This is Us - library.corporate-ir.netlibrary.corporate-ir.net/library/11/117/117746/items/154924/2004.pdf · Through the years you’ve felt our presence in your ... Paciﬁc Internet

This is Us

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Pacific Internet Limited Annual Report 2004

Contents

10 Regional Connectivity14 Letter from the Chairman of the Board16 Letter from the President and Chief Executive Officer20 Board of Directors24 Senior Management26 Year in Review32 Financial Highlights34 Business Highlights35 Management Discussion & Analysis41 Financial Contents

The LEADINGtelco-independent InternetCommunications ServiceProvider in Asia Pacific

Making Our Presence Felt

For more than a decade, whether you’re in the cosmopolitan cities of Singapore or Hong Kong;or in the remote outback of Australia; or taking in thediverse cultures of Malaysia; the exotic sights and sounds of India; enjoying the hospitality in Thailand;or immersing in the natural beauty of The Philippines, we’ve been keeping you connected over the milesand over the years.

Understanding Our Customers - Big and Small

7 days a week, 24 hours a day, events large and small shape your business. And we perfectly understand that. So no matter who you are, a global MNC or a start-up, our customer policy remains the same - to deliver innovative communications services that enhance your life and transform your business, anytime, anywhere.

More Than Just Internet

Through the years you’ve felt our presence in yourbusiness. Mergers and acquisitions, good and badnews; through it all, we’ve helped you stay in touch.Providing you with more choices, more value and more service; being ‘more than just an Internet company’.

Growing from Strength to Strength

Success can be measured in many ways. And for us it’s been a period of tremendous achievement. We are one of the few profitable Nasdaq listed Internet companies to post 12 consecutive quarters of profitability. Many would call our results extraordinary, but for us it’s just the beginning of a beautiful journey, filled with promises and the freedom to explore boundless opportunities.

Regional Connectivity

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Two words: Pacific Internet

One of the most gratifying things about being Asia Pacific’s largest telco-independent Internet Communications Service Provider by geographic reach is our ability to bring the promises of information technology to life for a cross section of humanity. We take enormous pride and pleasure in knowing that we are answering needs, facilitating improvements and generally, making a welcome difference in the activities of diverse businesses, consumers and communities.

And we do all that in ways big and, well, bigger. Take our presence in Thailand, for instance. When Virgin Radio was looking both to revamp its internal communications and to reach out to a wider audience via the Internet, the trendsetting network turned to us. As did the Thai government in appointing us as the official Internet service provider for a nation-wide project to transform Internet cafes into knowledge centers.

Similarly, in Australia, we have been designated the exclusive Internet service provider of choice of the Hunter Urban Division of General Practice (HUDGP) for secured, high-speed Internet connectivity, as well as of the Australian Communications Authority in its groundbreaking

crusade against spammers. Not surprisingly, during last year’s Australian Service Excellence Awards, we enjoyed yet another bumper harvest at both national and state levels. Indeed, we have a record – going right back to our inception – to receive awards wherever we operate.

And for good reasons.

SAFE, PREDICTABLE…AND EXCITING PACIFIC INTERNET

There are few certainties in life. Unless you’re talking about Pacific Internet. Because our customers can be sure of a number of things when they sign up with us. For one, we’re certainly more than just an Internet service provider. Our offerings go way beyond World Wide Web access to encompass a comprehensive range of value added services, including Security, Wireless, Voice, Mobility and Collaboration solutions. As a seasoned player in niche markets ourselves, we offer ready-to-use services for small and medium businesses (SMBs) and customized solutions for enterprises. So, as typified by the customized services in the last year for the Philippines’ Metrobank and Hong Kong’s hotel industry, we always innovate around our customers’ needs.

Pacific Internet Limited annual report 2004

What do DJs at Virgin Radio Thailand have in common with doctors across Hunter Valley, Australia? Or customers of a leading Filipino bank with guests at Hong Kong’s best hotels?

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Our full suite of Internet-based communications services is proving to be a boon for the growing number of businesses. From Virtual Private Networks (VPNs) to secured access solutions, we’re cost-effectively crafting infrastructures and mechanisms for companies that are most vulnerable and do not have the deep pockets of international conglomerates.

As well, our Asia Pacific footprint favors us with a capacity to help enhance our customers’ regional operations. Among other conveniences, we provide their geographically dispersed worksites with a single point of contact, 24/7 technical backup and consistency in standards across the region. With these advantages, you’ll see why our multinational clientele includes the time-zone-straddling real estate company Ascendas and regional media firm Asia City Publishing Group.

Most certainly and crucially, our network carries multiple redundancies to deny any single point of failure. Which is why we’re an Internet communications service provider known to have remained in service through major outages and even natural disasters like earthquakes. We’re able to deliver this compelling benefit primarily because we’re a telco-neutral Internet communications service provider with no obligation to push any “house-brand” services, but rather with the freedom to offer our customers the best-of-breed technologies obtained from numerous partners.

GOING FORWARD, GOING PLACES

Pacific Internet is headquartered in Singapore, whose famously efficient government is determined to establish the country as one of the world’s premier infocomm capitals. We’re equally determined to be a primary engine of that transformation as a strategic way to extend our reach. For starters, we’re on track to become the Republic’s only multi-wire broadband operator (DSL, cable modem and wireless) – thereby giving local customers even wider coverage, greater choice and more value.

Another near-term goal is to harness the synergies of our operations in Singapore, Malaysia, Thailand and the Philippines as these countries and the other six member-states of ASEAN combine into a unified, free-trade market. We’re well-positioned to extend our four-nation presence into a tentacular span of this regional grouping, thereby serving as a single point of entry to a customer base supplied by millions of businesses and consumers.

Naturally, we intend to continue leveraging our telco-neutral position to diversify our offerings. We’re also constantly on the lookout for opportunities with our partners to service businesses in the region. There are countless companies in Asia Pacific that are in need of products and services we provide.

And we’re well positioned to fulfil their needs.


INDIA

Legend

••

HQ Main Hub City

Main Hub

PoP Point of Presence

Pacific Internet Inter-Country Link

Internet Link

Inter-City Backbone

Reach VSNL i2i

Mumbai

Bangalore

New Delhi

Pune

Reach PI-SG TM Net

STIX Flag Telecom MCI T-System Asia Netcom AT&T FRANCE Telecom Reach Qwest

Regional Connectivity

Chennai

THAILAND

SINGAPORE

AUSTRALIA

THE PHILIPPINES

MALAYSIA

T-System Reach HGC MCI China Motion PI-SG

Globe Teleglobe PI-SG PI-HK

New Delhi

Bangkok

Pulau Penang

Kuala Lumpur

Johor Bahru

Perth

Adelaide

Melbourne

Sydney

Newcastle

Brisbane

Optus Telstra MCI

PI-HK PI-SG llG

Manila

HONG KONG

Letter from the Chairman of the Board

It’s always a pleasure to be a bearer of good news, so I’m pleased to write you this letter to report Pacific Internet’s performance in 2004.

To begin with, we achieved our third straight year of positive net income on the back of 12 consecutive profitable quarters. Once again, the company has proven that it is able to deliver consistently strong results by executing its strategy with discipline, tracking trends and acting against obstacles to growth.

The Board and the Management’s ability to focus on the core business and take necessary bold steps to shape the company’s long-term growth is key to its success thus far and in the years to come. We are seeing the results of the groundwork that was laid during the past several years.

Pacific Internet has reasons to celebrate. Our accomplishments in the last year have placed us in a position to reach crucial goals in the coming quarters. Let me briefly describe the most important results achieved in 2004.

During the year, we more than doubled our net income to S$10.1 million (or US$6.2 million), compared with S$4.8 million (US$3.0 million) in 2003. Amidst intense competition and falling ARPU due to pricing pressure, we grew our revenues from S$167.5 million (US$102.6 million) in 2003 to S$169.8 million (US$104.0 million). Our focus is on the corporate segment and we plan for growth in this segment to outpace contribution from the consumer segment.

We generated positive cash flow from operations in each quarter last year (as we have for the 12 quarters before), and maintained our gross margin above 55% - a clear indication of our ability to add value to our core access business and to manage costs of sales and processes efficiently. We further strengthened our financial health by closing the fiscal year with cash and cash equivalents of S$58.0 million (US$35.5 million), up from S$41.9 million (US$25.7 million) the year before.

Five out of our seven country operations have already contributed positive net income to the Group – Singapore, Australia, Hong Kong, Thailand, and The Philippines.

These results reflect Pacific Internet’s progress as we pursue the vision of creating the most trusted brand for Internet communications services in the Asia Pacific region.Our market-share gains, our strong cash position and our secured access product portfolio – either already available or in the midst of rollout with our solutions partners – will continue to pull us away from the pack.

Moreover, we’re primed to ensure that our success to date will continue. Our Board and Management are focused on the company’s objectives and have mapped out the strategy to grow our business consistently.

Our good results last year would not be possible if not for the contributions of the Management and staff. On behalf of the Board of Directors, I congratulate them on their success and thank them for their contributions.

To our shareholders, we appreciate your walking the path of growth with us last year, and hope to retain your companionship in the years ahead.

Low Sin LengChairman of the Board

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Dear Shareholders

Letter from the President and Chief Executive Officer

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We are proud to report another year of significant accomplishments culminating in the doubling of our full-year net income in 2004. Among the achievements are our growth of the business from regional subsidiaries, an increase in the number of multi-site corporate accounts, conversion of domestic corporate accounts into regional accounts, expansion of inter-country bandwidth, new partnerships to offer effective solutions, and various wireless initiatives. These strategic thrusts served us well in 2004. And they will yield even more benefits in 2005 and beyond as we continue with the upturn in our growth cycle.

Our priority is to build a company that delivers strong and consistent financials and a brand that is trusted by allour stakeholders. This trust must be established through a disciplined execution of our strategy, a constant demonstration of superior service, and a commitment to make Pacific Internet a company easy to work with and great to work for.

OUR STRATEGIC ANCHOR

A key part of our strategy is to anchor ourselves in the corporate business segment, which contributed 59% of total revenues in 2004. We intend to strengthen ourselves in this segment and turn it into our primary growth engine.

The corporate segment includes the Small & Medium Businesses or SMBs, and the Enterprise Businesses. The potential for these segments is enormous in Asia Pacific where there are millions of Small-Offices-Home-Offices, mid-size domestic companies and regional enterprises. SMBs in particular are driving the rapid adoption of corporate broadband services - the core of our business.

We can lead in the SMB segment by combining our deep understanding of SMBs’ challenges, and our regional reach, with the vertical market strengths of our diverse group of partners. This way, we can provide

effective SMB solutions that cater to specific vertical communications needs.

We will also be effective in our endeavour to serve the Enterprise segment, especially with secured access being our forte. Our partnership arrangements with solution market leaders further enhance our ability to serve in this segment.

OUR VALUE PROPOSITION

Pacific Internet is competing on value, rather than on price and speed. An integral part of this value creation process is about fortifying our Internet offerings to address business concerns. It is also about translating our understanding of customer needs into a value proposition. Pacific Internet’s value is driven by our unique Internet Communications Service Provider (ICSP) position. We believe we are the only pan-Asia Pacific regional service provider that can offer a complete suite of Internet Protocol (IP) based communications solutions beyond access services.

There are three strategic differentiators in our ICSP positioning: Secured Internet Services, Regional Network Services, and Wireless Services.

Secured Internet Services

Security is one of the most pressing corporate issues today. Every year, companies, particularly among the SMBs, lose millions of dollars through data loss, service disruptions, and frauds resulting from unauthorized intrusions and virus attacks.

We are approaching the market with a unique proposition of secured Internet services by integrating security solutions with our broadband offerings. By establishing ourselves as the definitive secured broadband service provider, we’ll be able to grow our business without getting bogged down in price wars.

Dear Shareholders

Letter from the President and Chief Executive Officer

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We are already seeing the fruits of our emphasis in value in a number of our markets, most notably in Australia, Singapore and Thailand. We will pursue this key differentiator aggressively in 2005, extending the coverage and depth of the initiative.

Regional Network Services

Businesses, especially among larger SMBs, are pushing beyond domestic boundaries. This regionalization trend is creating new demands for secured private communications between offices; communications services like voice; and outsourcing as a business option.

We are leveraging fully our regional coverage to address these trends. Unlike other domestically bound service providers, we can connect businesses and international telcos to more destinations directly on our regional IP network. We are capable of building virtual private network services for regional businesses on our secured network and provide reliable communications solutions for these customers. Simultaneously, we shield them from the complexities of dealing with multiple telcos across countries, allowing them to focus on their respective core businesses.

Our immediate plan is to enhance our network in South Asia with quality-of-service assurance to better meet the needs of businesses and global telco partners.

Wireless Services

Wireless technologies have advanced in recent years and are proving to be a reliable alternative for backhaul to fixed lines. With Intel’s work in the WiMax sphere, wireless is also widely seen as a viable large area access offering to businesses and individuals in the near future. In 2004, we moved into wireless with two successful trials in Singapore, using a combination of long-range, line-of-sight and wide area, non-line-of-sight technologies

together with wireless hotspots in residential and commercial buildings. The trials not only equipped us with the knowledge to take advantage of new wireless developments, we now have a clear option to employ wireless as a higher-quality infrastructural services at a much lower cost than those available from telco wholesalers.

We intend to go into fixed wireless implementation in 2005. This will immediately save cost as we avoid more expensive local loop charges. We can also offer wireless broadband and wireless leased lines to our customers, to whom we can provide better service because of our control of the infrastructure. Eventually, when we introduce the technology on a larger scale, we will be in a positionto also wholesale wireless services to other service providers.

OUR COMMITMENT TO OUR CUSTOMERS, AND TO OFFER MORE THAN JUST INTERNET

Our commitment to our customers remains the same. Pacific Internet’s focus on value creation for its customers will always include uncompromising standards of service. This means ensuring the customers of services and products at the right time, with the right balance between reliability, price, quality and service. As you will see elsewhere in this report, this unremitting dedication to customer satisfaction continues to win us awards across the region. Despite those outstanding achievements, we know that as soon as we’ve accepted a customer service accolade, we’re back on the journey. To us, customer service is not a destination. It will always be a commitment, a process of getting better.

The numerous initiatives undertaken last year were all geared toward making us more than just a plain Internet service provider. Offering more involves providing, together with our solutions partners, reliable Internet communications services beyond connectivity. Our goal

is to help businesses communicate securely and more efficiently. More also means we serve our customers beyond products, innovating around their needs to provide more choices, more value, more service, and more coverage.

These are exciting times in the Internet industry. Pacific Internet is part of that excitement, with strong financials and a positive growth profile. Our financial base and experienced team allow us to respond quickly to take advantage of opportunities. Our goal remains to be the leading regional Internet communications service provider that maximizes growth in shareholder value. We will continue to look for opportunities to capitalize on our strategic strengths and deliver outstanding results to all our stakeholders.

Thank you for entrusting us with your investment. We are relentless in our efforts to reward your confidence, and look forward to the year ahead knowing much progress was made in 2004 and much opportunity awaits us in 2005.

Tan Tong HaiPresident & Chief Executive Officer

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Board of Directors

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(From top left to bottom right)

1. Low Sin Leng Director and Chairman of the Board Chairman of Executive Committee Chairman of Compensation & Admin Committee

2. Tan Tong Hai Director, President and Chief Executive Officer

3. Dr. Lee Tsao Yuan Director and Chairman of Nominating Committee

4. Chong Phit Lian Director

5. Lawrence Wee Thiam Kim Director

6. Yeo Wee Kiong Director and Chairman of Litigation Committee

7. Stephen Yeo Siew Chye Director

8. David Wong Cheong Fook Director and Chairman of Audit Committee

9. Chua Kee Lock Director

10. Philip Yeo Special Advisor to the Board of Directors


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Board of Directors

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Low Sin LengDirector and Chairman of the BoardChairman of Executive CommitteeChairman of Compensation & Admin Committee

Ms Low was appointed as Chairman of the Board in February 2004. She was previously the Deputy Chairman from April 2002 and has served as a Director since December 2000. Ms Low is currently Senior Executive Director in the Chief Executive’s Office at SembCorp Industries Limited. Her previous appointments included Executive Vice President of Singapore Power where she also headed its telecom subsidiary SP Telecommunications as its Managing Director. Prior to Singapore Power, Ms Low served in various senior positions in the Singapore Government including the Ministries of Finance, Education and Trade & Industry.

Tan Tong HaiDirector, President and Chief Executive Officer

Mr Tan has been the President and Chief Executive Officer since March 2001. He has over 15 years of experience in the technology industry, 11 of which were with IBM. While at IBM, he held several senior appointments including General Manager of International Applications Solutions (IAS), a system integration service provider wholly owned by IBM Singapore. Mr Tan previously led StarHub Internet, one of Singapore’s major Internet service providers, and an Internet venture company focusing on incubator services for start-ups.Mr Tan is a member of the Singapore Chinese Chamberof Commerce & Industry IT advisory panel.

Dr. Lee Tsao YuanDirector and Chairman of Nominating Committee

Dr Lee was first appointed to the Board in October 2000. She also holds directorship positions in Keppel Corporation Limited, Oversea-Chinese Banking Corporation Limited and Skills Development Centre Pte Ltd where she is Executive Director. Dr Lee was previously Director of the

Institute of Policy Studies, Chairman of the International Trade Institute of Singapore and Governor of the United World College of South East Asia. She also served as a Nominated Member of Parliament in Singapore for two terms. Dr Lee holds a Bachelor of Economics and Statistics with First Class Honours from the University of Singapore and a Ph. D. in Economics from Harvard University.

Chong Phit LianDirector

Ms Chong was appointed as Director in April 2002. She is currently President and Chief Executive Officer of Singapore Mint and concurrently President and Chief Executive Officer of Singapore Precision Industries. She has served in various portfolios within the Singapore Technologies group of companies where she was involved in investment and acquisition of new businesses, corporate restructuring and divestment. Ms Chong is trained in production engineering, manufacturing technology and business administration.

Lawrence Wee Thiam KimDirector

Mr Wee was appointed to the Board in April 2002, bringing with him more than 20 years experience in the technology industry. He is currently President, Asia Pacific, of McAfee. Mr. Wee was previously Senior Vice President of Computer Sciences Corporation in Asia, and Vice President & Managing Director of Ariba Singapore. Mr Wee served most of his career with IBM where he held several senior positions in Asia.

Yeo Wee KiongDirector and Chairman of Litigation Committee

Mr Yeo has served as a Director since April 2002. He is currently Managing Director of Yeo Wee Kiong Law Corporation and was previously Senior Partner at Rajah and Tann and a Director at the former National Science


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& Technology Board. Mr Yeo currently also sits on the board of several listed companies and government linked companies. He holds a first class honours degree in Mechanical Engineering from the University of Singapore, an LLB (honours) from the University of London and an MBA from the National University of Singapore. He is a Barrister-at-Law with the Lincoln’s Inn in England and an advocate and solicitor in Singapore.

Stephen Yeo Siew ChyeDirector

Mr Yeo was appointed as a Director in January 2004. He sits on the Board of the Media Development Authority of Singapore and the Republic Polytechnic Board of Governors. Mr Yeo is currently President, Southeast Asia & India, at Electronic Data Systems Corporation. Prior to this, he served as Chief Executive Officer at the Singapore Computer Systems Ltd and Chief Executive Officer at the former National Computer Board. Mr Yeo has a Masters in Engineering Science from the Oxford University, an MBA from the University of Southern California and an MSc from the National University of Singapore.

David Wong Cheong FookDirector and Chairman of Audit Committee

Mr Wong was appointed to the Board in March 2004. He is Chairman of EM Services Pte Ltd and a Director at Oversea-Chinese Banking Corporation Limited, Bank of Singapore Ltd, Ascendas-MGM Funds Management Ltd, LMA International NV and Pan-United Marine Limited. Mr Wong was a Partner at Ernst & Young where he established and managed its Singapore consulting division. He was also Group Managing Director of Wearnes Technology, a division of Singapore-listed WBL Ltd, and a former pilot with the Republic of Singapore Air Force. Mr Wong holds a BA (Honours) in Economics and a MA from the University of Cambridge. He is also a Member of the Institute of Chartered Accountants in England and Wales and the Institute of Certified Public Accountants in Singapore.


Chua Kee LockDirector

Mr Chua was appointed as a Director in July 2004.He is currently Managing Director of Walden International, a US venture capital firm focusing in technology related investments in the USA and in Asia. He also sits on the Board of Logitech International S.A.- a US$3 billion company listed in Switzerland and on NASDAQ. Mr Chua is also a board member of Maris Stella High School in Singapore and Treasurer of MILK (Mainly I Love Kids) Fund. Mr Chua was previously President of MediaRing Ltd before joining Singapore-listed Intraco Limited as Chief Executive Officer and Natsteel Limited as Deputy President. Mr Chua has a BSc degree in Mechanical Engineering from the University of Wisconsin, and a MSc in Engineering from Stanford University.

Philip YeoSpecial Advisor to the Board of Directors

Mr Yeo has been a Special Advisor to the Board since October 1999 and was previously Chairman of the Board from March 1995 to May 1998. He is presently Chairman of the Agency for Science, Technology and Research (A*STAR, formerly the National Science & Technology Board) and Co-Chairman of the Economic Development Board (EDB). Mr Yeo was the Chairman of EDB from January 1986 to January 2001. During his EDB chairmanship, Mr Yeo redirected EDB’s focus to new areas of business which include promoting services, developing high-tech industries, nurturing local small and medium enterprises and encouraging Singapore companies to make direct investments abroad. Mr Yeo also served as the first Chairman of the National Computer Board from 1981 to 1987. He played a leading role in formulating and championing Singapore’s first national computerization plan to evolve the nation into the information age.

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Senior Management


SINGAPORE - HEADQUARTERSTan Tong Hai, President and Chief Executive Officer(Concurrently Managing Director, Malaysia)Mr Tan provides overall leadership for Pacific Internet’s offices in the region, working closely with the country heads. He is also responsible for the Singapore operations where the company is based. The Singapore headquarters serve as a hub for network operations and regional customer relationships. It also drives and coordinates activities in technology, customer service, marketing, finance and human resource. In 2002, Mr Tan expanded the footprint of the company with the opening of its seventh direct operations in Malaysia, where he is now covering as Managing Director.

SINGAPORE - HEADQUARTERSTay Kuan Ming, Senior Vice President, Group FinanceMr Tay joined Pacific Internet in August 2001 as the Financial Controller of its Singapore operations.He assumed overall corporate finance responsibility for the Group in 2003. Prior to Pacific Internet, Mr Tay was co-founder and head of finance of Warranty Plus Pte Ltd, the first auto warranty administration company in Asia. He has more than 13 years of finance and accounting experience with multinational corporations such as Ernst & Young, 3M and English China Clays International. Mr Tay is an Associate Chartered Accountant with the Institute of Chartered Accountants in England & Wales.

AUSTRALIADennis Muscat, Managing Director, AustraliaMr Muscat joined Pacific Internet in 1999 and co-founded the Australian operations. He was previously Finance Director of the company and was appointed Managing Director in 2001. Mr Muscat brings with him more than 15 years of senior IT management and finance experience. Prior to joining Pacific Internet, he held various management positions including Executive Manager of Finance at MITS Limited, Manager Group Accounting & Finance (Commodity Trading Division) with Fosters Brewing Group, and Management Consultant with SIP Pty Limited. Mr Muscat sits on the Board of the Service Providers Association Inc (SPAN), the national body that represents communications service providers in Australia.

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HONG KONGEddy Kuk Cho Yiu, Managing Director, Hong KongMr Kuk has been with Pacific Internet Hong Kong since 1997. He previously led the company’s sales team before assuming the current appointment in 2001. Mr Kuk brings to the company more than 12 years of sales and marketing experience in the IT industry, most notably in the Internet and systems integration businesses. Mr Kuk currently sits on the Executive Committee of the Hong Kong Internet Service Providers Association, Internet & Telecom Association of Hong Kong and Hong Kong Information Technology Federation.

THE PHILIPPINESJulia Theresa Yap, President and Managing Director, The PhilippinesMs Yap is a pioneer of commercial Internet in the Philippines when she established Primeworld Digital Systems, Inc. The company entered into a joint venture with Pacific Internet in 1997 with Ms Yap as President and Managing Director. Prior to Primeworld, Ms Yap was Vice President of Citibank Manila for nine years where she worked in areas like risk and relationship management for the Institutional Bank. Ms Yap was also previously with the National Economic Development Authority, the Central Bank of the Philippines and the Federal Reserve Bank of San Francisco. She is the current serving President and Board member of the Philippine Internet Services Organization.

THAILANDPrithayuth Nivasabutr, Managing Director, ThailandMr Nivasabutr joined Pacific Internet Thailand as its Managing Director in 2000, bringing with him extensive experience in the IT and payments industries. He was previously Director for MasterCard International in Thailand and founding Managing Director of Posnet Co. Ltd., a subsidiary of Thailand’s Samart Telecoms. Mr Nivasabutr had worked in the US with McDonnell Douglas Corporation where he managed both regional and national support services divisions.

INDIARaman Palaniappan, Executive Director, IndiaMr Palaniappan joined Pacific Internet as its head of Indian operations in 2003. Before that, he was with Nippecraft where he conceptualized and rolled out new digital products and built regional distribution network to drive the company’s business diversification efforts. Mr Palaniappan was previously with StarHub as part of the company’s pioneer team. He was a lead member of the consumer business and multimedia product development teams and subsequently assumed regional management position for international partnerships with operators in South Asia, Europe, and the United States.

Year in Review

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2004 offered many opportunities for the Pacific Internet Group – both the fruits of past decisions and the seeds of future successes.

We saw initial success of our strategy to shift our marketing focus to the corporate business segment, particularly the small-and-medium businesses and regional enterprises. For instance, in Australia we’re servicing about 200 Harvey World Travel outlets; and in Hong Kong, some 15 Hong Thai Travel Services branches and approximately 160 Centaline Property Agency offices.

As well, the alliances that we have established with telcos big and small, and with hundreds of channel and solutions partners in our countries of operation, ensure we’re well placed to grow our presence and product offerings domestically and regionally.

Another strategic decision that is beginning to pay off and will continue to do so in the years ahead is the variety of initiatives that we have undertaken to add value and convenience to our core data connection business. Last year saw us stepping up our efforts to play an industry- leading role with a wide array of Internet capabilities beyond plain connectivity service, including security, voice and video offerings.


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MORE THAN EVER,WE’RE MORE THAN JUST INTERNET

Businesses with a multi-site presence are leveraging our virtual private network services to communicate effectively. It uses our secured IP network and peering arrangements with multiple international and local partners to connect customers’ regional offices seamlessly.

In many cases, our clients once deployed separate networks for data, voice and video communications. Now we’re helping to reduce their operating expenses by converging all traffic through the same high-speed, high-quality and cost-effective IP network.

Our comprehensive suite of Internet services – Security, Voice, Wireless, Mobility and Collaboration – serve to ensure instant, reliable and cost-effective connectivity 24/7/365 within office, from remote offices and between regional offices. We are committed to extending the utility of customers’ existing investments in data connections with innovative communications services, which include voice, video and wireless services.

Herewith, a look back on our activities of the past year in our country markets.

SINGAPORE

We have our roots and corporate headquarters in this city-state, where a cosmopolitan and plugged-in populace provides the ideal test bed for many of our products and services. As coordinating center for our regional operations, our Singapore headquarters also serve to provide a single contact point for our growing base of corporate customers with multiple offices in the region.

We are the only service provider to offer both ADSL and cable broadband access in the country, and have embarked on wireless broadband trials to create a third access choice to Internet users. We are also adding more value by combining our voice offering with data solutions.

2004 highlights:• Spearheaded commercial launch of Asia’s first neutral

Peering Point for GPRS roaming• Appointed by Ascendas to service its technology park

tenants in Singapore and potentially across the region• Rolled out corporate voice service as a value-added

service to Internet connectivity• Conducted wireless broadband trials in residential

and commercial buildings


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• Selected by the Hunter Urban Division of General Practice (HUDGP) to deliver a secured, high-speed solution for managing information to health practitioners

• Exclusively selected by the Australian Communications Authority (ACA) in a ground-breaking program to help hunt down online spammers

HONG KONG

Like Singapore, the Special Administrative Territory is a technologically and economically advanced market. Their fast pace of life ensures that Hongkongers are early adoptors of the newest technologies. Our core clientele here comprises corporations of different sizes, with corporate broadband contributing the majority of overall revenues.

Amidst an intensely competitive environment where over 200 companies are licensed to provide Internet services, the Hong Kong office is holding its own as one of the market leaders in the richly fertile corporate broadband segment. In fact, we have established an additional revenue stream with the development of value-added services to service the Greater China market, especially in the wake of the relocation of backend operations to the mainland.


Year in Review

AUSTRALIA

We had a successful year in Australia in 2004. We picked up a raft of prestigious assignments, along with the country’s top accolades for the communications industry.Our operations Down Under provide constant validation of our current strategic focus on high-value corporate customers, such as nation-wide retail and travel chains, and on claiming market leadership with product differentiation by offering cutting-edge value-added services. As a result, our brand is becoming synonymous with “secured broadband” in the country. Additionally, we’ve positioned Pacific Internet as the ICSP for Australia’s many Small-Offices- Home-Offices as well as business and community association groups.

2004 highlights:• Conducted pioneering broadband survey on the

SMBs, “The Pacific Internet Broadband Barometer”, with leading industry analyst, ACNielsen.consult

• Swept the Australian Service Excellence Awards with four major titles

• Recognized by the Service Providers' Association (SPAN) for "Providing Leadership in Industry Growth" at the 2004 Telecommunications Achievement Awards

2004 highlights:• Inaugurated Private Network service to provide

enhanced confidentiality for business communications• Sealed partnership with a major telco operator to resell

broadband services• Launched Email Outsourcing service, a cost-efficient

and flexible web-based solution

THAILAND

Barely a half-decade old, our Thai office is on the right track in executing the Group’s focus on corporate customers. In the last couple of years, we’ve been riding the general economic upturn by registering one of the most robust growth in the corporate business sector among Thailand’s active Internet service providers. Indeed, corporate business accounts for most of our annual revenues. Following our first profitable year in the country, we’ve joined forces with a leading provider of open-source based security software to offer small-and-medium businesses secured Internet access solutions. This collaboration is typical of the formidable partnerships that we have forged, in particular with the telcos, to widen our national coverage and regional reach. In 2004, our Thai office consolidated it’s growing position in the Kingdom with several high profile deals.

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2004 highlights• Appointed official Internet service provider for the

GoodNet project, a national initiative to transform cybercafes into knowledge hubs

• Tapped by Virgin Radio to furnish end-to-end applications, including online broadcasts

• Partnered with award-winning Astaro to offer a comprehensive suite of managed security solutions for small and large enterprises

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Year in Review

INDIA

Established in 2000, our India office operates in Bangalore, Mumbai, Pune, Delhi, and Chennai, and is focused solely on the corporate business segment. There are more than a hundred operational Internet service providers; but we have been able to stand tall with our unique regional proposition. In line with the Group’s overarching strategy, our Indian operations have streamlined its appeal to regional enterprises, in particular, providing them global roaming solutions from our partners. Our operations in India achieved three quarters of positive cash flow in 2004.

2004 highlights:• Engaged to provide communications services to

tenants of International Tech Park in Bangalore• Established a new Point-of-Presence (PoP) in

Chennai to service proliferating Asian regional enterprises with Indian offices

• Created partnership with a global carrier to enhance our current enterprise data services

• Entered into partnerships with local telcos to establish points of interconnection in Bangalore and Mumbai to reduce the local provisioning lead time for customers

THE PHILIPPINES

One of our most vibrant markets, this sprawling archipelago presents both challenges and potential in abundance. Competition is rife, but new avenues of opportunities are constantly opening up beyond Metro Manila. Ranked as the leading player in the consumer market and among the top in the corporate business segment, we have been quick to sew up deals fulfilling requirements for the whole range of Internet users from consumers to small businesses and enterprises. Alongside the growth of broadband in the consumer space, we see a strong growth in the prepaid segment vis-à-vis postpaid Internet usage. Our position in this volatile market necessitates innovative positioning and aggressive sales efforts to optimize our quality+affordability proposition.

2004 highlights:• Forged an aggregated Internet connectivity solution

from multiple telcos for Metrobank• Named the Most Outstanding Internet Service Provider

at the 19th National Consumers Excellence Awards and Best ISP in the 2nd Shoppers’ Choice Awards

• Established SurfMaxx as the 2nd leading prepaid Internet card brand in the Philippines

31


MALAYSIA

This is the youngest of our seven country markets. Here, we’re focused on extending our network – currently consisting of six Points of Presence (PoPs) from Penang in the north to Johor in the south – to support our growing position in the corporate sector, in tandem with our growth elsewhere. The plan is to create a seamless link between Singapore, Malaysia and Thailand to position ourselves as the service provider of choice for regional businesses with presence in these countries. For our offerings, we’re positioned to help drive broadband into mainstream usage, at the same time that we’re designing and building customized virtual private networks for organizations in the country.

2004 highlights:• Instituted a redundancy network from Penang

to Johor Bahru• Acquired a 45Mbps line to Singapore to equip

Malaysia with sufficient capacity to support the growing needs of regional customers

Financial Highlights

32

2000 2001 2002 2003 2004(in millions, except share data and per share amounts) S$ S$ S$ S$ S$ US$(5)

Consolidated Statements of Operations Data Total gross revenues 106.2 141.1 157.0 167.5 169.8 104.0 Total net revenues 109.3 141.1 157.0 167.5 169.8 104.0 Operating (loss) income (18.3) (13.4) 8.1 8.2 12.1 7.4 Net (loss) income (22.4) (15.0) 2.9 4.8 10.1 6.2 Net (loss) income per share – basic (1) (1.75) (1.17) 0.23 0.37 0.77 0.47 Net (loss) income per share – diluted (2) (1.75) (1.17) 0.23 0.36 0.75 0.46 Weighted average number of shares outstanding – basic (1) 12,794,193 12,815,066 12,815,066 12,985,036 13,238,793 13,238,793 Weighted average number of shares outstanding – diluted (2) 12,794,193 12,815,066 12,815,066 13,249,096 13,429,615 13,429,615

Consolidated Balance Sheets Data Cash and cash equivalents 18.3 24.0 35.2 41.9 58.0 35.5 Intangible assets and goodwill 36.6 28.3 27.6 29.7 28.8 17.6 Total assets 141.4 133.1 130.0 132.7 144.4 88.5 Total debt (3) 21.6 24.6 17.1 4.9 4.5 2.7 Total shareholders’ equity 73.7 61.9 65.9 78.0 90.6 55.5

Other Operating Data Capital expenditures (4) 14.3 8.0 5.5 5.7 8.0 4.9 Cash flows from: Operating activities (4.8) 9.0 22.7 16.8 23.4 14.3 Investing activities (36.6) (3.3) (5.9) (6.2) (8.2) (5.0) Financing activities 5.8 (0.1) (5.5) (4.4) 1.0 0.6

(1) Based on the weighted average number of shares deemed to be outstanding during the period.(2) Includes the dilutive effect of all outstanding options under the Group’s share option plans.(3) Includes capital lease obligations, bank borrowings and non-trade payables to related parties but excludes payables to related parties arising from transactions in the ordinary course of business.(4) The amounts shown above for capital expenditures are equal to the sums of the amounts presented on the Group’s Consolidated Statements of Cash Flows as “cash flows from investing activities – acquisition of fixed assets’’.(5) For convenience, Singapore dollar amounts have been translated into U.S. dollar amounts at the exchange rate as of December 31, 2004, which was S$1.6319 to US$1.00.


Revenues for FY2004

180

150

120

90

60

30

0 ‘00 ‘01 ‘02 ‘03 ‘04

Total Revenues(S$M)

12

10

8

6

4

2

0

Net Income(S$M)

‘00 ‘01 ‘02 ‘03 ‘04

100

80

60

40

20

0

Shareholders’ Equity(S$M)

‘00 ‘01 ‘02 ‘03 ‘04

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

Diluted EPS(cents)

‘00 ‘01 ‘02 ‘03 ‘04

33

Revenues by GeographicalAreas for FY2003

Pacifi c Internet Limited annual report 2004

Singapore 52%

Hong Kong 20%

Australia 19%

The Philippines 8%

Malaysia 1%20%

52%

19%

8% 1%

Revenues by GeographicalAreas for FY2004

Singapore 48%

Australia 24%

Hong Kong 20%

The Philippines 7%

Malaysia 1%24%

48%

20%

7% 1%

23%

47%

12%

11%

7%

Broadband access 47%

Dial-up access 23%

Leased line access 12%

Value added access 11%

Other Revenues 7%

Revenues for FY2003

29%

40%

14%

9%

8%

Broadband access 40%

Dial-up access 29%

Leased line access 14%

Value added access 9%

Other Revenues 8%

106.

2

141.

1 157.

0 167.

5

169.

8

10.1

4.8

2.9

22.4 15

.0

73.7

61.9 65

.9

78.0

90.6

1.75 1.

17

0.75

0.36

0.23

Business Highlights

Pacific Internet provides a comprehensive suite of secured Internet data, voice and video services through its regional Internet Protocol network to more than 470,000 corporate businesses and consumers in the Asia Pacific region.

Total Subscriber Base by Country

Total Subscribers: 470,820

India1,210

The Philippines138,140

Australia61,480

Hong Kong90,860

Singapore158,420

Value Added Services Revenue (S$’000)

2003

2002

2001

15,702

13,012

9,994

200418,364

Broadband Customers

2003

2002

2001

58,030

37,070

17,000

200466,830

Corporate Customers

2003

2002

2001

20,000

90,690

77,220

66,310

2004100,660


34

Malaysia70

Thailand20,640

40,000 60,000 80,000 100,000 120,000

20,000 40,000 80,000

5,000 10,000 15,000 20,000

60,000

Dial-up subscriber base by geography*

Dec2004

Dec2003

Singapore 123,020 138,130

Malaysia 10 10

Hong Kong 74,020 88,650

Australia 33,340 37,220

The Philippines 137,740 92,930

Total for consolidated companies 368,130 356,940

India** 1,040 1,650

Thailand** 19,790 19,120

Total 388,960 377,710

* All numbers are rounded to the nearest 10.** Results of India and Thailand operations are equity accounted for.

35

Management Discussion & AnalysisFor the Year Ended December 31, 2004

DISCUSSION OF RESULTS OF OPERATIONS The Group ended 2004 with total revenues of S$169.8 million (US$104.0 million), up 1.4% from last year. The Group achieved a full year profit of S$10.1 million (US$6.2 million), more than doubled last year’s profit of S$4.8 million (US$3.0 million). The following is a detailed discussion of this year’s operating results. REVENUES Net revenue for the year increased by 1.4% compared to last year. This was mainly contributed by the increase in broadband and value added services. Dial-up Access Dial-up revenue for the year was S$38.7 million (US$23.7 million), accounting for 22.8% of total revenues, down from 28.5% one year ago at S$47.8 million (US$29.3 million). The Group ended the year with 388,960 dial-up subscribers, a 3.0% improvement from a year ago. As noted in the past trends, the Group’s more Internet savvy dial-up customers continued to migrate to higher-speed access i.e. broadband. The increase in the subscribers in the Philippines was largely from the lower priced prepaid service compared to the traditional post paid dial-up services.

Dial-Up Subscriber Base byGeographical Location for FY2003

24.5%

36.6%

23.5%

9.9%5.1%

Dial-Up Subscriber Base by Geographical Location for FY 2004

The Philippines 35.4%

Singapore 31.6%

Hong Kong 19.0%

Australia 8.6%

Thailand 5.1%

India 0.3% 31.6%

35.4%

19.0%

8.6%5.1% 0.3%

Singapore 36.6%


Hong Kong 23.5%

Australia 9.9%

Thailand 5.1%

India 0.4%

0.4%


The strong growth in broadband revenue was principally driven by the increase in corporate broadband subscribers in Singapore, Hong Kong and Australia. For the year ended December 31, 2004, PacNet Australia’s broadband revenue increased 48.6% whilst subscriber base increased almost double to 17,160. For the same period,PacNet Singapore improved its broadband revenue by 13.3% to S$33.7 million (US$20.6 million). PacNet Hong Kong also recorded a healthy broadband revenue growth of 7.2% for the year compared to last year. The increase in broadband revenue from the growth in subscriber base was partially offset by reduction brought about by decreasing broadband average revenue per user (“ARPU”).


36


Broadband Access

Broadband revenue for the year rose 19.7% to S$80.1 million (US$49.1 million) compared to last year. As of December 31, 2004, the Group had 66,830 broadband subscribers, a growth of 15.2% over the previous year.

Broadband subscriber base by geography*

Dec2004

Dec2003

Singapore 34,250 34,260

Hong Kong 14,910 13,200

Australia 17,160 10,320

The Philippines 170 100


Thailand** 340 150

Total 66,830 58,030

* All numbers are rounded to the nearest 10.** Results of Thailand operations are equity accounted for.

Broadband Subscriber Base byGeographical Location for FY2004

25.7%

51.2%22.3%

0.5%

Singapore 51.2%

Australia 25.7%

Hong Kong 22.3%

Thailand 0.5% The Philippines 0.3%

0.3%

Broadband Subscriber Base byGeographical Location for FY2003

22.7%

59.0%17.8%0.3%

Singapore 59.0%

Hong Kong 22.7%

Australia 17.8%

Thailand 0.3%


0.2%

Value-Added Services (“VAS”)

The Group currently provides a variety of VAS. This includes, amongst others, global roaming, web-hosting, anti-virus solutions, wireless access, data services and voice services etc. VAS revenue grew to S$18.4 million (US$11.3 million) this year, representing an increase of 14.5% year-on-year. Commission Revenue Commission revenue relates to travel commission generated by the Group’s travel arm – Safe2Travel Pte Ltd (“Safe2Travel”), which is the second largest corporate travel-ticketing agent in Singapore.

37


In terms of revenue mix, broadband revenue contributed 47.2% of the Group’s revenue for the year, an increase from 40.0% contribution one year ago. Moving forward, PacNet expects broadband to continue to be the key revenue driver. Leased Line Access Leased line revenue for the year was S$21.0 million (US$12.9 million), representing a decline of 8.3% when compared to last year. The reduction in consolidated subscriber base was a result of the small-and-medium businesses turning to more affordable corporate broadband alternatives.

In summary, revenues declined largely due to migration from existing leased line to more affordable alternatives and erosion of ARPU.

Leased line subscriber base by geography*

Dec2004

Dec2003

Singapore 540 640

Malaysia 30 30

Hong Kong 210 260

Australia 140 100

The Philippines 190 160


India** 100 60

Thailand** 390 260

Total 1,600 1,510

Leased Line Subscriber Base by Geographical Location for FY2004

13.1%

33.7%8.7%

6.3% 1.9%

Leased Line Subscriber Base by Geographical Location for FY2003

17.2%

42.4%6.6%4.0% 2.0%

Singapore 33.7%

Thailand 24.4%

Hong Kong 13.1%


Australia 8.7%

India 6.3%

Malaysia 1.9% 24.4%

11.9%

17.2%

10.6%Singapore 42.4%

Thailand 17.2%

Hong Kong 17.2%


Australia 6.6%

India 4.0%

Malaysia 2.0%

* All numbers are rounded to the nearest 10.** Results of India and Thailand operations are equity accounted for.


38


Safe2Travel applies Emerging Issue Task Force No. 99-19 (“EITF 99-19”), Reporting Revenue Gross as a Principal Versus Net as an Agent, in the recognition of commission revenues. As such, all air-ticketing revenues are recorded at the net amount, i.e. the amount charged to the customer less the amount payable/paid to the airlines. For this year, Safe2Travel earned total commission revenue of S$6.5 million (US$4.0 million), representing 5.0% of its gross ticket sales of S$130.7 million (US$80.1 million). Although the commission revenues are recorded net, Safe2travel’s accounts receivables and payables are recorded at the gross amounts charged to the customer and payable to the airlines, respectively. This partly explains the significant balance of accounts receivable and payables in the Group’s balance sheet relative to its revenues and cost of sales. As of December 31, 2004, Safe2Travel’s gross accounts receivable and accounts payables was S$10.3 million (US$6.3 million) and S$3.3 million (US$2.0 million), respectively. Commission revenue for the year registered a decrease of 4.0% when compared to last year, this was due to intense competition faced by the travel industry. Other revenues Other revenues include interconnect revenue, e-services revenue, online gaming revenue and system integration revenues. For the year, other revenues reduced by 28.4%, compared to one year ago. This was largely due to reduction in PacNet Singapore’s interconnect revenue and reduction in e-services revenue. The reduction in interconnect revenue was due to the expiry of the interconnect contract between PacNet Singapore and SingTel in September 2003.

OPERATING COSTS AND EXPENSES Cost of Sales The Group’s cost of sales consists mainly of ADSL wholesale charges, telecommunication costs in international leased circuits, leased line and monthly charges for the use of telephone lines to the Group’s modem pool. When compared to last year, cost of sales for the year increased 3.2% and gross margin for the year declined slightly from 55.9% to 55.1%. The reduction was due to competitive pricing pressure. Staff Costs Staff costs for the year was flat as compared to the previous year. The Group has adopted the disclosure-only provisions of SFAS 123 Accounting for Stock Based Compensation and applies Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (“APB 25”) and related interpretations in accounting for its employee stock-based compensation plans. The Group has elected to use the intrinsic value method prescribed in APB 25 to account for options issued to employees. For options issued to non-employees under its stock-based compensation plan, the Group has accounted for them as provided under SFAS 123. The fair value of the options granted is estimated using the Black-Scholes option-pricing model. Stock options granted under the 4th tranche of 1999 Stock Option Plan issued after January 18, 2001 are variable accounted for in accordance with EITF 00-23 Issues Relating to the Accounting for Stock Compensation under APB Opinion No.25 and FASB interpretation No.44, Issue 31 (“EITF 00-23 Issue 31”). As of December 31, 2004, there are 87,500 outstanding options with an exercise price of US$3.09, which are subject to variable accounting. A total compensation cost for the 4th tranche

39


stock options for the year was S$0.2 million(US$0.1 million) as compared to S$2.1 million (US$1.3 million) last year.

The total stock-based compensation cost recognized by the Group for the year was S$0.8 million (US$0.5 million) compared to S$2.4 million (US$1.5 million) last year. Excluding the effects of stock-based compensation cost, staff costs as a percentage of gross revenues was 29.0% and 28.3% for this year and last year, respectively. The Group’s staff strength including the unconsolidated affiliates as at year-end was 1,119 compared to 1,122 one year ago. Sales and Marketing Expenses Sales and marketing expenses for the year was S$5.5 million (US$3.4 million). For the year, sales and marketing expenses showed a decrease of 8.1% compared to last year. This decline is a result of on-going efforts to achieve revenue growth without proportionate increase in sales and marketing expenses. Other General and Administrative Expenses

Other G&A consisted mainly of traveling expenses, office expenses and professional and consultancy fees. For the year, these were 9.1% of net revenues, compared to 10.1% last year. The Group will continue to monitor this closely to ensure that increase is in line with business growth. Depreciation and Amortization

Depreciation and amortization decreased 16.3% for the year ended December 31, 2004 compared to last year. The reduction is due to lower depreciation charges.

Allowance for Doubtful Accounts Receivable

For the year ended December 31, 2004, allowance for doubtful accounts receivables decreased 27.6% compared to last year, a result of more effective credit management.

Other income (expenses) Other income / (expenses) consisted largely of equity in gains of unconsolidated affiliates, net loss in foreign exchange and interest income earned. Equity in gain of unconsolidated affiliates was contributed by gain incurred by the Group’s operations in Thailand but offset by the loss in operations in India. Compared to 2003, the Group has recorded a gain in affiliates for the year, an increase of 225.4% due to better results from the affiliates. This trend is expected to continue as these operations mature and grow. Net loss in foreign exchange was mainly due to exchange differences arising from funding of operations in Hong Kong and The Philippines using Singapore dollars. These are largely due to the weakening of their currencies against the Singapore dollar. Cumulative Effect Adjustment In July 2001, the FASB issued SFAS 143 Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which

40


it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accredited at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Group will recognize a gain or loss on settlement. SFAS 143 is effective from January 1, 2003, and the charge for the cumulative effect up to December 31, 2002 recognized by the Group in the first quarter of 2003 was S$0.2 million (US$0.1 million). Extraordinary Item This relates to a gain arising from the acquisition of the balance of 7.89% shareholding in PacFusion Limited from the minority shareholder in January 2004 whereby the fair value of the attributable tangible assets acquired is in excess of the cost of acquisition. Net income The Group’s full-year net income of S$10.1 million (US$6.2 million) is a marked improvement from a full-year net income of S$4.8 million (US$3.0 million) one year ago. Revenue growth, effective costs management, better equity profit of associated companies were the main contributors to this improvement. A more effective tax rate across the Group and the extraordinary gain on acquisition of PF’s shares from minority interest also contributed to the improved results. Liquidity and Capital Resources As of December 31, 2004, the Group held cash and cash equivalents of S$58.0 million (US$35.5 million). Total cash generated for the year was S$16.2 million (US$10.0 million).

For the year ended December 31, 2004, operating activities generated cash of S$23.4 million (US$14.3 million) as a result of strong operating performance. This was offset by the outflow of S$8.2 million (US$5.0 million) in investing activities, which were mainly acquisition of fixed assets. Cash provided by financing activities amounted to S$1.0 million (US$0.6 million) primarily from the issue of ordinary shares through employees’ exercises of stock options pursuant to PacNet’s employee stock option plan.



41

Financial Contents

43 Report of the Directors51 Statement by Directors

US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES52 Report of Independent Auditors53 Consolidated Balance Sheets55 Consolidated Statements of Operations

and Comprehensive Income58 Consolidated Statements of Cash Flows60 Consolidated Statements of Shareholders’ Equity62 Notes to Consolidated Financial Statements

SINGAPORE FINANCIAL REPORTING STANDARDS108 Report of the Auditors to the Members

of Pacific Internet Limited109 Profit and Loss Accounts110 Balance Sheets112 Statements of Changes in Equity113 Statements of Cash Flows115 Notes to the Financial Statements


42

NOTES

The Company maintains its records and prepares its statutory financial statements in accordance with the provisions of the SingaporeCompanies Act, Cap 50. On January 15, 2005, the Company has obtained waivers granted by the Chief Executive Accounting & CorporateRegulatory Authority (formerly known as Registrar of Companies & Business) in Singapore from preparing, amongst others, consolidatedfinancial statements prepared in accordance with the Singapore Financial Reporting Standards (‘SING GAAP”)

With the waiver, the Company has prepared its consolidated financial statements in accordance with the generally accepted accountingprinciples in the United States of America (‘US GAAP), which is found at pages 52 - 107. A set of the Company’s audited accounts, preparedin accordance with SING GAAP, can be found at pages 108 - 144.

Please note that there are variances between some of the figures in the financial statements reported under US GAAP and those statedunder SING GAAP. These variances have arisen solely as a result of differences in certain accounting standards under the twoGAAP regimes. Some examples of the adjustments relate to: (1) capitalization and amortization of goodwill, (2) deferred income taxes,(3) stock-based compensation, and (4) asset retirement obligations.


43

Report of the Directors

The Directors have pleasure in presenting their report together with the audited financial statements of the Company and of the Groupfor the financial year ended 31 December 2004.

Directors

The names of the Directors in office at the date of this report are :-

Low Sin Leng (Chairman)Tsao Yuan Mrs Lee Soo AnnTan Tong HaiChong Phit LianWee Thiam Kim LawrenceYeo Wee KiongYeo Siew Chye (Appointed on 28 January 2004)Linda Hoon Siew Kin (Appointed on 11 May 2004 as alternate to Chong Phit Lian)Wong Cheong Fook David Cecil Vivian (Appointed on 8 March 2004)Chua Kee Lock (Appointed on 29 July 2004)

None of the Directors who held office at the end of the financial year had, according to the register required to be kept under Section164 of the Singapore Companies Act, any interest in shares, share options, warrants or debentures of the Company, or its relatedcompanies, either at the beginning of the financial year, or date of appointment if later, or at end of the financial year, except asfollows :

Holdings in the name of theDirector, spouse or infant children

At beginning of thefinancial year or date At end of the

of appointment financial year

Pacific Internet LimitedOrdinary shares of S$2 each

Wong Cheong Fook David Cecil Vivian - 1,300

Pacific Internet LimitedOptions to purchase ordinary shares of S$2 each (1)

Low Sin Leng 17,000 26,000Tsao Yuan Mrs Lee Soo Ann 6,000 15,000Chong Phit Lian 4,000 9,000Tan Tong Hai 195,000 170,000Wee Thiam Kim Lawrence 8,000 17,000Linda Hoon Siew Kin 13,000 10,000Yeo Wee Kiong - 9,000


44

Report of the Directors (continued)

Directors (continued)

Holdings in the name of theDirector, spouse or infant children

At beginning of thefinancial year or date At end of the

of appointment financial year

Pacfusion Limited(Related Corporation)Options to purchase ordinary shares of US$0.001 each (2)

Chong Phit Lian 30,000 30,000

(1) These options are granted under the 1998 and 1999 share options plans of the Company, subject to continued employment.These share options, upon vesting, are exercisable within the time periods ranging from 5 February 2000 to 24 March 2009 atprices ranging from US$3.09 to US$32.48 per share.

(2) These options are granted in two tranches under an equity incentive plan of Pacfusion Limited, a related corporation, subject tocontinued employment. For details regarding vesting schedules of these options, please refer to the Share Options section ofthis report. Upon vesting, these options are exercisable at US$0.59 per share.

Since the end of the previous financial year, no Director of the Company or the Group has received or has become entitled toreceive a benefit by reason of a contract made by the Company or a related corporation with the Director, or with a firm of whichthe Director is a member, or with a company in which the Director has a substantial financial interest, except those disclosed inthe financial statements.

Save as disclosed above, neither at the end of the financial year, nor at any time during that year, did there subsist anyarrangements, to which the Company is a party, to enable Directors of the Company to acquire benefits by means of theacquisition of shares in, warrants or debentures of, the Company or any other body corporate.


45


Share options

The Company

(a) 1998 Employee Share Option Plan (the “1998 ESOP”)

The 1998 ESOP was approved by the Company’s shareholders at an Extraordinary General Meeting held on 19 November1998. In connection with the adoption of the 1998 ESOP, it was determined that the Company will limit the issuance of optionsunder the 1998 ESOP such that the aggregate number of shares subject to outstanding options granted under the 1998 ESOPwill not at any time exceed 10% of the Company’s outstanding fully-diluted equity. The plan fully expired during the year.

As at 31 December 2004, pursuant to the 1998 ESOP, options to subscribe for up to 1,500,000 ordinary shares of S$2 eachhave been granted to the employees of the Company of which 1,498,500 were accepted and the consideration of S$1 for eachoffer accepted was received. The exercise price of the options is US$17 per share.

Options to subscribe for a total of 256,700 shares expired as the expiration date was due and no options were exercised duringthe financial year.

The options granted under the 1998 ESOP do not carry any right to participate in share issue of any other company.

(b) 1999 Share Option Plan (the “1999 SOP”)

On 10 November 1999, the Directors approved the 1999 SOP for certain eligible persons to subscribe for ordinary shares in theCompany. The maximum number of shares which may be granted under the 1999 SOP shall be the number together with thetotal number of options granted under the 1998 ESOP equals 20% of the Company then issued share capital on a fully dilutedbasis. The exercise price is the average of the officially quoted closing price of the Company’s shares on the NASDAQ’sNational Market System for the five trading days immediately preceding the date of grant.

On 10 November 1999, the Company issued the 1st tranche of options under the 1999 SOP. Options to subscribe for a totalof 647,000 shares were granted to eligible persons of which 622,600 were accepted. The exercise price per share of theseoptions is US$32.48.

No options were exercised and 320,600 options under the 1st tranche of options expired during the financial year.

On 25 April 2000, the Company issued the 2nd tranche of options under the 1999 SOP. Options to subscribe for a total of408,000 shares were granted to eligible persons of which 394,900 were accepted. The exercise price per share of theseoptions is US$25.60.


46


Share options (continued)

(b) 1999 Share Option Plan (the “1999 SOP”) (continued)

No options were exercised and 65,050 options were cancelled during the financial year. There is a balance of 94,600 sharessubject to options under the 2nd tranche of options as at 31 December 2004.

On 10 January 2001, the Company issued the 3rd tranche of options under the 1999 SOP. Options to subscribe for a total of804,000 shares were granted to eligible persons of which 725,950 were accepted. The exercise price per share of theseoptions is US$3.60.

122,511 options were exercised and 5,650 were cancelled during the financial year. There is a balance of 71,014 sharessubject to options under the 3rd tranche of options as at 31 December 2004.

On 10 April 2001, the Company issued the 4th tranche under the 1999 SOP. Options to subscribe for a total of 319,000 shareswere granted to eligible persons of which 316,800 were accepted. The exercise price per share of these options is US$3.09.

111,100 options were exercised and zero options were cancelled during the financial year. There is a balance of 87,500 sharessubject to options under the 4th tranche of options as at 31 December 2004.

On 18 August 2003, the Company issued the 5th tranche under the 1999 SOP. Options to subscribe for a total of 821,000shares were granted to eligible persons of which 707,800 were accepted. The exercise price per share of these optionsis S$11.22.

25,876 options were exercised and 134,560 options were cancelled during the financial year. There is a balance of 534,364shares subject to option under the 5th tranche of options as at 31 December 2004.

On 25 March 2004, the Company issued the 6th tranche under the 1999 SOP. Options to subscribe for a total of 781,000shares were granted to eligible persons of which 766,000 were accepted. The exercise price per share of these options isS$16.92.

No options were exercised and 88,000 options were cancelled during the financial year. There is a balance of 678,000 sharessubject to option under the 6th tranche of options as at 31 December 2004.

Up to 31 December 2004, pursuant to the 1999 SOP, options to subscribe up to 3,780,000 shares have been granted toeligible persons of which 3,534,050 were accepted.

The options granted under the 1999 SOP do not carry any rights to participate in share issues of any other company.


47



Information pertaining to Outstanding Options

At the end of the financial year, unissued ordinary shares of the Company under the 1998 ESOP and 1999 SOP were as follows :

Number and class of shares

1,465,478 ordinary shares of S$2 each arising from the 1999 SOP

Exercise Price

1998 Options - US$17 per share1999 Options (1st tranche) - US$32.48 per share1999 Options (2nd tranche) - US$25.60 per share1999 Options (3rd tranche) - US$3.60 per share1999 Options (4th tranche) - US$3.09 per share1999 Options (5th tranche) - S$11.22 per share1999 Options (6th tranche) - S$16.92 per share

Option Terms

1998 Options - From 5 February 1999 to 4 February 20041999 Options (1st tranche) - From 10 November 1999 to 9 November 20041999 Options (2nd tranche) - From 25 April 2000 to 24 April 20051999 Options (3rd tranche) - From 10 January 2001 to 9 January 20061999 Options (4th tranche) - From 10 April 2001 to 9 April 20061999 Options (5th tranche) - From 18 August 2003 to 17 August 20081999 Options (6th tranche) - From 25 March 2004 to 24 March 2009

Statutory and other information regarding the Options

(i) The 1998 ESOP and 1999 SOP are administered by the Compensation & Administrative Committee (“CAC”) which is thereconstitution and merger of the Compensation Committee and the Administrative Committee on 30 May 2002. It is a committeecomprised of members of the Board of Directors of the Company.

(ii) The Bank of New York has been appointed as the Stock Administrator for both Option Plans.

(iii) Pursuant to the resolutions passed by the CAC on 19 February 2004, one former Director was authorised to exercisehis options in full (including in respect of unvested shares) under the option agreements signed with the Company dated10 November 1999, 25 April 2000, 10 January 2001 and 18 August 2003 in respect of some or all of the shares at any timeprior to or on 18 February 2006, with effect from 19 February 2004.


48



Statutory and other information regarding the Options (continued)

(iv) The Options for 1998, 1999 (1st, 2nd, 3rd and 4th tranche) generally become exercisable as follows :

(a) 25% of the Options will vest and become exercisable on the first anniversary of the date of grant;

(b) an additional 25% of the Options will vest and become exercisable on the second anniversary of the date of grant; and

(c) the remaining 50% of the Options will vest and become exercisable on the third anniversary of the date of grant.

The Options for 1999 (5th and 6th) become exercisable as follows :


(b) an additional 33% of the Options will vest and become exercisable on the second anniversary of the date of grant; and


Subsidiary

(a) Equity Incentive Plan (“EIP”)

In August 2000, a subsidiary of the Company, Pacfusion Limited (“PF”) established the 2000 Equity Incentive Plan. Optionsto subscribe for up to 4,471,800 shares were granted on 8 August 2000 to employees and non-employees of PF at anexercise price of US$0.59 per share of which 4,227,000 were accepted.

Information pertaining to Outstanding Options

At the end of the financial year, the number of unissued ordinary shares of PF under the EIP are 850,200 at an exerciseprice of US$0.59 per share with a term not more than 4 years from the Initial Vesting Date as defined below.


The 2000 Equity Incentive Plan is administered by the Administrative Committee, a committee constituted by members ofthe Board of Directors of PF.


49



(a) Equity Incentive Plan (“EIP”) (continued)

The vesting schedule is as follows :

(a) 25% of the Options shall vest and become exercisable on the earlier of the date which is five years after the grantdate and the first date upon which the shares of PF are listed or approved for listing (the earlier of such dates beingthe ‘Initial Vesting Date’);

(b) an additional 25% of the Options shall vest and become exercisable on the first anniversary of the Initial VestingDate; and

(c) the remaining 50% of the Options shall vest and become exercisable on the second anniversary of the InitialVesting Date.

Audit CommitteeThe Audit Committee was established on 19 November 1998 and as at 31 December 2004 comprise the following members:

Non-Executive Directors:

Wong Cheong Fook David Cecil Vivian (Chairman, appointed on 8 March 2004)Tsao Yuan Mrs Lee Soo AnnYeo Wee Kiong

The Audit Committee has adopted an Audit Committee Charter to, among others, regulate and administer the proceedings of theCommittee. In the discharge of its functions, the Audit Committee may seek guidance from the best corporate governancepractices in Singapore, including without limitation the Code of Corporate Governance issued by the Corporate GovernanceCommittee in Singapore and the SGX Securities Trading Listing Manual issued by the Singapore Exchange Limited, to the extentthat such practices are not inconsistent with the regulatory requirements of the US Securities Exchange Commission or theNASDAQ National Stock Market applicable to it.

During the financial year, the Audit Committee met five times and has:

1. reviewed the audit plan and the scope of examination of the external auditors of the Group; and

2. evaluated the findings and recommendation of the external auditors’ review of the internal controls of the Group.

The Audit Committee recommends to the Board of Directors the nomination of Ernst & Young as external auditors for re-appointmentat the forthcoming annual general meeting of the Company.


50


AuditorsThe auditors, Ernst & Young, Certified Public Accountants, have expressed their willingness to accept re-appointment.

On behalf of the Board,

Low Sin LengDirector

Tan Tong HaiDirector

Singapore28 February 2005


51

Statement by DirectorsPursuant to Section 201(15) of the Companies Act, Cap. 50

We, Low Sin Leng and Tan Tong Hai, being two of the Directors of Pacific Internet Limited, do hereby state that, in the opinion ofthe Directors :

(i) the accompanying balance sheets, profit and loss accounts, statements of changes in equity and statements of cash flowtogether with notes set out on pages 109 to 144 are drawn up so as to give a true and fair view of the state of affairs of theCompany as at 31 December 2004, and the results of the business, changes in equity and cash flows of the Company for thefinancial year ended on that date;

(ii) the balance sheets, statements of operations and comprehensive income statements, statements of shareholders’ equity andstatements of cash flow together with notes set out on pages 53 to 107 are drawn up so as to give a true and fair view of thestate of affairs of the Group as at 31 December 2004, and the results of the business, changes in equity and cash flow of theGroup for the financial year ended on that date;

(iii) at the date of this statement there are reasonable grounds to believe that the Company and the Group will be able to pay itsdebts as and when they fall due.

On behalf of the Board,

Low Sin LengDirector

Tan Tong HaiDirector



52

Report of Independent AuditorsTo the Board of Directors and ShareholdersPacific Internet Limited

We have audited the accompanying consolidated balance sheets of Pacific Internet Limited as of December 31, 2004 and 2003,and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each ofthe three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriatein the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position ofPacific Internet Limited at December 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for eachof the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

As discussed in Note 3 and Note 24 of the consolidated financial statements, in 2003, the Company changed its method of accountingfor asset retirement obligations.

ERNST & YOUNG



53

Consolidated Balance Sheets(Singapore and U.S. Dollar Amounts in Thousands, except Share Data)

See accompanying notes

ASSETS

December 31,

2003 2004 2004

Note S$ S$ US$

Current assets:Cash and cash equivalents $ 41,905 $ 57,964 $ 35,519Accounts receivable, net of allowance for doubtful accounts

of S$3,680 and S$3,143 (US$1,926) atDecember 31, 2003 and 2004, respectively 26,869 25,174 15,426

Receivables from related parties 6 4,123 4,413 2,704Inventories 340 341 209Prepaid expenses and other current assets 7 3,356 2,651 1,624Loan receivable 13 - - -Deferred income taxes 20 1,620 1,468 900

Total current assets 78,213 92,011 56,382

Non-current assets:Investments in unconsolidated subsidiary and affiliates 8 2 2 1Long term investments 9 35 32 20Fixed assets – net 10 18,742 17,860 10,944Intangible assets 11 805 561 344Goodwill 12 28,903 28,206 17,284Loan receivable from unconsolidated affiliates 14 5,081 4,957 3,038Deposits and other assets 377 262 160Deferred income taxes 20 582 533 327

Total non-current assets 54,527 52,413 32,118

Total assets $ 132,740 $ 144,424 $ 88,500


54

Consolidated Balance Sheets (continued)

(Singapore and U.S. Dollar Amounts in Thousands, except Share Data)

LIABILITIES AND SHAREHOLDERS’ EQUITY

December 31,

2003 2004 2004

Note S$ S$ US$

Current liabilities:Bank borrowings 15,16 $ 2,644 $ 2,526 $ 1,548Accounts payable 13,500 9,858 6,041Payables to related parties 17 1,078 951 583Accrued expenses and other liabilities 18 24,990 26,553 16,271Deferred income 19 2,279 5,594 3,428Current portion of capital lease obligations

with unrelated parties 22 453 470 288Income tax payable 4,154 4,295 2,632

Total current liabilities 49,098 50,247 30,791

Non-current liabilities:Capital lease obligations with unrelated parties,

less current portion 22 704 524 321Deferred income taxes 20 1,878 1,554 952

Total non-current liabilities 2,582 2,078 1,273

Commitments 22

Minority interest 3,085 1,480 907

Shareholders’ equityOrdinary shares, S$2 par value; authorized 25,000,000 shares,

issued and outstanding 13,034,691 and 13,294,178 sharesat December 31, 2003 and 2004, respectively 26,069 26,588 16,293

Additional paid-in capital 95,733 97,636 59,829Accumulated other comprehensive income 1,312 1,366 837Accumulated deficit (45,031) (34,901) (21,387)Deferred compensation (108) (70) (43)

Total shareholders’ equity 77,975 90,619 55,529

Total liabilities and shareholders’ equity $ 132,740 $ 144,424 $ 88,500



55

Consolidated Statements of Operations and Comprehensive Income(Singapore and U.S. Dollar Amounts in Thousands, except Share and Per Share Data)


December 31,

2002 2003 2004 2004

Note S$ S$ S$ US$

RevenuesDial-up access $ 58,421 $ 47,792 $ 38,708 $ 23,719Broadband access 41,635 66,918 80,104 49,086Leased line access 25,818 22,934 21,038 12,892Value-added services 13,012 16,044 18,364 11,253Commission revenue 9,043 6,808 6,537 4,006Other (1) 9,101 6,997 5,008 3,069

157,030 167,493 169,759 104,025

Operating costs and expensesCost of sales 64,648 73,866 76,243 46,721Selling, general and administrative expenses (2) 4 69,490 72,702 70,998 43,506Depreciation 10,610 9,612 8,519 5,220Amortization of intangible assets 1,587 1,021 380 233Allowance for doubtful accounts receivable 23 2,639 2,079 1,506 923

Total operating expenses 148,974 159,280 157,646 96,603

Operating income 8,056 8,213 12,113 7,422

Other income (expense)Interest income 414 367 427 262Interest expense (3) (705) (251) (141) (87)Gain on disposal of quoted investment - 69 - -Equity in (loss) gain of unconsolidated affiliates (1,738) (244) 306 187Foreign exchange (loss) gain (695) 549 (425) (260)Others 5 919 317 347 213

Total other (expenses) income (1,805) 807 514 315


56

Consolidated Statements of Operations and Comprehensive Income (continued)

(Singapore and U.S. Dollar Amounts in Thousands, except Share and Per Share Data)

December 31,

2002 2003 2004 2004

Note S$ S$ S$ US$

Income before income taxes and minority interest 6,251 9,020 12,627 7,737Provision for income taxes 20 (4,199) (3,650) (3,143) (1,926)

2,052 5,370 9,484 5,811

Minority interest in loss (gain) ofconsolidated subsidiaries 838 (325) (97) (59)

Cumulative effect adjustment – net of tax 21 - (220) - -

Net income before extraordinary item 2,890 4,825 9,387 5,752Extraordinary item – net of tax of S$nil (US$ nil) 33 - - 743 455

2,890 4,825 10,130 6,207Other comprehensive income

Foreign currency translation 766 3,516 54 33Unrealized (loss) gain (net of income tax

of S$7 in 2003 and S$16 in 2002)in available-for-sale securities (50) 22 - -

Comprehensive income $ 3,606 $ 8,363 $ 10,184 $ 6,240



57

Consolidated Statements of Operations and Comprehensive Income (continued)

(Singapore and U.S. Dollar Amounts in Thousands, except Share and Per Share Data)

December 31,

2002 2003 2004 2004

Note S$ S$ S$ US$

Net income per share:Basic – before extraordinary item and

accounting change $ 0.23 $ 0.39 $ 0.71 $ 0.43Cumulative effect adjustment - (0.02) - -Extraordinary item - - 0.06 0.04

Basic – after extraordinary item andaccounting change $ 0.23 $ 0.37 $ 0.77 $ 0.47

Diluted – before extraordinary itemand accounting change $ 0.23 $ 0.38 $ 0.69 $ 0.42

Cumulative effect adjustment - (0.02) - -Extraordinary item - - 0.06 0.04

Diluted – after extraordinary itemand accounting change $ 0.23 $ 0.36 $ 0.75 $ 0.46

Weighted average number of ordinary shares outstanding:

Basic 12,815,066 12,985,036 13,238,793 13,238,793

Diluted 12,815,066 13,249,096 13,429,615 13,429,615

(1) Includes sales to:former intermediate parent company 74 172 45 28affiliated companies 986 590 626 384

(2) Includes management fee paid and payable to:former immediate parent company andformer intermediate parent company 4,26 120 - - -

(3) Includes interest paid to affiliated company 429 27 - -



58

Consolidated Statements of Cash Flows(Singapore and U.S. Dollar Amounts in Thousands)

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Cash flows from operating activities:Net income $ 2,890 $ 4,825 $ 10,130 $ 6,207Adjustment to reconcile net cash provided by

(used in) operating activities:Equity in loss (gain) of unconsolidated affiliates 1,738 244 (306) (187)Allowance for doubtful accounts receivable 2,639 2,079 1,506 923Depreciation 10,610 9,612 8,519 5,220Amortization of intangible assets 1,587 1,021 380 233Minority interest (838) 325 97 59Provision (Credit) for deferred income taxes 473 (860) (123) (75)Realized gain on disposal of quoted investment - (69) - -(Gain) loss on disposal of fixed assets (34) 53 26 16Write-off of fixed assets 215 26 21 13Amortization of deferred compensation 394 2,375 842 516Cumulative effect adjustment – net of tax - 220 - -Extraordinary item - - (743) (455)

Changes in operating assets and liabilities, net of effectsfrom business acquisition and dispositions:Accounts receivable, net 1,200 111 189 116Balances with related parties (1,560) (5,706) (111) (68)Inventories, net (318) 142 (1) (1)Prepaid expenses and other assets 958 87 820 503Accounts payable 1,827 770 (3,642) (2,232)Other payables (106) 552 2,350 1,440Deferred income (96) 16 3,315 2,031Income tax payable 1,112 968 141 86

Net cash provided by operating activities 22,691 16,791 23,410 14,345



59

Consolidated Statements of Cash Flows (continued)

(Singapore and U.S. Dollar Amounts in Thousands)

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Cash flows from investing activities:Acquisition of fixed assets (5,516) (5,735) (8,031) (4,921)Investment in an unconsolidated subsidiary - (429) - -Acquisition of minority interest - - (300) (184)Proceeds from disposal of fixed assets 246 153 282 173Purchase of short term investment (250) - - -Proceeds from disposal of short term investment - 250 - -Purchase of quoted equity investment - (63) - -Proceeds from disposal of quoted equity investment - 299 - -Purchase of intangible assets (165) (570) (156) (96)Loan to affiliates (220) (94) - -

Net cash used in investing activities (5,905) (6,189) (8,205) (5,028)

Cash flows from financing activities:Proceeds from bank borrowings 947 - 14 9Repayment of bank borrowings (1,631) (605) (132) (81)Repayment of capital lease obligations (780) (840) (465) (285)Repayment of loan from affiliates (4,050) (4,250) - -Proceeds from issuance of ordinary shares - 1,329 1,618 991

Net cash (used in) provided by financing activities (5,514) (4,366) 1,035 634

Net increase in cash and cash equivalents 11,272 6,236 16,240 9,951

Cash and cash equivalents at beginning of year 24,001 35,179 41,905 25,679

Effect of exchange rate changes on cashand cash equivalents (94) 490 (181) (111)

Cash and cash equivalents at end of year $ 35,179 $ 41,905 $ 57,964 $ 35,519

Supplemental disclosure of cash flow information:Cash paid during the year for interest $ 683 $ 242 $ 134 $ 82Cash paid for income taxes 2,649 3,012 3,261 1,998



60

Consolidated Statements of Shareholders’ Equity(Singapore and U.S. Dollar Amounts in Thousands, except Share Data)

AccumulatedAdditional other

Ordinary paid-in Accumulated comprehensive Deferredshares Amount capital deficit (loss) income compensation

< —————————————————————— Singapore $ ——————————————————

Balance at January 1, 2002 12,815,066 $ 25,631 $ 93,424 $ (52,746) $ (2,942) $ (1,459)Net income - - - 2,890 - -Deferred compensation relating

to options - - (683) - - 683Amortization of deferred compensation - - - - - 394Unrealized loss

(net of income tax of S$16)in available-for-sale securities - - - - (50) -

Foreign currency translation - - - - 766 -

Balance at December 31, 2002 12,815,066 25,631 92,741 (49,856) (2,226) (382)

Net income - - - 4,825 - -Issue of shares through the exercise

of share options 219,625 438 891 - - -Deferred compensation relating

to options - - 2,101 - - (2,101)Amortization of deferred compensation - - - - - 2,375Net unrealized gain

(net of income tax of S$7)in available-for-sale securities - - - - 22 -

Foreign currency translation - - - - 3,516 -

Balance at December 31, 2003 13,034,691 26,069 95,733 (45,031) 1,312 (108)

Net income - - - 10,130 - -Issue of shares through the exercise

of share options 259,487 519 1,099 - - -Deferred compensation relating to options - - 804 - - (804)Amortization of deferred compensation - - - - - 842Foreign currency translation - - - - 54 -

Balance at December 31, 2004 13,294,178 $ 26,588 $ 97,636 $ (34,901) $ 1,366 $ (70)



61

Consolidated Statements of Shareholders’ Equity (continued)

(Singapore and U.S. Dollar Amounts in Thousands, except Share Data)

Totalshareholders’

equity

——————————————————-->

$ 61,9082,890

-394

(50)766

65,908

4,825

1,329

-2,375

223,516

77,975

10,130

1,618-

84254

$ 90,619

AccumulatedAdditional other Total

paid-in Accumulated comprehensive Deferred shareholders’Amount capital deficit income compensation equity

<——————————————————————— US $ ——————————————————————>

15,975 58,664 (27,594) 804 (66) 47,783

- - 6,207 - - 6,207

318 672 - - - 990- 493 - - (493) -- - - - 516 516- - - 33 - 33

$ 16,293 $59,829 $ (21,387) $ 837 $ (43) $ 55,529



62

Notes to Consolidated Financial StatementsDecember 31, 2004(Amounts presented in thousands of Singapore and U.S. Dollar except Share Data or unless otherwise indicated)

1. Organization

Pacific Internet Limited (“Pacific Internet” or the “Company”), together with its subsidiaries and associated companies,is an Internet communications service provider in the Asia Pacific region. Incorporated in the Republic of Singapore onMarch 28, 1995 as Sembawang Media Pte Ltd, it changed its name to Pacific Internet Pte Ltd on March 17, 1998.On November 23, 1998, it was converted to a public company and was listed on NASDAQ on February 5, 1999.

Pacific Internet and its consolidated subsidiaries are hereinafter collectively referred to as the “Group”.

2. Business Acquisitions

Singapore

On June 9, 2000, Pacfusion.com Limited (subsequently known as Pacfusion Limited) was incorporated in Bermuda (“Pacfusion”).Pacfusion currently has an authorized share capital of 262,000,000 shares at par value of US$0.001 each and an issued andpaid-up capital of US$64,406.78 divided into 64,406,780 shares of US$0.001 each. In January 2004, the Company acquired5,084,746 ordinary shares of US$0.001 each, representing a 7.89% equity interest in Pacfusion, from the minority shareholderfor S$300 (US$184), in an effort of making Pacfusion a wholly-owned subsidiary. As a result, the Company increased its equityinterest in Pacfusion from 92.11% to 100%. On April 12, 2000, Pacfusion.com (Singapore) Pte Ltd was incorporated inSingapore and subsequently changed its name to Pacfusion.com Group Holdings Pte Ltd and then to Pacfusion GroupHoldings Pte Ltd and then to Pacific Internet Services Pte Ltd (“PI Services”). PI Services’ principal activities are those ofinvestment holding and electronic commerce and portal business. During 2000, Pacfusion.com (Malaysia) Sdn. Bhd.(subsequently known as Pacfusion (Malaysia) Sdn. Bhd.) (“PF Malaysia”), Pacfusion.com (Australia) Pty Limited (“PF Australia”)and TravelFusion.com Limited (“Travelfusion”) were also incorporated in Malaysia, Australia and Bermuda on April 19, 2000,May 8, 2000 and April 27, 2000, respectively. On March 14, 2000, Pacfusion.com (Thailand) Limited (“PF Thailand”) wasincorporated with PI Services holding 49.0% of its issued share capital. The Group also acquired a shell company andrenamed it Pacfusion.com (Hong Kong) Limited (“PF Hong Kong”) on March 8, 2000 for a nominal sum.

Safe2Travel.com Pte Ltd (subsequently known as Safe2Travel Pte Ltd) (“Safe2Travel”) was incorporated on April 8, 2000 toacquire the travel and travel related businesses from Safe & Mansfield Travel Group Pte Ltd (“SMTG”) for a purchase considerationof S$10,000. SMTG is an established International Air Transport Association (IATA) accredited travel agency in Singapore witha focus on the corporate travel market since its formation in 1918. In December 2000, an intercompany loan of S$9,962granted to Safe2Travel by Travelfusion was converted into equity. As a result, Travelfusion increased its interest in Safe2Travelfrom 85.0% to 92.5%. In September 2004, PI Services acquired 18,462,000 ordinary shares of S$1 each, representing 92.5%equity interest in Safe2Travel, from Travelfusion for S$18,462. As a result, PI Services became the immediate holding companyof Safe2Travel.

During 2002, the Group conducted a restructuring exercise on its dormant subsidiaries. PF Hong Kong was deregistered witheffect from December 13, 2002.


63

Notes to Consolidated Financial Statements (continued)

December 31, 2004(Amounts presented in thousands of Singapore and U.S. Dollar except Share Data or unless otherwise indicated)

2. Business Acquisitions (continued)

In December 2003, PF Thailand commenced liquidation.

In February 2004, PF Australia was deregistered. In March 2004, PF Malaysia was officially dissolved under Members’ VoluntaryLiquidation.

In December 2004, the Company acquired 2 ordinary shares of $1 each, representing 100% equity interest in PI Services,from Pacfusion for a nominal sum.

The acquisition of 7.89% equity interest in PacFusion was accounted for using the purchase method of accounting.The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at thedate of the acquisition. The excess of estimated fair values of the net assets acquired over the purchase price is recognized asnegative goodwill, and the negative goodwill was allocated as a pro-rata reduction of the amounts that otherwise would havebeen assigned to all of the acquired assets except (a) financial assets other than investments accounted for by the equitymethod, (b) assets to be disposed of by sale, (c) deferred tax assets, (d) prepaid assets relating to pension or other postretirementbenefit plans, and (e) any other current assets. The operating results of the acquisition are included in the Consolidated Resultsof Operations from the date of acquisition. A summary of the purchase price allocation is as follows:

2004 2004

S$ US$

Trade receivables 899 551Cash and cash equivalents 819 502Other assets 270 165

Total assets acquired 1,988 1,218

Accounts payable (467) (286)Accrued expenses and other liabilities (478) (293)

Total liabilities assumed (945) (579)

Net assets acquired 1,043 639Negative goodwill (743) (455)

300 184


64




Australia

On January 19, 2000, Pacific Internet (Australia) Pty Limited (“PIAU”) acquired the business of Kralizec Pty Ltd (“Zeta Internet”)for approximately S$1,396. Zeta Internet is an Internet Service Provider founded in 1985 in Sydney and was one of the firstInternet service providers (“ISPs”) to operate in the metropolitan area with the commercialization of the Australian Internetindustry in 1994.

On February 1, 2000, PIAU acquired the business of Hub Communications Pty Ltd (“Hub Communications”) for S$536. HubCommunications is an Internet Service Provider established in Brisbane, Australia in 1995 and operated a chain of Internetcafes in Brisbane’s Central Business District.

On April 5, 2000, PIAU acquired Hunterlink Pty Limited (“Hunterlink”) for S$5,915. Hunterlink is an Internet Service Providerbased in Newcastle. Hunterlink was acquired for its reliability, customer service and customer base.

On September 15, 2003, PIAU acquired the customer lists of Product Information Services Pty Ltd (“Talent Internet”) for S$315.

Hong Kong

The Company first entered the Hong Kong market in June 1996 though the acquisition of a 50.1% interest in SembawangPacMann Pte Ltd, the holding company of Pacific Supernet Limited (“PSN”). In June 1999, the Company acquired the remaining49.9% interest in PSN from its minority shareholder, Pacific Media PLC for a consideration of $16,840.

Thailand

On January 5, 2000, Pacific Digiway Limited (“Digiway”), an investment holding company, was incorporated in Thailand.The Company subscribed to 4,900 ordinary shares of Baht 10 each, representing a 49.0% equity interest in Digiway. Digiwayin turn held a 26.0% direct equity interest in I.T. Star Company Limited. Digiway also owned 51.0% equity interest in PFThailand.

In March 2000, the Company completed the acquisition of a 49.0% direct equity interest in I.T. Star Company Limited, whichwas the holding company of World Net & Services Co., Ltd. (“WNS”), an ISP based in Thailand for S$2,040. Headquartered inBangkok, WNS had points of presence in Ayuthaya, Chon Buri and Songkha. Subsequently, I.T. Star Company Limited changedits name to Pacific Internet (Thailand) Limited (“PITH”).

On December 19, 2001, Digiway increased its equity interest in PITH from 26.0% to 41.0%. As a result, the Company’seffective interest in PITH was increased from 61.7% to 69.1%.

In July 2003, Digiway purchased 188,176 shares of Baht 100 each, representing a 10.0% equity interest in PITH, from theminority shareholder. As a result, Digiway increased its equity interest in PITH from 41.0% to 51.0%, and the Company’seffective interest in PITH was increased from 69.1% to 74.0%.


65




The Philippines

On March 18, 1998, the Company acquired a 40.0% stake in Primeworld Digital Systems, Inc. (subsequently known as PacificInternet Philippines, Inc.) (“PIPH”), a Philippines corporation that provides Internet access in the Philippines. On July 31, 1999,the Company acquired 40.0% in PW Holding Corporation (“PWC”), a Philippines corporation, which in turn held 56.7%of PIPH.

On March 16, 2001, the Company disposed 8.9% of its equity interest in PIPH for S$201 to an unrelated party, reducing itsdirect interest in PIPH from 40.0% to 31.1%. With this disposal, the Company owns direct and indirect interests of 31.1% and22.7% respectively in PIPH. As a consequence of the above changes, the Group ceased equity accounting for its investmentin PIPH and consolidated PIPH from that date, as it has met the criteria set out in Note 3, Principles of Consolidation.

India

On October 9, 1998 the Company entered into a non-binding Memorandum of Understanding (“MOU”) with Thakral Brothers(Pte) Ltd (“Thakral Brothers”) to enter into a strategic joint venture for the operation of an Internet-related and ISP businessin India (the “India Joint Venture”). On February 5, 1999, Pacific Internet India Private Limited (“PII’) was incorporated in India.On September 30, 1999, the Company acquired a 49.0% equity interest in PII. PII has obtained a nationwide license that allowsit to provide public Internet access in any city in India. On February 28, 2001, the Company formally signed a joint ventureagreement with an affiliate of Thakral Brothers.

Malaysia

Pacific Internet (Malaysia) Sdn. Bhd. (“PIMY”) was incorporated on March 2, 1999 and commenced operations in the secondquarter of 2002. Its principal activity is the provision of Internet access service to corporate customers.

All of the above acquisitions were accounted for using the purchase method of accounting. The purchase prices have beenallocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of the acquisition.The excess of purchase prices over the estimated fair values of the net assets acquired has been recorded as goodwill.The operating results of these acquisitions are included in the Consolidated Statements of Operations from the date of acquisition.For accounting policy on goodwill, please refer to Note 3.


66

3. Summary Of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiariesafter elimination of all significant intercompany balances and transactions. Investments in 20.0% to 50.0% owned affiliates areaccounted for by the equity method.

Where the Company has an indirect ownership of more than 50.0% in its subsidiaries, it will continue to account for theseinvestments using the equity method until it has met the criteria set out by Statement of Financial Accounting Standards(“SFAS”) No. 94 – Consolidation of All Majority-Owned Subsidiaries and Emerging Issues Task Force (“EITF”) 96-16 – Investor’sAccounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or ShareholdersHave Certain Approval or Veto Rights.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (revised December 2003)(“FIN 46R”) – Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46R provides a new framework foridentifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, non-controllinginterests and results of activities of a VIE in its consolidated financial statements and provides guidance related to a company’sinitial and subsequent measurement of newly consolidated VIEs. In general, a VIE is a corporation, partnership, limited-liabilitycorporation, trust or any other legal structure used to conduct activities or hold assets that either has: an insufficient amount ofequity to carry out is principal activities without additional subordinated financial support; a group of equity owners that areunable to make significant decisions about its activities; or, a group of equity owners that do not have the obligation to absorblosses or the right to receive returns generated by its operations.

FIN 46R requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE isobligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residualreturns, or both. FIN 46R must be applied to all entities subject to this Interpretation as of March 31, 2004. There was nofinancial statement impact from the application of this Interpretation.

Accounting Records

The Company maintains its records and prepares its statutory financial statements in accordance with the provisions of theSingapore Companies Act and the Singapore Financial Reporting Standards (“FRS”). In previous years up till the financial yearended December 31, 2002, the statutory financial statements of the Company were prepared in accordance with SingaporeStatements of Accounting Standard (“SAS”). The transition from SAS to FRS in the financial year ended December 31, 2003did not result in any significant change in accounting policies. The accounting policies have been consistently applied by theCompany and are consistent with those used in the previous years. The Company has obtained waivers from Chief Executive,Accounting & Corporate Regulatory Authority (formerly known as the Registrar of Companies and Businesses) in Singaporefrom preparing, amongst others, consolidated financial statements prepared in accordance with the FRS.




67

3. Summary Of Significant Accounting Policies (continued)

The accompanying consolidated financial statements differ from the consolidated financial statements that would have beenissued for statutory purposes in Singapore if the exemption was not obtained, in that they reflect certain adjustments, notrecorded in the Company’s books, which are appropriate to present the consolidated financial position, results of operationsand cash flows in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).Some examples of the adjustments relate to: (1) capitalization and amortization of goodwill, (2) deferred income taxes,(3) stock-based compensation, and (4) asset retirement obligations.

All dollar amounts included in the financial statements and in the notes herein are Singapore dollars (“S$”) unless designated asU.S. dollars (“US$”).

Foreign Currency

The Company, subsidiaries and affiliates consider their respective local currencies as their functional currency and the Singaporedollar as their reporting currency. Transaction gains and losses that arise from exchange rate fluctuations on transactionsdenominated in a currency other than the functional currency are recognized in the Consolidated Statement of Operationswhen incurred.

The assets and liabilities of subsidiaries are translated into Singapore dollars (“S$”) from their respective functional currencies atthe exchange rate at the balance sheet date, and revenues and expenses are translated into S$ at the weighted averageexchange rates for the year. Resulting translation adjustments are recorded as a component of Other Comprehensive Income.

The Group’s share of net assets of unconsolidated subsidiary and affiliates are translated into S$ from their respective functionalcurrencies at the exchange rate at the balance sheet date. The Group’s share of the operations of unconsolidated subsidiaryand affiliates are translated into S$ from their respective functional currencies at the weighted average exchange rates for theyear. Resulting translation adjustments are recorded as a component of Other Comprehensive Income.

The accompanying consolidated financial statement amounts expressed in US$ amounts are included solely for the convenienceof the readers and have been translated at S$1.6319 to US$1.00, the approximate exchange rate at December 31, 2004.No representation is made that the S$ amounts could have been, or could be, converted into US$ amounts at that or anyother rate.




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Cash and Cash Equivalents

The Group includes in cash and cash equivalents all short-term, highly liquid investments that mature within three months oftheir acquisition date. Cash equivalents consist principally of investments in interest-bearing demand deposit accounts withfinancial institutions and are stated at cost, which approximates fair value.

The Group maintains cash and cash equivalents with various financial institutions mainly in Singapore, Hong Kong, Australia,the Philippines and Malaysia. The Group performs periodic evaluation of the relative credit standing of financial institutions thatare considered in the Group’s investment strategy.

Long term investments

Long term investments consist of equity securities. These investments are accounted for in accordance with SFAS No.115 - Accounting for Certain Investments in Debt and Equity Securities. The Group has classified all marketable securities asavailable-for-sale. Available-for-sale securities are reported at fair value with changes in unrealized gains and losses, net ofapplicable taxes, recorded in a separate component of shareholder’s equity. Realized gains and losses are included in Otherincome and expenses and are determined on a specific identification basis. In the event that the carrying value of an investmentexceeds its fair value and the decline in value is other-than-temporary, an impairment charge is recorded and a new cost basisfor the investment is established. Fair value for investments in public companies are determined using quoted market prices.Fair value for investments in privately-held companies are estimated based upon one or more of the following: pricing modelsusing historical and forecasted financial information and current market rates; liquidation values; and quoted market prices ofcomparable companies. In order to determine whether a decline in value is other than temporary, the Group evaluates, amongother factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition andbusiness outlook of the company, current market conditions and future trends in the investee’s industry and the investee’srelative competitive position within the industry. Other-than-temporary declines in fair value from the original cost are charged tothe Consolidated Statement of Operations in the period the loss is established.

Fixed Assets and Website Development Costs

Fixed assets, including equipment under capital leases, are stated at cost and are depreciated or amortized using thestraight-line method over the shorter of the estimated useful lives of the assets or the term of the related lease, as follows:

Leasehold improvements - 2 - 15 yearsComputer equipment and software - 2 - 5 yearsFurniture and fixtures - 3 - 5 yearsOffice equipment - 3 - 6 yearsMotor vehicles - 5 - 6 yearsTelecommunication equipment - 9 months




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Fixed Assets and Website Development Costs (continued)

Depreciation of assets under capital lease is included in depreciation expense.

In accordance with EITF 00-2 - Accounting for Web Site Development Costs, the Group has capitalized certain websitedevelopment costs. These costs are amortized over a period of 2 years as the Group expects it will be 2 years before majorrevamp will occur on these web sites. The website development costs have been fully expensed in 2002, as it no longerprovided economic benefit to the Group. The resulting loss of S$87 was reflected in the Consolidated Statement of Operationsin 2002.

Repair and maintenance costs are charged to expense as incurred, whereas the cost of renewals and betterment that extendthe useful life of fixed assets are capitalized as additions to the related assets. Retirement, sale and disposals of assets arerecorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with anyresulting gain or loss reflected in the Consolidated Statement of Operations.

Asset Retirement Obligations

In August 2001, the FASB issued SFAS No. 143 – Accounting for Asset Retirement Obligations. In accordance with SFASNo. 143, the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associatedasset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of eachperiod through charges to operating expenses. If the obligation is settled for other than the carrying amount of the liability, theGroup will recognize a gain or loss on settlement.

The Group adopted SFAS No. 143 as of January 1, 2003. The cumulative effect of the change on prior years resulted in acharge to income, net of tax of S$220 (S$0.02 per share), which is included in income for the year ended December 31, 2003.

Concentration of Credit Risk

The Group provides Internet access, e-commerce, and travel-related services. The Group has thousands of individual customersprimarily located in Singapore, Hong Kong, Australia, the Philippines, India, Thailand and Malaysia. The Group performs ongoingcredit evaluations of its customers’ financial condition, and generally requires no collateral from its customers. The allowancefor doubtful accounts receivable is based upon the expected collectibility of outstanding accounts receivable at the balancesheet date.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported results of operations during the reporting period. Actual results could differfrom those estimates.




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Inventory

Inventory consists of the following:-

(i) Products and equipment parts for resale – they are stated at the lower of cost (calculated on a first-in-first-out basis)or market value

(ii) Unused air-tickets and pre-admission tickets – they are stated at the lower of cost or net realizable value. Net realizablevalue represents the estimated selling price after making allowance for expired tickets.

Accounts Receivable, Loan Receivable and Other Receivables

Accounts receivable, which generally have 30-90 days terms, are recognized and carried at original invoiced amount less anallowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longerprobable. Bad debts are written off as incurred.

Loan receivable is recognized and carried at cost less an allowance for any uncollectible amounts.

Services rendered but unbilled at the end of the financial year is recorded as unbilled revenue.

Allowance for Doubtful Debt

The Group maintains allowances for doubtful accounts for estimated losses resulting from inability of customers to makerequired payments. The Group reviews the accounts receivable on a periodic basis and makes general and specific allowanceswhen there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances,the Group considers many factors, including the age of the balance, customer’s historical payment history, their currentcredit-worthiness and current economic trends. As of December 31, 2003 and 2004, the Group’s allowance for doubtful debtswas S$3,680 and S$3,143 (US$1,926), respectively.

Intangible Assets

Identifiable intangible assets consist of the following:

(i) Trademarks, service marks and domain names - The Group has registered certain trademarks, service marks anddomain names in the United States Patent and Trademark Office and other jurisdictions. The Group believes the servicemarks and domain names are of material importance to the Group’s business and are amortized on a straight-line basisgenerally over a period of 10 - 25 years.




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Intangible Assets (continued)

(ii) License fee - License fee represents the cost of the license to operate as an ISP in Singapore for a 5-year periodcommencing September 1995. In April 2000, the Company was awarded a Facilities-Based Operator license for a15-year period, commencing April 1, 2000, which was subsequently transferred to a subsidiary. License fees areamortized on a straight-line basis over its estimated economic life of 5 years. In 2002, a license to use the Internetmessaging server software with estimated useful life of 5 years was purchased.

(iii) Customer contracts - Customer contracts were obtained through the acquisition of business in September 1995 andare amortized by use of the straight-line method over a period of 3 years commencing September 1995.

(iv) Acquired customer list - Acquired customer list represents capitalization of specific costs incurred for the purchase ofcustomer lists from other ISPs and is amortized on a straight-line basis over a period ranging from 2-5 years.

Annually, the Group reviews, and if necessary, adjusts the carrying value of intangible assets if the facts and circumstancessuggest intangible assets may be impaired. If this review indicates the intangible assets may not be recoverable, as determinedbased on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value ofintangible assets will be reduced by the estimated shortfall of the discounted cash flows.

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses and companies over the fair value of the netassets acquired.

In January 2002, the Group adopted SFAS No. 141 - Business Combinations. In accordance with SFAS No. 141, the unamortizedbalance for acquired workforce, of S$620, which has been recognized as an intangible asset separate from goodwill in prioryears, has been reclassified to goodwill.

In January 2002, the Group adopted SFAS No. 142 - Accounting for Goodwill and Other Intangibles, which requires companiesto stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires thatgoodwill and intangible assets deemed to have an indefinite life be reviewed for impairment upon adoption (January 1, 2002)and annually thereafter.

Under SFAS No. 142, goodwill is deemed to exist if the net book value of a reporting unit exceeds the estimated fair value. Fairvalue is determined based on the present value of estimated expected future cash flows using a discount rate commensuratewith the risk involved.




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Government Grants

Grants from the government are recognized in the Consolidated Statement of Operations where there is reasonable assurancethat the grant will be received and all matching conditions will be complied with.

Revenue Recognition

Revenue from the provision of Internet access services and e-commerce services are recognized in the period the service isrendered in accordance with Staff Accounting Bulletin, SAB 104 - Revenue Recognition in Financial Statements. Allowance fordiscounts is made when the related revenue is recognized. The corresponding cost is recognized when incurred.

The Group presently does not provide refunds to dial-up, broadband or leased line subscribers. Registration and activationfees are payable at the time applications are processed. Revenues generated from such fees are deferred and amortized overthe estimated average life of a subscriber relationship of one year. The fees deferred and not yet amortized are shown on theGroup’s Consolidated Balance Sheet as “Deferred income”. Revenues are recorded for monthly charges (which include acertain number of “free hours”) and for hours-used in excess of such “free hours”. The corresponding cost is recognized whenincurred. Free months are offered in connection with referral programs or promotional discounts. Because these free monthsare usually given without a contract at the beginning of a subscription period, no revenue is recognized during the free monthsas the customer’s continuance is not assured. Special gifts (other than products provided free by co-advertisers) given tocustomers or potential customers are previously included as advertising or promotional expenses. In 2002, the Group hasadopted EITF 01-09 – Accounting for Consideration Given by Vendor to a Customer or a Reseller of the Vendor’s Products.While the Task Force did not reach a consensus on the classification of the expense associated with free products, the SECObserver indicated that the SEC staff believes that the expense should be classified as cost of sales. Upon transition in 2002,the Group has applied EITF 01-09 prospectively and recorded an amount of S$410 relating to free products in cost of sales. Noreclassification of prior-period financial statements was made as the amount relating to previous years cannot be separated outfrom sales and marketing expenses with reasonable reliability.

Revenue for pre-paid cards is recognized based on usage hours. In the event that such usage hours cannot be determined orreasonably estimated, revenue is deferred and recognized upon expiration of the pre-paid cards. The corresponding cost isrecognized when incurred.

Commission revenues are generated from services rendered for arrangement of air travel, hotel rooms, car rental, vacationpackages and cruises. Commission revenues are recognized upon completion of the arrangement service.

Advertising revenues are derived primarily from the delivery of advertising impressions on the www.pacific.net.sg web site.Advertising revenues are recognized based on services rendered or number of impressions shown. The corresponding cost isrecognized when incurred.




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Revenue Recognition (continued)

The Group enters into fixed-price, long-term contracts for the installation and commissioning of Internet and intranet systems.Revenues from such contracts are recognized on the percentage-of-completion method as measured by the costs incurred todate as a percentage of the total contracts’ estimated cost. The corresponding cost is recognized when incurred. Provisionsfor estimated losses on uncompleted contracts are recognized in the period in which such losses are determined.

The Group provides website application and development services that include multiple element arrangements, which mayinclude any combination of hardware, services or software. These arrangements and stand-alone software arrangements mayalso involve any combination of software maintenance, software technical support or unspecified software upgrades. Whensome elements are delivered prior to others in an arrangement, revenue is deferred until the delivery of the last element unlessthere is all of the following:

• Objective evidence of fair value of the undelivered elements, which is the price charged by the Group to an externalcustomer for the same element when such element is sold separately.

• The undelivered elements do not affect the quality of use or value to the customer of the delivered elements.

• An element has been delivered.

In November 2002, the EITF reached a consensus on Issue No. 00-21 - Revenue Arrangement with Multiple Deliverables.Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets. The provision of Issue No. 00-21 applied to revenue arrangements entered intoin fiscal periods beginning after June 15, 2003. On June 15, 2003, the Group adopted Issue No. 00-21 and the impact of theadoption did not have material effect on the Group’s Consolidated Balance Sheet, Statement of Operations or Statement ofCash Flows.

Advertising

Advertising costs, primarily advertisements through mass media and billboards, are expensed when incurred. Advertisingexpense for the years ended December 31, 2002, 2003 and 2004 were S$4,906, S$5,000 and S$4,280 (US$2,623), respectively.




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Per Share Data

Earnings per share is computed in accordance with SFAS No. 128 - Earnings per Share. Under SFAS No. 128, earnings pershare is calculated using the weighted average number of Ordinary Shares outstanding during the year. The effect of theCompany’s stock options was not included in the computation of diluted earnings per share for the year ended December 31,2002 because their inclusion would have been anti-dilutive.

December 31,

2002 2003 2004

Weighted average shares outstanding-basic 12,815,066 12,985,036 13,238,793Effect of dilutive stock options - 264,060 190,822

Shares used for diluted earnings per share 12,815,066 13,249,096 13,429,615

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses and other assets, accountspayable, accrued expenses and other liabilities approximate fair value because of the short maturity of these instruments.

The aggregate net fair value of capital lease obligations of the Company which are not carried at fair value in the ConsolidatedBalance Sheet as at December 31, 2004 is $1,142 (US$700). The fair values of these capital lease obligations are estimatedusing discounted cash flow analysis, based on their effective interest rates.

The carrying amount of the bank borrowings issued pursuant to the Group’s bank credit agreement approximates fair value dueto its short-term maturity.




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Stock-Based Compensation Plans

The Group has adopted the disclosure-only provisions of SFAS No. 123 - Accounting for Stock Based Compensation (“SFASNo. 123”) and applies Accounting Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees (“APB No. 25”)and related interpretations in accounting for its employee stock-based compensation plans. For options issued to non-employeesunder its stock-based compensation plan, the Group has accounted for them as provided under SFAS No. 123. The fair valueof the options granted is estimated using the Black-Scholes option-pricing model. The compensation cost is amortized overthe vesting period of the options.

If the Company elected to recognize compensation costs for all plans based on the fair value of the options at the grant dates,consistent with the method prescribed by SFAS No. 123, net loss and loss per common share would have been different as thepro forma amounts indicate below:

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Net income, as reported 2,890 4,825 10,130 6,207Add: Stock-based compensation expense

included in reported net income,net of related tax effects 394 2,375 842 516

Deduct: Total stock based compensation expensedetermined under fair value based method ofall awards, net of related tax effects (3,560) (1,678) (5,041) (3,089)

Pro forma net (loss) income (276) 5,522 5,931 3,634

Basic net (loss) income per shareAs reported 0.23 0.37 0.77 0.47Pro forma (0.02) 0.43 0.45 0.27

Diluted net (loss) income per shareAs reported 0.23 0.36 0.75 0.46Pro forma (0.02) 0.42 0.45 0.27

The effect of applying SFAS No. 123 for recognizing compensation expense and providing pro forma disclosures are not likelyto be representative of the effects on reported net income for future years.




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Stock-Based Compensation Plans (continued)

Fair values of options used to compute pro forma net income and net income per common share disclosures were determinedusing the Black-Scholes Option Pricing Model with the following assumptions:

ExpectedRisk-free holding

interest rate period(weighted (weighted

Dividend Expected average in average inThe Company yield Volatility %) years)

1998 Employee Share Option Plan 0% 155.18% 4.85% 2.941999 (1st tranche) Share Option Plan 0% 155.18% 5.84% 2.941999 (2nd tranche) Share Option Plan 0% 140.00% 6.35% 2.771999 (3rd tranche) Share Option Plan 0% 140.09% 4.79% 2.941999 (4th tranche) Share Option Plan 0% 147.02% 4.27% 2.941999 (5th tranche) Share Option Plan 0% 134.94% 1.85% 2.761999 (6th tranche) Share Option Plan 0% 129.55% 1.56% 2.76

The table below summarized the weighted average fair value and exercise price of the stock options granted during the year.

2002 2003 2004 2004

S$ S$ S$ US$

Weighted average grant-date fair value of stock optionsgranted during the year:Where exercise price is higher than market price - 7.80 12.06 7.39

Weighted average exercise price of stock optionsgranted during the year:Where exercise price is higher than market price - 11.22 16.92 10.37




77

4. Selling, General and Administrative Expenses

Selling, general and administrative expenses comprise the following :

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Payroll and related staff costs $ 45,617 $ 49,759 $ 50,016 $ 30,649Sales and marketing expenses 5,535 5,950 5,467 3,350Traveling expenses 1,337 1,272 1,292 792Office expenses 11,676 11,632 10,201 6,251Professional and consultancy fees 1,958 1,390 2,186 1,339Others 3,367 2,699 1,836 1,125

$ 69,490 $ 72,702 $ 70,998 $ 43,506

For the years ended December 31, 2002, 2003 and 2004, the professional and consultancy fees include management feespaid or payable to the Company’s former immediate parent and intermediate parent company of S$120, S$nil, and S$nil(US$nil) respectively. Included in professional and consultancy fees is consultancy fees paid or payable to a Director-relatedcompany of S$72, S$58 and S$72 (US$44) for the years ended December 31, 2002, 2003 and 2004, respectively.

Defined contribution costs, which are included in payroll and related staff costs, are S$3,665, S$3,507 and S$2,698 (US$1,653)for the years ended December 31, 2002, 2003 and 2004, respectively.

5. Others

Others comprise the following :

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Gain (loss) on disposal of fixed assets $ 34 $ (53) $ (26) $ (16)Miscellaneous income 885 370 373 229

$ 919 $ 317 $ 347 $ 213




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6. Receivables from Related Parties

December 31,

2003 2004 2004

S$ S$ US$

Receivable from former intermediate parent companySembCorp Industries Ltd $ 46 $ 262 $ 160

Receivable from former immediate parent companySembCorp Ventures Pte Ltd 112 - -

Receivable from unconsolidated subsidiaryPacific Internet (Thailand) Limited 481 1,080 662

Receivable from affiliatesPacific Internet India Private Limited 1,851 1,687 1,034World Net & Services Co., Ltd. 731 772 473Others 902 612 375

$ 4,123 $ 4,413 $ 2,704

As of December 31, 2003 and 2004, the amounts receivable from related parties included amounts of S$721 and S$619(US$379) from the sale of goods and services respectively.

As of December 31, 2003, included in the amount receivable from SembCorp Ventures Pte Ltd are advances made to andpayments made on behalf of SembCorp Ventures Pte Ltd.

The amount receivable from PITH relates to the loan to PITH and payments made by the Company on their behalf.

The amount receivable from PII and WNS relates to payments made by the Company on their behalf.

The amount receivable from affiliates – others mainly relates to sale of air-tickets and provision of Internet access services.

The above receivables are payable upon demand and interest-free, except for the loan to PITH, which bears interest of 2%(2003: 2 to 7.75%) per annum.




79

7. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

December 31,

2003 2004 2004

S$ S$ US$

Deposits $ 403 $ 481 $ 295Prepaid expenses 1,851 1,579 967Recoverable from third parties 151 254 156Scholarship awards 21 - -Unbilled revenue 406 - -Other assets 524 337 206

$ 3,356 $ 2,651 $ 1,624

8. Investments in Unconsolidated Subsidiary and Affiliates

On January 5, 2000, Digiway, an investment holding company, was incorporated in Thailand. The Company subscribed to a49.0% equity interest in Digiway, which in turn held a 26.0% equity interest in PITH. From March 2000 to December 19, 2001,the Company effectively owned 61.7% interest in PITH, comprising a 49.0% direct equity interest and 12.7% indirect interestvia Digiway. On December 19, 2001, Digiway increased its equity interest in PITH to 41.0%. As a result, the Company’seffective interest in PITH was increased to 69.1%. In July 2003, Digiway purchased 188,176 shares of Baht 100 each, representinga 10.0% equity interest in PITH from the minority shareholder. As a result, Digiway increased its equity interest in PITH from41.0% to 51.0%, and the Company’s effective interest in PITH was increased from 69.1% to 74.0%.

The Group will continue to account for PITH using the equity method until it has met the criteria to consolidate the financialstatements of PITH under SFAS No. 94 – Consolidation of All Majority-Owned Subsidiaries and EITF 96-16 - Investor’s Accountingfor an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders HaveCertain Approval or Veto Rights.




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8. Investments in Unconsolidated Subsidiary and Affiliates (continued)

Summarized combined balance sheet and statement of operations for the unconsolidated subsidiary, PITH is presented below:

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Summarized Statement of Operations InformationNet Sales $ 3,192 $ 7,725 $ 11,624 $ 7,123Gross Profit 938 2,359 4,533 2,778Net (loss) profit (1,306) (237) 644 395

Summarized Balance Sheet InformationCurrent assets $ 2,260 $ 3,180 $ 4,479 $ 2,745Non-current assets 1,879 1,723 1,768 1,083Current liabilities 4,922 6,024 6,683 4,095Non-current liabilities - - 16 10

On October 9, 1998 the Company entered into a non-binding Memorandum of Understanding (“MOU”) with Thakral Brothers(Pte) Ltd (“Thakral Brothers”) to enter into a strategic joint venture for the operation of an Internet-related and ISP business inIndia (the “India Joint Venture”). On February 5, 1999, PII was incorporated in India. On September 30, 1999, the Companyacquired a 49.0% equity interest in PII. PII has obtained a nationwide license that allows it to provide public Internet access inany city in India. On February 28, 2001, the Company formally signed a joint venture agreement with an affiliate of ThakralBrothers.

As of December 31, 2004, the unamortized difference between the amount at which the investment in PITH was carried andthe amount of the Group’s underlying equity in net assets represents goodwill of S$533 (US$327).




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8. Investments in Unconsolidated Subsidiary and Affiliates (continued)

Summarized combined balance sheet and statement of operations for the unconsolidated affiliates, namely PWC, PII andDigiway is presented below:

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Summarized Statement of Operations InformationNet Sales $ 325 $ 927 $ 2,074 $ 1,271Gross (loss)/ profit (132) 131 949 582Net loss (1,728) (828) (360) (221)

Summarized Balance Sheet InformationCurrent assets $ 968 $ 1,027 $ 1,347 $ 825Non-current assets 1,466 946 379 232Current liabilities 15,272 15,579 15,523 9,512




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9. Long Term Investments

The following table summarizes the Group’s investment in securities, all of which are considered available-for-sale and long-term investments.

December 31, 2004

Gross ImpairmentUnrealized in value of Carrying Carrying

Cost Loss investments Value Value

S$ S$ S$ S$ US$

Quoted equity investments $ 58 $ (26) $ - $ 32 $ 20Unquoted equity investments 1,454 - (1,454) - -

$ 1,512 $ (26) $ (1,454) $ 32 $ 20

December 31, 2003

Gross ImpairmentUnrealized in value of Carrying

Cost Loss investments Value

S$ S$ S$ S$

Quoted equity investments $ 63 $ (28) $ - $ 35Unquoted equity investments 1,454 - (1,454) -

$ 1,517 $ (28) $ (1,454) $ 35

Unquoted equity investments are accounted for under the cost method. Any impairment in the value of the investments isreported in the Consolidated Statement of Operations in the year the impairment is identified. The impairment analysis isperformed based on the specific identification method. These investments generally consist of minority equity interests in acompany in related Internet or telecommunication businesses incorporated in the United States of America.

Quoted equity investments are carried at fair value, with any unrealized gains and losses, net of applicable taxes, reported in aseparate section of Shareholder’s Equity. Realized gains and losses are included in the statement of operations and are determinedon a specific identification basis. Other than temporary declines in market value from the original cost are charged to theConsolidated Statement of Operations in the period in which the loss occurs. These investments consist of equity interest in atelecommunication company and a bank incorporated in the Philippines. Proceeds from sale of available-for-sale securities inthe year ended December 31, 2003 and 2004 were S$299 and nil respectively. The gross realized gain in the year endedDecember 31, 2003 totaled S$69.




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10. Fixed Assets - Net

Fixed assets consist of the following:

December 31,

2003 2004 2004

S$ S$ US$

Computer equipment and software $ 51,044 $ 54,596 $ 33,456Furniture and fixtures 1,963 2,029 1,243Leasehold improvements 6,243 6,099 3,737Office equipment 5,378 5,354 3,281Motor vehicles 353 131 80Telecommunication equipment 1,741 1,717 1,052Construction-in-progress 314 1,155 708

67,036 71,081 43,557Less: accumulated depreciation (48,294) (53,221) (32,613)

$ 18,742 $ 17,860 $ 10,944

Fixed assets that are acquired under capital leases consist of the following:

December 31,

2003 2004 2004

S$ S$ US$

Computer equipment and software $ 2,110 $ 2,710 $ 1,661Office equipment 326 - -

2,436 2,710 1,661Less: accumulated depreciation (903) (1,066) (653)

$ 1,533 $ 1,644 $ 1,008




84

11. Intangible Assets

Intangible assets consist of the following:

December 31,

2003 2004 2004

S$ S$ US$

CostLicense fees $ 813 $ 827 $ 507Customer contracts 1,299 1,299 796Trademarks, service marks and domain name 205 208 127Acquired customer list 7,033 7,137 4,374

9,350 9,471 5,804Accumulated AmortizationLicense fees $ (629) $ (681) $ (417)Customer contracts (1,299) (1,299) (796)Trademarks, service marks and domain name (50) (64) (39)Acquired customer list (6,567) (6,866) (4,208)

(8,545) (8,910) (5,460)

Net Carrying ValueLicense fees $ 184 $ 146 $ 90Customer contracts - - -Trademarks, service marks and domain name 155 144 88Acquired customer list 466 271 166

$ 805 $ 561 $ 344

The amortization expense for the year ended December 31, 2004 was S$380 (US$233). The estimated amortization expensefor the next five years is as follows:

S$ US$

For the year ending December 31,2005 $ 161 $ 992006 114 702007 83 512008 11 72009 7 4




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12. Goodwill

December 31,

2003 2004 2004

S$ S$ US$

Goodwill $ 52,629 $ 51,757 $ 31,716Less : accumulated amortization (23,726) (23,551) (14,432)

$ 28,903 $ 28,206 $ 17,284

In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other Intangible Assets. This standard eliminates the amortizationof goodwill, requires annual impairment testing of goodwill and introduces the concept of indefinite life intangible assets.The new rules also prohibit amortization of goodwill associated with business combinations that close after June 30, 2001.An initial transition impairment test of goodwill must also be performed in 2002 as of January 1, 2002. The Group completedthis initial transition impairment test and the annual impairment test and determined that goodwill is not impaired.

The Group reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carryingvalue of an asset may not be recoverable in accordance with SFAS No. 142. The provisions of SFAS No.142 require that atwo-step impairment test be performed on goodwill. In the first step, the fair value of each reporting unit is compared to itscarrying value. The reporting units are consistent with the reportable segments identified in Note 27. Fair value of the reportingunits is determined using the income approach. Under the income approach, the fair value of a reporting unit is calculatedbased on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of thenet assets assigned to that unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assetsassigned to the reporting unit exceeds the fair value of the reporting unit, the Group performs the second step, which isdetermining the implied fair value of the reporting unit’s goodwill, and comparing it to the carrying value of the reporting unit’sgoodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to thedifference is recorded. The Group completed the annual impairment test and determined that goodwill is not impaired.




86

12. Goodwill (continued)

The changes in carrying amount of goodwill for the years then ended are as follows:

December 31, 2004

Accumulated Carrying CarryingCost Amortization Amount Amount

S$ S$ S$ US$

Balance at January 1, 2004 $ 52,629 $ (23,726) $ 28,903 $ 17,711Arising from acquisition of shares from minority interest (802) 143 (659) (404)Translation adjustment (70) 32 (38) (23)

Balance at December 31, 2004 $ 51,757 $ (23,551) $ 28,206 $ 17,284

December 31, 2003

Accumulated CarryingCost Amortization Amount

S$ S$ S$

Balance at January 1, 2003 $ 47,939 $ (21,595) $ 26,344Translation adjustment 4,690 (2,131) 2,559

Balance at December 31, 2003 $ 52,629 $ (23,726) $ 28,903

Goodwill attributable to operating segments for the years ended December 31, 2003 and December 31, 2004 are as follows:

Access Travel Consolidated

Balance at January 1, 2003 $ 17,986 $ 8,358 $ 26,344Translation Adjustment 2,559 - 2,559

Balance at December 31, 2003 20,545 8,358 28,903Arising from acquisition of shares from minority interest - (659) (659)Translation Adjustment (38) - (38)

Balance at December 31, 2004 $ 20,507 $ 7,699 $ 28,206




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13. Loan Receivable

Loan receivable is unsecured and bears interest at 6.50% (2003: 6.50%) per annum. The amount is fully provided for in thefinancial year ended December 31, 2003.

14. Loan Receivable from Unconsolidated Affiliates

Loan receivable from unconsolidated affiliates is unsecured, bears interest at 2.0% to 7.75% (2003: 2.0% to 7.75%) and is notexpected to be repaid within one year.

15. Banking Facilities

As of December 31, 2003 and 2004, the Group had uncommitted revolving credit facilities, representing short-term loanfacilities, overdraft facilities and guarantees from various banks, of S$26,070 and S$25,821 (US$15,823) respectively.The weighted average interest rate was 1.85% per annum. Total unused credit facilities available to the Group as of December31, 2003 and 2004 were S$16,382 and S$16,996 (US$10,415), respectively.

16. Bank Borrowings

December 31,

2003 2004 2004

S$ S$ US$

Secured $ 195 $ 88 $ 54Unsecured 2,449 2,438 1,494

$ 2,644 $ 2,526 $ 1,548

As of December 31, 2004, bank borrowings of S$88 (US$54) were secured by leasehold improvements and motor vehicles ofPIPH with net book values of S$400 (US$245) and S$24 (US$15) respectively. The weighted average interest rate was 9.90%(2003: 9.98%) per annum.




88

17. Payables to Related Parties

December 31,

2003 2004 2004

S$ S$ US$

Payable to former intermediate parent companySembCorp Industries Ltd $ 42 $ 7 $ 4

Payable to former immediate parent companySembCorp Ventures Pte Ltd 100 96 59

Payable to affiliatesOthers 936 848 520

$ 1,078 $ 951 $ 583

The amount payable to SembCorp Ventures Pte Ltd largely relates to payments made on behalf of a subsidiary. The amountpayable to SembCorp Industries Ltd largely relates to payments made on behalf of a subsidiary.

Other payables above are non-trade in nature, interest-free and have no fixed terms of repayment.

18. Accrued Expenses and Other Liabilities

The components of accrued expenses and other liabilities are as follows:

December 31,

2003 2004 2004

S$ S$ US$

Accrued payroll $ 3,890 $ 5,567 $ 3,412Accrued operating expenses 15,079 16,752 10,265Deposits received 3,152 2,930 1,795Other payables 2,869 1,304 799

$ 24,990 $ 26,553 $ 16,271




89

19. Deferred Income

Deferred income consists of the following:

December 31,

2003 2004 2004

S$ S$ US$

Deferred registration and activation fees $ 305 $ 303 $ 186Advanced billings 1,974 5,291 3,242

2,279 5,594 3,428

20. Income Taxes

The Group accounts for income taxes using the liability method under SFAS No. 109 - Accounting for Income Taxes. Deferredtax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets andliabilities and are measured using the enacted rates when the differences are expected to reverse.

The components of deferred income taxes are as follows:

December 31,

2003 2004 2004

S$ S$ US$

Deferred tax liabilities:Fixed assets $ 1,855 $ 1,521 $ 932Others 23 33 20

$ 1,878 $ 1,554 $ 952

Deferred tax assets:Uncollectible accounts receivable $ 898 $ 689 $ 422Fixed assets 206 63 39Net operating loss and unabsorbed capital allowances carry forward 5,275 4,554 2,791Others 1,362 1,359 833

7,741 6,665 4,085Valuation allowance (5,539) (4,664) (2,858)

$ 2,202 $ 2,001 $ 1,227

Net deferred tax assets $ 324 $ 447 $ 275




90

20. Income Taxes (continued)

The net change in the valuation allowance for the years ended December 31, 2002, 2003, and 2004, was a (decrease) increaseof S$(426), S$336 and S$(875) (US$(536)), respectively.

Under Singapore tax law, net operating losses and unabsorbed capital allowances can be carried forward indefinitely to offsetfuture taxable income from the entity that originally generated the loss, subject to the provisions of the Income Tax Act. Underboth the Hong Kong and Australian tax laws, net operating losses and unabsorbed capital allowances can also be carriedforward indefinitely to offset future taxable income from the entity that originally generated the loss, subject to the provisions ofthe Inland Revenue Ordinance and Income Tax Assessment Act, respectively. Under the Philippines tax law, net operatinglosses can be carried forward to offset future taxable income from the entity that originally generated the loss for the threeconsecutive taxable years immediately following the year of loss, subject to the provision of the National Inland Revenue Code1997 of the Philippines. Under Malaysia tax laws, net operating losses and unabsorbed capital allowances can also be carriedforward indefinitely to offset future taxable income from the entity that originally generated the loss, subject to the provisions ofthe Malaysia Income Tax Act.

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Pre-tax income (loss)Singapore $ 8,091 $ 7,864 $ 10,288 $ 6,304Foreign : Australia (540) 167 1,158 710 Hong Kong 1,239 681 805 493 The Philippines (719) 643 210 129 Thailand (892) 157 477 292 India (846) (401) (171) (105) Malaysia (82) (91) (140) (86)

$ 6,251 $ 9,020 $ 12,627 $ 7,737




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20. Income Taxes (continued)

Income tax (expense) credit consists of the following:

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Current:Singapore $ (3,650) $ (4,262) $ (3,183) $ (1,951)Foreign (76) (106) (83) (51)

(3,726) (4,368) (3,266) (2,002)

Deferred:Singapore $ 569 $ 718 $ (2) $ (1)Foreign (1,042) - 125 77

$ (473) $ 718 $ 123 $ 76

$ (4,199) $ (3,650) $ (3,143) $ (1,926)

The reconciliation of tax computed by applying the statutory income tax rate to pre-tax income is:

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Tax at Singapore Statutory rate of 20.0%(2003: 22.0%, 2002: 22.0%) $ (1,375) $ (1,984) $ (2,525) $ (1,547)

Foreign tax rate differences 249 (32) (124) (76)Net operating losses and temporary

differences not recognized (416) (103) (444) (272)Utilization of operating losses brought forward

which were previously not recognized 562 266 690 423Expenses not deductible for tax purposes (1,507) (1,099) (638) (391)Changes in valuation allowances (1,360) 178 352 215Changes in enacted tax rates (300) - - -Underprovision of tax in prior years - (952) - -Others (52) 76 (454) (278)

$ (4,199) $ (3,650) $ (3,143) $ (1,926)

The underprovision of tax in prior years of S$952 arose from expenses deducted in computing tax in prior years for which thetax authority of Singapore has taken the position in the current financial year that these expenses are not deductible.




92

21. Cumulative Effect Adjustment – Net of Tax

Effective January 1, 2003, the Group adopted the method of accounting for asset retirement obligations in accordance withSFAS No. 143 – Accounting for Asset Retirement Obligations. The charge for the cumulative effect up to December 31, 2002recognized by the Group was $220. Further details on Accounting for Asset Retirement Obligation can be found in Note 24.

22. Leases And Commitments

Leases

December 31,

2003 2004 2004

S$ S$ US$

Current portion of capital lease obligations with unrelated parties $ 453 $ 470 $ 288

Non-current portion of capital lease obligations with unrelated parties 704 524 321

$ 1,157 $ 994 $ 609

The Company leases its corporate offices under non-cancelable operating leases, which expire in 2006. The Company has theoption to extend each of these leases for an additional three years.

Operating leases also include international leased lines with cancelable and non-cancelable leases expiring at various datesbetween 2005 and 2007. The lease agreements do not include renewal options.




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22. Leases and Commitments (continued)

Future minimum lease payments for capital leases and operating leases with initial or remaining terms of one year or more areas follows as of December 31, 2004.

Capital Leases Operating Leases

Year Ended December 31: S$ US$ S$ US$

2005 $ 521 $ 319 $ 6,052 $ 3,7092006 304 186 2,176 1,3332007 164 101 1,019 6242008 69 42 833 5102009 18 11 197 121

Total minimum lease payments 1,076 659 $ 10,277 $ 6,297Less amount representing interest (82) (50)

Present value of net minimum lease payments 994 609Less non-current portion (524) (321)

Current portion of capital lease obligation $ 470 $ 288

Supply contracts for satellite bandwidth of S$2,564 (US$1,571), payable within one year from December 31, 2004 wereincluded in operating leases.

The operating leases expenses of the Group are as follows:-

December 31,

2002 2003 2004 2004

S$ S$ S$ US$

International leased lines $ 19,121 $ 10,573 $ 7,195 $ 4,409Office and equipment rental 5,155 4,968 3,708 2,273Broadband leases 6,825 11,751 17,194 10,536Corporate trunk line leases 5,308 6,140 5,435 3,330Other operating leases 2,406 1,939 1,682 1,031

$ 38,815 $ 35,371 $ 35,214 $ 21,579

Rental payments under operating leases are expensed on a straight line basis over the periods of the respective lease.

CommitmentsA subsidiary company has committed to Infocomm Development Authority of Singapore (“IDA”) that it will spend S$200 (US$123)within the next year, largely on capital equipment and infrastructure.




94

23. Valuation and Qualifying Accounts

Balance at Charged to Balance at Balance atBeginning Costs and Deductions Translation End of End ofof Period Expenses Write-offs Difference Period Period

S$ S$ S$ S$ S$ US$

Allowance for doubtful accounts receivableYear ended December 31, 2002 3,483 2,639 (1,742) (155) 4,225 2,589Year ended December 31, 2003 4,225 2,079 (2,561) (63) 3,680 2,255Year ended December 31, 2004 3,680 1,506 (1,657) (386) 3,143 1,926

24. Asset Retirement Obligation

Effective January 1, 2003, the Group adopted the method of accounting for asset retirement obligations in accordance withSFAS No. 143 – Accounting for Asset Retirement Obligations. Previously, the Group had not been recognizing amounts relatedto asset retirement obligations. Under the new accounting method, the Group now recognizes asset retirement obligations inthe period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costsare capitalized as part of the carrying amount of the long-lived asset. A reliable estimate of the market premium risk cannot bemade, as these information are not readily available; as such this has been excluded in the computation of the estimate of thefair value of the asset retirement obligations.

The proforma effects of the application of SFAS No. 143 as if the Statement had been adopted on January 1, 2001 (rather thanJanuary 1, 2003) are presented below:

December 31,

2002 2003

S$ S$

Pro forma amounts assuming the accounting change is applied retroactively net-of-tax:

Net income $ 2,803 $ 5,045EPS – basic 0.22 0.39EPS – diluted 0.22 0.38




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24. Asset Retirement Obligation (continued)

The Group leases various operating facilities in Asia and Australia and has renovated the premises as well as installed variousfixtures in the premises. According to the lease contract, the Group is legally required to restore the premises back to itsoriginal condition at the end of the lease. The Group recognized the fair value of liabilities for asset retirement obligation andcapitalized that cost as part of the cost basis of leasehold improvements and depreciates it on a straight line bases over 2 – 5years. The following table describes all changes to the Group’s asset retirement obligation liability, recorded as part of accruedoperating expenses:

December 31,

2003 2004 2004

S$ S$ US$

Balance at beginning of year $ - $ 332 $ 203Liabilities incurred in transition 327 - -Liabilities settled (11) (22) (13)Translation difference - (1) (1)Accretion expense 16 15 9

Balance at end of year $ 332 $ 324 $ 198

The pro forma asset retirement obligation liability balances as if SFAS No. 143 had been adopted on January 1, 2001(rather than January 1, 2003) are as follows:

December 31,

2003

S$

Pro forma amounts of liability for asset retirement obligation at beginning of year: $ 327

Pro forma amounts of liability for asset retirement obligation at end of year: $ 332

25. Declaration of Dividends

In a general meeting, the Company may, by ordinary resolution, declare dividends but no dividend will be payable in excess ofthe amount recommended by the directors. Singapore law allows dividends to be paid only out of profits of the Company,determined in accordance with accounting principles generally accepted in Singapore. As the Company is incorporated inSingapore, all dividends declared will be denominated in Singapore currency. The Company has not declared any dividends todate. The amount of the Company’s retained earnings available for distribution was approximately S$2,300 (US$1,409).The Group does not anticipate paying cash dividends in the foreseeable future.




96

26. Related Party Transactions

Prior to May 1999, the Company was a 74.99% owned subsidiary of SembCorp Ventures Pte Ltd (formerly known as SembawangVentures Pte Ltd). The Company’s intermediate parent companies at that point in time were Sembawang Corporation Ltd andSembCorp Industries Ltd.

In May 1999, the parent company, SembCorp Ventures Pte Ltd, diluted their shareholdings from 54.6% to 41.8%. Since then,SembCorp Ventures Pte Ltd and SembCorp Industries Ltd are considered as the former immediate parent company andformer intermediate parent company, respectively. During the year ended December 31, 2003, SembCorp Ventures Pte Ltdfurther diluted their shareholdings in the Company from 41.8% to 30.8%. During the year ended December 31, 2004, SembCorpVentures Pte Ltd further diluted their shareholdings in the Company from 30.8% to 29.2%.

The Company paid an annual management fee to its former immediate parent company and former intermediate parentcompany for various management and administrative services provided. These services were provided by its former immediateparent company and former intermediate parent company to all its strategic business units based on the application ofpre-defined weightage to parameters such as profitability. For the years ended December 31, 2002, 2003 and 2004, managementfees paid or payable to the Company’s former immediate parent company and former intermediate parent company wereS$120, $nil and S$nil (US$nil), respectively.

On September 2000, the Company sold its 15.0% equity interest in 1-Net Singapore Pte Ltd for S$1,943 to MediaCorpInteractive Pte Ltd (“MediaCorp Interactive”). At the time of the aforementioned sale, one of the Directors of the Company alsoheld a directorship on the board of directors of MediaCorp Interactive and Media Corporation of Singapore Pte Ltd (“MCS”).MCS owns a 13.9% stake in the Company through its wholly-owned subsidiary SIM Ventures Pte Ltd (subsequently known asMediaCorp Investments Pte. Ltd.). MediaCorp Interactive is a wholly-owned subsidiary of MCS. During the year ended December31, 2003, SIM Ventures Pte Ltd (subsequently known as MediaCorp Investments Pte. Ltd.) disposed part of their shareholdingsin the Company, thus diluting their shareholdings to 7.11%. During the year ended December 31, 2004, SIM Ventures Pte Ltdfurther diluted their shareholdings in the company from 7.11% to 1.28%.

On June 20, 2000, the Company through its subsidiary Safe2Travel, acquired the travel and travel-related businesses of SMTG(the “SMTG Acquisition”) for S$10,000. At the time of the SMTG Acquisition, the Company indirectly owned 85.0% of theissued share capital of Safe2Travel. SMTG was a 75.0%-owned subsidiary of SembCorp Industries Ltd at the time of theSMTG Acquisition. SembCorp Industries Ltd through its wholly-owned subsidiaries, SembVentures, also held 30.8% of theissued share capital of the Company. Pursuant to the terms and conditions of the SMTG Acquisition, Safe2Travel had agreedto extend a loan of S$5,000 to SMTG. The loan from Safe2Travel to SMTG is interest-free and has no fixed term of repayment.This loan was fully repaid in 2002.




97

26. Related Party Transactions (continued)

For the years ended December 31, 2002, 2003 and 2004, the Company provided Internet Access and related services amountingto S$69, S$172 and S$45 (US$28) respectively, to its former intermediate parent company.

For the years ended December 31, 2002, 2003 and 2004, Safe2Travel provided travel-related services amounting to S$191,S$155 and S$159 (US$97) respectively, to the Group’s former intermediate parent company and other affiliated companies.

For the years ended December 31, 2002, 2003 and 2004, consultancy fees paid or payable by Safe2Travel amounted to S$72,S$58 and S$72 (US$44) respectively, to a Director-related company.

For the period May 2002 to September 2002, PI Services provided IT consultancy services amounting to S$75 to the Group’sformer intermediate parent company.

27. Segment Reporting

In accordance with SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information, certain informationshould be disclosed based on the financial information management analyzes for making operating decisions and assessingperformance. The Group operates in three reportable segments as each of these segments offer different products and services:

• Internet Access and Internet Services• e-Commerce Services• Travel-related Services

Internet Access and Internet Services (“Access”). This segment includes all Internet access services such as dial-up,leased lines, broadband, value added services and all other Internet access-related services.

e-Commerce Services (“e-Commerce”). This segment includes e-commerce services, website content and communityrelated services as well as application development services.

Travel-related Services (“Travel”). This segment includes services provided by a “brick-and-mortar” travel agent, such as airticketing, tours, hotels and other travel-related services.




98

27. Segment Reporting (continued)

ReconcilingDecember 31, 2002 Access e-commerce Travel items Consolidated

RevenueUnaffiliated customers $ 146,495 $ 1,492 $ 9,043 $ - $ 157,030Intersegment - - 18 (18) -

Total revenues 146,495 1,492 9,061 (18) 157,030

Depreciation & amortization (11,111) (781) (305) - (12,197)Other operating expenses (126,016) (3,452) (7,327) 18 (136,777)Interest income 372 11 31 - 414Interest expense (705) - - - (705)Equity in (loss) profit of

unconsolidated affiliates (1,746) 8 - - (1,738)Other non-operating income (expenses) 127 (18) 115 - 224Income tax expenses (3,885) (3) (311) - (4,199)Minority interest 855 77 (94) - 838

Segment P&L $ 4,386 $ (2,666) $ 1,170 $ - $ 2,890

Total assets $ 99,408 $ 1,184 $ 29,422 $ - $ 130,014



Total revenues 158,970 1,715 6,819 (11) 167,493

Depreciation & amortization (9,967) (442) (224) - (10,633)Other operating expenses (140,753) (2,162) (5,743) 11 (148,647)Interest income 316 2 49 - 367Interest expense (251) - - - (251)Equity in (loss) profit of

unconsolidated affiliates (460) 216 - - (244)Other non-operating income 602 55 278 - 935Income tax expenses (3,396) - (254) - (3,650)Minority interest (244) (15) (66) - (325)Cumulative effect adjustment (167) (14) (39) - (220)

Segment P&L $ 4,650 $ (645) $ 820 $ - $ 4,825

Total assets $ 100,169 $ 5,047 $ 27,524 $ - $ 132,740




99




Total revenues 162,172 1,050 6,550 (13) 169,759

Depreciation & amortization (8,517) (309) (73) - (8,899)Other operating expenses (141,256) (1,703) (5,801) 13 (148,747)Interest income 358 5 64 - 427Interest expense (134) (7) - - (141)Equity in profit of unconsolidated affiliates 306 - - - 306Other non-operating (expense) income (77) (97) 96 - (78)Income tax expenses (3,004) (2) (137) - (3,143)Minority interest (50) (47) - - (97)Extraordinary item 743 - - - 743

Segment P&L $ 10,541 $ (1,110) $ 699 $ - $ 10,130

Total assets $ 113,830 $ 4,420 $ 26,174 $ - $ 144,424

Intersegment sales and transfers were accounted as if the sales or transfers were to third parties, that is, at currentmarket prices.




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December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Geographical areaNet revenues :

Singapore :Unaffiliated customers $ 88,048 $ 87,979 $ 81,184 $ 49,748Intercompany 3,816 1,386 1,003 615

Hong Kong :Unaffiliated customers 33,042 34,012 33,797 20,710Intercompany - 59 51 31

Australia :Unaffiliated customers 21,493 31,921 41,881 25,664Intercompany - - 45 27

The Philippines :Unaffiliated customers 14,219 12,649 11,896 7,290Intercompany 529 102 16 10

Malaysia :Unaffiliated customers 228 932 1,001 613Intercompany - - - -

161,375 169,040 170,874 104,708Elimination (4,345) (1,547) (1,115) (683)

$ 157,030 $ 167,493 $ 169,759 $ 104,025




101


December 31,

2002 2003 2004 2004

S$ S$ S$ US$

Long-lived AssetsSingapore $ 17,895 $ 16,260 $ 15,629 $ 9,577Hong Kong 11,620 11,658 12,067 7,394Australia 14,904 17,457 16,550 10,142The Philippines 4,200 2,904 2,262 1,386Malaysia 70 171 119 73

$ 48,689 $ 48,450 $ 46,627 $ 28,572

Long-lived assets include fixed assets, intangible assets and goodwill.

Net (liabilities)/assets of significantoperations outside SingaporeHong Kong (348) 300 1,073 658Australia 12,691 16,836 18,283 11,203The Philippines (1,524) (945) (763) (468)

28. Licenses

The Group has obtained authorization to use the products of each licensor of software that the Group bundles in its front-endsoftware product provided to subscribers. The particular applications included in the Company’s start-up packages have,when necessary, been licensed, including Microsoft Internet Explorer from Microsoft Corporation (the license is automaticallyrenewed for successive one-year terms), Netscape Navigator from Netscape Communications Corporation (the license isautomatically renewed annually), the evaluation version of WinZip from NicoMak Computing, Inc., Adobe Acrobat Reader fromAdobe Systems Incorporated (the license is valid unless terminated by licensor), mIRC by MIRC Co. Ltd and WS_FTP fromIpswitch, Inc. (the license is automatically renewed annually).

Historically, any license fees charged to the Group upon enrollment of additional subscribers were generally passed through tosubscribers in their start-up fees. However, the Group has increasingly waived start-up fees in Singapore due to competitivepressures and has absorbed the cost of license fees. Microsoft currently does not charge the Group a license fee with respectto the Group’s distribution of Microsoft Internet Explorer; however, there can be no assurance that such arrangement willcontinue in the future. The Group currently intends to maintain or negotiate renewals of all relevant existing software licensesand authorizations as necessary. The Group may also want or need to license other applications in the future. Other applicationsincluded in the Group’s start-up package are shareware that the Group has obtained permission to distribute or that are fromthe public domain and are freely distributable.




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29. Common Stock

The Company completed its first and second offerings (collectively known as the “offerings”) of common stock on February 5,1999 and May 20, 1999, respectively. The Company sold an aggregate of 2,500,000 shares in the offerings and received netproceeds after offerings expenses amounting to approximately S$76,300.

30. Stock Option Plan

The Group has three fixed stock option plans under which it may grant options to certain employees, directors, officers andconsultants of the Group to subscribe for shares within the Group.

The 1998 Employees’ Share Option Plan was established by the Company in November 1998 and became effective upon theCompany’s initial public offering. Options to purchase up to 1,500,000 shares were granted, of which 1,498,500 were accepted,at an exercise price equal to the initial public offering price of US$17.00 per share and no amounts applicable thereto arereflected in the Consolidated Statement of Operations. The 1998 Employees’ Share Option Plan expired during the year.

In November 1999, the Company established the 1999 Share Option Plan. As of December 31, 2004, a total of six trancheswere granted under the aforesaid plan, namely, on November 10, 1999, April 25, 2000, January 10, 2001, April 10, 2001,August 18, 2003 and March 25, 2004 respectively. The exercise price is the average of the officially quoted closing price of theCompany’s shares on the NASDAQ’s National Market System for the five trading days immediately preceding the date of grant,which was determined to be US$32.48, US$25.60, US$3.60, US$3.09, S$11.22 and S$16.92 (US$10.37) per share for therespective six tranches. As of December 31, 2004, options to subscribe for an aggregate of 3,780,000 shares have beengranted under this plan, of which 3,534,050 were accepted.

As at December 31, 2004, options to subscribe for 650,612 shares under the 1998 Employees’ Share Option Plan and 1999Share Option Plan have been exercised by employees. An aggregate of 1,465,478 stock options remains outstanding as of theaforesaid date.

The vesting schedule for 1998, 1999 (1st, 2nd, 3rd and 4th tranche) is as follows:

(i) 25% of the Options will vest and become exercisable on the first anniversary of the date of grant;

(ii) an additional 25% of the Options will vest and become exercisable on the second anniversary of the date of grant; and

(iii) the remaining 50% of the Options will vest and become exercisable on the third anniversary of the date of grant.

The vesting schedule for 1999 (5th and 6th tranche) is as follows:

(i) 33% of the Options will vest and become exercisable on the first anniversary of the date of grant;

(ii) an additional 33% of the Options will vest and become exercisable on the second anniversary of the date of grant; and

(iii) the remaining 34% of the Options will vest and become exercisable on the third anniversary of the date of grant.




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30. Stock Option Plan (continued)

In August 2000, Pacfusion established the 2000 Equity Incentive Plan. Options to subscribe for up to 4,767,600 shares weregranted, of which 4,457,800 were accepted, at an exercise price of US$0.59 per share. The vesting schedule is as follows:

(i) 25% of the options shall vest on the earlier of the date which is five years after the grant date and the first date uponwhich the shares of Pacfusion are listed or approved for listing (the earlier of such dates being the ‘Initial Vesting Date’)of Pacfusion’s shares;

(ii) an additional 25% of the options shall vest on the first anniversary of the Initial Vesting Date; and

(iii) the remaining 50% of the options shall vest on the second anniversary of the Initial Vesting Date.

Presented below is a summary of the Group’s stock option activity:

Weighted-Exercise Average

Price ExerciseShares Range Price

Balance, January 1, 2002 1,696,125 US$3.09 – $32.48 US$14.51Exercised - - -Forfeited / Cancelled / Expired (234,350) US$3.09 – $32.48 US$9.04

Balance, December 31, 2002 1,461,775 US$3.09 – $32.48 US$15.38Granted and Accepted 707,800 S$11.22 S$11.22Exercised (219,625) US$3.09-$3.60 US$3.48Forfeited / Cancelled / Expired (120,425) US$3.09 – $32.48 US$13.39

Balance, December 31, 2003 1,829,525 US$3.09 – $32.48 US$13.47Granted and Accepted 766,000 S$16.92 S$16.92Exercised (259,487) US$3.09-$6.40 US$3.66Forfeited / Cancelled / Expired (870,560) US$3.60 – $32.48 US$20.91

Balance, December 31, 2004 1,465,478 US$3.09 – $32.48 US$8.98




104


Presented below is a summary of the Group’s outstanding stock options as of December 31, 2004:

<—————— Options outstanding ——————> <—— Options exercisable ——>

Weighted-Number Average Weighted- Number Weighted-

Outstanding Remaining Average Exercisable Averageat Dec 31, Contractual Exercise at Dec 31, Exercise

Range of Exercise Prices 2004 Life Price 2004 Price

US$25.60 94,600 0.42 US$25.60 94,600 US$25.60US$3.09 – $3.60 158,514 1.20 US$3.32 158,514 US$3.32S$11.22 534,364 3.67 S$11.22 170,152 S$11.22S$16.92 678,000 4.25 S$16.92 - S$16.92

1,465,478 423,266

The Group has elected to use the intrinsic value method prescribed in APB No. 25 to account for options issued to employeesunder its stock-based compensation plans. Accordingly, the difference between the option exercise price and the quotedmarket price or unquoted valuation price of the Group’s shares on grant date is recognized as compensation cost over theoptions’ vesting period. Such compensation cost recognized by the Group in 2002, 2003 and 2004 relating to both the 1999Share Option Plan and 2000 Equity Incentive Plan was S$427, S$2,192 and S$616 (US$377).

During the year ended December 31, 2003, two members resigned from the Board of Directors of the Company. For one of theDirectors, in accordance with the terms of the relevant share option plans and his share option agreements, the Compensation& Administrative Committee passed the resolution on May 29, 2003 extending the exercise periods of his unexercised shareoptions for a period of 24 months from his resignation date. During the year ended December 31, 2004, one member resignedfrom the Board of Directors of the Company. In accordance with the terms of the relevant share option plans and his shareoption agreements, the Compensation & Administrative Committee passed a resolution on February 19, 2004 extending theexercise periods of his unexercised share options for a period of 24 months from his resignation date.

The Group has accounted for this modification in accordance with FIN 44 - Accounting for Certain Transactions Involving StockCompensation. Under FIN 44, compensation cost shall be measured as if the outstanding award was newly granted at the dateof the change in status and the pro-rated deferred compensation expense arising at the new grant date based on intrinsic valuemethod is recognized.

During the years ended December 31, 2002, 2003 and 2004, nil, 56,000 and 59,000 options were granted to non-employeesof which nil, 56,000 and 59,000 were accepted. In accordance with SFAS No. 123’s fair value method, for the years endedDecember 31, 2002, 2003 and 2004, compensation cost of S$(33), S$183 and S$226 (US$139) were recognized(written back). Fair value was computed using the Black-Scholes Option Pricing Model.




105


The total stock-based compensation cost recognized by the Group for the years ended December 31, 2002, 2003 and 2004were S$394, S$2,375 and S$842 (US$516), respectively.

Stock option awards granted after January 18, 2001 are variable accounted for in accordance with EITF 00-23 – IssuesRelating to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, Issue 31.The total compensation expense recognized in 2002, 2003 and 2004 in relation to these outstanding options are S$nil, S$2,129and S$240 (US$147).

31. Legal Proceedings

Except as mentioned below, the Company is not involved in any material pending legal proceedings.

On December 6, 2001, a class action lawsuit (“IPO Allocation Suit”) was instituted in the United States District Court for theSouthern District of New York against the Company and several of the Company’s former directors and officers as well asagainst the underwriters who handled the Company’s February 5, 1999 initial public offering (“IPO”). The complaint filed withrespect to the IPO Allocation Suit alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 andis based primarily on the assertion that there were undisclosed commissions received by the underwriter defendants andagreements or arrangements entered into by the underwriters for additional purchases of the Company’s securities in theaftermarket by selected investors at pre-determined prices. The action seeks damages in an unspecified amount. In April 2002,an amended complaint was filed against the Company. The amended complaint included, amongst others, allegations of price-manipulation in the Company’s IPO as well as its second offering conducted in May 1999.

The Company has been advised by its US counsel that similar class action suits have been filed against about 300 othercompanies that went public between 1998 and 2001 and that all such cases have been consolidated before a single judge forcase management purposes. On July 15, 2002, the Company and the individual defendants, along with the other issuers andtheir related officer and director defendants, filed a joint motion to dismiss based on common issues. On February 19, 2003,the Court denied the motion to dismiss as to all claims brought against the Company and the individual defendants, except forclaims brought against the individual defendants under Section 10(b) of the Securities Exchange Act of 1934, which weredismissed.

On July 30, 2003, the Litigation Committee of the Board of Directors of the Company approved a Memorandum of Understanding(the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against the Company with prejudice inreturn for the assignment by the Company of claims that the Company might have against its underwriters. No payment to theplaintiffs by the Company is required under the MOU. After further negotiations, the essential terms of the MOU were formalizedin a Stipulation and Agreement of Settlement (“Settlement”), which has been executed on behalf of the Company. The settlingparties presented the Settlement papers to the Court on June 14, 2004 and filed briefs formally seeking preliminary approval ofthe proposed Settlement on June 25, 2004. The underwriter defendants, who are not parties to the proposed Settlement, fileda brief objecting to the Settlement’s terms on July 14, 2004. On February 15, 2005, the Court granted a preliminary approval ofthe Settlement conditioned on agreement by the parties to narrow one of a number of provisions in the Settlement intended toprotect the issuers against possible future claims by the underwriters. A final hearing on approval of the Settlement will bescheduled in mid-March. Despite the preliminary approval, there can be no assurance that the Court will provide final approvalof the Settlement.




106

31. Legal Proceedings (continued)

The proposed Settlement does not resolve the claims that the plaintiffs have against the underwriter defendants. The litigationbetween those parties is proceeding and is currently in the class certification stage. Due to the large number of cases consolidatedinto the IPO litigation, the Court, as a case management device, ordered the plaintiffs and underwriters to select from theapproximately 300 consolidated cases “focus cases” intended to present a representative sample of parties and issues.Six focus cases were chosen for the class certification stage. On October 13, 2004, the Court certified classes in each of thesix class certification focus cases. The underwriter defendants have sought review of that decision.

The plaintiffs and underwriters have chosen additional focus cases for purposes of the discovery phase. The underwriterdefendants selected the Company as a merits focus case. As a result, among other things, the Company will be subject todiscovery obligations that non-focus case issuers will not be subject to. However, the selection of the Company as a focus casewill not impact its ability to participate in the proposed Settlement.

The Company believes that it and the individual defendants have meritorious defenses to the claims made in the complaintsand, if the Settlement is not approved by the Court, intends to contest the lawsuit vigorously. However, the litigation remains ata preliminary stage. Due to the inherent uncertainties of the lawsuit, the Company cannot accurately predict the ultimateoutcome of the lawsuit. An unfavorable outcome could have a material adverse effect on the business, financial condition andresults of operation of the Company in the period in which the lawsuit is resolved.

The Group is or may be potentially involved in other litigation incidental to its business. Although the outcome of any suchlitigation is not presently determinable, the resolution of such litigation is not expected to have a material adverse effect on itsbusiness. No assurances can be given with respect to the extent or outcome of any such litigation in the future.

32. Guarantees

As of December 31, 2004, the Company has issued the following guarantees to third parties on behalf of its subsidiaries andbelieves that the risk involved is minimal.

(i) A corporate guarantee of S$8,300 (US$5,086) (2003: S$8,300) to a bank in respect of banking facilities extended toSafe2Travel amounting to S$8,000 (US$4,902) (2003: S$8,000) of which S$3,050 (US$1,869) (2003: S$2,250) hasbeen utilized.

(ii) A corporate guarantee of S$1,266 (US$776) (2003: S$1,320) to a bank in respect of banking facilities extended to PIHK amounting to S$1,266 (US$776) (2003: S$1,320) of which S$633 (US$388) (2003: S$660) has been utilized.

33. Extraordinary Item

This relates to a gain arising from the acquisition of the balance of 7.89% shareholding in Pacfusion from the minority shareholderin January 2004 whereby the fair value of the attributable tangible assets acquired is in excess of the cost of acquisition.




107

34. Subsequent Events

In January 2005, Travelfusion was placed into liquidation by way of written resolution of members.

35. Recent Accounting Pronouncements

Share-Based Payment

On December 16,2004, the FASB issued FASB Statement No. 123 (revised 2004) – Share-Based Payment (“SFAS No. 123R”),which is a revision of SFAS No. 123. SFAS No. 123R supercedes APB No. 25 and amends FASB Statement No. 95 – Statementof Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However,SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognizedin the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS No. 123R must be adopted in the first interim or annual period after June 15, 2005. Early adoption will be permitted inperiods in which financial statements have not yet been issued. We expect to adopt SFAS No. 123R on July 1, 2005.

SFAS No. 123R permits public companies to adopt its requirements using one of two methods:

(i) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) basedon the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based onthe requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R thatremained unvested on the effective date.

(ii) A “modified retrospective” method which includes the requirements of the modified prospective method describedabove, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 forpurposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Group is currently evaluating the above methods of adoption.

As permitted by SFAS No. 123, the Group currently accounts for share-based payments to employees using APB No. 25’sintrinsic value method. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a significant impact on theGroup’s results of operations, although it will have no impact on the Group’s overall financial position. The impact of adoptionof SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in thefuture. However, had the Group adopted SFAS No. 123R in prior periods, the impact of that standard would have approximatedthe impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 3.

36. Comparative Figures

Certain comparative figures have been reclassified to conform with current year’s presentation.




108

Report of the Auditorsto the Members of Pacific Internet Limited

We have audited the accompanying financial statements of Pacific Internet Limited for the year ended 31 December 2004, set out onpages 109 to 144. These financial statements are the responsibility of the Company’s Directors. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with Singapore Standards on Auditing. Those Standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by the Directors, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion,

(a) the financial statements are properly drawn up in accordance with the provisions of the Singapore Companies Act, Cap. 50 (theAct) and Singapore Financial Reporting Standards so as to give a true and fair view of the state of affairs of the Company as at31 December 2004 and the results, changes in equity and cash flows of the Company for the financial year ended on that date;and

(b) the accounting and other records required by the Act to be kept by the Company and by those subsidiaries incorporated inSingapore of which we are the auditors have been properly kept in accordance with the provisions of the Act.

As explained in note 2, the financial statements for the financial year ended 31 December 2004 have been separately prepared for theGroup, comprising the Company and its subsidiaries, in accordance with accounting principle generally accepted in the United Statesof America. On 28 February 2005, we reported separately on the consolidated financial statements of the Group.

Furthermore, in respect of the requirements of the Act as modified by waivers granted by the Chief Executive, Accounting & CorporateRegulatory Authority as they pertain to the consolidated financial statements, in our opinion, the consolidated financial statements areproperly drawn up as to give a true and fair view of the matters required by section 201 of the Act to be dealt with in the consolidatedfinancial statements.

ERNST & YOUNGCertified Public Accountants



109

Profit and Loss Accountsfor the financial year ended 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

Note 2004 2003

$’000 $’000

RevenuesDial-up access 17,881 23,593Leased line access 11,607 13,956Broadband access 33,599 29,860Value added services 9,083 8,880Other revenues 2,019 4,740

Total revenues 74,189 81,029

Operating costs and expensesCost of sales 31,042 35,920Staff costs 19,566 19,819Depreciation of property, plant and equipment 2,649 3,520Amortisation of intangible assets 168 168Advertising and promotion expenses 1,750 2,646Foreign currency losses 198 41Other operating expenses 8,310 9,987

Total operating costs and expenses 63,683 72,101

Operating profit 4 10,506 8,928

Other (expenses)/incomeInterest income 5 234 208Finance costs 6 (98) (137)Other income 1,582 905

1,718 976

Profit before taxation and exceptional item 12,224 9,904Exceptional item 30 (31,607) -

(Loss)/profit before taxation (19,383) 9,904Income tax 7 (3,279) (3,290)

(Loss)/profit for the financial year transferred to revenue reserves (22,662) 6,614

The accounting policies and explanatory notes form an integral part of the financial statements.


110

Balance Sheetsas at 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

Note 2004 2003

$’000 $’000

ASSETS LESS LIABILITIES

Non-current assetsDeferred expenditure 8 - 21Property, plant and equipment, net 9 6,868 7,067Intangible assets 10 145 298Long term receivable and loans receivable from related companies 11 13,503 13,455Investments in subsidiaries 12 59,811 90,568Investments in associates 13 5,453 5,361Other investments 14 - -

Total non-current assets 85,780 116,770

Current assetsInventories 15 64 43Amounts due from related companies and parties 11 12,055 11,716Trade receivables, net 16 8,320 7,475Other receivables 17 1,740 1,931Loan receivable 18 - -Fixed deposits 26 38,476 17,671Cash and bank balances 26 3,534 11,308

64,189 50,144



111

Balance Sheets (continued)

as at 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

Note 2004 2003

$’000 $’000

Current liabilitiesBank borrowings 19 2,300 2,300Amounts due to related companies and parties 11 6,922 6,864Trade payables 2,902 4,277Provision and other payables 20 17,545 15,715Deferred income 21 3,293 81Hire purchase creditors 22 470 417Provision for income tax 4,302 3,801

37,734 33,455

Net current assets 26,455 16,689

Non-current liabilitiesHire purchase creditors 22 524 704

Net assets 111,711 132,755

EquityShare capital 23 26,588 26,069Share premium 23 82,818 81,719Revenue reserves 2,305 24,967

Total equity 111,711 132,755



112

Statements of Changes in Equityfor the financial year ended 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

2004 2003

$’000 $’000

Issued share capitalBalance at beginning of the financial year 26,069 25,630Issuance of ordinary shares 519 439

Balance at end of the financial year 26,588 26,069

Share premiumBalance at beginning of the financial year 81,719 80,828Premium on issuance of ordinary shares 1,099 891


Revenue reservesBalance at beginning of the financial year 24,967 18,353(Loss)/profit for the financial year (22,662) 6,614


Total shareholder’s equity 111,711 132,755



113

Statements of Cash Flowsfor the financial year ended 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

2004 2003

$’000 $’000

Cash flows from operating activities :(Loss)/profit before taxation and exceptional item (19,383) 9,904Adjustments for :-

Exceptional item 31,607 -Write off of property, plant and equipment 22 138Depreciation of property, plant and equipment 2,649 3,520Amortisation of intangible assets 168 168Loss/(gain) on disposal of property, plant and equipment 24 (3)Allowance for doubtful debts- Loan receivable - 111- Trade receivables 968 847- Receivables from related companies - 429Interest expense 98 137Interest income (234) (208)

Operating income before reinvestment in working capital 15,919 15,043(Increase)/decrease in trade and other receivables (1,601) 2,364Increase in trade and other payables 3,596 480Increase in inventories (21) (30)(Decrease)/increase in net trade-related amounts due to related parties and companies (60) 1,711

Cash generated from operations 17,833 19,568Interest paid (98) (137)Interest income received 234 208Income tax paid (2,778) (2,911)

Net cash provided by operating activities 15,191 16,728



114

Statements of Cash Flows (continued)

for the financial year ended 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

2004 2003

$’000 $’000

Cash flows from investing activities :Purchase of property, plant and equipment (2,962) (2,181)Purchase of intangible assets (15) (229)Proceeds from sales of property, plant and equipment 839 33Proceeds from sale of short term investment in bond - 250Issuance of loan receivable (48) (756)Increase in net non-trade amounts due from related parties and companies (221) (3,601)Increase in investment in subsidiary and associated companies (942) (429)

Net cash used in investing activities (3,349) (6,913)

Cash flows from financing activities :Repayment of bank borrowings - (300)Repayment of hire purchase creditors (429) (459)Repayment of loan payable - (4,250)Issuance of ordinary shares 1,618 1,330

Net cash provided by/(used in) financing activities 1,189 (3,679)

Net increase in cash and cash equivalents 13,031 6,136Cash and cash equivalents at beginning of the financial year (Note 26) 28,979 22,843

Cash and cash equivalents at end of the financial year (Note 26) 42,010 28,979



115

Notes to the Financial Statements- 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

1. Significant accounting policies

(a) Basis of preparation

The financial statements have been prepared in accordance with Singapore Financial Reporting Standards (FRS) asrequired by the Companies Act.

The accounting policies have been consistently applied by the Company and are consistent with those used in theprevious year.

The financial statements of the Company, which are expressed in Singapore dollars (S$), have been prepared underhistorical cost convention. Except for share data, the dollar amounts are presented in thousands of Singapore dollars.

(b) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and therevenue can be reliably measured on the following basis:

(i) Revenue from the provision of Internet access services, design and maintenance of websites, e-commerce andvalue added services like web hosting, data hosting services, roaming services and anti-virus solution servicesare recognised when the services are rendered;

(ii) Revenue from the sale of network configuration equipment are recognised upon the passage of title whichnormally coincides with delivery and acceptance of the equipment; and

(iii) Interest and management fee income are recognised on an accrual basis.

(c) Intangible assets

Intangible assets which consist of purchased telecommunications access codes and software license are capitalisedto the extent that the carrying values do not exceed their future economic benefits.

The intangible assets are stated at cost less accumulated amortisation. Amortisation is calculated on a straight linebasis over the estimated useful lives as follows :

Telecommunications access codes - 5 yearsInternet service provider license - 5 yearsSoftware license - 5 yearsAcquired customer list - 2 years


116

Notes to the Financial Statements (continued)

- 31 December 2004(Amounts presented in thousands of Singapore Dollar unless otherwise indicated)

1. Significant accounting policies (continued)

(d) Investments in subsidiaries

A subsidiary is a company in which the Company, directly or indirectly, holds more than 50% of the issued share capital,or controls more than half of the voting power, or controls the composition of the Board of Directors.

Investments in subsidiary companies are stated at cost less impairment losses on an individual subsidiary companybasis.

(e) Investments in associates

An associate is an entity, not being a subsidiary, in which the Company has a long-term interest of not less than20% nor more than 50% of the equity and in whose financial and operating policy decisions the Company exercisessignificant influence.

Investments in associated companies are stated at cost less impairment loss on an individual associated companybasis.

(f) Unquoted equity investments

Unquoted equity investments held on a long term basis are stated at cost. Allowance is made for permanent impairmentin value.

(g) Deferred expenditure

Deferred expenditure comprises of expenses incurred in providing staff scholarships and is stated at cost less amortisationon a straight line basis over the bond period of 1 to 6 years.

(h) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. The costof an asset comprises its purchase price and any directly attributable costs of bringing the asset to working conditionfor its intended use. Expenditure for additions and improvements are capitalised and expenditure for repairs andmaintenance are charged to the profit and loss account. When assets are sold or retired, their cost and accumulateddepreciation are removed from the financial statements and any gain or loss resulting from their disposal is included inthe profit and loss account.


117




(i) Depreciation

Depreciation is calculated on the straight-line method to write off the cost of the assets over their estimated useful lives.The estimated useful lives are as follows:-

Renovation - 3 yearsFurniture and fittings - 5 yearsComputers and software - 3 to 5 yearsOffice equipment - 5 yearsMotor vehicles - 6 yearsTelecommunication equipment - 9 months

No depreciation is charged on construction-in-progress until the construction is completed and the property, plant andequipment is transferred to its appropriate category.

Fully depreciated assets are retained in the financial statements until they are no longer in use and no further charge fordepreciation is made in respect of these assets.

The useful life and depreciation method are reviewed annually to ensure that the method and period of depreciation areconsistent with the expected pattern of economic benefits from items of property, plant and equipment.

(j) Inventories

Inventories are stated at the lower of cost and net realisable value calculated on a first-in-first-out basis. Cost comprisesacquisition costs of products and equipment parts for resale. Net realisable value represents the estimated selling priceless anticipated cost of disposal and after making allowance for damaged, obsolete and slow-moving items.

(k) Trade receivables, other receivables and amounts due from related companies and parties

Trade receivables, which generally have 30-90 day terms, are recognised and carried at original invoiced amount lessan allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amountis no longer probable. Bad debts are written off as incurred.

Other receivables and current amounts and long term loans receivable from related companies and related parties arerecognised and carried at cost less an allowance on any uncollectible amounts.

(l) Bank borrowings

Bank borrowings are recognised and carried at cost. Borrowing costs are generally expensed as incurred.


118


(m) Trade payables, other payables and amounts due to related companies and parties

Liabilities for trade and other payables, which are settled on 30-90 day terms, are carried at cost, which is the fair valueof the consideration to be paid in the future for goods and services received, whether or not billed to the Company.

Amounts due to related companies and related parties are recognised and carried at cost.

(n) Deferred taxation

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred taxassets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled based on tax rates enacted or substantively enacted atthe balance sheet date.

Deferred tax liabilities are recognised for all taxable temporary differences except where the timing of the reversal of thetemporary difference can be controlled by the Company and it is probable that the temporary difference will not reversein the foreseeable future.

At each balance sheet date, the Company re-assesses unrecognised tax assets and the carrying amount of deferredtax assets. The Company recognises a previously unrecognised deferred tax asset to the extent that it has becomeprobable that future taxable profit will allow the deferred tax asset to be recovered. The Company conversely reducesthe carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will beavailable to allow the benefit of part or all of the deferred tax asset to be utilised.

Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets andunused tax losses, to the extent that it is probable that taxable profit will be available against which the deductibletemporary differences, carry-forward of unused tax assets and unused tax losses can be utilised.

(o) Foreign currencies

Foreign currency transactions are measured in Singapore dollars and recorded at exchange rates approximating thoseruling at transaction dates. Foreign currency monetary assets and liabilities are translated at the rates ruling at thebalance sheet date. All resultant exchange differences are recognised in the profit and loss account.




119


p) Leases

Finance lease

Finance leases, which effectively transfer to the Company substantially all the risks and rewards incidental to ownershipof the leased item, are capitalised at amounts equal, at the inception of the lease, to the fair value of the leased item or,if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the financecharges and reduction of the lease liability so as to achieve a constant periodic rate of interest on the remaining balanceof the liability for each period. Finance charges are charged directly to the profit and loss account.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Operating lease

Leases where the lessor effectively retains substantially all the risks and rewards of ownership of the leased item areclassified as operating leases. Operating lease payments are recognised as an expense in the profit and loss accounton a straight-line basis over the lease term.

The aggregate benefit of incentives provided by the lessor is recognised as a reduction of rental expense over the leaseterm on a straight-line basis.

(q) Cash and cash equivalents

Cash and cash equivalents consist of unpledged fixed deposits, cash at bank and in hand less bank overdrafts butexclude secured bank overdrafts which are used for financing activities.

(r) Employee benefits

Defined contribution plans

As required by the law, the Company makes contributions to the state pension scheme, the Central Provident Fund(CPF). CPF contributions are recognised as compensation expense in the same period as the employment that givesrise to the contribution.

Accumulated compensation absences

The Company has accumulated compensated absences in the form of annual leave that are carried forward and canbe used in future periods if the current period’s entitlement is not used in full. Accumulated compensated absences arerecognised as annual leave expense in staff costs in the same period as the employment that gives rise to thecompensated absences. A provision is made for the estimated liability for leave as a result of services rendered byemployees up to balance sheet date.




120


(r) Employee benefits (continued)

Equity compensation benefits

The Company has employee share option plans for the granting of non-transferable options. No compensation cost isrecognised upon the grant or exercise of options. When the options are exercised, the proceeds received net of anytransaction costs are credited to share capital and share premium accordingly.

(s) Provisions

Provisions are recognised when the Company has a present obligation (legal or constructive) where as a result of a pastevent, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheetdate and adjusted to reflect the current best estimate.

(t) Borrowing costs

Borrowing costs are recognised as expenses in the period in which they are incurred.

(u) Impairment of assets

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount,an impairment loss is recognised in the profit and loss account.

Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairmentlosses recognised for the asset no longer exist or have decreased. The reversal is recorded in income. However, theincreased carrying amount of an asset due to a reversal of an impairment loss is recognised to the extent it does notexceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairmentloss been recognised for that asset in prior years.

2. Requirements of the Singapore Companies Act

The Company presents these financial statements to comply with the requirements of the Singapore Companies Act, to theextent that such requirements have not been waived by the Chief Executive, Accounting & Corporate Regulatory Authority.

Financial statements have been separately prepared for the Group, comprising the Company and its subsidiaries, in accordancewith accounting principles generally accepted in the United States of America which are set out in pages 53 to 107 attached tothese financial statements.




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3. General

The Company which is incorporated in Singapore is an associated company of SembCorp Ventures Pte Ltd, incorporated inSingapore. SembCorp Ventures Pte Ltd is a wholly-owned subsidiary of SembCorp Industries Ltd, incorporated in Singapore.Related parties refer to the members of the SembCorp Industries Ltd group of companies. Related companies refer to themembers of the Pacific Internet Limited group of companies.

The principal activities of the Company are the provision of Internet access services, e-commerce and communications services,sale of network configuration equipment, the design and maintenance of websites and investment holding.

The principal activities of the subsidiaries are those of e-commerce, content and community online services, website andapplication development services and operation of web portals in various segments, Internet access services, provision ofservices relating to corporate ticketing and hotel reservation and investment holding.

The Company employed 324 (2003 : 308) employees as at 31 December 2004.

Details of subsidiaries and associates at 31 December 2004 are :-

Name of Company Principal activities Effective equity(Country of incorporation) (Place of business) Cost interest held

2004 2003 2004 2003

$’000 $’000 % %

Subsidiaries

Held by the Company

* Pacific Internet Corporation Internet service provider 4,597 4,597 100 100Pte Ltd (Singapore)(Singapore)

* Pacific Supernet Limited Internet access service 20,957 20,957 100 100(known as Pacific Internet provider(Hong Kong) Limited (Hong Kong)with effect from3 January 2005)(Hong Kong)

* Pacific Internet (Australia) Investment holding and 33,606 33,606 100 100Pty. Limited internet access service(Australia) provider

(Australia)




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3. General (continued)


2004 2003 2004 2003

$’000 $’000 % %

Subsidiaries (continued)

Held by the Company

* Pacific Internet Corporation Inactive - (2) - (2) 100 100(Hong Kong) Limited (Hong Kong)(formerly known asPacific Internet(Hong Kong) Limited)(Hong Kong)

* Pacific Internet (Malaysia) Internet access 550 - (2) 100 100Sdn. Bhd. service provider(Malaysia) (Malaysia)

* Pacfusion Limited Inactive 31,607 31,307 100 (a) 92.1 (a)

(Bermuda) (Singapore)

* Pacific Internet Philippines, Inc. Internet access 920 920 53.8 (b) 53.8 (b)

(The Philippines) service provider(The Philippines)

* Pacific Internet Services Investment holding, - (2) - (2) 100 92.1Pte Ltd (1) e-commerce, content(Singapore) and community online

service provider.Became inactiveduring the year.(Singapore)

92,237 91,387

(a) During the year, the Company purchased 7.9% of shares in Pacfusion Limited for cash consideration of $300.(b) 53.8% (2003 : 53.8%) represents the effective interest of the Company in Pacific Internet Philippines, Inc. This includes

a direct interest of 31.1% (2003 : 31.1%) and an indirect interest of 22.7% (2003 : 22.7%).




123



2004 2003 2004 2003

$’000 $’000 % %

Subsidiaries (continued)

Held by Pacific Internet (Australia) Pty. Limited

* Zip World Pty Ltd Internet access 1,396 1,396 100 100(Australia) service provider

(Australia)

* Hunterlink Pty Limited Internet access 5,915 5,915 100 100(Australia) service provider

(Australia)

Held by Pacific Internet Services Pte Ltd (1)

* TravelFusion.com Limited Inactive - (2) - (2) 100 92.1(In Members’ Voluntary (Singapore)Liquidation)(Bermuda)

* Pacfusion (Malaysia) Sdn. Bhd. Inactive - - (2) - 92.1(Officially dissolved on (Malaysia)1 March 2004)(Malaysia)

* Pacfusion.com (Australia) Inactive - - (2) - 92.1Pty. Limited (Australia)(Deregistered on11 February 2004)(Australia)

* Safe2Travel Pte Ltd Provision of corporate 18,462 18,462 92.5 85.2(Previously held by and retail ticketing andTravelFusion.com Limited) hotel reservation services(Singapore) (Singapore)




124



2004 2003 2004 2003

$’000 $’000 % %

Associated companies

Held by the Company

* Pacific Internet India Internet access 92 - (2) 49 49Private Limited service provider(India) (India)

+ Pacific Digiway Limited Investment holding 2 2 49 49(Thailand) (Thailand)

* Pacific Internet (Thailand) Investment holding 5,140 5,140 74.0 (c) 74.0 (c)

Limited (Thailand)(Thailand)

* PW Holding Corporation Investment holding 764 764 40 40(The Philippines) (The Philippines)

5,998 5,906

Held by Pacific Internet Services Pte Ltd (1)

* Pacfusion.com (Thailand) Dormant 2 2 74 70Limited (Thailand)(Thailand)

Held by Pacific Internet (Thailand) Limited

* World Net & Services Co., Ltd. Internet access 23 23 49.8 49.8(Thailand) service provider

(Thailand)




125


(c) 74.0% (2003 : 74.0%) represents the effective interest of the Company in Pacific Internet (Thailand) Limited. Thisincludes a direct interest of 49% (2003 : 49%) and an indirect interest of 25.0% (2003 : 25.0%).

(1) Previously known as Pacfusion Group Holdings Pte Ltd. In 2004 the Company changed its holding company fromPacfusion Limited (Bermuda) to Pacific Internet Limited.

(2) Cost of investments lesser than S$500.* Audited by Ernst & Young, Singapore or member firms of Ernst & Young Global in the respective countries.+ Audited by other Certified Public Accounting firm

4. Operating profit

2004 2003

$’000 $’000

Operating profit is stated after charging/(crediting) :-Amortisation of intangible assets 168 168Auditors’ remuneration 310 314Depreciation of property, plant and equipment 2,649 3,520Directors’ fee 281 289Exchange loss 198 41Loss/(gain) on sales of property, plant and equipment 24 (3)Write off of property, plant and equipment 22 138Allowance for doubtful debts- trade receivables 968 847- receivables from related companies - 429- loan receivable - 111Staff costs- Central Provident Fund 1,852 2,268- Salaries, wages, bonuses and other cost 17,099 17,042- Directors’ Central Provident Fund 12 31- Directors’ remuneration 603 478

Included in staff costs above are remuneration of key management/executive officers amounting to $836 (2003 : $994).




126

5. Interest income

2004 2003

$’000 $’000

Interest income from :-Related company 42 104Fixed deposit and bank balances 192 104

234 208

6. Finance costs

2004 2003

$’000 $’000

Interest expense on :-Related party balances - 27Term loan 37 36Hire purchase creditors 61 74

98 137

7. Taxation

2004 2003

$’000 $’000

Current taxation :-Current year 3,279 2,738Prior year underprovision - 1,300

Deferred taxation :-Current year (Note 24) - (400)Prior year overprovision (Note 24) - (348)

3,279 3,290




127

7. Taxation (continued)

Reconciliations between the applicable statutory tax rate and effective tax rate for the years ended 31 December were asfollows :-

2004 2003

% %

Applicable statutory tax rate 20.0 22.0Effect of expenses that are not deductible 2.5 2.2Singapore statutory stepped income exemption - (0.1)Underprovision in respect of previous years - 9.6Others 4.3 (0.5)

Effective tax rate 26.8 33.2

8. Deferred expenditure

2004 2003

$’000 $’000

CostBalance at beginning and end of the financial year 379 379

AmortisationBalance at beginning of the financial year 358 358Charge for the financial year 21 -

Balance at end of the financial year 379 358

Net book value at end of the financial year - 21




128

9. Property, plant and equipment

Furniture Computers Telecom-and and Office Motor Construction- munication

Renovation fittings software equipment vehicles in-progress equipment Total

$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

CostAt 1 January 2004 2,913 673 25,150 2,107 130 786 2,561 34,320

Additions 111 122 1,963 48 - 1,091 - 3,335Disposals - (13) (2,143) (13) - - - (2,169)Write offs (216) (38) (522) (38) (130) - - (944)

Reclassifications - 4 235 - - (239) - -

At 31 December 2004 2,808 748 24,683 2,104 - 1,638 2,561 34,542

Accumulated depreciation *At 1 January 2004 2,752 499 19,248 1,571 125 497 2,561 27,253Charge for the financial year 127 93 2,182 242 5 - - 2,649Disposals - (5) (1,290) (11) - - - (1,306)Write offs (215) (32) (507) (38) (130) - - (922)

At 31 December 2004 2,664 555 19,633 1,764 - 497 2,561 27,674

Net book value

At 31 December 2004 144 193 5,050 340 - 1,141 - 6,868

At 31 December 2003 161 174 5,902 536 5 289 - 7,067

During the year, the Company acquired plant and equipment with an aggregate fair value of $302 (2003 : $476) by means offinance leases.

As at 31 December 2004, certain property, plant and equipment with a total net book value of $1,644 (2003 : $1,450) wereacquired under hire purchase contracts.

* Aggregated with accumulated impairment losses.




129

10. Intangible assets

2004 2003

$’000 $’000

CostAt the beginning of the financial year 1,042 813Additions 15 229

At the end of the financial year 1,057 1,042

Accumulated amortisationAt the beginning of the financial year 744 576Charge for the financial year 168 168

At the end of the financial year 912 744

Net book value at end of financial year 145 298

11. Amounts due from/(to) related companies and related parties

2004 2003

$’000 $’000

Long term receivable and loans receivable from related companies 13,503 13,455

The long term receivable and loans receivable from related companies are unsecured, interest-free and is repayable after morethan one year. Long term receivable and loans receivable from related companies are stated after deducting allowance fordoubtful debts of $1,041 (2003 : $1,041).

Due from :-

Related companies- trade 1,083 529- non-trade 10,607 10,918

Related parties- trade 160 157- non-trade 205 112

12,055 11,716




130

11. Amounts due from/(to) related companies and related parties (continued)

Amounts due from related companies and related parties are stated after deducting allowance for doubtful debts as follows :-

2004 2003

$’000 $’000

Allowance for doubtful debts 448 448

The amounts due from related companies and parties are unsecured, interest-free and are payable on demand, except foran amount of $428 (2003 : $428) due from a related company which bears an interest of 2% to 7.5% (2003 : 2% to 7.5%)per annum.

2004 2003

$’000 $’000

Due to :-

Related companies- trade (1,657) (1,160)- non-trade (5,198) (5,514)

Related parties

- non-trade (67) (190)

(6,922) (6,864)

The amounts due to related companies and parties are unsecured, interest-free and have no fixed terms of repayment.




131

12. Investments in subsidiaries

2004 2003

$’000 $’000

Unquoted shares, at cost 92,237 91,387Less : Impairment loss (32,426) (819)

59,811 90,568

13. Investments in associates

2004 2003

$’000 $’000

Unquoted shares, at cost 5,998 5,906Less : Impairment loss (545) (545)

5,453 5,361

14. Other investments

2004 2003

$’000 $’000

Unquoted shares, at cost 1,454 1,454Less : Impairment loss (1,454) (1,454)

- -

15. Inventories

2004 2003

$’000 $’000

Finished goods at cost 64 43




132

16. Trade receivables, net

2004 2003

$’000 $’000

Trade receivables are stated after deducting allowance for doubtful debts as follows :-

Allowance for doubtful debts 1,329 1,589

17. Other receivables

2004 2003

$’000 $’000

Deposits 176 269Prepayments 1,437 1,653Sundry receivables 127 9

1,740 1,931

18. Loan receivable

Loan receivable is unsecured, bears interest at 5.50% (2003 : 5.50%) per annum and is payable within one year.

Loan receivable is stated after deducting allowance for doubtful debts as follows:-

2004 2003

$’000 $’000

Allowance for doubtful debts 108 108

19. Bank borrowingsThe bank borrowings are unsecured, bear interest between 1.33% to 2.04% (2003 : 1.25% to 1.56%) per annum and arepayable on demand.




133

20. Provision and other payables

2004 2003

$’000 $’000

Provision for employee benefits 4,838 3,507Provision for advertising and promotion 1,379 1,423Accrued expenses 10,181 9,321Sundry creditors -

On purchase of fixed assets 71 38On advertising expenses 87 70Others 987 1,356

Deposits received 2 -

17,545 15,715

21. Deferred income

Deferred income relates to advanced billings to customers.

22. Hire purchase creditors

2004 2003

$’000 $’000

The present value of minimum lease payments are as follows:-Repayable within 1 year 470 417Repayable within 2 to 5 years 524 704

994 1,121

The future lease payments under hire purchase creditors are as follows :-Within 1 year 518 477Within 2 to 5 years 558 751

Total minimum lease payments 1,076 1,228Less : Amounts representing interest (82) (107)

Present value of minimum lease payments 994 1,121

The average discount rate implicit in the leases is 6.23% (2003 : 6.35%).




134

23. Share capital and share premium

2004 2003

$’000 $’000

Authorised :-Balance at beginning and at end of the financial year25,000,000 ordinary shares of $2 each 50,000 50,000

Issued and fully paid :-At beginning of year

13,034,691 (2003 : 12,815,066) ordinary shares of $2 each 26,069 25,630Issued during the financial year

259,487 (2003 : 219,625) ordinary shares of $2 each 519 439

At end of the financial year13,294,178 (2003 : 13,034,691) ordinary shares of $2 each 26,588 26,069

Share premium :-At beginning of the financial year 81,719 80,828Premium on issuance of ordinary shares 1,099 891

At end of the financial year 82,818 81,719

The holders of ordinary shares are entitled to receive dividends as and when declared by the Company. All ordinary sharescarry one vote per share without restriction.

Shares issued during the financial year relates to the exercising of share options under the Company’s share options plans asdisclosed in Note 25.

There are outstanding options to subscribe to the Company’s shares granted under the share option plans as disclosed inNote 25.




135

24. Deferred taxation

2004 2003

$’000 $’000

Balance at beginning of the financial year - 748Prior year overprovision (Note 7) - (348)Movement in temporary differences (Note 7) - (400)

- -

Deferred income tax assets and liabilities

Deferred tax liabilities :-Differences in depreciation and capital allowance claimed 1,068 1,242

Deferred tax assets :-Allowance for doubtful debts 266 471Provision for unutilised leave 85 97Other provisions 717 674

1,068 1,242

Net deferred tax - -

25. Equity compensation benefits

(a) 1998 Employee Share Option Plan (the “1998 ESOP”)

The 1998 ESOP was approved by the Company’s shareholders at an Extraordinary General Meeting held on 19 November1998. In connection with the adoption of the 1998 ESOP, it was determined that the Company will limit the issuance ofoptions under the 1998 ESOP such that the aggregate number of shares subject to outstanding options granted underthe 1998 ESOP will not at any time exceed 10% of the Company’s outstanding fully-diluted equity. The 1998 ESOPexpired during the year.

(b) 1999 Stock Option Plan (the “1999 SOP”)

On 10 November 1999, the Directors approved the 1999 SOP for certain eligible persons to subscribe for ordinaryshares in the Company. The maximum number of shares which may be granted under the 1999 SOP shall be thenumber together with the total number of options granted under the 1998 ESOP equals 20% of the Company thenissued share capital on a fully diluted basis. The exercise price is the average of the officially quoted closing price of theCompany’s shares on the NASDAQ’s National Market System for the five trading days immediately preceding the dateof grant.




136

25. Equity compensation benefits (continued)


(i) The 1998 ESOP and 1999 SOP are administered by the Compensation & Administrative Committee (“CAC”) which isthe reconstitution and merger of the Compensation Committee and the Administrative Committee on 30 May 2002.It is a committee comprising of the Board of Directors of the Company.

(ii) The Bank of New York has been appointed as the Stock Administrator for both Option Plans.

(iii) Pursuant to the resolutions passed by the CAC on 19 February 2004, one former Director was authorised to exercisehis options in full (including in respect of unvested shares) under the option agreements signed with the Companydated 10 November 1999, 25 April 2000, 10 January 2001 and 18 August 2003 in respect of some or all of the sharesat any time prior to or on 18 February 2006, with effect from 19 February 2004.

(iv) The Options for 1998, 1999 (1st, 2nd, 3rd and 4th tranche) generally become exercisable as follows :


(b) an additional 25% of the Options will vest and become exercisable on the second anniversary of the date ofgrant; and


The Options for 1999 (5th and 6th tranche) become exercisable as follows :


(b) an additional 33% of the Options will vest and become exercisable on the second anniversary of the date ofgrant; and





137


As at the end of the financial year, details of the options granted under the 1998 ESOP and 1999 SOP on the unissued ordinaryshares at S$2 each of the Company were as follows :-

Movements of share options outstanding :

Market priceof shares Weighted

Number of Options Number of at date averageExercise options granted Options options of issue remaining

Date of grant price outstanding and Options cancelled/ outstanding pursuant to Exercise contractualof options per share 1.1.2004 accepted exercised lapsed 31.12.2004 the scheme period life

5.2.1999 US$17.00 256,700 - - 256,700 - US$17.00 5.2.2000 -to 4.2.2004

10.11.1999 US$32.48 320,600 - - 320,600 - US$37.38 10.11.2000to 9.11.2004 -

25.4.2000 US$25.60 159,650 - - 65,050 94,600 US$27.22 25.4.2001to 24.4.2005 0.42

10.1.2001 US$3.60 199,175 - 122,511 5,650 71,014 US$3.59 10.1.2002to 9.1.2006 1.04

10.4.2001 US$3.09 198,600 - 111,100 - 87,500 US$3.01 10.4.2002to 9.4.2006 1.33

18.8.2003 S$11.22 694,800 - 25,876 134,560 534,364 S$10.66 18.8.2004to 17.8.2008 3.67

25.3.2004 S$16.92 - 766,000 - 88,000 678,000 S$16.80 25.3.2005to 24.3.2009 4.25

1,829,525 766,000 259,487 870,560 1,465,478




138


Movements of share options vested :

Number of Number of Number of Number of Number ofoptions options options options options

Date of grant vested vested exercised cancelled/ vestedof options 1.1.2004 in 2004 in 2004 lapsed 31.12.2004 Exercise period

5.2.1999 256,700 - - 256,700 - 5.2.2000 to 4.2.2004

10.11.1999 320,600 - - 320,600 - 10.11.2000 to 9.11.2004

25.4.2000 159,650 - - 65,050 94,600 25.4.2001 to 24.4.2005

10.1.2001 41,942 157,233 * 122,511 5,650 71,014 10.1.2002 to 9.1.2006

10.4.2001 77,291 121,309 111,100 - 87,500 10.4.2002 to 9.4.2006

18.8.2003 - 205,103 * 25,876 9,075 170,152 18.8.2004 to 17.8.2008

856,183 483,645 259,487 657,075 423,266

* Pursuant to the resolution passed by the Compensation & Administrative Committee (“CAC”) on 19 February 2004,the CAC authorised one former Director to exercise his options in full (including in respect of unvested shares) under theoption agreements signed with the Company dated 10 November 1999, 25 April 2000, 10 January 2001 and 18 August2003 in respect of some or all of the shares at any time prior to or on 18 February 2006, with effect from 19 February 2004.

26. Cash and cash equivalents

Cash and cash equivalents included in the statement of cash flow comprises the following balance sheet amounts :-

2004 2003

$’000 $’000

Cash and bank balances 3,534 11,308Unpledged fixed deposits 38,476 17,671

42,010 28,979




139

27. Commitments

2004 2003

$’000 $’000

Future capital expenditureCapital expenditure not provided for in the financial statements :-Commitments in respect of contracts placed - 800

During the year, the commitment to IDA was discharged as the license associated with the commitment was transferred to asubsidiary company.

28. Operating leases

Rental expense (principally for offices and equipment) was $1,107 and $2,068 for the financial years ended 31 December 2004and 2003, respectively.

The future minimum lease payments under non-cancellable operating leases are as follows:-

2004 2003

$’000 $’000

Amount payable :-Within 1 year 2,056 2,469Within 2 to 5 years 931 1,433

2,987 3,902




140

29. Related party transactions

Sales of goods to related companies and related parties were made at the Company’s usual list prices. Purchases were madeat the market price. The Company had the following significant related party transactions and the effect of these transactionson the basis determined between the parties are reflected in the financial statements:

2004 2003

$’000 $’000

Management fees receivable from related companies and related parties (913) (822)Sale of fixed assets to subsidiary companies (822) (10)Purchase of fixed assets from subsidiary companies - 20Sales to subsidiary companies (202) (316)Sales to associated companies (15) 41Sales to related parties (444) (596)Purchase of goods and services from subsidiary companies 880 1,657Purchase of goods and services from associated company 20 78Interest incurred on amounts owing to related parties - 27Interest income from an associated company (42) (104)Loan to associated company - 125Loan to subsidiary company 800 250

An amount of nil (2003 : S$74) of the Company’s banking facilities has been utilised by a subsidiary company in favor of athird party for the lease of premises.

30. Exceptional item

This relates to impairment loss on a subsidiary company.




141

31. Financial risk management objectives and policies

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk, foreign currency risk andcredit risk. The Board of Directors reviews and agrees policies for managing each of these risks and they are summarisedbelow.

Interest rate risk

The Company’s exposure in market risk for changes in interest rates relate primarily to its short-term bank borrowings, longterm loans receivable from related companies and cash deposits placed with financial institutions. Information relating to theCompany’s interest rate exposure is disclosed in the notes on bank borrowings, loans due from related parties and relatedcompanies and finance lease obligations. For interest from cash deposits, the Company manages the interest rate risks byplacing surplus funds with reputable banks.

Liquidity risk

The Company manages its liquidity risk by placing its cash and cash equivalents with reputable banks and obtaining its short-term funding from bank borrowings.

Foreign currency risk

Certain of the Company’s international transmission capacity charges are denominated in U.S. dollars, and purchase orders forcertain equipment may from time to time be denominated in U.S. dollars. The non-current amounts due from an associatedcompany and some parts of the long term loans to related companies are denominated in Philippine Pesos, Thai Baht and U.S.dollars. The Company’s exposure to foreign currencies is primarily managed by natural hedges of matching assets and liabilitiesdenominated in currencies. The Company closely monitors and ensures that the remaining net foreign exchange exposure ismaintained at an acceptable level by buying or selling foreign currencies at spot rates to address short-term imbalances.

The Company does not use any hedging instruments to protect against the volatility associated with foreign currency purchaseof products and other assets and liabilities created in the normal course of business.

Credit risk

The Company’s maximum exposure to credit risk in the event that the counterparties fail to perform their obligations as of 31December 2004 in relation to trade and other receivables, current amounts due from/to related companies and parties andcash and cash equivalents, is the carrying amount of those assets as indicated in the balance sheet, and is generally limited tothe amounts, if any, by which the counterparty’s obligations exceed the obligations of the Company.

No other financial assets carry a significant exposure to credit risk. The Company has no significant concentrations of creditrisk. Cash is placed with substantial financial institutions.




142

31. Financial risk management objectives and policies (continued)

Fair values

The aggregate net fair value of hire purchase liabilities of the Company which are not carried at fair value in the balance sheetis $1,142 (2003 : $1,248). The fair values of these hire purchase liabilities are estimated using discounted cash flow analysis,based on their effective interest rates.

The carrying amounts of trade and other receivables, cash, fixed deposits, current amounts due from/to related companies andparties, bank borrowings, trade payables, deferred income, provisions and other payables, approximate their fair values due totheir short-term nature.

In the Directors’ opinion, it is not practicable to determine the fair values of the unquoted equity investments in subsidiary andassociated companies held as long-term investments and carried at cost, net of provision, of $65,264 (2003 : $95,929). Theexpected cash flows from these investments are believed to be in excess of their carrying amounts.

In the Director’s opinion, it is not practicable to determine the fair value of long-term amounts due from related companiescarried at cost, net of provision, of $13,503 (2003 : $13,455) as there are no fixed terms of repayment although they are notexpected to be repaid within one year.

32. Contingent liabilities

(a) On 6 December 2001, a class action lawsuit (“IPO Allocation Suit”) was instituted in the United States District Court forthe Southern District of New York against the Company and several of the Company’s former directors and officers aswell as against the underwriters who handled the Company’s 5 February 1999 initial public offering (“IPO”). The complaintfiled with respect to the IPO Allocation Suit alleges violations of the Securities Act of 1933 and the Securities ExchangeAct of 1934 and is based primarily on the assertion that there were undisclosed commissions received by the underwriterdefendants and agreements or arrangements entered into by the underwriters for additional purchases of the Company’ssecurities in the aftermarket by selected investors at pre-determined prices. The action seeks damages in an unspecifiedamount. In April 2002, an amended complaint was filed against the Company. The amended complaint included,amongst others, allegations of price-manipulation in the Company’s IPO as well as its second offering conducted inMay 1999.

The Company has been advised by its US counsel that similar class action suits have been filed against about 300other companies that went public between 1998 and 2001 and that all such cases have been consolidated before asingle judge for case management purposes. On July 15, 2002, the Company and the individual defendants, alongwith the other issuers and their related officer and director defendants, filed a joint motion to dismiss based on commonissues. On February 19, 2003, the Court denied the motion to dismiss as to all claims brought against the Companyand the individual defendants, except for claims brought against the individual defendants under Section 10(b) of theSecurities Exchange Act of 1934, which were dismissed.




143

32. Contingent liabilities (continued)

a) On July 30, 2003, the Litigation Committee of the Board of Directors of the Company approved a Memorandum ofUnderstanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against the Companywith prejudice in return for the assignment by the Company of claims that the Company might have against its underwriters.No payment to the plaintiffs by the Company was required under the MOU. After further negotiations, the essentialterms of the MOU were formalized in a Stipulation and Agreement of Settlement (“Settlement”), which has been executedon behalf of the Company. The settling parties presented the Settlement papers to the Court on June 14, 2004 and filedbriefs formally seeking preliminary approval of the proposed Settlement on June 25, 2004. The underwriter defendants,who are not parties to the proposed Settlement, filed a brief objecting to the Settlement’s terms on July 14, 2004. OnFebruary 15, 2005, the Court granted preliminary approval of the Settlement conditioned on agreement by the partiesto narrow one of a number of provisions in the Settlement intended to protect the issuers against possible future claimsby the underwriters. A final hearing on approval of the settlement will be scheduled in mid-March. Despite the preliminaryapproval, there can be no assurance that the Court will provide final approval of the Settlement.

The proposed Settlement does not resolve the claims that the plaintiffs have against the underwriter defendants. Thelitigation between those parties is proceeding and is currently in the class certification stage. Due to the large numberof cases consolidated into the IPO litigation, the Court, as a case management device, ordered the plaintiffs andunderwriters to select from the approximately 300 consolidated cases “focus cases” intended to present a representativesample of parties and issues. Six focus cases were chosen for the class certification stage. On October 13, 2004, theCourt certified classes in each of the six class certification focus cases. The underwriter defendants have sought reviewof that decision.

The plaintiffs and underwriters have chosen additional focus cases for purposes of the discovery phase. The underwriterdefendants selected the Company as a merits focus case. As a result, among other things, the Company will besubject to discovery obligations that non-focus case issuers will not be subject to. However, the selection of theCompany as a focus case will not impact its ability to participate in the proposed Settlement.

The Company believes that it and the individual defendants have meritorious defenses to the claims made in thecomplaints and, if the Settlement is not approved by the Court, intends to contest the lawsuit vigorously. However, thelitigation remains at a preliminary stage. Due to the inherent uncertainties of the lawsuit, the Company cannot accuratelypredict the ultimate outcome of the lawsuit. An unfavorable outcome could have a material adverse effect on thebusiness, financial condition and results of operation of the Company in the period in which the lawsuit is resolved.

The Company is or may be potentially involved in other litigation incidental to its business. Although the outcome of anysuch litigation is not presently determinable, the resolution of such litigation is not expected to have a material adverseeffect on its business. No assurances can be given with respect to the extent or outcome of any such litigation inthe future.




144

32. Contingent liabilities (continued)

(b) The Company has given corporate guarantees of S$9,566 (2003 : S$9,620) to banks in respect of banking facilitiesextended to subsidiary companies amounting to S$9,566 (2003 : S$9,320) of which the amount utilised was S$3,683(2003 : S$2,910).

33. Authorisation of financial statements

The financial statements for the year ended 31 December 2004 were authorised for issue in accordance with a resolution of theDirectors on 28 February 2005.



Investor Information

Independent AccountantsErnst & Young

Stock ExchangeThe Common Stock of the Company is traded on the NASDAQ National Market under the symbol PCNTF in lots of 100 shares.

Shares OutstandingAs of December 31, 2004 is 13,294,178

Fiscal YearDecember 31

Stock Register and Transfer AgentThe Bank of New York One Wall Street New York, New York 10286

Form 20-F and 6-K InformationSoftcopies of Form 20-F and 6-K as filed with the Securities and Exchange Commission are available on our Investor Relations website: www.pacnet.com/investor

Quarterly Earnings Schedule of our quarterly earnings release datesis available on our Investor Relations website.A conference call is held on the same day afterthe earnings results have been released.

Investor Contact InformationShareholders, financial analysts, brokers, financial mediaand others seeking information about the Company’sfinancial affairs may contact:

Pacific Internet LimitedInvestor Relations89, Science Park Drive#02-05/06, The RutherfordSingapore 118261Tel: 65-6872 0322Fax: 65-6872 2126Email: [email protected]


Forward-looking Statements Disclaimer

Included in this report are various forward-looking statements which are made pursuant to the safe harbor provisions of the “Private Securities Litigation Reform Act of 1995”, some of these may be identified by the use of words such as “seek”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, “project”, “plan”, “strategy”, “forecast” and similar expressions or future or conditional verbs such as “will”, “would”, “should”, “could”, “may” and “might”. The Group has made forward-looking statements with respect to the following, among others:

• projected capital expenditures, expansion plans and liquidity;• development and growth of additional revenue sources;• development and maintenance of profitable pricing programs; and• outcome of potential litigation.

These statements are forward-looking which reflect the Group's current expectations, beliefs, hopes, intentions or strategies regarding the future and assumptions in light of currently available information. They are subject to a number of risks and uncertainties, including but not limited to, (1) continued decline in economic conditions; (2) increasing maturity of the market for Internet access and fluctuations in the use of the Internet that may adversely impact the Group’s subscriber growth rates and revenues; (3) changes in technology and the Internet marketplace; (4) the Group’s continued ability to develop and win acceptance of its products and services, which are offered in highly competitive markets, more particularly, changes in the assumptions of the effectiveness of business strategies or initiatives carried out or to be carried out by the Group; (5) the success of its business partnerships and alliances; (6) exchange rates, particularly between the Singapore dollar, the US dollar and other currencies in which the Group makes significant sales or in which its assets and liabilities are denominated; (7) deterioration of the financial position of debtors; (8) changes in estimates of network service costs accruals due to delayed or late billing by telecommunication companies; (9) changes in economic environment, churn rate of subscribers or assessment of future operations resulting in an impairment in goodwill and other intangible assets; (10) changes in assumptions of the effectiveness of strategies related to legal proceedings generally and more particularly changes in assumptions of costs of maintaining such proceedings; (11) changes in assumptions of the effectiveness of tax planning strategies generally and more particularly (i) changes in operations that may affect the assumptions relating to deferred tax assets; and (ii) changes in factors affecting the interpretation of certain withholding tax laws which may significantly impact the Group’s cash resources; (12) obtaining the requisite funding support and the challenge of keeping expense growth at manageable levels while increasing revenues; (13) changes in the economic, regulatory and political environment in the countries where the Group operates, or may in the future operate, including but not limited to (i) changes in tax, telecommunications, licensing and other relevant laws and regulations; (ii) changes in political stability; and (14) the outcome of contingencies. In addition to the foregoing factors, a description of certain other risks and uncertainties which could cause actual results to differ materially can be found in the section captioned “Risk Factors” in our latest Annual Report on Form 20-F filed with the U.S. Securities and Exchange Commission. In light of the many risks and uncertainties surrounding the Group and the Internet marketplace, actual results could differ materially from those discussed in this report. Given these concerns, undue reliance should not be placed on these statements.The Group assumes no obligation to update any such statements.

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Pacific Internet Limited

89 Science Park Drive#02-05/06 The Rutherford

Singapore 118261Tel: (65) 6872 0322Fax: (65) 6774 1677www.pacnet.com

Documents

This is Us - library.corporate-ir.netlibrary.corporate-ir.net/library/11/117/117746/items/154924/2004.pdf · Through the years you’ve felt our presence in your ... Paciﬁc Internet