** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

----

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|
|       | **For the quarterly period ended  September 30, 2001**                                       |

 
| **o**  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|--------|-----------------------------------------------------------------------------------------------|
|   | **For the transition period from  _____ to _____**                                       |

 

 

**Commission FileNumber:  000-24985**

 

**PACIFICNET.COM,INC.**

(Exact name of small business issuer inits charter)

 

| **Delaware**                                                    |   | **11-2854355**                             |
|-----------------------------------------------------------------|--------|--------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S.  Employer Identification No.) |
|                                                            |   |                                       |
| **7808 Creekridge Circle, Suite 101**                           |   |                                       |
| **Bloomington, MN**                                             |   | **55439**                                  |
| (Address of principal  executive offices)                       |   | (Zip Code)                                 |

 

**Registrant’s Telephone Number:  952-829-5888**

 

 

(Former Name andAddress)

 

Check whether theissuer (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  YES ý  NO o

 

There were8,176,742 shares of the PacificNet.com, Inc.’s (the “Company”) Common Stockoutstanding on November 10, 2001.

 

 

**TABLE OF CONTENTS**

 

 
| PART  1 - FINANCIAL INFORMATION                                                                       |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |   |
| ITEM  1 - FINANCIAL STATEMENTS                                                                        |
|                                                                                                  |   |
|                                                                                                  | Condensed  Consolidated Balance Sheets –  as of  September 30, 2001  (unaudited) and  December 31, 2000 |
|                                                                                                  |   |
|                                                                                                  | Unaudited  Condensed Consolidated Statements of Operations - for each of the three and  nine-month periods ended September 30, 2001 and 2000 |
|                                                                                                  |   |
|                                                                                                  | Unaudited  Condensed Consolidated Statements of Cash Flows - for each of the nine-month  periods ended September 30, 2001 and 2000 |
|                                                                                                  |   |
|                                                                                                  | Notes  to Condensed Consolidated Financial Statements |
|                                                                                                  |   |
| ITEM  2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS |
|                                                                                                  |   |
| PART II - OTHER INFORMATION                                                                           |
|                                                                                                  |   |
| ITEM  1 - LEGAL PROCEEDINGS                                                                           |
|                                                                                                  |   |
| ITEM  2 - CHANGES IN SECURITIES AND USE OF PROCEEDS                                                   |
|                                                                                                  |   |
| ITEM 3 -  DEFAULTS UPON SENIOR SECURITIES                                                             |
|                                                                                                  |   |
| ITEM  4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |
|                                                                                                  |   |
| ITEM  5 - OTHER INFORMATION                                                                           |
|                                                                                                  |   |
| ITEM 6 -  EXHIBITS AND REPORTS ON FORM 8-K                                                            |
|                                                                                                       |  |  |

 

**PACIFICNET.COM, INC. AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**

(In thousands of UnitedStates dollars, except par values and share numbers)

 
|                                                                                                                                   |   | **September 30, 2001** |    |                  |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                                                                                                   |   | **(Unaudited)**        |    | **December 31, 2000** |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **ASSETS**                                                                                                                             |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Current Assets:**                                                                                                                    |   |                   |    |                  |   |
| Cash, including  $500 restricted cash as of September 30, 2001                                                                         |   | $                      | 2,167   |                  | $      | 4,197 |   |
| Accounts  receivable, net of allowance of $232 as of September 30, 2001 and $225 as of  December 31, 2000                              |   | 182                    |    | 344                   |   |
| Prepaid assets,  rental deposits and other current assets                                                                              |   | 541                    |    | 769                   |   |
| Total Current  Assets                                                                                                                  |   | 2,890                  |    | 5,310                 |   |
|                                                                                                                                   |   |                   |    |                  |   |
| Property and  Equipment, net                                                                                                           |   | 478                    |    | 692                   |   |
| Capitalized  Software Development Costs                                                                                                |   | 261                    |    | 302                   |   |
| Investments in  Affiliated Companies                                                                                                   |   | 95                     |    | 1,241                 |   |
| Other Assets                                                                                                                           |   | 75                     |    | 89                    |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Total Assets**                                                                                                                       |   | $                      | 3,799   |                  | $      | 7,634 |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **LIABILITIES, MINORITY INTEREST AND  STOCKHOLDERS' EQUITY**                                                                           |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Current Liabilities:**                                                                                                               |   |                   |    |                  |   |
| Accounts  Payable                                                                                                                      |   | $                      | 644     |                  | $      | 331 |   |
| Accrued  Expenses                                                                                                                      |   | 120                    |    | 185                   |   |
| Customer  Deposits                                                                                                                     |   | 211                    |    | 0                     |   |
| Net Liabilities  of Discontinued Operations                                                                                            |   | -                      |    | 438                   |   |
| Total Current  Liabilities                                                                                                             |   | 975                    |    | 954                   |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Minority Interest in Consolidated Subsidiary**                                                                                       |   | 48                     |    | 179                   |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Stockholders' Equity:**                                                                                                              |   |                   |    |                  |   |
| Common Stock,  par value $0.0001:                                                                                                      |   |                   |    |                  |   |
| Authorized -  125,000,000 shares Outstanding - 8,187,342 shares as of September 30, 2001  and 7,937,342 shares as of December 31, 2000 |   | $                      |  1 |                  | $      |  1 |   |
| Additional  Paid-In Capital                                                                                                            |   | 26,769                 |    | 26,560                |   |
| Treasury Stock  - 10,600 shares as of September 30, 2001                                                                               |   | (12                    | )       | 0                     |   |
| Accumulated  Other Comprehensive Loss                                                                                                  |   | (22                    | )       | (14                   | )      |
| Accumulated  Deficit                                                                                                                   |   | (23,960                | )       | (20,046               | )      |
| Total  Stockholders' Equity                                                                                                            |   | 2,776                  |    | 6,501                 |   |
|                                                                                                                                   |   |                   |    |                  |   |
| **Total Liabilities, Minority Interest and Stockholders' Equity**                                                                      |   | $                      | 3,799   |                  | $      | 7,634 |   |

 

The accompanying notesare an integral part of these financial statements.

 

**PACIFICNET.COM, INC. AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands of UnitedStates dollars, except loss per share and share amounts)

 
|                                                                                                |   | **Three months ended September 30,** |   | **Nine months ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                                                                                |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| **Revenues**                                                                                        |   | $                                    | 1,753  |                                | $      | 1,624 |   | $ | 5,554 |   | $ | 2,904 |   |
| **Cost of revenues**                                                                                |   | (1,452                               | )      | (1,352                              | )      | (5,103 | ) | (1,585 | ) |
| Gross Margin                                                                                        |   | 301                                  |   | 272                                 |   | 451 |   | 1,319 |   |
| Selling, General and Administrative  expenses                                                       |   | (1,278                               | )      | (874                                | )      | (3,508 | ) | (1,852 | ) |
| **Loss from operations**                                                                            |   | (977                                 | )      | (602                                | )      | (3,057 | ) | (533 | ) |
| Interest Income                                                                                     |   | 33                                   |   | 137                                 |   | 148 |   | 261 |   |
| **Loss before losses from  affiliated companies and minority interest and discontinued operations** |   | (944                                 | )      | (465                                | )      | (2,909 | ) | (272 | ) |
| Equity in Losses of Affiliated Companies                                                            |   | (10                                  | )      | (14                                 | )      | (35 | ) | (25 | ) |
| Provision for Impairment Loss of  Affiliated Companies                                              |   | (358                                 | )      | 0                                   |   | (1,093 | ) | 0 |   |
| Minority Interests                                                                                  |   | 61                                   |   | (7                                  | )      | 123 |   | (7 | ) |
| **Loss from continuing  operations**                                                                |   | (1,251                               | )      | (486                                | )      | (3,914 | ) | (304 | ) |
| **Losses from  discontinued operations:**                                                           |   |                                 |   |                                |   |   |   |   |   |
| Creative Master business                                                                            |   | 0                                    |   | (13,441                             | )      | 0 |   | (13,441 | ) |
| International Trading business                                                                      |   | 0                                    |   | (1,248                              | )      | 0 |   | (2,013 | ) |
| **Net Loss**                                                                                        |   | $                                    | (1,251 | )                                   | $      | (15,175 | ) | $ | (3,914 | ) | $ | (15,758 | ) |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| **Basic and Diluted Loss  Per Common Share:**                                                       |   |                                 |   |                                |   |   |   |   |   |
| Loss from continuing operations                                                                     |   | $                                    | (0.15  | )                                   | $      | (0.06 | ) | $ | (0.49 | ) | $ | (0.05 | ) |
| Net loss from discontinued operations                                                               |   | $                                    | 0.00   |                                | $      | (1.85 | ) | $ | 0.00 |   | $ | (2.36 | ) |
| Net loss                                                                                            |   | $                                    | (0.15  | )                                   | $      | (1.91 | ) | $ | (0.49 | ) | $ | (2.41 | ) |
|                                                                                                |   |                                 |   |                                |   |   |   |   |   |
| Weighted average number of shares  outstanding:                                                     |   | 8,150,475                            |   | 7,957,969                           |   | 8,025,053 |   | 6,551,362 |   |

 

The accompanying notesare an integral part of these financial statements.

**PACIFICNET.COM,INC. AND SUBSIDIARIES**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**

(In thousands of UnitedStates dollars)

 
|                                                                    |   | **Nine months ended  September 30,** |   |
|-------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                    |   | **2 0 0 1**                          |   | **2000** |   |
| **Cash Flows Used in Operating activities:**                            |   |                                 |   |   |   |
| Net loss                                                                |   | $(3,914                              | )      | $(15,758 | ) |
| Adjustments:                                                            |   |                                 |   |   |   |
| Net loss from  discontinued operations                                  |   | 0                                    |   | 15,454 |   |
| Depreciation                                                            |   | 156                                  |   | 68 |   |
| Amortization                                                            |   | 211                                  |   | 0 |   |
| Expenses  settled by issuance of Common Stock                           |   | 209                                  |   | 0 |   |
| Minority  Interest                                                      |   | (123                                 | )      | 7 |   |
| Equity in  Losses of Affiliated Companies                               |   | 35                                   |   | 25 |   |
| Provision for  Impairment Loss of Affiliated Companies                  |   | 1,093                                |   | 0 |   |
| Changes in  Current Assets and Current Liabilities:                     |   |                                 |   |   |   |
| Accounts Receivable  and Other Current Asssets                          |   | 390                                  |   | (1,634 | ) |
| Accounts  Payable, Accrued Expenses and Customer Deposits               |   | 459                                  |   | 498 |   |
| Net Cash Used  in Continuing Operations                                 |   | (1,484                               | )      | (1,340 | ) |
| Net Cash Used  in Discontinued Operations                               |   | (347                                 | )      | (1,687 | ) |
| Net Cash Used  in Operating Activities                                  |   | (1,831                               | )      | (3,027 | ) |
|                                                                    |   |                                 |   |   |   |
| **Cash Flows Used in Investing Activities:**                            |   |                                 |   |   |   |
| Acquisition of  Property and Equipment                                  |   | (41                                  | )      | (622 | ) |
| Acquisition of  Affiliate Company interests                             |   | 0                                    |   | (3,294 | ) |
| Cost of  Acquisition                                                    |   | 0                                    |   | (320 | ) |
| Purchase of  Treasury Stock                                             |   | (12                                  | )      | 0 |   |
| Acquisition of  Capitalized Software Development Costs and other assets |   | (138                                 | )      | 0 |   |
| Net Cash Used  in Investing Activities                                  |   | (191                                 | )      | (4,236 | ) |
|                                                                    |   |                                 |   |   |   |
| **Cash Flows Provided by Financing Activities:**                        |   |                                 |   |   |   |
| Proceeds from  Issuance of Common Stock                                 |   | 0                                    |   | 9,295 |   |
|                                                                    |   |                                 |   |   |   |
| **Effect of Exchange Rate Changes on Cash**                             |   | (8                                   | )      | (13 | ) |
|                                                                    |   |                                 |   |   |   |
| **(Decrease) Increase in cash**                                         |   | (2,030                               | )      | 2,019 |   |
| **Cash, beginning of period**                                           |   | 4,197                                |   | 4,061 |   |
| **Cash, end of period**                                                 |   | $                                    | 2,167  |   | $ | 6,080 |   |
|                                                                         |        |                                      |        |  |  |  |  |

 

The accompanying notesare an integral part of these financial statements.

 

**PACIFICNET.COM, INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts expressed in United Statesdollars unless otherwise stated)**

 

 

**1.  BASIS OF PRESENTATION**

 

*Interim Financial Statements. *The interim financial statements areprepared pursuant to the requirements for reporting on Form 10-Q.  TheDecember 31, 2000 balance sheet data was derived from audited financialstatements but does not include all disclosures required by generally acceptedaccounting principles.  The interim financial statements and notes theretoshould be read in conjunction with the financial statements and notes includedin the annual report of PacificNet.com, Inc. (referred to herein as"PacificNet," "PACT" or the "Company") on Form10-KSB for the fiscal year ended December 31, 2000.  In the opinion ofmanagement, the interim financial statements reflect all adjustments of anormal recurring nature necessary for a fair presentation of the results forthe interim periods presented.

 

As shown in the accompanying interim financial statements, the Companyincurred a net loss for the nine months ended September 30, 2001 of$3,914,000.  Net tangible assets of theCompany as of September 30, 2001 were $2,776,000 which includes $2,167,000 ofcash. Management has instituted cost reduction measures that have reduced theCompany’s monthly cash expense rate and is pursuing strategic alternatives toits existing operations that it believes will contribute toward achievingprofitability.  The accompanying interimfinancial statements do not include any adjustments that might be necessary ifthe Company is unable to continue as a going concern.

 

*Investments in Affiliated Companies.*  The Company’s investments inPacificNet-NTSC.com Sdn.Bhd and Xmedia Holdings Inc. (“Xmedia”),affiliated companies for which its ownership equals or exceeds 20% but are notmajority-owned or controlled, are accounted for using the equity method. TheCompany’s investment in affiliated companies for which its ownership is lessthan 20% (APP China Group Limited, Cypress Rise and ABCDEnet.com) are accountedfor using the cost method.  Under the equity method, the Company’sproportionate share of each affiliate’s net income or loss and amortization ofthe Company’s net excess investment over its equity in each affiliate’s netassets is included in “equity in losses of affiliated companies”.  TheCompany assesses the need to record impairment losses on its investments whenindicators of impairment are present.  Indicators of value generallyinclude revenue growth, operating results, cash flows and other measures. Management then determines whether there has been a permanent impairment ofvalue based upon events and circumstances that have occurred since acquisition. Based on a review of indicators of value, the Company recorded a provision forimpairment loss of affiliated companies of $358,000 related to the Company’sinvestments in ABCDEnet.com and Xmedia and $1,093,000 related to the Company’sinvestments in APP China Group Limited, Cypress Rise, ABCDEnet.com and Xmediafor the three-months and nine-months ended September 30, 2001,respectively.  The impairment losseswere recorded to state the investment at the estimated recoverable amount.  As of September 30, 2001, investment inaffiliated companies relates principally to the Company’s investment in Xmedia.

 

*Operating Results for FuturePeriods.* These results are not necessarily indicative of the operating results that maybe expected for the entire year ending December 31, 2001 and future periods.

 

*Restatement of Historical FinancialStatements. *Thehistorical financial statements prior to the reverse merger transaction (seenote 3 below) have been restated to be those of the accounting acquirer,PacificNet.com LLC (“PLLC”).  Historical stockholders’ equity prior to thereverse merger has been retroactively restated (a recapitalization) for theequivalent number of shares received in the merger after giving effect to anydifference in par value of the issuer’s and acquirer’s stock with an offset topaid-in-capital.

 

**2.  RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In June 2001, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standards No. 141("SFAS 141"), "Business Combinations."  SFAS 141 requiresthe purchase method of accounting for business combinations initiated afterJune 30, 2001 and eliminates the pooling-of-interests method.  Theadoption of SFAS 141 did not have a significant impact on the Company’sfinancial statements.

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 142 ("SFAS 142"), "Goodwill and Other IntangibleAssets," which is effective January 1, 2002.  SFAS 142 requires,among other things, the discontinuance of goodwill amortization.  In addition,the standard includes provisions for the reclassification of certain existingrecognized intangibles as goodwill, reassessment of the useful lives ofexisting recognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill and the identification of reporting units forpurposes of assessing potential future impairments of goodwill. SFAS 142 alsorequires the Company to complete a transitional goodwill impairment test sixmonths from the date of adoption. The Company does not believe that SFAS 142will have a significant impact on the Company’s financial statements.

 

 In August 2001, the FASB issuedStatement of Financial Accounting Standards No. 143 (“SFAS 143”),  “Accounting for Asset RetirementObligations”, which is effective for financial statements issued for fiscalyears beginning after June 15, 2002. SFAS 143 requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of thecarrying amount of the long-lived asset. The Company is currently assessing but has not yet determined the impactof SFAS 143 on its financial position and results of operations.

 

In October 2001, the FASB issued Statement of Financial AccountingStandards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, whichis effective for financial statements issued for fiscal years beginning afterDecember 15, 2001.  SFAS 144 requiresthat (a) impairment losses be recognized only if the carrying amount of along-lived asset is not recoverable from its undiscounted cash flows and (b) impairmentlosses be measured as the difference between the carrying amount and fair valueof the asset.  In addition, SFAS 144retains existing accounting provisions for the presentation of discontinuedoperations in the income statement but broadens that presentation to include acomponent of an entity (rather than a segment of a business).  The Company is currently assessing but hasnot yet determined the impact of SFAS 144 on its financial position and resultsof operations.

 

 **3.  BUSINESS COMBINATIONS AND DISPOSITIONS**

 

*Acquisition of PacificNet.com LLC.*  On July 27, 2000, in exchange forall the ownership interests in PLLC, the Company issued 7,166,667 shares of itsCommon Stock to the former owners of PLLC.  This transaction was accountedfor as a purchase and treated as a reverse merger since the former owners ofPLLC controlled over 80% of the total shares of Common Stock of the Companyoutstanding immediately following the acquisition on July 27, 2000. The sharesissued by the Company in connection with the reverse merger of PLLC are notregistered under the Securities Act of 1933, as amended, and are subject torestrictions on transferability for a period of one year from the date ofissuance.

 

*Disposition of Creative MasterBusiness.* InSeptember 2000, the Company’s Board of Directors approved a plan to dispose ofits die-cast replica manufacturing business (“the Creative Masterbusiness”).  On October 2, 2000, the Company sold the Creative Masterbusiness to a management group led by Mr. Carl Tong, former Chief ExecutiveOfficer of the Company.  As consideration for this business, themanagement group i) returned 895,765 shares of the Company’s Common Stock witha quoted market value of approximately $4.9 million, ii) assumed allindebtedness and obligations of the Company related to the Creative Masterbusiness and iii) relinquished any claim with respect to an intercompanybalance of $1.5 million payable by the Company.  Revenues related to the Creative Master business were $10.6million and $28.6 million for the three-month and nine-month periods endedSeptember 30, 2000.

 

*Disposition of Laptizen Business* - In September 2001, the Board ofDirectors of the Company approved a plan to dispose of its Laptizen.com Limited(“Laptizen”) subsidiary.  Laptizen is aHong Kong value added reseller of computer systems.  As of September 30, 2001 all activities related to Laptizen hadceased and the Company was in the process of liquidating Laptizen*. * During the three-month periodended September 30, 2001, the Company recorded provisions for disposal relatedto Laptizen of  $25,000 and wrote-offassociated Laptizen goodwill of $82,000. Revenue and net loss informationrelated to Laptizen operations is as follows and includes the provisions fordisposal and write-off of goodwill:

 
|                  |   | **Three months ended September 30,** |      | **Nine months ended September 30,** |   |
|-----------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                  |   | **2001**                             |      | **2000**                            |   | **2001** |   | **2000** |   |
|                  |   |                                 |      |                                |   |   |   |   |   |
| **Revenues**          |   | $                                    | 1,339,000 |                                | $      | 1,215,000 |   | $ | 4,831,000 |   | $ | 1,215,000 |   |
| **Net (loss) income** |   | $                                    | (182,000  | )                                   | $      | 9,000 |   | $ | (257,000 | ) | $ | 9,000 |   |

 

Net assets of Lapitzen operations included incontinuing operations in the accompanying financial statements were $34,000and   $325,000 at September 30, 2001 andDecember 31, 2000, respectively.   Totalassets were comprised primarily of inventory, accounts receivable and propertyand equipment.  Total liabilities werecomprised primarily of trade payables and accrued expenses.  Net assets of Laptizen operations alsoinclude minority interest of $48,000 and $179,000 at September 30, 2001 andDecember 31, 2000, respectively.

 

*Discontinuation of InternationalTrading Group Business.*In September 2000, the Company’s International Trading Group (“ITG”)operations, including the North America China Trade Centre and B2B globaltrading group, were discontinued.* *Thenet liabilities and results of operations for ITG are reflected as discontinuedoperations in the accompanying financial statements.  There were no revenues related to ITG operations for thethree-month and nine-month periods ended September 30, 2001 and September 30,2000.

 

*Continuing Operations.* At present, the Company solely engagesin providing IT consulting services in Hong Kong.

 

**4. NONCASH TRANSACTIONS**

 

For the three month and nine months ended September 30, 2001, theCompany issued 100,000 and 250,000 shares of Common Stock with a market valueof $83,000 and $209,000 to satisfy current liabilities.

 

**5.  SUBSEQUENT EVENTS - STATUSOF PROPOSED TRANSACTIONS**

 

*China Holley Transaction.*On November 6, 2001,  the Company and Holley Group Co., Ltd.(“China Holley”) mutually agreed to terminate the Sale and Purchase Agreementdated July 28, 2001 on the basis that the transaction, if completed, would haveviolated NASDAQ’s shareholder approval rules. Management believes that themutual termination of this agreement will not have a material adverse effect onthe Company's financial position or results of operations.

 

*Lawson Transaction.* In a proposed transaction announced inFebruary 2001, the Company and Lawsons InfoTech Corporation have mutally agreedto terminate the related agreement in principle. The mutual termination of thisagreement had no effect on the Company's financial position or results ofoperations.

 

 

**ITEM 2 -  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

### **PRELIMINARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

The statements contained in this Form 10-Q that are not purelyhistorical are forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  These include statements about theCompany’s expectations, beliefs, intentions or strategies for the future, whichare indicated by words or phrases such as “anticipate,” “expect,” “intend,”“plan,” “will,” “the Company believes,” “management believes” and similar wordsor phrases.  The forward-looking statements are based on the Company’scurrent expectations and are subject to certain risks, uncertainties andassumptions. The Company’s actual results could differ materially from resultsanticipated in these forward-looking statements.  All forward-lookingstatements included in this document are based on information available to theCompany on the date hereof, and the Company assumes no obligation to update anysuch forward-looking statements.

 

### **THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TOTHREE MONTHS ENDED SEPTEMBER 30, 2000**

*Revenues, Cost of Revenues and Gross Margin*.  Revenues for the three months ended September 30, 2001 were $1,753,000,an increase of $129,000 from $1,624,000 for the three months ended September30, 2000.  Cost of revenues for thethree months ended September 30, 2001 were $1,452,000, an increase of $100,000from $1,352,000 for the three months ended September 30, 2000.  Cost ofrevenues, as a percentage of revenues, was 83% for the three months endedSeptember 30, 2001 compared with 83% for the three months ended September 30,2000.  Gross margin for the three monthsended September 30, 2001 was $301,000, an increase of  $29,000 from $272,000 for the three months ended September 30,2000.

*Selling, General and AdministrativeExpenses.  *Selling*,*General and Administrative expenses totaled $1,278,000 for the three monthsended September 30, 2001, an increase of $404,000 from $874,000 for the threemonths ended September 30, 2000.   The majority of this increase isdue to incremental legal and professional fees related to public filings andproposed transactions of the Company (see note 5 to the financial statements)of  $108,000,  provisions and goodwill write-off related to the disposal ofLaptizen totaling $107,000, increased provision for obsolete inventory of$69,000, increased amortization of capitalized software development costs of$32,000, and increased directors and officers insurance costs of $24,000 in2001 over 2000.

 

*Interest Income. *Interest income was $33,000 for the three months endedSeptember 30, 2001, as compared to $137,000 for the three months endedSeptember 30, 2000. The decrease is due to the lower net cash balances in 2001over 2000.

 

*Equity in Losses of AffiliatedCompanies. *TheCompany’s equity in losses of affiliated companies totaled $10,000 for the three months endedSeptember 30, 2001, as compared to losses of $14,000 for the three months ended September 30,2000. The loss reflects the Company’s 40% equity in losses inPacificNet-NTSC.com Sdn.Bhd, a Malaysian based consulting company and resellerof the Company’s products that was acquired in May 2000.

 

*Provision for Impairment Loss ofAffiliated Companies. *The Company’s provision for impairment loss ofaffiliated companies totaled $358,000 for the three months ended September 30, 2001 related tothe Company’s investments in ABCDEnet.com and Xmedia.  This compares with $0 forthe three months ended September 30, 2000.

 

*Income Taxes. *No tax provision has been recorded forthe three months ended September 30, 2001, as the result of the cumulativeoperating loss generated by the Company.

 

*Minority Interests.* Minority interests in losses forthe three months ended September 30, 2001 totaled $61,000, compared with a gainof $7,000 for the same period in the prior year relates to the Laptizenoperations that commenced in July 2000.

 

 

### **NINE  MONTHSENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000**

 

*Revenues, Cost of Revenues andGross Margin.** *Revenues for the nine months endedSeptember 30, 2001 were $5,554,000, an increase of $2,650,000 from $2,904,000for the nine months ended September 30, 2000.  Costof revenues for the nine months ended September 30, 2001 were $5,103,000, anincrease of $3,518,000 from $1,585,000 for the nine months ended September 30,2000.  The majority of increases in revenues and cost of revenues whencomparing the nine months ended September 30, 2001 with the comparable 2000period relates to the operations of Laptizen, which commenced operations inJuly 2000.  Cost of revenues, as apercentage of revenues, was 92% for the nine months ended September 30, 2001compared with 55% for the nine months ended September 30, 2000.  Grossmargin for the nine months ended September 30, 2001 was $451,000, a decreaseof  $868,000 from $1,319,000 for thenine months ended September 30, 2000.  The $868,000 decrease in grossmargin was the result of a premium pricing received on consulting projectsduring the first two quarters of 2000 as compared to 2001 as well as additionalcosts to complete fixed price services contracts in 2001 over 2000.

 

*Selling, General and AdministrativeExpenses.* Selling,General and Administrative expenses totaled $3,508,000 for the nine monthsended September 30, 2001, an increase of $1,656,000 from $1,852,000 for thenine months ended September 30, 2000. The majority of this increase is due tohigher business activity levels in 2001 over 2000, increased advertising andpublicity costs of $286,000, incremental legal and professional fees related tothe Company’s public filings and proposed transactions (See note 5 to thefinancial statements) of  $172,000,increased Hong Kong premises costs of $167,000, increased directors andofficers insurance costs of  $131,000,  provisionsand goodwill write-off related to the disposal of Laptizen totaling$107,000,  increased amortization ofcapitalized software development costs of $104,000, increased depreciation fromacquisitions of property and equipment of $88,000, and increased provision forobsolete inventory of $69,000 in 2001 over 2000.

 

*InterestIncome. *Interest income was$148,000 for the nine months ended September 30, 2001, as compared to $261,000 for the nine months endedSeptember 30, 2000. The decrease is due to the lower net cash balances in 2001as compared to 2000.

 

*Equity in Losses of AffiliatedCompanies.* TheCompany’s equity in losses of affiliated companies totaled $35,000 for the nine months endedSeptember 30, 2001, as compared to $25,000 for the nine months ended September 30, 2000.The increase reflects the Company’s 40% equity in losses in PacificNet-NTSC.comSdn.Bhd, a Malaysian based consulting company and reseller of the Company’sproducts that was acquired in May 2000.

 

*Provision for Impairment Loss ofAffiliated Companies. *The Company’s provision for impairment loss ofaffiliated companies totaled $1,093,000 for the nine months ended September 30, 2001related to the Company’s investments in APP China Group Limited, Cypress Rise,ABCDEnet.com and Xmedia.  This comparesto $0 for the ninemonths ended September 30, 2000.

 

*Income Taxes.* No tax provision has been recordedfor the nine months ended September 30, 2001, as the result of the cumulativeoperating loss generated by the Company.

 

*Minority Interests.* Minority interests in losses forthe nine months ended September 30, 2001 totaled $123,000, compared with a gainof $7,000 for the same period in the prior year relates to the Laptizenoperations that commenced in July 2000.

 

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

*Cash.* The Company’s cash balance decreased by $2.0million to $2.2 million at September 30, 2001, as compared to $4.2 million atDecember 31, 2000.  Operating activities used $1.8 million of cashcomprised of  $1.5 million for continuing operations and $347,000 fordiscontinued operations.

 

*Working Capital.* The Company’s working capitaldecreased $2.4 million to $1.9 million at September 30, 2001, as compared to$4.4 million at December 31, 2000.  When compared to balances at December31, 2000, the decrease in working capital at September 30, 2001 reflects adecrease in cash of $2,030,000, a decrease in receivables and other currentassets of $390,000 and an increase in current liabilities of $21,000.

 

*Property and Equipment Additions.* For the nine months ended September30, 2001, additions to property and equipment aggregated $41,000.  TheCompany does not anticipate material expenditures for additions to property andequipment over the next year.

 

*Issuance of Common Stock.* For the nine months ended September30, 2001, the Company issued 250,000 shares of Common Stock with a market valueof $209,000 to satisfy certain current liabilities.

 

*Investments in AffiliatedCompanies.  *As of September 30, 2001, investments in affiliated companies andgoodwill had a net carrying value of $95,000 as compared to $1,241,000 as ofDecember 31, 2000.  The decrease of $1,146,000 reflects the Company'sshare of losses of affiliated companies of $35,000, amortization of $18,000 andcumulative provisions for impairment losses of $1,093,000 related to theCompany’s investments in APP China Group Limited, Cypress Rise, ABCDEnet, andXmedia.

 

*Cash Needs for theForeseeable Future.*  As of September 30, 2001, theCompany had approximately $2.2 million of cash.  The Company expects thatits cash needs for the foreseeable future will arise primarily from workingcapital requirements, technology development and capital expenditures. The Company expects that the principal sources of cash will be cash onhand.  In the event that additional credit facilities are required, theCompany believes that these additional credit facilities can be negotiated atmarket rates currently in effect.  The Company believes that these sourceswill be adequate to meet anticipated cash requirements for the next twelvemonths.

 

*Inflation*.  Inflation has not had a materialimpact on PacificNet’s business in recent years.

 

*Currency Exchange Fluctuations.*  All of PacificNet’s revenues aredenominated either in U.S. dollars or Hong Kong dollars, while its expenses aredenominated primarily in Hong Kong dollars and Renminbi (“RMB”), the currencyof the People’s Republic of China.  There can be no assurance thatRMB-to-U.S. dollar or Hong Kong dollar-to-U.S. dollar exchange rates willremain stable.  Although a devaluation of the Hong Kong dollar or RMBrelative to the U.S. dollar would likely reduce PacificNet’s expenses (asexpressed in U.S. dollars), any material increase in the value of the Hong Kongdollar or RMB relative to the U.S. dollar would increase PacificNet’s expenses,and could have a material adverse effect on PacificNet’s business, financialcondition and results of operations.  PacificNet has never engaged incurrency hedging operations and has no present intention to do so.

 

*Seasonality and QuarterlyFluctuations*. PacificNet has not experienced fluctuations in quarterly revenues from itse-commerce solutions business since inception.  The Company believes thatits business is not subject to seasonal and quarterly fluctuations.  However, since the Company, in its currentform of business operations as an Asian IT solutions and consulting company,has only been in existence since July 1999, the Company does not have sufficientoperating history to determine whether seasonal and quarterly fluctuationsexist within its business lines.

 

 

**PART II - OTHER INFORMATION**

 

**ITEM 1 - LEGAL PROCEEDINGS**

 

**NONE**

 

**ITEM 2. CHANGES IN SECURITIES AND USEOF PROCEEDS.**

 

**NONE**

** **

**ITEM 3- DEFAULTS UPON SENIOR SECURITIES**

 

**NONE**

 

**ITEM4  - SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

**NONE**

 

**ITEM 5- OTHER INFORMATION**

 

**NONE**

**ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K**

 

                (a)           Exhibits

 

                The followingexhibits are filed as part of this report:

 
| **Exhibit** |   |                                                                                                                                                                            |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  |   | **Description**                                                                                                                                                                 |
|        |   |                                                                                                                                                                            |
| 2.1         |   | Share Exchange Agreement by and among Davin  Enterprises, Inc., Carl Tong, Leo Kwok and Acma Strategic Holdings Limited  dated December 15, 1997. (1)                           |
| 2.2         |   | Share Exchange Agreement dated February 17, 2000,  between Registrant and holders of membership interests in PacificNet.com LLC.  (3)                                           |
| 2.3         |   | Supplement to Share Exchange Agreement dated April  29, 2000, between Registrant and holders of membership interests in  PacificNet.com LLC. (3)                                |
| 2.4         |   | Agreement dated September 30, 2000, among the  Company and the "Purchasers" named therein. (4)                                                                        |
| 2.5         |   | Supplemental Agreement dated October 3, 2000, among  the Company and the "Purchasers" named therein. (4)                                                              |
| 2.6         |   | Deed of Waiver, dated October 3, 2000, by Creative  Master Limited in favor of the Company. (4)                                                                                 |
| 3.1         |   | Certificate of Incorporation, as amended. (3)                                                                                                                                   |
| 3.2         |   | By Laws of the Company. (5)                                                                                                                                                     |
| 3.3         |   | Amendment to By Laws of the Company. (2)                                                                                                                                        |
| 4           |   | Specimen Stock Certificate of the Company. (7)                                                                                                                                  |
| 10.1        |   | Form of Indemnification Agreement with officers and  directors. (1)                                                                                                             |
| 10.2        |   | Amendment to 1998 Stock Option Plan. (6)                                                                                                                                        |
| 10.3        |   | Form of Notice of Stock Option Grant and Stock  Option Agreement under the 1998 Stock Option Plan. (3)                                                                          |
| 10.4        |   | Sub-Lease Agreement LDA-2 dated September 22, 2000.  (6)                                                                                                                        |
| 10.5        |   | Sub-Lease Agreement LDA-3 dated May 8, 2000. (6)                                                                                                                                |
| 10.6        |   | Agreement dated July 28, 2001 for the sale and  purchase of an equity interest in a joint venture in the People’s Republic of  China with Holley Group Co., Ltd.  (7) |

 

----

 (1) Incorporated by referenceto the Company's Form SB-2 filed on October 21, 1998.

 (2) Incorporated by referenceto the Company's Form 10-KSB filed on March 30, 1999.

 (3) Incorporated by referenceto the Company's Form 8-K filed on August 11, 2000.

 (4) Incorporated by referenceto the Company's Form 8-K filed on October17, 2000.

 (5) Incorporated by referenceto the exhibits of the Company's registration statement (file no. 33-14521-NY).

 (6)Incorporated by reference to the Company's Form 10-KSB filed on March 30, 2001.

 (7)Incorporated by reference to the Company's Form 10-Q filed on August 10, 2001.

 

 

                (b)           Reports on Form 8-K:

 

**Form 8-K  - July 25, 2001**                Change in the Company’s independent accountants fromArthur Andersen & Co to Deloitte Touche Tohmatsu.  The change wasrecommended and approved by the Company’s Audit Committee on July 19,2001.  In addition, for purposes ofcomplying with Nasdaq rules, the Company provided information regardingsecurity ownership of management and certain beneficial owners as of July 25,2001.

 

**Form 8-K/A  - August 24, 2001**   The Company provided additional information related to thechange in the Company’s independent accountants from Arthur Andersen & Coto Deloitte Touche Tohmatsu.

 

### **SIGNATURES**

 

In accordance withthe requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

 
|                    |   | PACIFICNET.COM, INC.    |
|-------------------------|--------|-------------------------|
|                    |   |                    |   |
|                    |   |                    |   |
| Date: November 19, 2001 | By:    | /s/ DAVID BUSSMANN      |   |
|                    |   | David Bussmann          |   |
|                    |   | Chairman                |   |
|                    |   |                    |   |
| Date: November 19, 2001 | By:    | /s/ CHARLES W. MUELLER  |   |
|                    |   | Charles W. Mueller      |   |
|                    |   | Chief Financial Officer |   |
|                    |   |                    |   |