGN CORRUPT PRACTICES ACT. We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. Foreign companies, including some
that may compete with us, are not subject to these prohibitions. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices occur from
time-to-time in China. We have attempted to implement safeguards to prevent
losses from such practices and to discourage such practices by our employees and
agents. There is no assurance, however, that we will not suffer such losses or
that our employees or other agents will not engage in such conduct for which we
might be held responsible.
9
RISKS RELATED TO THE SALE OF OUR SHARES
OUR STOCK PRICE IS HIGHLY VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES
AT OR ABOVE THE PURCHASE PRICE. Our stock price has fluctuated in the past and
may continue to do so. There is a significant risk that the market price of the
common stock will decrease in the future in response to any of the following
factors, some of which are beyond our control:
o variations in our anticipated or actual operating results;
o announcements that our revenue or income are below analysts'
expectations;
o general economic slowdowns;
o changes in market valuations of similar companies;
o sales of large blocks of our common stock;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments; or
o fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally based companies.
10
USE OF PROCEEDS
The selling stockholders will receive all of the net proceeds from
sales of common stock sold pursuant to this prospectus. However, the Company
will receive approximately $1,103,388 if all of the warrants are exercised.
These funds would be used for general corporate purposes. We will not receive
any proceeds from the sale of the shares by the selling stockholders.
SELLING STOCKHOLDERS
On January 15, 2004, we completed a private placement in which we sold
an aggregate of 617,285 shares of common stock and issued warrants to purchase
up to an aggregate of 154, 320 shares of common stock to the selling
stockholders listed in the table below. Under the terms of a registration rights
agreement between each investor and us, we are required to file this
registration statement prior to March 1, 2004. We also agreed to bear expenses
in connection with the registration and sale of the shares. See "Plan of
Distribution."
The following table sets forth information regarding the current
beneficial ownership of our common stock by the selling stockholders and the as
adjusted beneficial ownership by the selling stockholders, giving effect to the
sale of the shares offered hereby. The shares beneficially owned have been
determined in accordance with rules promulgated by the SEC, and the information
is not necessarily indicative of beneficial ownership for any other purpose. The
information in the table below is current as of March 1, 2004 and the percentage
of ownership shown in the table is based on approximately 7,260,262 shares of
common stock issued and outstanding as of March 1, 2004. All information
contained in the table below is based upon information provided to us by the
selling stockholders and we have not independently verified this information.
The selling stockholders are not making any representation that the shares
covered by this prospectus will be offered for sale. The selling stockholders
may from time to time offer and sell pursuant to this prospectus any or all of
the common stock being registered.
No selling stockholder has held any position nor had any material
relationship with PacificNet or its affiliates during the past three years.
Number of Shares
Beneficially
Shares Maximum Number Owned Percentage
Name of Beneficially Owned of Shares After Ownership After
Selling Stockholder Prior to Offering to be Sold Offering(1) Offering(1)
------------------- ----------------- ---------- ----------- -----------
Whalehaven Fund Limited(2) 25,720 25,720 0 0
Bluegrass Growth Fund(3) 128,601 128,601 0 0
Omicron Master Fund(4) 128,601 128,601 0 0
Greenwich Growth Fund Limited(5) 25,270 25,720 0 0
Excalibur Limited Partnership(6) 77,160 77,160 0 0
Vertical Ventures LLC(7) 128,601 128,601 0 0
Stonestreet LP(8) 128,601 128,601 0 0
Alpha Capital AG(9) 128,601 128,601 0 0
11
(1) We do not know when or in what amounts the selling stockholders may
offer for sale the shares of common stock pursuant to this offering. Because the
selling stockholders may choose not to sell any of the shares offered by this
prospectus, and because there are currently no agreements, arrangements or
undertakings with respect to the sale of any of the shares of common stock, we
cannot estimate the number of shares of common stock that the selling
stockholders will hold after completion of the offering. For purposes of this
table, we have assumed that the selling stockholders will have sold all of the
shares covered by this prospectus upon the completion of the offering.
(2) Includes 5,144 shares of common stock issuable upon exercise of a
warrant.
(3) Includes 25,720 shares of common stock issuable upon exercise of a
warrant.
(4) Includes 25,720 shares of common stock issuable upon exercise of a
warrant.
(5) Includes 5,144 shares of common stock issuable upon exercise of a
warrant.
(6) Includes 15,432 shares of common stock issuable upon exercise of a
warrant.
(7) Includes 25,720 shares of common stock issuable upon exercise of a
warrant.
(8) Includes 25,720 shares of common stock issuable upon exercise of a
warrant.
(9) Includes 25,720 shares of common stock issuable upon exercise of a
warrant.
12
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling
stockholders. The selling stockholders are offering shares of common stock that
they received in connection with the private placement. As used in this
prospectus, the term "selling stockholders" includes pledgees, transferees or
other successors-in-interest selling shares received from the selling
stockholders as pledgors, assignees, borrowers or in connection with other
non-sale-related transfers after the date of this prospectus. This prospectus
may also be used by transferees of the selling stockholders, including
broker-dealers or other transferees who borrow or purchase the shares to settle
or close out short sales of shares of common stock. The selling stockholders
will act independently of us in making decisions with respect to the timing,
manner and size of each sale or non-sale related transfer. We will not receive
any of the proceeds of such sales by the selling stockholders.
The selling stockholders may sell their shares of common stock directly
to purchasers from time to time. Alternatively, they may from time to time offer
the common stock to or through underwriters, broker/dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any profit on the sale of such
securities and any discounts, commissions, concessions or other compensation
received by any such underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The selling stockholders have informed us
that they do not have any agreement or understanding, directly or indirectly,
with any person to distribute the Common Stock.
The common stock may be sold by the selling stockholders from time to
time in one or more transactions at or on any stock exchange, market or trading
facility on which shares are traded or in private transactions. The sales may be
made at fixed prices, at prevailing market prices at the time of sale, at
varying prices determined at the time of sale or at negotiated prices. The sale
of the common stock may be affected by means of one or more of the following
transactions (which may involve cross or block transactions):
o a block trade in which the broker-dealer so engaged will
attempt to sell such shares as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
o on any exchange or quotation service on which the shares may
be listed or quoted at the time of sale in accordance with the
rules of the applicable exchange;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o in privately negotiated transactions;
o through the settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise; and
o any other method permitted pursuant to applicable law.
13
The selling stockholders may also sell shares under Rule 144 of the
Securities Act , if available, rather than under this prospectus. To the extent
required, this prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may also enter into option or other
transactions with broker-dealer's, or other financial institutions for the
creation of one or more derivative securities, which require the delivery to
such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction.)
In connection with the sale of the common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker/dealers of
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our Common Stock short and deliver these
shares to close out such short positions, or loan or pledge common stock to
broker/dealers that in turn may sell such securities.
The selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the common stock by the
selling stockholders. The foregoing may affect the marketability of such
securities.
Pursuant to the registration rights agreement with the selling
stockholders, all expenses of the registration of the common stock will be paid
by us, including, without limitation, SEC filing fees; provided, however, that
the selling stockholders will pay any broker or similar commissions, or, except
to the extent otherwise provided for, any legal fees or other costs of the
selling stockholders. The selling stockholders will be indemnified by us against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. We will be
indemnified by the selling stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
To comply with the securities laws of certain jurisdictions, if
applicable, the common stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for
us by Loeb & Loeb LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 2002 and 2001, and for the
years ended December 31, 2002 and 2001, incorporated in this prospectus by
reference from PacificNet's Annual Report on Form 10-KSB for the year ended
December 31, 2002, have been audited by Clancy and Co., P.L.L.C. independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
14
RECENT DEVELOPMENTS
On December 1, 2003, we signed an agreement to acquire a controlling
interest in Epro Telecom Holdings Limited. The total purchase price to be paid
upon the consummation of this transaction is approximately $3.5 million payable
in cash and shares of our common stock. Epro Telecom Holdings Limited, a company
incorporated in the Hong Kong Special Administrative Region of the People's
Republic of China, is engaged in the business of providing value-added telecom
services (VAS), call center and customer relationship management (CRM) services
for Hong Kong and the PRC's telecom operators, banks, insurance, and other
financial services companies, mobile marketing and promotion services, call
center training, management and consulting services, call center software,
interactive voice response (IVR) systems, mobile payment and mobile point of
sale (POS) solutions, internet e-commerce and mobile commerce, mobile
applications based on short messaging services (SMS), multimedia messaging
services (MMS), outsourced telemarketing and customer support services, and
other mobile value-added services (VAS) in the PRC. Epro's clients include the
major telecom operators, banks, insurance and financial services companies in
Greater China.
On December 15, 2003, we signed an agreement to acquire a controlling
interest in Beijing Linkhead Technologies Co., Ltd. The total purchase price to
be paid upon the consummation of this transaction is approximately $5 million
payable in cash and shares of our common stock. Beijing Linkhead Technologies
Co., Ltd (Linkhead), a People's Republic of China limited liability corporation,
is engaged in the business of providing value-added services (VAS), interactive
voice response (IVR) system development and integration, voice internet portals,
computer telephony integration (CTI), VoIP, internet and mobile application
development, telecom customer relationship management (CRM) services for China's
telecom operators, telecom related management and consulting services, mobile
consumer analytics, mobile data-mining, internet e-commerce and mobile commerce,
mobile applications based on WAP, K-Java, BREW, EMS, short messaging services
(SMS), multimedia messaging services (MMS), outsourced software development, and
other mobile value-added services (VAS) in the PRC. Linkhead's major clients and
profit-sharing partners include some of the leading telecom operators in China.
15
SUMMARY FINANCIAL INFORMATION
Summary financial information for our recent acquisitions consists of the
following:
I. Unaudited interim financial statements for Beijing Linkhead Technologies Co.,
Ltd. as of September 30, 2003
II. Unaudited consolidated interim financial statements of Epro Telecom Holdings
Ltd. as of September 30, 2003
III. Audited consolidated financial statements of Epro Telecom Holdings Ltd. for
the years ended March 31, 2003 and 2002.
IV. Pro Forma consolidated financial statements for PacificNet Inc. giving
effect to the acquisitions of Beijing Linkhead Technologies Co., Ltd. and Epro
Telecom Holdings Ltd. as of September 30, 2003
--------------------------------------------------------------------------------
I. UNAUDITED FINANCIAL STATEMENTS FOR BEIJING LINKHEAD TECHNOLOGIES CO., LTD.
The accompanying unaudited financial statements of Beijing Linkhead Technologies
Co., Ltd. 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 and Rule 10-01 of Regulation S-X. All
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the financial condition and results of operations, have been
included. Operating results for the period ended September 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. The significant accounting policies are the same as those for
PacificNet Inc., which can be found in our Annual Report for the year ended
December 31, 2002 and 2001 filed with the Securities and Exchange Commission,
and incorporated by reference hereto.
Linkhead was formed on April 2 , 2003, and therefore the financial statements
include the balance sheet as of September 30, 2003, and the statements of
operations and cash flows for the period from inception (April 2, 2003) to
September 30, 2003. Accordingly, there is no comparative prior period to
present.
F-1
BEIJING LINKHEAD TECHNOLOGIES CO., LTD
BALANCE SHEET
SEPTEMBER 30, 2003
(Unaudited. In thousands of United States dollars, except par values and share
numbers)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 25
Other Receivables 6
------------
Total Current Assets 31
Property and Equipment, net 86
------------
TOTAL ASSETS $ 117
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' Equity:
Common Stock, par value $0.01, Authorized - 120,000,000 shares
Issued and outstanding:
September 30, 2003 -5,167,820 shares $ 517
Cumulative Other Comprehensive Loss 3
Accumulated Deficit (403) (a)
------------
Total Stockholders' Equity 117
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 117
============
(a) The deficit is mainly due to the write off of intangible assets of $399,000
incurred during the year.
F-2
BEIJING LINKHEAD TECHNOLOGIES CO., LTD
STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND FOR THE PERIOD FROM INCEPTION
(APRIL 2, 2003) TO SEPTEMBER 30, 2003
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
INCEPTION
THREE MONTHS (APRIL 2, 2003)
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
------------ ------------
Revenues $ -- (b) $ --
Cost of Revenues -- --
------------ ------------
Gross Margin -- --
Selling, General and Administrative Expenses (5) (5)
Provision for Written Off Intangible Assets (399)(a) (399)
------------ ------------
LOSS FROM OPERATIONS (404) (404)
Sundry income 1 1
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (403) $ (403)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
(0.12) (0.08)
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 3,445,213 5,167,820
============ ============
(b) Revenue is recognized when the outcome of a transaction can be measured
reliably and when it is probable that the economic benefits associated with the
transaction will flow to the Company. As of September 30 2003, the Company did
not record any sales from the provision of value-added services and interactive
voice response system development and integration and other related services.
F-3
BEIJING LINKHEAD TECHNOLOGIES CO., LTD
STATEMENTS OF CASH FLOWS
INCEPTION (APRIL 2, 2003) TO SEPTEMBER 30, 2003
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
INCEPTION
(APRIL 2, 2003)
TO
SEPTEMBER 30,
2003
-------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (403)
Provision for Written Off Intangible Assets 399
Adjustments:
Changes in:
Other Receivables (6)
-------------
Net cash used in operating activities (10)
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of Property and Equipment (86)
Acquisition of Intangible Assets (399)
-------------
Net cash used in investing activities (485)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock 517
-------------
Net cash provided by financing activities 517
EFFECT OF EXCHANGE RATE CHANGES IN CASH 3
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 22
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD --
-------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25
=============
F-4
II. UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF EPRO TELECOM HOLDINGS
LTD. AS OF SEPTEMBER 30, 2003
The accompanying unaudited financial statements of Epro Telecom Holdings Limited
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 and Rule 10-01 of Regulation S-X. All adjustments,
which, in the opinion of management, are necessary for a fair presentation of
the financial condition and results of operations, have been included. Operating
results for the period ended September 30, 2003, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003. EPRO
has an adopted fiscal year end of March 31. Please refer to the audited
financial statements for EPRO for the fiscal years ended March 31, 2003 and
2002, which are presented below following the current unaudited interim
financial information, for a summary of significant accounting policies.
EPRO TELECOM HOLDINGS LIMITED
INTERIM CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(Unaudited. In thousands of United States dollars, except par values and share
numbers)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 364
Accounts Receivables (net of allowance for doubtful
accounts of $Nil as of September 30, 2003) 1,099
Other Current Assets 617
-------------
Total Current Assets 2,080
Property and Equipment, net 440
-------------
TOTAL ASSETS $ 2,520
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 1,527
Accounts Payable 429
Accrued Expenses 1,071
-------------
Total Current Liabilities 3,027
Minority Interest in Consolidated Subsidiary 77
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.1282, Authorized - 12,000,000 shares
Issued and outstanding:11,633,986 shares 1,492
Additional Paid-In Capital 653
Cumulative Other Comprehensive Loss 22
Accumulated Deficit (2,751)
-------------
Total Stockholders' Equity (584)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,520
=============
F-5
EPRO TELECOM HOLDINGS LTD.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues $ 1,740 $ 1,441 $ 3,260 $ 3,141
Cost of Revenues (1,414) (1,240) (2,612) (2,561)
------------- ------------- ------------- -------------
Gross Margin 326 201 648 580
Selling, General and Administrative Expenses (275) (336) (516) (843)
Depreciation and Amortization (55) (179) (117) (305)
Provision for Written Off Intangible Assets -- -- (230)(a) (192)
------------- ------------- ------------- -------------
PROFIT / (LOSS) FROM OPERATIONS (4) (314) (215) (760)
OTHER INCOME -- -- 1 2
------------- ------------- ------------- -------------
PROFIT / (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (4) (314) (214) (758)
Provision for Income Taxes (24) (19) (47) (38)
Minority Interests (7) 11 4 19
------------- ------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (35) $ (322) $ (257) $ (777)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE: -- $ (0.03) $ (0.02) $ (0.07)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 11,633,986 11,633,986 11,633,986 11,633,986
============= ============= ============= =============
(a) The write off of intangible assets of $230,00 and $192,000 were incurred
in 2003 and 2002, respectively..
F-6
EPRO TELECOM HOLDINGS LTD.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited. In thousands of United States dollars, except loss per share and
share amounts)
SIX MONTHS ENDED
SEPTEMBER 30
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (257) $ (777)
Adjustments:
Minority Interests (4) (19)
Depreciation and amortization 117 305
Provision for Written Off Intangible Assets 230 192
Changes in:
Receivables and Other Current Assets (277) (10)
Accounts Payable and Accrued Expenses 1 3
-------------- --------------
Net cash used in operating activities (190) (306)
CASH FLOWS FROM INVESTMENT ACTIVITIES
Acquisition of Property and Equipment -- (8)
Acquisition of Intangible Assets -- (192)
-------------- --------------
Net cash used in investing activities -- (200)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Advances under Bank Line of Credit 360 504
-------------- --------------
Net cash provided by financing activities 360 504
-------------- --------------
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 170 (2)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 194 253
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 364 $ 251
============== ==============
F-7
III. AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF EPRO TELECOM HOLDINGS LTD. FOR
THE YEARS ENDED MARCH 31, 2003 AND 2002.
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Independent Auditors' Report ............................................. F-9
Consolidated Balance Sheets .............................................. F-10
Consolidated Statements of Operations .................................... F-11
Consolidated Statements of Changes in Stockholders'Equity (Deficiency).... F-12
Consolidated Statements of Cash Flows .................................... F-12
Notes to Consolidated Financial Statements ............................... F-14
F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Epro Telecom Holdings Limited
We have audited the accompanying consolidated balance sheets of Epro Telecom
Holding Limited, a Hong Kong limited liability company, and subsidiaries (the
"Company") as of March 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency), and cash
flows for two preceding years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
March 31, 2003 and 2002, and the consolidated results of its operations and its
cash flows for the periods indicated in conformity with generally accepted
accounting principles in the United States of America.
/s/ Clancy and Co., P.L.L.C.
Phoenix, Arizona
February 27, 2004
F-9
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
ASSETS
------
Current assets
Cash and cash equivalents $ 40,607 $ 100,737
Restricted cash - pledged bank deposits (Note 4) 153,649 151,903
Trade receivables 846,690 958,436
Prepayments and other current assets 182,137 574,618
Inventories (Note 1) 76,014 4,513
Income tax refundable 17,264 2,241
Amounts due from related parties (Note 2) 316,968 214,961
------------ ------------
Total current assets 1,633,329 2,007,409
Fixed assets, net (Note 3) 557,128 901,328
Intangible assets (Note 1) 229,260 --
------------ ------------
TOTAL ASSETS $ 2,419,717 $ 2,908,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Bank overdrafts (secured) $ 267,754 $ 194,999
Bank loans - current portion (Note 4) 728,796 371,679
Trade payables 981,632 1,195,230
Other payables and deposits 231,972 62,401
Capital lease obligations - current portion (Note 5) 86,316 110,675
Amounts due to related parties (Note 2) 154,868 --
------------ ------------
Total current liabilities 2,451,338 1,934,984
Long-term liabilities
Bank loans - noncurrent portion (Note 4) 169,957 19,672
Capital lease obligations - non current portion (Note 5) 43,550 142,669
------------ ------------
Total long-term liabilities 213,507 162,341
------------ ------------
Total liabilities 2,664,845 2,097,325
Minority interest 80,922 112,653
Stockholders' equity (deficiency)
Common stock, $0.1282 par value (12,000,000 shares authorized,
11,633,986 shares issued and outstanding) 1,491,537 1,491,537
Additional paid-in capital 652,547 652,547
Other comprehensive income 21,367 21,367
Accumulated deficit (2,491,501) (1,466,692)
------------ ------------
Total stockholders' equity (deficiency) (326,050) 698,759
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,419,717 $ 2,908,737
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-10
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
2003 2002
------------- -------------
Revenues - service fee income $ 5,637,838 $ 8,440,219
Operating expenses
Wage-related expenses (4,509,968) (5,391,079)
Operating expenses (1,695,918) (2,304,574)
Depreciation expense (367,924) (537,889)
------------- -------------
Total operating expenses (6,573,810) (8,233,542)
------------- -------------
Earnings (loss) from operations (935,972) 206,677
Other income (expense)
Interest income 1,947 8,908
Sundry income 18,359 32,630
Interest expense (89,592) (67,818)
------------- -------------
Total other income (expense) (69,286) (26,280)
------------- -------------
Earnings (loss) before minority interest and income taxes (1,005,258) 180,397
Minority interest 31,731 5,376
Provision for income taxes (51,282) (68,546)
------------- -------------
Net earnings (loss) $ (1,024,809) $ 117,227
============= =============
Basic and diluted earnings (loss) per share $ (0.09) $ 0.01
============= =============
Basic and diluted weighted-average shares outstanding 11,633,986 11,633,986
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-11
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
COMMON COMMON ADDITIONAL OTHER
STOCK STOCK PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
---------------------------------------------------------------------------------------------------
Balance, March 31, 2001 11,633,986 $ 1,491,537 $ 652,547 $ 21,367 $ (1,583,919) $ 581,532
Net earnings - - - - 117,227 117,227
---------------------------------------------------------------------------------------------------
Balance, March 31, 2002 11,633,986 $ 1,491,537 $ 652,547 $ 21,367 $ (1,466,692) $ 698,759
Net loss - - - - (1,024,809) (1,024,809)
---------------------------------------------------------------------------------------------------
Balance, March 31, 2003 11,633,986 $ 1,491,537 $ 652,547 $ 21,367 $ (2,491,501) $ (326,050)
===================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net earnings (loss) $(1,024,809) $ 117,227
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation 367,924 537,889
Loss on disposal of fixed assets 172,614 528
Minority interest (31,731) (5,376)
Changes in assets and liabilities
(Increase) decrease in trade and other current assets 504,227 (682,958)
(Increase) decrease in inventories (71,501) 66,803
(Increase) decrease in refundable income taxes (15,023) (93,445)
Increase (decrease) in trade and other current payables (44,027) 182,537
------------ ------------
Total adjustments 882,483 5,978
------------ ------------
Net cash flows provided by / (used in) operating activities (142,326) 123,205
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Increase in restricted cash - pledged bank deposits (1,746) (23,698)
Acquisition of fixed assets (196,724) (225,765)
Acquisition of intangible assets (229,260) --
Repayments to related parties (102,007) (15,758)
Advances from related parties 26,663 62,844
Proceeds from disposal of fixed assets 386 4,674
------------ ------------
Net cash flows used in investing activities (502,688) (197,703)
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Change in bank overdraft 72,755 (185,256)
Net advances under bank loans 507,402 75,922
Loan from a related party 128,205 --
Repayments under capital lease obligations (123,478) (72,806)
------------ ------------
Net cash flows provided by / (used in) financing activities 584,884 (182,140)
------------ ------------
Decrease in cash and cash equivalents (60,130) (256,638)
Cash and cash equivalents, beginning of year 100,737 357,375
------------ ------------
Cash and cash equivalents, end of year $ 40,607 $ 100,737
============ ============
CASH PAID FOR:
Interest $ 89,592 $ 67,818
============ ============
Income taxes $ 66,305 $ 161,991
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-13
EPRO TELECOM HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Epro Telecom Holdings Limited ("the Company") was incorporated in Hong Kong with
limited liability under the Hong Kong Companies Ordinance. The principal
activity of the Company is investment holding. The principal activities of its
consolidated subsidiaries include providing telecommunications and information
services to the major telecom operators, banks, insurance and financial services
companies in Greater China. The Company is headquartered in Kowloon Bay,
Kowloon, Hong Kong.
Emil International (Holdings) Limited, a company incorporated in Hong Kong, is
the immediate holding company of the Company. The directors of the Company
consider the ultimate holding company to be Merry Silver Limited, a company
incorporated in the British Virgin Islands.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has a net
stockholders' deficiency, negative working capital, and a recent significant net
loss. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Continuation of the Company is dependent upon
raising additional capital and ultimately, achieving net profits and positive
cash flow from operations. Should the Company be unable to successfully
accomplish the above objectives, it will not be able to continue operations.
To meet these objectives, management has available unused operating lines of
credit at March 31, 2003 of approximately $500,000 (HKD$4,000,000), has obtained
additional lines of credit and banking facilities subsequent to March 31, 2003
of approximately $400,000 (HKD$3,100,000), and has achieved a net profit for the
nine months period ended December 31, 2003 (unaudited). Based on these
mitigating factors, the Company's ability to continue as a going concern has
been alleviated. Therefore, for at least the next twelve months, the Company can
continue to operate as a going concern.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
ACCOUNTING METHOD - The financial statements were prepared under the accrual
method of accounting.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of cash at bank and on hand and
demand deposits with banks and other financial institutions.
CONCENTRATION OF CREDIT RISK - The Company derives all of its revenues from
customers in Greater China.
F-14
FOREIGN CURRENCY TRANSLATION - The reporting currency used in the preparation of
these consolidated financial statements is United States Dollars (USD). The
functional currency of the Company and its subsidiaries operating in Hong Kong
is Hong Kong Dollars (HKD) and their financial records are maintained and their
financial statements are prepared in HKD. The functional currency of the
Company's subsidiary established in the People's Republic of China is Renminbi
(RMB) and its financial records are maintained and its financial statements are
prepared in RMB.
Transactions in foreign currencies are translated at exchange rates ruling at
the transaction dates. Monetary assets and liabilities expressed in foreign
currencies at the balance sheet date are translated at rates of exchange ruling
at the balance sheet date. Exchange differences arising in these cases are
included in net earnings (loss) on the statement of operations.
The translation of the consolidated financial statements into USD is performed
for balance sheet accounts using the closing exchange rate in effect at the
balance sheet date and for revenue and expenses using an average exchange rate
during each reporting period. The resulting foreign currency translation gain or
loss is included in other comprehensive income in the equity section of the
balance sheet.
INVENTORIES - Inventories consist of finished goods of telecommunication
products for resale and are stated at the lower of cost or net realizable value,
with cost computed on a first-in, first-out basis.
FIXED ASSETS - Fixed assets are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets, ranging from three to five years. Significant improvements
and betterments are capitalized. Routine repairs and maintenance are expensed
when incurred.
LONG-LIVED ASSETS - Long-lived assets, such as fixed assets, are reviewed for
impairment when circumstances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impairment loss is
recognized when the estimated undiscounted cash flows associated with the asset
or group of assets is less than their carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value, and a loss is
recorded as the difference between the carrying value and fair value. Fair
values are determined based on quoted market values, discounted cash flows or
internal and external appraisals, as applicable. Assets to be disposed of are
carried at the lower of carrying value or estimated net realizable value.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are charged to
operations when incurred and are included in operating expenses. Research costs
for 2003 were $31,365 (2002: $0). Costs incurred on development projects
relating to the design and testing of new or improved products are capitalized
and deferred only when the technical feasibility and intention of completing the
product under development has been demonstrated and the resources are available
to do so, costs are identifiable and there is an ability to sell or use the
asset that will generate probable future economic benefits. Amortization is
calculated on a straight-line basis to write off the deferred development costs
over the estimated commercial lives of the underlying products, subject to a
maximum of twenty years, commencing from the date on which the products are
available for use.
ADVERTISING COSTS - Advertising costs are expensed as incurred and amounted to
$14,163 for 2003 (2002: $24,016).
CAPITALIZED INTEREST - Borrowing costs that are directly attributable to the
acquisition, construction or production of an asset that necessarily takes a
substantial period of time to get ready for its intended use or sale are
capitalized as part of the cost of that asset. All other borrowing costs are
charged to the statement of operations when incurred. No interest cost was
capitalized for 2002 and 2003.
F-15
EARNINGS PER SHARE - Basic earnings per share ("EPS") is calculated using net
earnings and the weighted-averaged number of shares outstanding during the
reporting period. Diluted EPS includes the effect from potential issuance of
common stock, such as stock issuable pursuant to the exercise of stock options
or other convertible securities, of which there are none during the reporting
periods. All earnings per share in these financial statements are basic earnings
(loss) per share.
INCOME TAXES - The Company recognizes deferred tax assets and liabilities for
the expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts using enacted tax rates in
effect for the year the differences are expected to reverse. The Company records
a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not to be realized.
REVENUE RECOGNITION - Revenue is recognized when it is probable that the
economic benefits will flow to the Company and when the revenue can be measured
reliably. Revenue from service fee income is recognized when the services are
rendered.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company presents accounts receivable, net
of allowances for doubtful accounts to ensure accounts receivable are not
overstated due to uncollectibility. The allowances are calculated based on
detailed review of certain individual customer accounts, historical rates and an
estimation of the overall economic conditions affecting the Company's customer
base. The Company reviews a customer's credit history before extending credit.
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. There was no allowance for either of the periods presented.
COMPREHENSIVE INCOME - The Company includes items of other comprehensive income
by their nature in a financial statement and displays the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. Other comprehensive
income consists of cumulative translation adjustments.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For certain of the Company's financial
instruments, including cash and cash equivalents, trade and other receivables,
trade and other payables, and amounts due to and from related parties, the
carrying amounts approximate fair value due to their short maturities.
RELATED PARTY TRANSACTIONS - A related party is generally defined as (i) any
person that holds 10% or more of the Company's securities and their 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.
NOTE 2 - RELATED PARTY TRANSACTIONS
-----------------------------------
Amounts due from related parties on the balance sheet are as follows:
2003 2002
----------- -----------
Amounts due from holding companies $ 163,131 $ 73,909
Amounts due from fellow subsidiaries 153,837 141,052
----------- -----------
$ 316,968 $ 214,961
=========== ===========
These amounts due were unsecured, interest-free and had no fixed terms of
repayment.
F-16
Amounts due to related parties on the balance sheet are as follows:
2003 2002
------------ ------------
Amount due to a director [1] $ 26,663 -
Loan from a shareholder of a holding company [2] 128,205 -
------------ ------------
$ 154,868 -
============ ============
[1] The amount due was unsecured, interest-free and had no fixed terms of
repayment.
[2] The loan was secured by personal guarantees given by certain of the
Company's present and former directors and bore interest at a rate of 6% over
the prime lending rate prevailing in Hong Kong. For the year ended March 31,
2003, accrued interest expense amounted to $11,676 (2002: Nil).
NOTE 3 - FIXED ASSETS
---------------------
Fixed assets consist of the following:
2003 2002
----------- -----------
Land and buildings $ -- $ 102,564
Furniture and fixtures 933,983 1,027,075
Computers and office equipment 3,639,013 3,519,534
Motor vehicles 93,451 93,451
Rental pagers 195,653 199,596
----------- -----------
4,862,100 4,942,220
Less accumulated depreciation 4,304,972 4,040,892
----------- -----------
$ 557,128 $ 901,328
========== ===========
Depreciation expense charged to operations for 2003 was $367,924 (2002:
$537,889).
NOTE 4 - BANK LOANS
-------------------
Bank loans represent the following:
2003 2002
----------- -----------
Secured [1] $ 841,336 $ 260,115
Unsecured 57,417 131,236
----------- -----------
898,753 391,351
Less current portion 728,796 371,679
----------- -----------
Noncurrent portion $ 169,957 $ 19,672
=========== ===========
[1] The loans were secured by the following: joint and several personal
guarantees executed by certain directors of the Company; corporate guarantee
executed by a subsidiary of the Company; second legal charge over a property
owned by a fellow subsidiary of the Company; charge over certain trade
receivables of a subsidiary of the Company; and pledged bank deposits of a
subsidiary of the Company in the amount of $153,649 (2002: $151,903).
Aggregate future maturities of borrowing for the next five years are as follows:
(2004: $728,796; 2005: $104,750; 2006: $65,207; 2007: $0; and 2008: $0)
F-17
The Company has established lines of credit with quality financial institutions
of approximately $1,300,000 (HKD$10,000,000) to finance general working capital
requirements and trade transactions. Interest is charged at the bank's prime
lending rate plus 0.5%-2% per annum depending on the reason for the utilization
of the line, i.e. overdraft protection, receivable financing, etc. At March 31,
2003, the Company had available unused lines of credit of approximately
$500,000.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
----------------------------------
The Company leases various equipment under capital leases expiring in various
years through 2005. The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the asset. The assets are depreciated over the lesser of their related
lease terms or their estimated productive lives and are secured by the assets
themselves. Depreciation of assets under capital leases is included in
depreciation expense for 2003 and 2002.
Aggregate minimum future lease payments under capital leases as of March 31,
2003 for each of the next five years are as follows: (2004: $100,934; 2005:
$50,896; 2006: $0; 2007: $0; and 2008: $0)
Capital lease obligations represent the following:
2003 2002
----------- -----------
Total minimum lease payments $ 151,830 $ 296,824
Interest expense relating to future periods 21,964 43,480
----------- -----------
Present value of the minimum lease payments 129,866 253,344
Less current portion 86,316 110,675
----------- -----------
Noncurrent portion $ 43,550 $ 142,669
=========== ===========
Following is a summary of fixed assets held under capital lease:
2003 2002
----------- -----------
Computers and office equipment $ 386,511 $ 386,511
Less accumulated depreciation 262,101 193,283
----------- -----------
$ 124,410 $ 193,228
=========== ===========
NOTE 6 - INCOME TAXES
---------------------
Hong Kong profits tax has been provided at a rate of 16% on the estimated
assessable profits arising in Hong Kong for each of the years ended March 31,
2003 and 2002. Provision for Hong Kong profits tax for 2003 was $51,282 (2002:
$68,546).
No provision for deferred tax asset or liability has been made as the amounts
involved were insignificant.
F-18
The following is a reconciliation of income tax calculated at the applicable tax
rate of 16% with income tax expense:
2003 2002
------------ ------------
Earnings (loss) before minority interest and income taxes $(1,005,258) $ 180,397
============ ============
Expected Hong Kong profits tax at applicable tax rate of 16% -- 28,864
Tax effects of:
Nondeductible expenses 13,068 84
Nontaxable income -- (2,937)
Unused tax losses not recognized 45,344 17,986
Excess depreciation (7,130) 24,549
------------ ------------
Provision for income taxes $ 51,282 $ 68,546
============ ============
NOTE 7 - COMMITMENTS
--------------------
The Company leases warehouse and office space under operating leases for two
years with fixed monthly rentals. None of the leases included contingent
rentals. Lease expense charged to operations for 2003 amounted to $371,958
(2002: $509,240). Future minimum lease payments under non-cancelable operating
leases at March 31:
2003 2002
------------ ------------
Due in one year $ 46,186 $ 271,116
Later than one year and not later than five years -- 46,186
------------ ------------
$ 46,186 $ 317,302
============ ============
NOTE 8 - EMPLOYEE BENEFIT PLAN
------------------------------
Through one of the Company's wholly-owned subsidiaries, the Company operates two
defined contribution retirement plans for eligible employees which are
recognized as exempted Mandatory Provident Fund Schemes under the Hong Kong
Mandatory Provident Fund Schemes Ordinance. For those employees who are not
qualified for the above retirement plan, they are required to participate in a
defined contribution Mandatory Provident retirement benefits plan under the Hong
Kong Mandatory Provident Fund Schemes Ordinance. The plan assets are held
separately from those of the Company in an independently administered fund.
Contributions to the plan, net of forfeited contributions, which are included in
wage-related expenses in the statement of operations for 2003 and 2002 were
approximately ($28,000) and $125,000, respectively.
NOTE 9 - SUBSEQUENT EVENTS
--------------------------
On December 1, 2003, the Company signed an agreement with PacificNet
Communications Limited, a wholly-owned subsidiary of PacificNet Inc., a company
that trades on the Nasdaq small cap market, to sell 50% of its shares for a
total purchase consideration of approximately US$3.5 million payable in cash and
shares by PacificNet Inc.
F-19
IV. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS FOR PACIFICNET, INC. GIVING
EFFECT TO THE ACQUISITIONS OF BEIJING LINKHEAD TECHNOLOGIES CO., LTD. AND EPRO
TELECOM HOLDINGS LTD. AS OF SEPTEMBER 30, 2003
On December 1, 2003, we signed an agreement to acquire a controlling interest in
Epro Telecom Holdings Limited. The total purchase price to be paid upon the
consummation of this transaction is approximately $3.5 million payable in cash
($500,000) and shares of our common stock ($3,000,000 representing 600,000
shares of our common stock valued at $5.00 per share.)
On December 15, 2003, we signed an agreement to acquire a 51% interest in
Beijing Linkhead Technologies Co., Ltd. The total purchase price to be paid upon
the consummation of this transaction is approximately $5 million payable in cash
($222,500) and shares of our common stock ($4,750,000 representing 950,000
shares of our common stock valued at $5.00 per share.)
The following pro forma financial results reflects the historical consolidated
balance sheet of PacificNet Inc. at September 30, 2003, and the statements of
operations for the nine months ended September 30, 2003 and 2002, and the year
ended December 31, 2002, giving effect to the acquisitions described in the
preceding two paragraphs. The significant pro forma line item adjustments have
been described below, however, the majority of the pro forma adjustments relate
to Epro as Linkhead was not formed until April 2003.
F-20
PACIFICNET INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30 2003
(In thousands of United States dollars, except par values and share numbers)
HISTORICAL PROFORMA RESULT
SEPTEMBER 30, PRO-FORMA SEPTEMBER 30,
2003 ADJUSTMENT 2003
------------ ------------ ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 4,791 389 (c) $ 4,457
(723)(b)
Accounts Receivables (net of allowance for doubtful
accounts of $Nil as of September 30 2003) 843 1,099 (c) 1,942
Other Current Assets 213 263 (c) 476
------------ ------------
Total Current Assets 5,847 6,875
Property and Equipment, net 8 525 (c) 533
Goodwill 17 8,463 (a) 8,480
------------ ------------
TOTAL ASSETS $ 5,872 $ 15,888
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 932 1,527 (c) $ 2,459
Accounts Payable 102 429 (c) 531
Accrued Expenses 132 1,071 (c) 1,203
------------ ------------
Total Current Liabilities 1,166 4,193
Minority Interest in Consolidated Subsidiary 977 (340)(c) 637
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: 6,162,977 shares 1 -- 1
Additional Paid-In Capital 32,246 7,750 (d) 39,996
Unearned Compensation (58) -- (58)
Warrants 15 -- 15
Escrowed shares (800,000 shares of common stock
pending approval of joint venture agreement) (480) -- (480)
Cumulative Other Comprehensive Loss (24) -- (24)
Accumulated Deficit (27,971) (421)(c) (28,392)
------------ ------------
Total Stockholders' Equity 3,729 11,058
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,872 $ 15,888
============ ============
(a) The goodwill is a result of the acquisitions of Epro and Linkhead of
$3,754,000 and $4,709,000, respectively.
(b) Adjustment gives effect to cash paid for acquisition of Epro and Linkhead of
$500,000 and $223,000, respectively.
(c) Adjustments represent consolidation of Epro and Linkhead and resulting
minority interest.
(d) Adjustment gives effect to additional paid-in capital resulting from
issuance of shares to Epro (600,000 shares) and Linkhead (950,000 shares) of
$3,000,000 and $4,750,000 respectively.
F-21
PACIFICNET INC.
PRO FORMA CONDENSED INTERIM STATEMENT OF OPERATIONS
AS OF SEPTEMBER 30, 2003
NINE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2002
PRO-FORMA PRO-FORMA PRO-FORMA PRO-FORMA
HISTORICAL ADUSTMENT RESULT HISTORICAL ADUSTMENT RESULT
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ 3,854 $ 4,461 (c) $ 8,315 $ 2,168 $ 4,629 (c) $ 6,797
Cost of Revenues (1,491) (3,266)(c) (4,757) (1,651) (3,736)(c) (5,387)
------------ ------------ ------------ ------------ ------------ ------------
Gross Margin 2,363 1,195 3,558 517 893 1,410
Selling, General and
Administrative Expenses (1,149) (1,303)(c) (2,452) (1,112) (1,575)(c) (2,687)
Depreciation and Amortization (4) (187)(c) (191) (203) (365)(c) (568)
Provision for Written Off
Tangible and Intangible Assets (91) (857)(c) (948) -- (259)(c) (259)
------------ ------------ ------------ ------------ ------------ ------------
PROFIT/(LOSS) FROM OPERATIONS 1,119 (1,152)(c) (33) (798) (1,306)(c) (2,104)
OTHER INCOME 69 20 (c) 89 48 2 (c) 50
PROVISION FOR IMPAIRMENT LOSS -- -- -- (24) -- (24)
PROVISION FOR INCOME TAXES -- (60)(c) (60) -- (58)(c) (58)
------------ ------------ ------------ ------------ ------------ ------------
PROFIT/(LOSS) FROM
CONTINUING OPERATIONS 1,188 (1,192)(c) (4) (774) (1,362)(c) (2,136)
BASIC AND DILUTED
INCOME/ (LOSS) PER
COMMON SHARE: 0.23 (0.77) -- (0.19) (2.27) (0.47)
WEIGHTED AVERAGE
NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 5,170,079 1,550,000 (e) 6,720,079 3,971,361 600,000 (f) 4,571,361
(e) The increase resulted from the issuance of 600,000 shares and 950,000 shares
to Epro and Linkhead, respectively, and assumes the shares were outstanding as
of the first day of the period presented.
(f) The increase resulted from the issuance of 600,000 shares to Epro. No pro
forma adjustment is required for 2002 as Linkhead was incorporated in 2003.
F-22
PACIFICNET INC.
PRO FORMA CONDENSED INTERIM STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 2002
PRO-FORMA PRO-FORMA
HISTORICAL ADUSTMENT RESULT
------------ ------------ ------------
Revenues $ 2,319 $ 5,933 (c) $ 8,252
Cost of Revenues (1,787) (4,932)(c) (6,719)
------------ ------------ ------------
Gross Margin 532 1,001 1,533
Selling, General and Administrative
Expenses (2,912) (1,885)(c) (4,797)
Depreciation and Amortization (264) (442)(c) (706)
Provision for Written Off
Tangible and Intangible Assets -- (268)(c) (268)
------------ ------------ ------------
LOSS FROM OPERATIONS (2,644) (1,594)(c) (4,238)
OTHER INCOME 33 2 (c) 35
PROVISION FOR IMPAIRMENT LOSS (97) -- (97)
PROVISION FOR INCOME TAXES -- (64)(c) (64)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS $ (2,708) (1,656) $ (4,364)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE: $ (0.65) (2.76) $ (0.91)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,191,816 600,000 (f) 4,791,816
============ ============
F-23
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which we have filed with the Commission (File
No.000-24985) pursuant to the Exchange Act of 1934 are incorporated herein by
reference:
1. Our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2002, including any documents or portions thereof incorporated by reference
therein;
2. Our Quarterly Reports on Form 10-QSB for the periods ended March 31,
2003, June 30, 2003 and September 30, 2003;
3. Our Current Reports on Form 8-K dated August 18, 2003 and November
12, 2003;.
4. Our Proxy Statement dated November 18, 2003, relating to the 2002
Annual Meeting of Stockholders; and
5. the description of our common stock under the caption "Description
of Registrant's Securities to be Registered" included in the Company's
Registration Statement on Form 8-A, filed on October 21, 1998 with the
Securities and Exchange Commission under Section 12 of the Exchange Act, as
amended, including any amendment or report filed for the purpose of updating
such description.
All other documents filed by us pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of this offering.
Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this prospectus.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request of any
such person, a copy of any or all of the documents incorporated herein by
reference. Requests for documents should be directed to our Secretary, Victor
Tong, at our executive offices.
16
AVAILABLE INFORMATION
We have filed with the Commission a Registration Statement on Form S-3
under the Securities Act of 1993 covering the shares offered by this prospectus.
This prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance such statement is qualified by
reference to each such contract or document. The Company is subject to the
informational requirements of the Exchange Act, and in accordance therewith
files reports and other information with the Commission. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Company is an electronic filer, and
the Commission maintains a web site that contains reports, proxy and information
statements, and other information regarding the Company at
www.sec.gov./edgar.html.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows companies to
indemnify their directors and officers against expenses, judgments, fines and
amounts paid in settlement under the conditions and limitations described in the
law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant, pursuant to the foregoing provisions, or otherwise the Company has
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
17
[Back Cover]
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS PACIFICNET INC.
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN
CONTAINED IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
March ___, 2004
PART II
Information Not Required in Prospectus
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
SEC Registration Fee.............................................. $559.30
Printing and Engraving Expenses................................... $2,000.00
Legal Fees and Expenses........................................... $25,000.00
Accounting Fees and Expenses...................................... $25,000.00
----------
Total........................................................ $ 52,559.30
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provide
that the Registrant shall indemnify any person to the full extent permitted by
the Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL,
relating to indemnification, is hereby incorporated herein by reference.
ITEM 16. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1 Securities Purchase Agreement, dated as of January 15, 2004, among
PacificNet Inc. and the purchasers identified therein
4.2 Form of Common Stock Purchase Warrant issued to each of the
purchasers
5.1 Opinion of Loeb & Loeb LLP regarding legality of securities
23.1 Opinion of Clancy & Co. P.L.L.C.
23.3 Consent of Loeb & Loeb LLP (included in the opinion filed as Exhibit
5)
24.1 Power of Attorney (included on signature page to Registration
Statement)
ITEM 17. UNDERTAKINGS
Undertaking Required by Item 512 of Regulation S-B.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
II-1
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(I) and (a)(1)(ii) of
this section do not apply if the Registration Statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 hereof or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-2
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 2nd day of March, 2004.
PACIFICNET INC.
By: /s/ Tony Tong
-----------------------------
Tony Tong, Chairman, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signature" constitutes and appoints Tony Tong
and Victor Tong, or either of them, his true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign any or all amendments
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
Signature Title Date
------------------------------------ ---------------------------------------- -------------------
/s/Tony Tong Chairman, President and Chief Executive
------------------------------------ Officer March 2, 2004
Tony Tong
/s/ Victor Tong Vice President of N. America Operations
------------------------------------ and Director March 2, 2004
Victor Tong
/s/ Shaojian Wang Chief Financial Officer, Vice President of
------------------------------------ International Business and Director March 2, 2004
Shaojian Wang
/s/ Richard C.H. Lo Director March 2, 2004
------------------------------------
Richard C.H. Lo
/s/ David Fisher Director March 2, 2004
------------------------------------
David Fisher
/s/ Peter Wang Director March 2, 2004
------------------------------------
Peter Wang
/s/ Michael Ha Director March 2, 2004
------------------------------------
Michael Ha
II-3