Overview

 

This compensation discussion describes the material elements of compensation awarded to, earned by, and paid to each of our executive officers listed in the Summary Compensation Table below (the "named executive officers") during the last completed fiscal year. This compensation discussion focuses on the information contained in the following tables and related footnotes and narrative primarily for the last completed fiscal year, but we have also described compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.

 

The compensation committee currently oversees the design and administration of our executive compensation program.

 

Objectives and Philosophy

 

In General. The objectives of our compensation programs are to:

 

	·	Provide our executive officers with both cash and equity incentives to motivate them to further the interests of the company and our stockholders
	·	Provide employees with long-term incentives to assist in creating a culture of corporate ownership, which we believe will assist in retaining these employees
	·	Provide stability during our growth stage

 

Generally, the compensation of our executive officers is composed of an annual base salary annual incentive compensation and equity awards in the form of stock options, other benefits and perquisites, post-termination severance and acceleration of stock option vesting for certain named executive officers upon termination and/or a change in control. Our other benefits and perquisites consist of life and health insurance benefits. In setting base salaries, the compensation committee generally reviews the individual contributions of the particular executive. In addition, stock options are granted to provide the opportunity for long-term compensation based upon the performance of our common stock over time. Our philosophy is to aggregate these elements so that they reach at a level that is commensurate with our size and sustained performance.

 

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Elements of Compensation

 

Compensation consists of following elements:

 

Base Salary. Base salaries for our executive officers are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies in our industry for similar positions, and the other elements of the executive officer’s compensation, including stock-based compensation. Our intent is to target executive base salaries near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed annually, and may be increased annually to realign salaries with market levels after taking into account individual responsibilities, performance and experience. Based on publicly available information, we believe that the base salaries established for our executive officers are comparable to those paid by similar companies in our industry.

 

Annual Bonuses. Our executive officers and certain other employees are eligible for annual cash bonuses, which are paid at the discretion of our compensation committee. The employment agreement with our executive officers do not provide for minimum bonuses. The determination of the amount of annual bonuses paid to our executive officers generally reflects a number of subjective considerations, including the performance of our company overall and the contributions of the executive officer during the relevant period.

 

Incentive Compensation. We believe that long-term performance is achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock-based awards. Our 2006 Stock Option Plan permits the grant of stock options, restricted stock, stock appreciation rights, and performance-based stock awards. Under power delegated by our Board, the Compensation Committee of the Board has the authority to award incentive compensation to our executive officers, employees, consultants and directors in such amounts and on such terms as the committee determines in its sole discretion.

 

Currently, we do not maintain any incentive compensation plans based on pre-defined performance criteria. Incentive compensation is intended to compensate executive officers, employees, consultants and directors for achieving financial and operational goals and for achieving individual annual performance objectives. These objectives are expected to vary depending on the individual executive, but are expected to relate generally to strategic factors such as expansion of our services and to financial factors such as improving our results of operations. The actual amount of incentive compensation for the prior year will be determined following a review of each executive’s individual performance and contribution to our strategic goals conducted during the first quarter of each year. Specific performance targets used to determine incentive compensation for each of our executive officers in 2007 have not yet been determined.

 

Other Compensation. Each employment agreement provides the executive with certain other benefits, including reimbursement of business and entertainment expenses and housing allowance. Each executive is eligible to participate in all benefit plans and programs that are or in the future may be available to other executive employees of our company, including any profit-sharing plan, thrift plan, health insurance or health care plan, disability insurance, pension plan, supplemental retirement plan, vacation and sick leave plan, and other similar plans. The compensation committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites as it deems advisable. We believe that these benefits and perquisites are typically provided to senior executives of similar companies.

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Compensation Committee Report

 

Our compensation committee has certain duties and powers as described in its charter. The compensation committee is currently composed of the four independent directors named at the end of this report, each of whom is independent as defined by the NASDAQ Global Market listing standards.

 

The compensation committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this Proxy Statement. Based upon this review and discussion, the compensation committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in our Proxy Statement to be filed with the SEC.

 

Compensation Committee of the Board of Directors

Michael Ha, Chairman

Jeremy Goodwin

Jin Tao

Peter Wang

 

This report shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.

 

Summary Compensation Table

 

The following table sets forth all cash compensation paid or to be paid by the Company, as well as certain other compensation paid or accrued, during each of the Company’s last three fiscal years to each named executive officer.

Name and Principal Position				Year			Salary ($)			Housing Allowance			Option Awards ($) (1)			All Other Compensation			Total ($)
Tony Tong, Chairman, Chief Executive Officer and Director					2006			$100,000						$21,552						$121,552
Joe Levinson, Chief Financial Officer					2006			$40,000	(2)											$40,000
Victor Tong, President and Director					2006			$48,000			$24,000			$21,552						$93,552
	1)	Valuation based on the dollar amount of option grants recognized for financial statement reporting purposes pursuant to FAS 123R with respect to 2006. On December 15, 2006, the board of directors cancelled all options granted in 2005 and 2006.
	2)	Mr. Levinson resigned as our Chief Financial Officer on February 9, 2007.

 

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Employment Agreements

 

On March 25, 2003, we entered into an Executive Employment Contract with Victor Tong. Mr. Tong currently serves as our President. The employment agreement provides for Mr. Tong to earn an annual base salary of $48,000 in cash, plus $10,000 in stock compensation annually until January 1, 2006. Mr. Tong is also eligible for an annual bonus for each fiscal year during the term of his contract based on performance standards as the compensation committee may deem appropriate. Mr. Tong is entitled to receive a monthly housing allowance of $2,000 and a monthly automobile allowance of $500. Mr. Tong’s employment contract was renewed for a period of three years through December 30, 2008, starting from the expiration of the previous employment contract which ended on December 30, 2005. Mr. Tong’s annual base salary was also increased to $100,000 on October 29, 2006.

 

On December 30, 2002, we entered into an Executive Employment Contract with Tony Tong. Mr. Tong currently serves as our Chief Executive Officer. The employment agreement provides for Mr. Tong to earn an annual base salary of $100,000 in cash, plus $60,000 in stock compensation annually until April 1, 2005. Mr. Tong is also eligible for an annual bonus for each fiscal year during the term of his contract based on performance standards as the Board or compensation committee designates. Mr. Tong is entitled to receive a monthly housing allowance of $2,500, monthly automobile allowance of $500, tax preparation expenses of $2,000 per year, and cash bonus based on our net profit. Mr. Tong’s employment contract was renewed for a period of three years through December 30, 2008, starting from the expiration of the previous employment contract which ended on December 30, 2005.

 

On August 3, 2006, the Company entered into a consulting services agreement with Levinson Services Partners, of which Joe Levinson, the Company’s former Chief Financial Officer is manager, which set forth Mr. Levinson’s duties as the Chief Financial Officer of the Company and the terms of his compensation. The agreement was for a term of three (3) years commencing on September 5, 2006. The consulting agreement provided that Mr. Levinson was to receive an annual base salary of $120,000, plus stock options to purchase up to 12,000 shares of Company common stock per year, vesting in equal installments over a 10 month period, and stock options granted on an annual basis which vest only if the stock price of PacificNet common stock reaches certain thresholds. Mr. Levinson was also to be reimbursed for expenses. The consulting agreement was terminated as a result of Mr. Levinson’s resignation as Chief Financial Officer on February 9, 2007.

 

Grants of Plan-Based Awards

 

During the fiscal year ended December 31, 2006, options were issued to the named executive officers to purchase 70,000 shares of common stock in the aggregate. On December 15, 2006, our board of directors decided to cancel all options previously granted in 2005 and 2006, due to the increasing cost to administer stock options.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2006.

 

Name		Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)			Option Expiration Date
Tony Tong, CEO			75,000			-			-			$2.00			7-26-2007
Victor Tong, President			75,000			-			-			$2.00			7-26-2007
Joseph Levinson, CFO			-			-			-			-			-

 

Option Exercises and Stock Vested

 

The following table summarizes stock option exercises by our named executive officers in 2006.

 

		Option Awards
Name/ Principal Position		Number of Shares Acquired on Exercise (#)		Value Realized on Exercise ($)
Tony Tong, CEO		90,000		$193,500
Victor Tong, President		90,000		$198,000
Joseph Levinson, CFO		-		-

 

1998 Incentive Stock Option Plan

 

Administration of the 1998 Plan

 

2,000,000 shares of common stock are reserved under the PacificNet, Inc. 1998 Stock Option Plan (the “1998 Incentive Plan”) for issuance upon exercise of stock options. . The 1998 Incentive Plan provides for a term of ten years from the date of its adoption by the board of directors (unless the Incentive Plan is earlier terminated), after which no awards may be made.   The 1998 Plan may be administered by the Board of Directors or a committee of the Board of Directors (in either case, the “Committee”), which has complete discretion to select the optionees and to establish the terms and conditions of each option, subject to the provisions of the 1998 Plan. Options granted under the 1998 Plan may be “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified options.

 

Options

 

Options granted under the 1998 Plan may be either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”). Options may be granted on such terms and conditions as the Committee may determine; provided, however, that the exercise price of an option may not be less than the fair market value of the underlying stock on the date of grant and the term of the option my not exceed 10 years (110% of such value and 5 years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of capital stock of the Company or a parent or subsidiary of the Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of Common Stock covered by ISOs (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO.

 

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Transferability of Options.

 

The Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

 

Term; Amendments

 

The 1998 Plan is effective for 10 years, unless it is sooner terminated or suspended. The Committee may at any time amend, alter, suspend or terminate the 1998 Plan; provided that no amendment requiring stockholder approval will be effective unless such approval has been obtained. No termination or suspension of the 2005 Plan will affect an award which is outstanding at the time of the termination or suspension.

 

Certain Federal Income Tax Consequences

 

Incentive stock options granted under the 1998 Plan will be afforded favorable federal income tax treatment under the Code. If an option is treated as an incentive stock option, the optionee will recognize no income upon grant or exercise of the option unless the alternative minimum tax rules apply. Upon an optionee’s sale of the shares (assuming that the sale occurs at least two years after grant of the option and at least one year after exercise of the option), any gain will be taxed to the optionee as long-term capital gain. If the optionee disposes of the shares prior to the expiration of the above holding periods, then the optionee will recognize ordinary income in an amount generally measured as the difference between the exercise price and the lower of the fair market value of the shares at the exercise date or the sale price of the shares. Any gain or loss recognized on such a premature sale of the shares in excess of the amount treated as ordinary income will be characterized as capital gain or loss.

 

All other options granted under the 1998 Plan will be nonstatutory stock options and will not qualify for any special tax benefits to the optionee. An optionee will not recognize any taxable income at the time he or she is granted a nonstatutory stock option. However, upon exercise of the nonstatutory stock option, the optionee will recognize ordinary income for federal income tax purposes in an amount generally measured as the excess of the then fair market value of each share over its exercise price. Upon an optionee’s resale of such shares, any difference between the sale price and the fair market value of such shares on the date of exercise will be treated as capital gain or loss and will generally qualify for long-term capital gain or loss treatment if the shares have been held for more than one year. Recently enacted legislation provides for reduced tax rates for long-term capital gains based on the taxpayer’s income and the length of the taxpayer’s holding period.

 

The foregoing does not purport to be a complete summary of the federal income tax considerations that may be relevant to holders of options or to the Company. It also does not reflect provisions of the income tax laws of any municipality, state or foreign country in which an optionee may reside, nor does it reflect the tax consequences of an optionee’s death.

 

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2005 Equity Incentive Plan

 

Awards

 

The 2005 Equity Incentive Plan (the “2005 Plan”) provides for the grant of options and stock appreciation rights (“SARs”) of up to an aggregate of 2,000,000 shares of Common Stock to directors, officers, employees and independent contractors of the Company or its affiliates. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2005 Plan.

 

Administration of the 2005 Plan

 

The 2005 Plan is administered by the Board of Directors or a committee of the Board of Directors consisting of not less than two members of the Board, each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and an “outside director” within the meaning of Code Section 162(m) (in either case, the “Committee”). Among other things, the Committee has complete discretion, subject to the express limits of the 2005 Plan, to determine the persons to be granted an award, the type of award to be granted, the number of shares of Common Stock subject to each award, the exercise price of each option, the term of each award, the vesting schedule for an award, whether to accelerate vesting, the value of the stock, and the required withholding. The Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would materially and adversely affect the participant. The Committee is also authorized to construe the award agreements, and may prescribe rules relating to the 2005 Plan. Notwithstanding the foregoing, the Committee does not have any authority to grant or modify an award under the 2005 Plan with terms or conditions that would cause the grant, vesting or exercise to be considered nonqualified “deferred compensation” subject to Code Section 409A.

 

Limitation on number of Awards.

 

Among other things, in order for the grant of stock options and SARs to qualify as performance-based compensation and be excluded from the Company’s corporate income tax deduction cap of $1,000,000 per year for its Named Executive Officers, as set forth in Section 162(m) of the Code, the stockholders must approve the maximum number of shares of common stock that can be issued to any one person under the Plan in any calendar year. The number of shares of Common Stock for which stock options or SARs may be granted to a participant under the 2005 Plan in any calendar year cannot exceed 500,000.

 

Options

 

Options granted under the 2005 Plan may be either “incentive stock options” (“ISOs”), which are intended to meet the requirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”). Options may be granted on such terms and conditions as the Committee may determine; provided, however, that the exercise price of an option may not be less than the fair market value of the underlying stock on the date of grant and the term of the option my not exceed 10 years (110% of such value and 5 years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of capital stock of the Company or a parent or subsidiary of the Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of Common Stock covered by ISOs (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO.

 

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Stock Appreciation Rights.

 

Stock appreciation rights may be granted under our 2005 Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The Committee determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the increased appreciation in cash or with shares of our common stock, or a combination thereof. Stock appreciation rights expire under the same terms that apply to stock options.

 

Additional Terms

 

Except as provided in the 2005 Plan, awards granted under the 2005 Plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their guardian or legal representative. Each award agreement will specify, among other things, the effect on an award of the disability, death, retirement, authorized leave of absence or other termination of employment. The Company may require a participant to pay the Company the amount of any required withholding in connection with the grant, vesting, exercise or disposition of an award. A participant is not considered a stockholder with respect to the shares underlying an award until the shares are issued to the participant.

 

Term; Amendments

 

The 2005 Plan is effective for 10 years, unless it is sooner terminated or suspended. The Committee may at any time amend, alter, suspend or terminate the 2005 Plan; provided that no amendment requiring stockholder approval will be effective unless such approval has been obtained. No termination or suspension of the 2005 Plan will affect an award which is outstanding at the time of the termination or suspension.

 

Certain Federal Income Tax Consequences

 

The following is a general summary of the federal income tax consequences under current tax law of options and stock appreciation rights. It does not purport to cover all of the special rules, including special rules relating to participants subject to Section 16(b) of the Exchange Act and the exercise of an option with previously-acquired shares, or the state or local income or other tax consequences inherent in the ownership and exercise of stock options and the ownership and disposition of the underlying shares or the ownership and disposition of restricted stock.

 

Options. A participant does not recognize taxable income upon the grant of NQSO or an ISO. Upon the exercise of a NQSO, the participant recognizes ordinary income in an amount equal to the excess, if any, of the fair market value of the shares acquired on the date of exercise over the exercise price thereof, and the Company will generally be entitled to a deduction for such amount at that time. If the participant later sells shares acquired pursuant to the exercise of a NQSO, the participant recognizes long-term or short-term capital gain or loss, depending on the period for which the shares were held. Long-term capital gain is generally subject to more favorable tax treatment than ordinary income or short-term capital gain.

 

Upon the exercise of an ISO, the participant does not recognize taxable income If the participant disposes of the shares acquired pursuant to the exercise of an ISO more than two years after the date of grant and more than one year after the transfer of the shares to the participant, the participant recognizes long-term capital gain or loss and the Company is not be entitled to a deduction. However, if the participant disposes of such shares within the required holding period, all or a portion of the gain is treated as ordinary income and the Company is generally entitled to deduct such amount.

 

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Stock Appreciation Rights. Generally, no taxable income is realized upon the grant of an SAR. Upon exercise, the holder of the SAR is taxed at ordinary income tax rates on the amount of any cash and the fair market value of any stock received.

 

In addition to the tax consequences described above, a participant may be subject to the alternative minimum tax, which is payable to the extent it exceeds the participant’s regular tax. For this purpose, upon the exercise of an ISO, the excess of the fair market value of the shares over the exercise price therefore is an adjustment which increases alternative minimum taxable income. In addition, the participant’s basis in such shares is increased by such excess for purposes of computing the gain or loss on the disposition of the shares for alternative minimum tax purposes. If a participant is required to pay an alternative minimum tax, the amount of such tax which is attributable to deferral preferences (including the incentive option adjustment) is allowed as a credit against the participant’s regular tax liability in subsequent years. To the extent the credit is not used, it is carried forward.

 

Option Exercises and Stock Vested

 

The following table summarizes stock option exercises by our named executive officers in 2006.

 

		Option Awards				Stock Awards
Name/ Principal Position		Number of Shares Acquired on Exercise (#)		Value Realized on Exercise ($)		Number of Shares Acquired on Vesting (#)		Value Realized on Vesting ($)
Tony Tong, CEO		90,000		$193,500		-		-
Victor Tong, President		90,000		$198,000		-		-
Joseph Levinson, CFO		-		-		-		-

 

Pension Benefits

 

We do not sponsor any qualified or non-qualified defined benefit plans.

 

Nonqualified Deferred Compensation

 

We do not maintain any non-qualified defined contribution or deferred compensation plans. The compensation committee may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests.

 

Non-Employee Director Compensation

 

Name of Director				Year		Fees Owed or Paid in Cash		Option Awards ($) (1)		All other compensation ($)		Total($)
ShaoJian (Sean) Wang				2006		-		$12,316		-		$12,316
Peter Wang				2006		-		$9,237		-		$9,237
Michael Ha				2006		-		$9,237		-		$9,237
Tao Jin				2006		-		$9,237		-		$9,237
Jeremy Goodwin (2)				2006		$10,000		-		-		$10,000
	(1)	Valuation based on the dollar amount of option grants recognized for financial statement reporting purposes pursuant to FAS 123(R). On December 15, 2006, the board of directors cancelled all options granted in 2005 and 2006.
	(2)	As per Mr. Goodwin’s request the director fees for 2006 were paid in cash.

 

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COMPENSATION OF DIRECTORS

 

Directors’ Fees. All of the Company’s directors are reimbursed for out-of-pocket expenses relating to attendance at meetings. Each director is paid a sign-on bonus of 10,000 stock options of common stock of the Company. Each director is also entitled to US$500 for each board meeting that such director attends in person, by conference call, or by committee action and US$200 for each committee meeting, payable by cash, common stock or stock options of the Company, at the option of the Company.

 

Annual Retainer Fee. Each director is paid an annual retainer fee of US$10,000 in the form of common stock or stock options of the Company. Such retainer fee is paid semi-annually in arrears. The number of shares of common stock issued is based on the average closing market price over the ten trading days prior to the end of the six month period that the retainer fee is due.

 

 

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PROPOSAL 2

RATIFICATION OF THE APPOINTMENT OF THE

INDEPENDENT PUBLIC ACCOUNTANTS

 

The firm of Kabani & Company, Inc. (“Kabani”) has served as our independent auditors since February 2007 and audited our financial statements for the fiscal year ended December 31, 2006.  The Board of Directors has appointed Kabani to continue as our independent auditors for the fiscal year ending December 31, 2007.  A representative from Kabani will be present by telephone at the Annual Meeting to respond to appropriate questions.  The representative will also have the opportunity to make a statement if he so desires.

 

Our former auditors, the firm of Clancy and Co., P.L.L.C. (“Clancy”) served as our independent auditors from 2001 to January 2007.  No representative from Clancy is expected to be present at the Annual Meeting.  Attached as Appendix II, is a statement from Clancy with respect to our disclosure set forth below regarding Clancy’s resignation .

 

On January 18, 2007, we were verbally informed by Clancy that it was resigning from its engagement, which resignation was effective immediately. Clancy provided written confirmation to us on January 19, 2007.

 

The reports of Clancy for the years ended December 31, 2005 and December 31, 2004 did not contain any adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope, or accounting principles.

 

There were no disagreements between the Company and Clancy on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, during the two fiscal years of the Company ended December 31, 2004 and 2005 and subsequently up to the date of resignation which disagreements, if not resolved to Clancy’s satisfaction, would have caused Clancy to make reference to the subject matter of the disagreement in connection with its report issued in connection with the audit of the Company’s financial statements and there were no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

 

On February 7, 2007, our audit committee approved the appointment of Kabani as our new independent public accountant. Kabani was engaged by the Company on the same day. We had not consulted with Kabani on any matters described in Item 304(2) of Regulation S-K during the two most recent fiscal years or subsequently up to the date of Kabani’s engagement. Kabani conducted the audit of our financial statements for the fiscal year ended December 31, 2006.

 

Audit Fees

 

This category includes aggregate fees billed by our independent auditors for the audit of our annual financial statements, audit of management’s assessment and effectiveness of internal controls over financial reporting, review of financial statements included in our quarterly reports on services that are normally provided by the auditor in connection with statutory and regulatory filings for the fiscal years ended December 31, 2006 and 2005.

 

Although Kabani was engaged by us subsequent to the fiscal year ended December 31, 2006, Kabani performed the audit of our annual financial statements for the year ended December 31, 2006. Aggregate fees billed to us by Kabani for such audit services was $150,000.

 

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Aggregate fees billed to us by Clancy are as follows:

	2006		2005
Audit Fees	$150,000		$182,400

 

Audit-Related Fees

 

Audit-related fees are fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements.

 

Aggregate fees billed to us by Kabani for audit-related services with respect to the audit of our financial statements for the fiscal year ended December 31, 2006 was $31,200.

 

There were no audit-related fees billed to us by Clancy in the last two fiscal years.

 

Tax Fees

 

Tax fees are fees billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.  There were no tax fees billed to us by Kabani or Clancy in the last two fiscal years.

 

All Other Fees

 

All other fees comprise fees billed for products and services provided by the principal accountant, other than audit fees, audit-related fees or tax fees.  We were not billed for any other fees by Kabani or Clancy in the last two fiscal years.

 

Pre-Approval Policies and Procedures

 

The Audit Committee pre-approves all services, including both audit and non-audit services, provided by our independent accountants. For audit services, each year the independent auditor provides the Audit Committee with an engagement letter outlining the scope of the audit services proposed to be performed during the year, which must be formally accepted by the audit commences. The independent auditor also submits an audit services fee proposal, which also must be approved by the audit commences.

 

The Audit Committee pre-approved all of the audit-related services that were provided to the Company by Kabani.  None of the audit-related services were performed by persons other than Kabani’s full-time, permanent employees.

 

REQUIRED VOTE

 

Ratification of the appointment of the independent public accounts requires affirmative vote of a majority of the shares represented in person or by proxy at the Annual Meeting, provided a quorum exists.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT PUBLIC ACCOUNTANTS.

 

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MISCELLANEOUS

 

2007 STOCKHOLDER PROPOSALS

 

Rule 14a-4 of the SEC proxy rules allows the Company to use discretionary voting authority to vote on matters coming before an annual meeting of stockholders if the Company does not have notice of the matter at least 45 days before the date corresponding to the date on which the Company first sent its proxy materials for the prior year’s annual meeting of stockholders or the date specified by an overriding advance notice provision in the Company’s By-Laws. The Company’s By-Laws do not contain such an advance notice provision. For the Company’s Annual Meeting of Stockholders to be held in 2008, stockholders must submit such written notice to Mike Fei, the Secretary of the Company, at the Company’s executive offices, on or before July 16, 2008.

 

Stockholders of the Company wishing to include proposals in the proxy material for the Annual Meeting of Stockholders to be held in 2008, must submit the same in writing so as to be received by Mike Fei, the Secretary of the Company at the Company’s executive offices, on or before May 2, 2008. Such proposals must also meet the other requirements of the rules of the SEC relating to stockholder proposals.

 

OTHER BUSINESS

 

Management is not aware of any matters to be presented for action at the Annual Meeting, except matters discussed in the Proxy Statement. If any other matters properly come before the meeting, it is intended that the shares represented by proxies will be voted in accordance with the judgment of the persons voting the proxies.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual and quarterly reports, proxy statements and other information with the SEC. Stockholders may read and copy any reports, statements or other information that we file at the SEC’s public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our public filings are also available from commercial document retrieval services and at the Internet Web site maintained by the SEC at http://www.sec.gov. The Company’s Annual Report on Form 10-K is available on our website at www.pacificnet.com.

 

STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT TO VOTE THEIR SHARES AT THE ANNUAL MEETING. NO ONE HAS BEEN AUTHORIZED TO PROVIDE ANY INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED AUGUST 20, 2007. STOCKHOLDERS SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE.

 

By Order of the Board of Directors

 

/s/ Mike Fei

Name:  Mike Fei

Title:  Company Secretary & Corporate Counsel

 

August 20, 2007

 

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APPENDIX I

 

PACIFICNET INC.

COMPENSATION COMMITTEE CHARTER

The Compensation Committee of the Board of Directors of PacificNet Inc. (the “Board”) shall consist of a minimum of three directors, each of which shall meet the independence requirements and standards established from time to time by the Securities and Exchange Commission (the “SEC”) and any such securities exchange on which the Company’s securities are listed or quoted for trading, or which directors shall constitute the majority of the directors of the Board meeting the independence requirements and standards established from time to time by the SEC and any such securities exchange on which the Company’s securities are listed or quoted for trading.  The Board shall designate one member of the Compensation Committee to be the Chairperson.  The Compensation Committee shall meet at least once a year.

The purpose of the Compensation Committee shall be to assist the Board in determining the compensation of the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and other officers of the Company (collectively, the “Officers”).

 

In furtherance of this purpose, the Compensation Committee shall have the following authority and responsibilities:

1.      Annually review the Company’s corporate goals and objectives relevant to the Officers’ compensation; evaluate the Officers’ performance in light of such goals and objectives; and, either as a Compensation Committee together with the other independent directors (as directed by the Board), determine and approve the Officers’ compensation level based on this evaluation.  In determining the long-term incentive component of the Officers’ compensation, the Compensation Committee will consider the Company’s performance, the value of similar incentive awards to the Officers at comparable companies, and the awards given to the Company’s Officers in past years.

2.      Annually review and make recommendations to the Board with respect to non-CEO and non-CFO compensation.  The Compensation Committee shall attempt to ensure that the Company’s compensation program is effective in attracting and retaining key employees, reinforces business strategies and objectives for enhanced stockholder value, and is administered in a fair and equitable manner consistent with established policies and guidelines.

3.      Administer the Company’s incentive-compensation plans and equity-based plans, insofar as provided therein.

4.      Make recommendations to the Board regarding approval, disapproval, modification, or termination of existing or proposed employee benefit plans.

5.      Approve any stock option award or any other type of award as may be required for complying with any tax, securities, or other regulatory requirement, or otherwise determined to be appropriate or desirable by the Compensation Committee or Board.

6.      Review and assess the adequacy of this charter annually.

 

7.      Prepare a report on executive compensation as required to be included in the Company’s proxy statement or annual report on Form 10-K, Form 10-KSB or equivalent, filed with the SEC.

 

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The Compensation Committee shall have the authority to delegate any of its responsibilities to subcommittees as it may deem appropriate in its sole discretion.  The Chief Executive Officer of the Company may not be present during voting or deliberations of the Compensation Committee with respect to his compensation.

 

Notwithstanding anything to the contrary in this charter, if permitted by applicable SEC and stock exchange laws and regulations in effect from time to time, one director who (i) is not independent as defined under applicable stock exchange rules, and (ii) is not a current employee or an immediate family member (as defined under applicable stock exchange rules) of such employee, may be appointed to the Compensation Committee if the Board, under exceptional and limited circumstances, determines that membership on the Compensation Committee by the individual is required in the best interests of the Company and its stockholders.  In such event, the Board will disclose in the Company’s next annual proxy statement (or in its next annual report on SEC Form 10-K, 10-KSB or equivalent if the Company does not file an annual proxy statement), subsequent to such determination, the nature of that director’s relationship with the Company and the reasons for that determination.  A member appointed under this exception may not serve longer than two years.

 

The Compensation Committee shall have the authority retain outside counsel and any other advisors as it may deem appropriate in its sole discretion. The Compensation Committee shall have sole authority to approve related fees and retention terms.

 

The Compensation Committee shall report its actions and recommendations to the Board after each committee meeting.

 

 

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APPENDIX II

 

CLANCY AND CO., P.L.L.C.

SCOTTSDALE ATRIUM PROFESSIONAL BUILDING

14300 N. NORTHSIGHT BLVD.

SUITE 107

SCOTTSDALE, AZ 85260

 

Via email and facsimile

 

July 25, 2007

 

Tahra Wright, Attorney

Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

 

RE:

PACIFICNET INC. – SCHEDULE 14A PROXY STATLYIENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Dear Tahra,

 

In response to your request of July 18, 2007, we have reviewed the draft disclosure under Proposal #2 of the 2007 proxy statement of PacificNet Inc. (“PacificNet” or the “Company”). We believe the draft is incomplete because it fails to disclose the following material events occurring subsequent to our resignation as auditors for the Company:

 

1.

The audit opinions of Clancy and Co., P.L.L.C. for the two-year period ending December 31, 2005 were withdrawn due to concerns surrounding the Company’s stock option accounting practices.

 

2.

The Company failed to timely file an SEC Form 8-K following the withdrawal of those opinions.

 

3.

The SEC Form 8-K that the Company eventually filed on March 22, 2007 was misleading, as we identified in our letter to the SEC pursuant to Item 4.02(c)(2) of Form 8-K, dated April 6, 2007.

 

4.

Although we requested management of the Company to conduct an independent investigation concerning the Company’s stock option. accounting practices, the investigation and the resulting report were deficient in numerous, significant respects, as identified in our letter to the Audit Committee dated May 21, 2007.

 

/s/ Clancy and Co.

 

cc:           via email only – Norwood Beveridge, Mitchell Nussbaum, Tony Tong, Victor Tong,Hamid Kabani, Maureen Beyers

 

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PACIFICNET INC. PROXY

FOR ANNUAL MEETING TO BE HELD ON OCTOBER 17, 2007

 

The undersigned stockholder of PacificNet Inc., a Delaware corporation (the “Company”), hereby acknowledges receipt of the Notice of Availability of Proxy Materials and hereby appoints Mike Fei and Daniel Lui, or either of them, proxies and attorneys-in-fact, with full power to each of substitution and revocation, on behalf and in the name of the undersigned, to represent the undersigned at the 2007 Annual Meeting of Stockholders of the Company to be held at 1:00 p.m. (Hong Kong Time) at the Company’s executive offices located at 23/F, Building A, TimeCourt, No. 6 Shuguang Xili, Chaoyang District, Beijing China 10028 on October 17, 2007, or at any adjournment or postponement thereof, and to vote, as designated below, all shares of common stock of the Company which the undersigned would be entitled to vote if then and there personally present, on the matters set forth below.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” EACH PROPOSAL.

 

1. Elect seven (7) Directors
			Tony Tong	Victor Tong			ShaoJian (Sean) Wang
			Tao Jin	Jeremy Goodwin			Michael Chun Ha
			Ho-Man (Mike) Poon
[   ]		FOR all nominees listed above (except those			[   ]	WITHHOLD AUTHORITY to
		whose names or numbers have been written on				vote for all nominees
		the line below)				listed above

 

2. Proposal to ratify the appointment of Kabani & Company, Inc., as the Company’s independent auditors.

[   ] FOR

[   ] AGAINST

[   ] ABSTAIN

 

3. To transact any other business as may properly be presented at the Annual Meeting or any adjournment or postponement thereof.

 

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED “FOR” EACH PROPOSAL SPECIFICALLY IDENTIFIED ABOVE.

 

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

 

Date:__________, 2007
		PLEASE DATE AND SIGN ABOVE exactly as name appears at the left, indicating, where proper, official position or representative capacity. For stock held in joint tenancy, each joint owner should sign.