omniture

PacificNet Reports Third Quarter Results

PacificNet, Inc.
2006-11-21 09:23 1668


* Q3 Revenues Increased 16.5% Year-Over-Year to $12.9 Million

* Company to Focus on High-Margin Game and Gaming Technology Business and

Seeks Strategic Alternative for Low-Margin Telecom Business

* Company to Host Conference Call at 8 a.m. Eastern Time Monday to

Discuss Results and New Focus

BEIJING, CHINA, Nov. 20 /Xinhua-PRNewswire/ -- PacificNet, Inc.

(Nasdaq: PACT), a leading provider of Customer Relationship Management (CRM),

mobile internet, e-commerce and gaming technology in China, today reported

unaudited results for the third quarter ended September 30, 2006.

"Q3 2006 marks the beginning of PacificNet's transformation away from the

low-margin telecom business into the new high-margin gaming business," said

Tony Tong, Chairman and CEO of PacificNet. "In recent board and management

meetings, we evaluated the early success of our gaming technology operation

and were satisfied with the rapid progress and financial performance of the

gaming operation. The board of directors and management team have approved

our new strategy to focus on the rapidly growing gaming market in greater

China, Macau, and Asia. With the help of professional financial advisors and

bankers, PacificNet will be seeking strategic alternatives for our low-margin

telecom business units which may include sales, disposition, spin-offs and

mergers."

"Our Q3 performance was significantly impacted by certain unforeseen

events including the well-publicized China Mobile / government policies and

regulations that altered the entire value-added telecom services industry in

China and impacted all VAS players in our industry, and the accrual of an

$800,000 liquidated damages liability in connection with our debenture

financing earlier this year. With the filing of our 10Q and the amended S-1

registration statement, led by our new CFO, we believe the high amount of

damages were short term and we are now well positioned for rapid growth in our

new focus in games and gaming."

"While we are pursuing the higher-margin gaming business, our traditional

businesses are continuing to perform with organic growth," said Victor Tong,

President of PacificNet. "Q3 revenues of $12,875,000 represented an increase

of 16.5% as compared to $11,047,000 from Q3 2005, and quarterly gross profit

was $2,483,000, an increase of 13.1% as compared to $2,195,000 from Q3 2005.

On the negative side, some of our businesses, specifically the telecom

value-added services group, suffered from the Chinese government restrictions

on value-added service providers announced in July."

During Q3, our VAS revenues were impacted by China's policy changes for

all value-added telecom subscription services on China Mobile's Monternet

platform and China Unicom's VAS platform. The changes, implemented under the

policy directives of China's Ministry of Information Industry, aim to address

a number of issues, including reducing customer complaints, increasing

customer satisfaction and promoting the healthy development of value-added

telecom services in the long run. Key details of these new policies related

to subscription services included:

1. Monthly trial period and double reminders for new subscriptions: For

all subscription services (including SMS, MMS and WAP) on China Mobile's

Monternet, China Mobile will offer a one-month free trial period to new

subscribers, where they will be given two reminders: the first at the time of

service registration and the second at the end of the free trial period. For

new users subscribing to services on or before the 20th day of any month, the

content fee for the first month will be waived. For users subscribing after

the 21st day of any month, content fees for that month and the following month

will be waived. Previously, China Mobile sends one reminder immediately after

the subscription is ordered and the free trial period is three to eleven days.

2. Existing user subscription reminders (August to September

implementation) -- From August to September, China Mobile and its provincial

subsidiaries implemented SMS reminders to existing wireless value added

service (WVAS) subscribers about their subscriptions and fees being charged.

Some provincial subsidiaries of China Mobile including Guangdong Mobile, one

of China Mobile's largest provincial subsidiaries, will not charge

subscription fees to existing customers' phone bills unless these customers

reply to the reminders to confirm their subscriptions. In addition, some

provincial subsidiary of China Mobile also cancelled existing WAP

subscriptions that were inactive for more than four months.

"Despite the severe impact by the above-mentioned China Mobile and

government policies on valued-added telecom services, we believe these polices

will greatly increase the barriers of entry and reduce the number of marginal

players, leading to stronger players like us gaining a stronger foothold. And

we anticipate the future of VAS should improve when China officially launches

its 3G telecom services, which is expected to drive demand for value-added

telecom services provided by PacificNet and our various subsidiaries."

"As always, one of our Company's great strengths is the relationships we

have with major companies in Asia. We signed deals with several clients,

including new contracts with CCTV, Nanjing Airlines, China Unicom and China

Telecom. The McDonalds Corporation selected the Company to provide web-based

quality management services and supplier quality management services. The

Company's 18900.com website has become one of the leading Internet e-commerce

distributors of mobile products in China, covering 1,572 cities throughout the

nation. Additionally during the third quarter, PacificNet iMobile entered

into a new agreement with Motorola to become a designated post-sale service

provider for Motorola's mobile products and accessories in China."

"As we have previously announced publicly, we have already begun shifting

to focus more on gaming. The acquisition of Able Entertainment in Macau by

PacificNet Games Limited (PacGames) earlier this year has already gained us a

lot of traction in this market and we see this as a great avenue to deliver

returns to our shareholders by leveraging our existing businesses. We have

excellent existing relationships in Macau and we will continue to very

actively pursue this area. We believe we have many of the tools and the

experience necessary to execute effectively in this market."

Joseph Levinson, CFO of PacificNet, said, "Our traditional businesses

continued to perform this quarter. We have moved quickly to build a stronger

SOX required internal control team. With our several lines of business, it is

essential that we continue to build a financial structure that will meet the

requirements of Section 404 of SOX."

Levinson continued, "There were several new items on our financial

statements this quarter. First, we recorded a charge of $800,000 for

liquidated damages in relation to the convertible note we issued in March.

Since we were unable to register our investors' shares within the requisite

time period, we have a contractual obligation to pay this amount. Although we

may ultimately not need to pay all this money, we have elected to record the

full amount. We believe liquidated damages of such a high amount will not

recur. If you exclude write-downs on inventory and accounts receivable

totaling over $1.1 million, we would have been profitable for the quarter."

"Additionally, especially in light of the China Mobile restrictions

announced in July, after my appointment as CFO in September, I asked my

internal audit team to conduct a thorough review of certain of our

subsidiaries and to consider the effect of these restrictions. Based on the

reports that our internal audit team delivered to me, we identified a

potential need to write down certain receivables and inventory. With audit

committee oversight, we acted swiftly to record the bad debt and inventory

charges on our P&L."

Additional details on the third quarter are as follows:

-- Q3 revenues of $12,875,000 represented an increase of 16.5% as compared

to $11,047,000 from Q3 2005.

-- Quarterly gross profit was $2,483,000, an increase of 13.1% as compared

to $2,195,000 from Q3 2005.

-- Gross profit margin decreased to 19.3% for Q3 2006 from 19.9% for Q3

2005. As part of its strategy of shifting to higher-margin businesses,

the Company is increasingly focusing on the gaming businesses. Gross

profit margins from the Company's new gaming technology unit are

currently more than 40%.

-- Quarterly operating loss was $1,792,000, a decrease of 304.6% as

compared to an operating profit of $876,000 from Q3 2005. The decrease

in operating profit year-over-year was primarily due to increased

capital expenditures and an increase in staff costs, as well as rent

and electricity expenses for the expansion of its call centre. As the

Company expanded its call centre sites in Hong Kong, amortization and

depreciation expenses related to the new leasehold improvement,

furniture & fixtures, computer equipment and software incurred in the

third quarter of 2006 rose also.

-- Quarterly net loss of $1,115,000, or EPS of ($0.10) per basic share,

and ($0.10) per diluted share, represented a decrease of 282% as

compared to net income of $611,000, or $0.06 per basic share or

$0.05 per diluted share in Q3 2005. Net profit margin decreased to

(8.7%) for Q3 2006 from 5.5% for Q3 2005.

-- If you exclude write-downs on inventory and accounts receivable

totaling over $1.1 million, we would have been profitable for the

quarter.

-- With the rapid growth in the Company's business over the last couple of

years, management is now building the groundwork and infrastructure to

meet the challenges of being a larger company. Part of that means an

investment in talent and an emphasis on system controls while retaining

a high degree of flexibility to capture opportunities.

-- Cash and cash equivalents were $7,439,000 as of September 30, 2006,

compared to $9,579,000 at December 31, 2005 as the Company invested its

cash to drive revenue and profit growth.

-- Equity per share of $3.26 and cash per share of $0.67 as of September

30, 2006, as compared to equity per share of $2.91 and cash per share

of $0.9 as of December 31, 2005 respectively.

-- Quarterly revenues of $3,733,000, $2,350,000, and $6,411,000; and

operating profit of $113,000, $(833,000), and $(191,000) were generated

from the Company's three business units: (1) CRM Outsourcing Services,

(2) Value Added Services (VAS) and (3) Products (Telecom & Gaming),

respectively. This compares to revenues of $3,368,000, $2,870,000, and

$4,677,000; and operating profit of $217,000, $824,000, and $172,000,

respectively for Q3 2005.

-- The Company continues to pursue high-quality businesses in its area of

expertise that will drive long-term growth and profitability. While

there are many potential acquisition candidates, the Company continues

to focus its efforts on acquisitions that it believes will generate

long-term shareholder value. In executing this strategy, the Company

has seen continued profitability in the following acquired

subsidiaries: Epro, Guangzhou 3G, PacificNet Communications,

PacificNet AD and PacificNet Games.

-- The Company became Motorola's designated internet e-commerce service

provider and after-sales service provider for Motorola's mobile phones

and accessories online store in China.

9-Month Highlights

-- Total revenues for the first nine months of 2006 were $47,239,000 which

represented an increase of 45.2% as compared to $32,539,000 for the

same period in 2005.

-- Gross profit for the first nine months of 2006 was $13,887,000, an

increase of 111.7% as compared to gross profit of $6,560,000 in 2005.

Gross profit margin increased to 29.4% for the nine months ended

September 30, 2006 from 20.2% for the nine months ended September 30,

2005.

-- Operating profit for the first nine months of 2006 was $1,437,000, a

decrease of 49.4%, as compared to operating profit of $2,842,000 in

2005.

-- Net income for the first nine months of 2006 was $604,000 or EPS of

$0.05 per basic share ($0.05 per diluted share), represented an

decrease of 62.7% as compared to net income of $1,619,000, or $0.16 per

basic share ($0.15 per diluted share) for the same period in 2005, an

EPS decrease of 68.8%. Net profit margin decreased to 1.3% for the nine

months ended September 30, 2006 from 5% for the nine months ended

September 30, 2005.

Business Outlook

At the time of this announcement, the Company anticipates the following

outlook for fiscal 2006:

-- Total revenues projected to be in the range of $60 to $65 million.

-- Net income projected to be in the range of $1.0 to $1.2 million, or

about $0.09 to $0.11 per basic share.

-- Recently issued accounting guidance requires us to record quarterly

changes in the fair value of our $8,000,000 convertible debentures

issued in March. After an evaluation of several factors, we recorded a

fair value change (gain) of $1,212,000.

For fiscal 2007:

-- Total revenues projected to be in the range of $62 to $67 million.

-- Net income projected to be in the range of $3.4 million to $3.8 million

or about $0.31 to $0.35 per basic share.

-- The Company expects continued revenue and profit growth in 2006 through

organic growth and accretive acquisitions in the mobile game, internet

game and gaming markets in China.

-- PacificNet plans to focus on expansion in the higher-margin gaming and

game technology sectors and will seek strategic alternatives and M&A

opportunities to divest or spin-off traditional low margin telecom

business.

In September, PacificNet opened an office in Macau to focus on the rapidly

expanding gaming and entertainment industries in that region. The Macau

office is located in First International Commercial Centre, Macau Special

Administrative Region, China, and is adjacent to the new Galaxy StarWorld

Hotel and is minutes from both the Wynn and Sands Casinos.

"Macau has become the fastest growing part of China and we are very

excited to be moving forward in our pursuit of the Macau gaming technology

business," said Tony Tong, CEO of PacificNet. "The opening of our Macau

office will facilitate our rapid launch into this market. We feel that the

Asian gaming technology market has near-term growth potential and are very

happy to enter this exciting high growth market. We recognize Macau's

remarkable growth potential and have opened an office in this location as a

first step in entering this market. The bulk of Macau's current gaming

revenue comes from VIP rooms and high-roller table games. As the market

matures, it is predicted that lower stakes, electronic versions of these

popular table games played by the masses will exceed the revenue of the table

games, as in Las Vegas. This trend is already visible. PacificNet plans to

aggressively pursue this mass market with the goal of being the leading

provider of electronic adaptations of popular Asian casino table games."

Macau is one of the fastest-growing gaming markets in the world and is

predicted to surpass Las Vegas in total revenues by 2007. According to recent

statistics provided by Macau government, in 2005, Macau's gaming revenues

reached US$5.8 billion, second only to Las Vegas gaming revenues of US$6

billion. Macau borders Zhuhai City of Guangdong Province of China, one of the

country's wealthiest and most developed regions and is an hour away from Hong

Kong via ferry. The number of tourists visiting Macau reached 18.7 million in

2005, of which 56% or 10.5 million visitors were from mainland China. By 2010,

the number of tourists is expected to nearly double to nearly 30 million

visitors per year. Approximately one billion people live within a three-hour

flight of Macau. Numerous hotel, gaming, and other projects are in the works

in Macau which are expected to add over 10,000 guest rooms and over 20,000

live entertainment seats in eight separate venues. The number of hotel-

casinos in operation and in development in Macau continues to grow, including

well-known Chinese names such as Galaxy and Melco, and famous Las Vegas names

such as the Sands, the Venetian, and the newly opened Wynn Resort, which

celebrated its grand opening on September 6. With the disposable income of the

average Chinese on the rise, Macau's gaming and entertainment market is

expected to grow for years to come. Macau is the only area in China where

gambling is legal.

PacificNet's management team will host a conference call at 8:00 am

Eastern Time on Monday, November 20, 2006, to discuss its third quarter

results and its outlook for the remainder of 2006. The conference call is

open to the public and may be accessed by calling (888) 850-5066 or

(206) 315-8587 and entering conference entry code: 877448, followed by the

# key. For those unable to attend the conference call live, an archive of the

call will be available for 30 days. The replay numbers are 1-800-207-7077 or

(314) 255-1301. Please use PIN number: 5121.

About PacificNet

PacificNet Inc. ( http://www.PacificNet.com ) is a leading provider of

Customer Relationship Management (CRM), mobile internet, e-commerce and gaming

technology in China. PacificNet's clients include the leading telecom

companies, banks, insurance, travel, marketing, and business services

companies, and telecom consumers, in Greater China. PacificNet's corporate

clients include China Telecom, China Mobile, Unicom, PCCW, Hutchison Telecom,

Bell24, Motorola, Nokia, SONY, TCL, Huawei, American Express, Citibank, HSBC,

Bank of China, Bank of East Asia, DBS, TNT, and Hong Kong Government.

PacificNet employs over 2,300 staff in its various subsidiaries throughout

China with offices in Hong Kong, Beijing, Shenzhen, Guangzhou, Macau, and

branch offices in 28 provinces in China and is headquartered in Beijing and

Hong Kong.

PacificNet Games Limited (PacGames), is a leading provider of Asian

multi-player electronic gaming machines, gaming technology solutions, gaming

related maintenance, IT and distribution services for the leading hotel,

casino and slot hall operators based in Macau, China and other Asian gaming

markets. PacGames is a leading developer of electronic versions of these

popular table games which are less expensive to run resulting in higher casino

profits with great appeal to the mass market players. Further, the growing

market in Macau is for Asian table games such as Baccarat, Roulette, Fan Tan,

Fish-Prawn-Crab and Sic-Bo Cussec as these games have wider acceptance in the

Asian market than Western games such as poker or slots. The development,

manufacture, maintenance, and service of electronic Asian table games are

underserved areas which are predicted to grow considerably as Macau's gaming

market matures. PacGames products include multi-play electronic gaming

machines such as Baccarat, Fish-Prawn-Crab, Sib-Bo Cussec, Roulette, and Video

Lottery Terminals (VLT) such as Keno and Bingo, as well as other traditional

slot machines.

PacificNet's operations can be classified into the following three main

business units:

(1) Outsourcing Services -- involves human voice services such as Business

Process Outsourcing, CRM, call center, IT Outsourcing and software development

services. These types of services are conducted through our subsidiaries EPRO,

Smartime/Soluteck and PacificNet Solution Ltd.

(2) Telecom Value-Added Services (VAS) -- primarily involves machine voice

services such as Interactive Voice Response, SMS and related VAS, which are

conducted through our subsidiaries such as Linkhead, Clickcom, MOABC and

Guangzhou 3G.

(3) Products (Telecom & Gaming) -- primarily involves communication and

gaming products, GSM/CDMA/3G Products, Multimedia Communication Kiosks. This

Group includes the following subsidiaries: PacificNet Communications Limited,

iMobile, Take1 and PacificNet Games. PacificNet Games Limited (PacGames) is a

leading developer of Asian electronic gaming machines, multi-player electronic

gaming technology solutions and gaming related maintenance, IT, and

distribution services for the leading hotel and casino operators based in the

Macau and other Asian gaming markets. Take1Technologies is a subsidiary of

PacificNet that designs, manufactures, and distributes multimedia interactive

self-service kiosks, bingo and gaming machines for the casino and slot machine

operators Europe and Asia.

(4) Other Business -other administrative, financial and investment

services and non-core businesses such as PacificNet Power Limited (PacPower),

Pacific Financial Services Limited, etc.

SEGMENT INFORMATION

The Company's reportable segments are operating units, which represent the

operations of the Company's significant business operations. Summarized

financial information concerning the Company's reportable segments is shown in

the following table. The "Other" column includes the Company's other

insignificant services and corporate related items, and, as it relates to

segment earnings (loss), income, and expense not allocated to reportable

segments.

For the

Three months

ended

September Group 2. Group 3.

30, 2006 Group 1. Telecom Products Group 4.

Outsourcing Value-Added (Telecom & Other Total

Services Services Gaming) Business

($) ($) ($) ($) ($)

Revenues 3,733,000 2,350,000 6,411,000 381,000 12,875,000

(% of Total

Revenues) 29 % 18 % 50 % 3 % 100 %

Earnings /

(Loss)

from

Operations 113,000 (833,000) (191,000) (881,000) (1,792,000)

(% of Total

Earnings) -6 % 46 % 11 % 49 % 100 %

Total Assets

9,159,000 18,939,000 12,813,000 26,159,000 67,070,000

(% of Total

Assets) 14 % 28 % 19 % 39 % 100 %

Goodwill

3,936,000 12,920,000 1,529,000 -- 18,385,000

Geographic

Area HK, PRC PRC Macau, HK, HK, PRC,

PRC USA

For the

three Group 2. Group 3.

months Group 1. Telecom Products Group 4.

ended Outsourcing Value-Added (Telecom & Other Total

September Services Services Gaming) Business

30, 2005 ($) ($) ($) ($)

Revenues

3,368,000 2,870,000 4,677,000 132,000 11,047,000

(% of Total

Revenues) 31 % 26 % 42 % 1 % 100 %

Earnings /

(Loss) from

Operations 217,000 824,000 172,000 (337,000) 876,000

(% of Total

Earnings) 25 % 94 % 20 % -39 % 100 %

Total

Assets 4,939,000 9,254,000 189,000 28,983,000 43,365,000

(% of Total

Assets) 11 % 21 % 0 % 67 % 100 %

Goodwill

3,542,000 8,702,000 979,000 -- 13,223,000

Geographic HK, PRC PRC Macau, HK, HK, PRC,

Area PRC USA

For the

nine

months Group 2. Group 3.

ended Group 1. Telecom Products Group 4.

September Outsourcing Value-Added (Telecom & Other Total

30, 2006 Services Services Gaming) Business

($) ($) ($) ($) ($)

Revenues

10,312,000 14,907,000 18,262,000 3,758,000 47,239,000

(% of Total

Revenues) 22 % 31 % 39 % 8 % 100 %

Earnings /

(Loss)

from

Operations 515,000 2,011,000 74,000 (1,163,000) 1,437,000

(% of Total

Earnings) 36 % 140 % 5 % -81 % 100 %

Total

Assets 9,159,000 18,939,000 12,813,000 26,159,000 67,070,000

(% of Total

Assets) 14 % 28 % 19 % 39 % 100 %

Goodwill

3,936,000 12,920,000 1,529,000 - 18,385,000

Geographic

Area HK, PRC PRC Macau, HK, HK, PRC,

PRC USA

For the

Nine months Group 2. Group 3.

ended Group 1. Telecom Products Group 4.

September Outsourcing Value-Added (Telecom & Other Total

30, 2005 Services Services Gaming) Business

($) ($) ($) ($)

Revenues 9,860,000 9,024,000 13,408,000 247,000 32,539,000

(% of Total 30 % 28 % 41 % 1 % 100 %

Revenues)

Earnings /

(Loss)

from

Operations 866,000 2,413,000 408,000 (845,000) 2,842,000

(% of Total

Earnings) 30 % 85 % 14 % -30 % 100 %

Total

Assets 4,939,000 9,254,000 189,000 28,983,000 43,365,000

(% of Total

Assets) 11 % 21 % 0 % 67 % 100 %

Goodwill 3,542,000 8,702,000 979,000 -- 13,223,000

Geographic

Area HK, PRC PRC Macau, HK, HK, PRC,

PRC USA

Product and service revenues classified by major geographic areas are as

follows (in US$):

For the three

months ended

September 30, Hong Kong,

2006 Macau PRC United States Total

Product

revenues 5,261,000 2,169,000 -- 7,430,000

Service

revenues 3,435,000 2,010,000 -- 5,445,000

For the three

months ended

September 30, Hong Kong,

2005 Macau PRC United States Total

Product

revenues 4,776,000 1,363,000 -- 6,139,000

Service

revenues 2,305,000 2,603,000 -- 4,908,000

For the nine

months ended

September 30, Hong Kong United

2006 Macau PRC States Total

Product

revenues 17,355,000 7,739,000 -- 25,094,000

Service

revenues 9,970,000 12,175,000 -- 22,145,000

For the nine

months ended

September 30, Hong Kong,

2005 Macau PRC United States Total

Product 13,538,000 4,769,000 -- 18,307,000

revenues

Service 6,990,000 7,242,000 -- 14,232,000

revenues

PACIFICNET INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

September December

30, 31,

2006 2005

(Unaudited) (Audited)

ASSETS

Current Assets:

Cash and cash equivalents $7,439 $9,579

Restricted cash - pledged bank deposit 232 1,652

Accounts receivables, net of allowances for

doubtful accounts of $622 and $5 13,116 5,998

Inventories 2,039 1,836

Loan receivable from related parties 4,879 2,520

Loan receivable from third parties 1,219 1,572

Other current assets 8,782 7,973

Total Current Assets 37,706 31,130

Property and equipment, net 8,731 4,300

Investments in affiliated companies and

subsidiaries 776 410

Marketable equity securities - available for sale 545 539

Goodwill 18,385 14,824

Other assets - debt issuance costs (net) 927 --

TOTAL ASSETS $67,070 $51,203

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Bank line of Credit 1,082 1,060

Bank loans-current portion 992 188

Capital lease obligations - current portion 133 126

Accounts payable 3,931 3,186

Accrued expenses and other payables 2,586 4,620

Income tax payable 113 296

Subscription payable 390 775

Loans payable to related party 373 369

Total Current Liabilities 9,600 10,620

Long-term liabilities:

Bank loans - non current portion 1,436 6

Capital lease obligations - non current portion 148 78

Convertible Debenture 8,000 --

Warrant Liability 268 --

Compound Embedded Derivatives Liability 357 --

Interest discount (1,530) --

Liquidated damages liability 800 --

Total long-term liabilities 9,479 84

Total liabilities 19,079 10,704

Minority interest in consolidated subsidiaries 11,586 8,714

Commitments and contingencies

Stockholders' Equity:

Preferred stock, par value $0.0001, Authorized -

5,000,000 shares

Issued and outstanding - none -- --

Common stock, par value $0.0001, Authorized -

125,000,000 shares;

Issued and outstanding:

September 30, 2006 - 13,983,497 shares issued,

11,646,836 outstanding

December 31, 2005 - 12,000,687 issued, 10,831,024

outstanding 1 1

Treasury stock, at cost (2006 Q3: 2,336,661

shares, 2005: 1,169,663 shares) (243) (119)

Additional paid-in capital 62,201 57,690

Cumulative other comprehensive income (loss) 266 247

Accumulated deficit (25,386)(25,990)

Less stock subscription receivable (434) (44)

Total Stockholders' Equity 36,405 31,785

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 67,070 $51,203

PACIFICNET INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited. In thousands of United States dollars, except loss per share and

share amounts)

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30 SEPTEMBER 30

2005 2005

(as (as

2006 restated) 2006 restated)

Revenues $12,875 $11,047 $47,239 $32,539

Services 5,445 4,908 22,145 14,232

Product sales 7,430 6,139 25,094 18,307

Cost of revenues (10,392) (8,852) (33,352) (25,979)

Services (3,352) (3,113) (10,635) (9,314)

Product sales (7,040) (5,739) (22,717) (16,665)

Gross margin 2,483 2,195 13,887 6,560

Selling, general and

administrative expenses (2,482) (1,004) (9,982) (3,261)

Inventory write-down charge (486) -- (486) --

Bad debt expense (657) -- (657) --

Depreciation and amortization (255) (133) (474) (275)

Interest expense (395) (182) (851) (182)

EARNINGS/(LOSS) FROM OPERATIONS (1,792) 876 1,437 2,842

Interest income 96 155 177 155

Gain in change in fair value of

derivatives 1,004 -- 1,212 --

Liquidated damages expense (800) -- (800) --

Sundry income, net (113) 171 173 577

Earnings/(Loss) before Income

Taxes and

Minority Interest (1,605) 1,202 2,199 3,574

Provision for income taxes (119) 13 (319) (51)

Share of earnings of associated

companies 80 8 129 12

Minority interests 529 (612) (1,405) (1,916)

Net Earnings/(Loss) Available to

Common

Stockholders $(1,115) $611 $604 $1,619

BASIC EARNINGS PER SHARE $(0.10) $0.06 $0.05 $0.16

DILUTED EARNINGS PER SHARE $(0.10) $0.05 $0.05 $0.15

Safe Harbor Statement

This Company's announcement contains forward-looking statements. We may

also make written or oral forward-looking statements in our periodic reports

to the SEC on Forms 10-K, 10-Q, 8-K, etc., in our annual report to

shareholders, in our proxy statements, in press releases and other written

materials and in oral statements made by our officers, directors or employees

to third parties. Statements that are not historical facts, including

statements about our beliefs and expectations, are forward-looking statements.

These statements are based on current plans, estimates and projections, and

therefore you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties. We

caution you that a number of important factors could cause actual results to

differ materially from those contained in any forward-looking statement.

Potential risks and uncertainties include, but are not limited to,

PacificNet's historical and possible future losses, limited operating history,

uncertain regulatory landscape in China, fluctuations in quarterly and annual

operating results. Further information regarding these and other risks is

included in PacificNet's Form 10K and other filings with the SEC.

Source: PacificNet, Inc.
Keywords: Food/Beverages
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