<PAGE>
As filed with the Securities and Exchange Commission on December 21, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ASIAINFO HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 1731 752506390
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification Number)
jurisdiction Classification Code
ofincorporation or Number)
organization)
AsiaInfo Holdings, Inc.
4th Floor, Ligong Science & Technology Tower
11 Bashiqiao Road, Haidian District
Beijing 100081, China
Tel: (8610) 6846-7058
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
James Zhang, General Manager
AsiaInfo Holdings, Inc.
Techmart of Santa Clara
5201 Great American Parkway, Suite 226
Santa Clara, California 95054
Tel: (408) 970-9788
Fax: (408) 970-9366
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
Thomas M. Britt, III Anthony Root
Rogers & Wells LLP Milbank, Tweed, Hadley & McCloy LLP
Jardine House, 8th Floor 3007 Alexandra House
One Connaught Place 16 Chater Road
Central, Hong Kong Central, Hong Kong
Tel: (852) 2844-3500 Tel: (852) 2971-4888
Fax: (852) 2844-3555 Fax: (852) 2840-0792
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box............................................... [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering................................ [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering....................................................... [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering....................................................... [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.............................................. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
itle of Each Class of Securities to be RegisteredT Proposed Maximum Offering Price(1) Amount of Registration Fee(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock par value $0.01 per share......... $50,000,000 $13,200.00
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
Shares
AsiaInfo Holdings Inc.
COMMON STOCK
AsiaInfo Holdings, Inc. is offering shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be
between $ and $ per share.
-----------
We have filed an application for the shares of common stock to be quoted on
the Nasdaq National Market under the symbol "ASIA."
-----------
Investing in our common stock involves
risks. See "Risk Factors" beginning on
page 9.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting Discounts
Price to Public and Commissions Proceeds to AsiaInfo
--------------- ---------------------- --------------------
<S> <C> <C> <C>
Per Share........ $ $ $
Total............ $ $ $
</TABLE>
AsiaInfo Holdings Inc. has granted the underwriters the right to purchase up to
an additional shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on February , 2000.
-----------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
February , 2000
<PAGE>
----------------
"AsiaInfo" is a registered trademark of AsiaInfo Holdings, Inc. AsiaInfo
and designs are pending trademarks of AsiaInfo Holdings Inc. All other brand
names or trademarks appearing in this prospectus are property of their
respective holders.
----------------
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our shares of common stock.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 9
Special Note Regarding Forward-
Looking Statements................. 18
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Selected Consolidated Financial
Data............................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 34
Management....................... 49
Certain Transactions............. 55
Principal Stockholders........... 57
Description of Capital Stock..... 59
Shares Eligible for Future Sale.. 61
Taxation......................... 63
Underwriters..................... 65
Legal Matters.................... 67
Experts.......................... 67
Enforceability of Civil
Liabilities..................... 68
Additional Filing and Company
Information..................... 69
Index to Financial Statements.... F-1
</TABLE>
----------------
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
Unless otherwise indicated, (1) references to "AsiaInfo", "we", "us" and
"our" refer to AsiaInfo Holdings, Inc. and our wholly-owned subsidiaries; (2)
references to the China Telecom system, are to the Directorate General of
Telecommunications, a state owned enterprise, provincial post and
telecommunication administrations and city and county telecommunications
bureaus. References to China Mobile are to China Mobile Communications
Corporation and various provincial mobile telephone subsidiaries. China Unicom
and China Netcom refer to China United Telecommunications Corporation and
China Netcom Corporation Ltd., respectively; and (3) "China" for the purpose
of this prospectus refers to the People's Republic of China, excluding Taiwan
and Hong Kong. Except as otherwise noted, all information in this prospectus
assumes (1) the conversion of all of our outstanding shares of preferred stock
into shares of common stock upon the completion of this offering, (2) the
exercise of all outstanding warrants held by holders of our Series A Preferred
Stock and (3) no exercise of the underwriters' option to purchase additional
shares in this offering. References to "U.S. dollars" or "$" are to United
States dollars.
Until March , 2000 (25 days after commencement of this offering), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the shares of the common stock being sold
in this offering and our historical financial statements and notes thereto
included elsewhere in this prospectus.
AsiaInfo Holdings, Inc.
Our Business
We are a leading provider of Internet-related, information technology ("IT")
professional services and software products in China. We offer total network
solutions and proprietary software to meet our customers' Internet and
telecommunications infrastructure and operating needs. Our customers are
leading telecommunications service providers, Internet service providers
("ISPs") and Internet content providers ("ICPs") in China, including the China
Telecom system and China Unicom, the two largest Chinese telecommunications and
Internet service providers, as well as China Mobile, the largest wireless
telephony service provider in China.
We provide network solutions for large Internet and telecommunications
projects. We deliver Internet infrastructure solutions such as backbone and
access networks, operations support solutions using our proprietary and third
party software, service applications such as IP telephony and virtual private
networks, and network performance and security solutions. In response to
customer preferences in China, we often offer services in the context of total
solutions, which include systems integration and customization of our
proprietary and third party software.
With an early entry into the market, we are now a leading provider of
network solutions for large Internet and telecommunications companies in China.
Our Chinese, western-trained senior management and technical personnel have a
proven track record of delivering high performance, cost effective solutions
for the specific needs of these companies. We designed and built ChinaNET,
China's first commercial and largest national Internet backbone. We are in the
process of designing and building UniNET, China's second-largest national
Internet backbone, for China Unicom. We have also built numerous provincial
Internet backbones, including GuangdongNET, the first and largest provincial
Internet backbone in China.
We develop and sell carrier class software products tailored for the
specific needs of the China market. These products include real time, highly
scalable customer management and billing ("CM&B") software and carrier-scale
messaging software for ISPs, ICPs and wireless telephony service providers. We
have historically sold our software products as part of our network solutions
projects, but we are increasingly marketing these products on a stand-alone
basis. Our software can support up to millions of users and is designed with
open architecture to facilitate customization.
We have the largest customer base for CM&B software among large ISPs and
ICPs in China, with approximately 1.8 million user licenses as of December 15,
1999. AsiaInfo Mail Center ("AIMC"), the latest version of our messaging
software, was launched in April 1999 and within eight months has been licensed
for over 3 million users. As of December 15, 1999, we had sold over 7 million
user licenses for our wireless telephony CM&B software.
Our Market Opportunity
The Internet market in China has been growing rapidly due primarily to
increased access to telecommunications services and declining personal computer
prices. International Data Corp. ("IDC") estimates that China will have 3.8
million users at the end of 1999 and forecasts that China's Internet population
will grow at a compound rate of 54% per year to 33 million users in 2004.
4
<PAGE>
Chinese telecommunications carriers have made significant investments in
Internet and telecommunications infrastructures using advanced technologies.
The Internet and telecommunications markets in China have become increasingly
competitive as the Chinese government has taken measures to deregulate the
telecommunications industry and introduce competition. China's pending entry
into the World Trade Organization (the "WTO") is expected to stimulate spending
on the Internet and telecommunications infrastructures, particularly broadband
networks. Increased demand for Internet services and competition have also
prompted service providers to offer varying, customer-tailored service plans
and focus on customer care and support. We believe that the combined effects of
increased deregulation and industry competition, coupled with a growing demand
for Internet services and multimedia applications, have created opportunities
for us in the following areas:
. high value Internet-related IT services in an increasingly complex
network environment;
. real-time, scalable CM&B software that meets the specific requirements
of Chinese service providers; and
. broadband network and convergent communications solutions including
unified messaging software, which integrates email, voicemail and fax
services.
Our Strategy
Our strategy is to be the leading China-based, world-class provider of
Internet-related IT professional services and software products to enable our
customers to build, maintain, operate and continuously improve their Internet
and communications infrastructures. Key aspects of this strategy are to:
Maintain our leading position in providing Internet and telecommunications
infrastructure solutions in China. We plan to maintain our position as a
leading provider of network solutions to the largest Internet and
telecommunications companies in China. Total investment in China's
telecommunications industry is expected to continue to grow rapidly,
particularly in Internet infrastructure and related areas. We expect most of
this investment will be made through our customers, which are the largest
Internet and telecommunications companies in China. We believe that our close
relationships with our customers, our unique understanding of the China market,
our technical capabilities and our proven track record will allow us to
capitalize on these growth opportunities.
Focus on high value IT professional services. As the IT market matures in
China, we plan to focus increasingly on providing our customers high value IT
professional services such as network planning, design and optimization, while
gradually outsourcing lower end services such as hardware installation.
Significantly grow our software business to maximize opportunities in the
Internet software market in China. We expect rapidly expanding Internet usage
in China to create increasing demand for reliable and scalable software
products that address the specific requirements of Chinese ISPs and ICPs. We
plan to invest significant financial and personnel resources to expand our
Internet software business and strengthen our leadership position in the
Internet CM&B and messaging software markets in China.
Develop broadband and convergent communications solutions. We are committed
to developing solutions and software products to meet the future requirements
of our customers. We expect increasing investment in broadband network
solutions and convergent communications, which combine voice, data, video and
Internet services using IP technology. We plan to develop broadband backbone
and access network solutions and upgrade our CM&B and messaging software to
support convergent communications. Our Internet infrastructure technology
leadership and software experience in both the Internet and wireless services
markets make us well positioned to develop broadband and convergent
communications software and solutions for the China market.
5
<PAGE>
Leverage our large customer base to generate recurring revenues. We have a
high quality group of network solutions customers and one of the largest
installed software customer bases for leading telecommunications service
providers, ISPs and ICPs in China. Our customers include the China Telecom
system, China Unicom, China Mobile and China Netcom. These companies have
historically accounted for and are expected to continue to account for a
majority of Internet investments in China. Our large customer base enables us
to foster close relationships with our customers, develop an in-depth
understanding of their needs and raise barriers to entry for our competitors.
We intend to generate recurring revenues from our existing customer base
through upgrades of their networks and implementation of new services and
products, including outsourced applications.
Attract and retain highly qualified personnel. We place great importance on
attracting and retaining highly qualified personnel. In view of the specific
needs of the China market, we target our recruitment efforts on Chinese who
have both IT and professional competence and extensive exposure to western
education and/or management practices. We attract and retain these qualified
personnel by offering them attractive compensation packages, including stock
options, and a challenging and rewarding working environment.
Our Competitive Strengths
Internet infrastructure technology leadership in China. Our technical
personnel have state-of-the-art expertise in Internet infrastructure
information technologies in China. This expertise enables us to develop and
implement Internet solutions that employ high quality designs and to deliver
the high performance-to-cost solutions required by Chinese companies.
Combined international and China expertise. Our senior management is a
Chinese team. A majority of our senior management has been educated in the
United States or has worked with leading multinational companies in or outside
China. They have an in-depth understanding of the China market, combined with a
knowledge of best management practices gained from some of the world's leading
IT companies. We believe that the unique strengths of our management team will
enable us to anticipate and effectively capitalize on market opportunities for
our business in China.
Established customer relationships. We have close relationships with almost
all the leading telecommunications services providers, ISPs and ICPs in China
and have provided services and products to most of them. Our understanding of
their requirements allows us to successfully deliver customized solutions and
maximize revenue opportunities created by increased investments in the Internet
in China.
Real time, scalable and adaptable proprietary software. Our proprietary
software allows service providers to monitor user activity and analyze user
data in real time. All our software products are scalable to accommodate up to
millions of users. Our software products are also designed with fully
documented, open application programming interfaces ("APIs") that allow our
customers and third party systems integrators and software developers to
integrate our software with existing applications and services requiring
minimal effort and programming overhead.
Total solutions approach. We provide our services in the context of total
solutions including systems integration and customization of proprietary and
third party software. This total solutions approach is favored by Chinese
customers and allows us to build and maintain close, long term relationships
with them.
Corporate Information
We started our business in Texas through a predecessor company in 1993 and
are now incorporated in Delaware. In 1995, we moved our base of operations from
Dallas, Texas to Beijing, China to capitalize on emerging opportunities in the
rapidly developing Internet market in China. Today, almost all our operations
and employees are based in China. Our executive offices are located at Ligong
Science & Technology Tower, 4th Floor, 11 Baishiqiao Road, Haidian District,
Beijing 100081, China, and our telephone number is (8610) 6846-7058.
6
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... We intend to use the
estimated net proceeds of
approximately $ million
from this offering for
working capital,
expansion of sales and
marketing activities,
software product
development, acquisitions
and general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.............. "ASIA"
</TABLE>
The total number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of November 30, 1999
and includes 9,429,226 shares of common stock issued pursuant to the exercise
of all outstanding warrants issued to holders of our Series A Convertible
Preferred Stock and 6,952,153 shares of common stock issuable upon the
automatic conversion of all outstanding shares of our convertible preferred
stock upon the completion of this offering, but excludes
. options granted under our stock option plans to purchase 7,521,024 shares
of common stock at a weighted average exercise price of $2.07 per share
outstanding as of November 30, 1999,
. 1,783,300 shares of common stock available for issuance upon the exercise
of future grants under our stock option plans and
. 40,000 shares of common stock issuable upon the exercise of warrants to
purchase shares of common stock at an exercise price of $0.01 per share.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data. You
should read this information together with our consolidated financial
statements, the notes to those statements beginning on page F-1 of this
prospectus and the information under "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."The summary consolidated balance sheet data and summary
consolidated statements of operations data in the table below as of and for the
three years ended December 31, 1996, 1997 and 1998 have been derived from our
audited consolidated financial statements. The summary consolidated statement
of operations data for the year ended December 31, 1995 and for the nine months
ended September 30, 1998 and 1999, and the summary consolidated balance sheet
data as of the same dates are derived from our unaudited consolidated financial
statements, which have been prepared on the same basis as our audited
consolidated financial statements and contain normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for such unaudited periods. Historical results are not necessarily
indicative of the results to be expected in the future, and results of interim
periods are not necessarily indicative of those for the full year.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------ ------------------------
1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
(Amounts in thousands of U.S. dollars except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network Solutions...... $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 17,324 $ 43,598
Software License....... -- 762 775 2,258 1,898 4,643
---------- ----------- ----------- ----------- ----------- -----------
Total revenues......... 1,799 15,543 37,284 44,222 19,222 48,241
Gross profit............ 546 6,445 7,728 12,033 5,512 14,836
Operating income
(loss)................. (598) 2,186 (713) 681 (1,208) (472)
Net income (loss)....... (578) 1,670 (381) 1,536 (8) (737)
Net income (loss) per
share:
Basic.................. $ (0.07) $ 0.12 $ (0.03) $ 0.11 $ 0.00 $ (0.05)
Fully diluted(/1/)..... $ (0.07) $ 0.10 $ (0.03) $ 0.05 $ 0.00 $ (0.05)
Shares used in
computation:
Basic.................. 8,154,463 13,530,000 13,530,000 13,616,412 13,594,135 13,937,072
Fully diluted(/2/)..... 8,154,463 15,999,133 13,530,000 31,765,532 13,594,135 13,937,072
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1999
------------------------------ ------------------------
1995 1996 1997 1998 Actual As Adjusted(/2/)
------ ------ ------- ------- ------- ----------------
(Amount in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $1,732 $2,221 $24,066 $ 9,749 $25,354 $
Total current assets.... 3,747 8,325 36,131 42,805 62,038
Total assets............ 3,787 9,227 37,085 45,359 69,611
Total liabilities
(excluding minority
interest).............. 4,089 6,429 20,008 26,048 26,535 26,535
Total stockholders'
equity (deficit)....... (567) 1,333 16,179 19,247 43,077
</TABLE>
- --------
(1) In 1997 and for the nine months ended September 30, 1998 and 1999, the
diluted net loss per share computation excludes shares of common stock
issuable under stock option plans, upon the exercise of warrants and upon
the automatic conversion of our convertible preferred stock which, if
included, would have an antidilutive effect on the net loss reported in
these periods. See note 11 of Notes to Consolidated Financial Statements
for a detailed explanation of the determination of the shares used in
computing basic and diluted net income (loss) per share.
(2) Fully diluted shares are adjusted to reflect (a) the sale of shares of
common stock offered by AsiaInfo hereby at an initial public offering price
of $ per share and after deducting the underwriting discount and
estimated offering expenses, (b) the conversion of all outstanding shares
of our convertible preferred stock into 6,952,153 shares of common stock as
of the closing of this offering as if the closing occurred on September 30,
1999 and (c) the issuance of 9,429,226 shares of common stock pursuant to
the exercise of all outstanding warrants held by holders of our Series A
Convertible Preferred Stock. Excludes (a) 7,794,200 shares of common stock
underlying options granted under our stock option plans and outstanding as
of September 30, 1999 at a weighted average exercise price of $1.93 per
share, (b) 1,783,300 shares of common stock available for issuance upon the
exercise of future grants under our stock option plans and (c) 40,000
shares of common stock issuable upon the exercise of outstanding warrants
to purchase shares of common stock at an exercise price of $0.01 per share.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. The risks described below are not the
only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations. Our
business, financial condition or results of operations could be materially
adversely affected by any of these risks. The trading price of our common
stock could decline due to any of these risks, and you may lose all or part of
your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the risks faced by us described below and elsewhere in this
prospectus.
Risks Relating to AsiaInfo
The growth of our business is dependent on government budgetary policy for
the telecommunications industry and the Internet in China.
Virtually all our large customers are directly or indirectly owned or
controlled by the Chinese government. Accordingly, their business strategies
and capital expenditure budgets and spending plans are largely decided in
accordance with government policies, which, in turn, are determined on a
centralized basis at the highest level by the State Planning Commission. As a
result, the growth of our business is heavily dependent on government policies
for telecommunications and Internet infrastructure.
Despite the high priority currently accorded by the government to the
development of telecommunications industry and Internet infrastructure and a
high level of funding allocated by the government to these sectors in 1999, we
believe that our customers' capital spending for Internet infrastructure was
lower in 1999 than 1998 due to a variety of factors, particularly the current
restructuring of the telecommunications industry. While there is a possibility
that the unspent funds will be carried forward to 2000, we cannot make any
conclusions or predictions at this time regarding government funding plans for
the telecommunications industry and the Internet. Furthermore, we can give no
assurance as to the government's budget policies in future years. Insufficient
government allocation of funds to sustain the growth of the telecommunications
industry and the Internet in China could have a material adverse effect on our
business.
Laws and regulations applicable to the Internet in China remain unsettled
and could have a material adverse effect on Internet's growth and thereby have
material adverse effect on our business.
Growth of the Internet in China could be materially adversely affected by
governmental regulation of the industry. Due to the increasing popularity and
use of the Internet and other online services, it is possible that regulations
may be adopted with respect to the Internet or other services covering issues
such as user privacy, pricing, content, copyrights, distribution, antitrust
and characteristics and quality of products and services. Furthermore, the
growth and development of the market for electronic commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business online. Although we are engaged in Internet
infrastructure development and Internet-related software business, the
adoption of additional laws or regulations may slow the growth of the Internet
or other services, which could in turn lead to reduced Internet traffic,
decrease the demand for our network solutions and Internet-related software
products and increase our cost of doing business.
The Ministry of Information Industries (the "MII") is currently reviewing
its telecommunications regulations, particularly as they relate to Internet
activities. While we are not aware of any existing or proposed regulations
that have a significant direct adverse effect on our business, a restrictive
regulatory policy regarding the Chinese Internet industry would have a
material direct adverse effect on us by retarding the industry's growth in
China.
9
<PAGE>
Our customer base is highly concentrated and the loss of one or more of our
customers could cause our business to suffer significantly.
We have derived and believe that we will continue to derive a significant
portion of our revenues from a limited number of large customers, such as the
China Telecom system and China Unicom. Although various provincial and local
entities of the China Telecom system are separate legal entities and generally
make purchasing decisions independent of the Directorate General of
Telecommunications ("DGT"), their business decisions may nonetheless be
affected by the DGT. Entities of the China Telecom system accounted for almost
all of our revenues in 1997 and 1998. At September 30, 1999, entities of the
China Telecom system accounted for over 80% of our backlog. In the future, we
expect to derive an increasing portion of our revenues from China Unicom,
China Mobile and China Netcom. The loss of the China Telecom system, whose
provincial and local entities have historically accounted for a major portion
of our business, or cancellation or deferral of any large contract by any of
our large customers would have a material adverse effect on our business,
financial condition and results of operations. See "Business--Customers."
The long and variable sales cycles for our products and services can cause
our revenues and operating results to vary significantly.
A customer's decision to purchase our services and products involves a
significant commitment of its resources and an extended evaluation. As a
result, our sales cycle tends to be lengthy. We spend considerable time and
expense educating and providing information to prospective customers about
features and applications of our services and products. Because our major
customers operate large and complex networks, they usually expand their
networks in large increments on a sporadic basis. The combination of these
factors can cause our revenues and results of operations to vary significantly
and unexpectedly.
The unpredictability of our quarterly results may adversely affect the
trading price of our common stock.
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. The primary factors
that may affect us include the following:
. fluctuation in demand for our products and services as a result of
budgetary cycles of our large customers;
. the reduction, delay, interruption or termination of one or more
significant projects;
. introduction of new products and services by our competitors;
. changes in our pricing policies or those of our competitors;
. our ability to introduce, develop and deliver our products and services
that meet customer requirements in a timely manner;
. the variation in the mix of our product and service from period to
period;
. costs related to acquisitions of technologies or businesses;
. insufficient personnel for management, sales, marketing, research,
technical support and other activities;
. the amount and timing of expenditures related to expansion of our
operations; and
. general economic conditions as well as those specific to the
telecommunications industry, the Internet and related industries in
China.
A large part of the contract amount of a network solutions project usually
relates to hardware procurement. Since we recognize most of the revenues
relating to hardware plus a portion of contract services revenues at the time
of hardware delivery, the timing of hardware delivery can cause our quarterly
revenues to fluctuate significantly.
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Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance and should not be relied upon. It is likely that our operating
results in some periods may be below the expectations of public market
analysts and investors. In this event, the price of our common stock will
probably decline, perhaps significantly more in percentage terms than the
decline in operating results.
Our working capital requirements may increase significantly as a result of
less favorable payment terms for network hardware from our customers.
We typically purchase hardware for our customers as part of our turnkey
total solutions services. We generally require our customers to pay 90% of the
invoice value of the hardware upon delivery. We place orders for hardware only
against a back-to-back order from customers and seek favorable payment terms
from hardware vendors. This policy has historically minimized our working
capital requirements. However, for certain large and strategically important
projects, we have agreed to payment of less than 90% of the invoice value of
the hardware upon delivery in order to maintain competitiveness. Wider
adoption of these less favorable payment terms would require us to increase
our working capital needs.
We may incur slower earnings growth, earnings declines or net losses in the
future.
Although we made a net profit in 1998, we have sustained losses in prior
years and in 1999 to date. There are no assurances that we can regain or
sustain profitability or avoid net losses in the future. We expect to increase
our operating expenses as our business grows. The level of these expenses will
be largely based on anticipated organizational growth and revenue trends and a
high percentage will be fixed. As a result, any delays in expanding sales
volume and generating revenue could result in substantial operating losses.
Any such developments could cause the market price of shares of our common
stock to decline.
Management's ability to implement adequate control systems will be critical
to successfully manage our future growth.
We have been expanding our operations rapidly, both in size and scope, in
recent years. Our growth places a significant strain on our management systems
and resources. Our ability to successfully offer our products and implement
our business plan in a rapidly evolving market requires an effective planning
and management process. We will need to continue to improve our financial,
managerial and operational controls and reporting systems, and to expand,
train and manage our work force. We may not be able to implement adequate
control systems in an efficient and timely manner.
We are highly dependent on the skills and services of key management and
skilled personnel, who are in high demand.
We are highly dependent on the skills of our key employees, including
technical, sales, marketing, financial and executive personnel. We do not
currently maintain "key man" insurance. The loss of the services of senior
management or key personnel could have a material adverse effect on our
business, financial condition and results of operations. In addition, if key
personnel join a competitor or form a competing company, the loss of such
employees and any resulting loss of existing or potential customers to the
competitor could have a material adverse effect on our business, financial
condition and results of operations.
Competition for highly skilled software design, engineering and sales and
marketing personnel is intense in China. Failure to attract, assimilate or
retain qualified personnel to fulfill our current or future needs could impair
our growth. Competition for skilled personnel comes primarily from a wide
range of foreign companies active in China, many of which have substantially
greater resources than us. Limitations on our ability to hire and train
sufficient number of personnel at all levels would limit our ability to
undertake projects in the future and could cause us to lose market share. We
may need to increase the levels of our employee compensation more rapidly than
in the past in order to remain competitive. These additional costs could
reduce our profitability and cause losses.
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Our historical financial information may not be an appropriate basis on
which to evaluate us or our prospects.
We moved our operations from Texas to China in 1995, began generating
substantial network solutions revenue in 1996 and selling software products in
1996. We expect our business to continue to evolve as the Internet and
telecommunications markets in China change and expand. In particular, we are
currently investing substantial personnel and financial resources in expanding
our software business, which we expect to account for a significantly greater
portion of our operating expenses and revenues than in the past. As a result,
our historical financial data may not provide a meaningful basis upon which
investors may evaluate us and our prospects. You should consider the risks and
difficulties encountered by companies like ours in a new and rapidly evolving
market. Our ability to sell products and the level of success, if any, we
achieve depends, among other things, on the level of demand for Internet-
related, professional IT services and software products in China, which are
rapidly evolving.
We extend warranties to our network solutions customers that expose us to
potential liabilities.
We customarily provide our customers with one to three year warranties,
under which we agree to maintain the installed systems at no additional cost
to our customers. The maintenance services cover both hardware and our
proprietary and third party software products. Although we seek to arrange
back-to-back warranties with hardware and software vendors, we have the
primary responsibility to maintain the installed hardware and software. Our
contracts do not have disclaimers or limitations on liability for special,
consequential and incidental damages nor do we cap the amounts recoverable for
damages. In addition, we do not currently maintain any insurance policy with
respect to our exposure to warranty claims. Although to date we have not
incurred any liability for special, consequential or incidental damages,
failure of our installed projects to operate properly could give rise to
substantial claims against us that in turn could materially and adversely
affect us, particularly because our customers are primarily large
telecommunication service providers.
We sell our large systems integration projects on a fixed-price, fixed-time
basis which exposes us to risks associated with cost overruns and delays.
We sell substantially all our systems integration projects on a fixed-
price, fixed-time basis. Failure to complete a fixed-price, fixed-time project
within budget and the required time frame would expose us to cost overruns and
penalties that could have a material adverse effect on our business, operating
results and financial condition. In contracts with our customers, we typically
agree to pay late completion fines up to 5% of the total contract value. In
large scale Internet infrastructure projects, there are many factors beyond
our control which could cause delays or cost overruns. In this event, we would
be exposed to cost overruns and liable for late completion fines. A part of
our network solutions business is installing Internet network hardware. If we
are unable to obtain access to such equipment in a timely manner or on
acceptable commercial terms, our business and results of operations may be
materially and adversely affected.
We may become less competitive if we are unable to develop or acquire new
products or enhancements to our software products that are marketable on a
timely and cost-effective basis.
We continually develop new services and proprietary software products.
Unexpected technical, operational, distribution or other problems could delay
or prevent the introduction of one or more of these products or services or
any products or services that we may plan to introduce in the future.
Moreover, we cannot be sure that any of these products and services will
achieve widespread market acceptance or generate incremental revenue.
Acquisitions could disrupt our business and create new risks.
We may use the net proceeds from this offering to finance the cash portion
of the purchase price of acquisitions. Such acquisitions would expose us to
various risks, including, among others, difficulties in assimilating the
operations, assets, systems, structure and personnel of the acquired entities.
Furthermore, acquisitions of
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<PAGE>
companies engaged in businesses outside the scope of our experience may pose
unfamiliar management challenges and change the risk profile of our
businesses.
Our proprietary rights may be inadequately protected and there is a risk of
weak law enforcement.
Our success and ability to compete depend substantially upon our
intellectual property rights, which we protect through a combination of
copyright, trade secret law and trademark law. We do not own any patents and
have not filed any patent applications, as we do not believe that the benefits
of patent protection outweigh the costs of filing and updating patents for our
software products. We enter into confidentiality agreements with our employees
and consultants, and control access to and distribution of our documentation
and other licensed information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our licensed services or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of our licensed technology is
difficult and there can be no assurance that the steps taken by us will
prevent misappropriation or infringement of our proprietary technology. In
addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, which could result in
substantial costs and diversion of our resources and could have a material
adverse effect on our business, results of operations and financial condition.
We are exposed to certain business and litigation risks with respect to
technology rights held by third parties.
We currently and intend to increasingly license technology from third
parties. As we introduce services that require new technology, we will
probably need to license additional third party technology. We cannot provide
assurance that these technology licenses will be available to us on
commercially reasonable terms, if at all. Our inability to obtain any of these
licenses could delay or compromise our ability to introduce new services. In
addition, we may or may allegedly breach the technology rights of others and
incur legal expenses and damages, which might be substantial and could
materially and adversely affect our business and financial condition.
Year 2000 issues present technological risks which could expose us to
liabilities and cause disruption to our business and hurt sales of our
software products.
Currently, many computer systems and hardware and software products are
coded to accept only two digit entries in the date code field and,
consequently, cannot distinguish 21st century dates from 20th century dates.
This may result in software failures or the creation of erroneous results. In
our network solution business, we integrate hardware from third party vendors
and sell software products from third party licensors as well as our own
proprietary software products. Our proprietary software products sold on a
stand-alone basis interact directly and indirectly with a number of other
hardware and software systems. Despite investigation and testing by us, the
systems installed by us and our proprietary software may contain errors or
defects associated with Year 2000 date functions. We may not identify all Year
2000 failures in hardware and software products supplied by third party
vendors or in our own software products because not all failures are within
the scope of these tests. Errors or defects that affect the operation of our
software could result in:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
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Any of the foregoing developments or related difficulties could have a
material adverse effect on our business, results of operations and financial
condition.
In addition, we use multiple software systems for our internal business
purposes, including accounting, human resources, e-mail, engineering
development and testing tools, customer service and support, professional
services and sales tracking applications. Any Year 2000 failures in our
internal system could cause business disruption and hurt our reputation. We
expect our Year 2000 risks to continue well into 2000 and perhaps beyond.
Investors may not be able to enforce judgments by United States courts
against us.
AsiaInfo is incorporated in the State of Delaware. However, a majority of
AsiaInfo's directors, executive officers and shareholders live outside the
United States, principally in Beijing, China and Hong Kong. Also, all or most
of our assets are located outside the United States. As a result, you may not
be able to:
. effect service of process upon us or these persons within the United
States, or
. enforce against us or these persons in United States courts judgments
obtained in United States courts, including judgments relating to the
federal securities laws of the United States.
We do not intend to pay dividends on our common stock.
We have never declared or paid any dividends on our capital stock and we do
not intend to declare any dividends in the foreseeable future. We currently
intend to retain future earnings to fund growth. Furthermore, if we decide to
pay dividends, foreign exchange and other regulations in China may restrict
our ability to distribute retained earnings from China or convert these
payments from Renminbi into foreign currencies. In addition, loan agreements
and contractual arrangements we enter into in the future may also restrict our
ability of distributing dividends.
Risks Relating to the Industry
The markets in which we sell our services and products are highly
competitive and we may not be able to compete effectively.
The IT services market for Internet infrastructure in China is new and
rapidly changing. Our competitors in the market mainly include domestic
systems integrators such as Suntek and Aotian. Although we are a leading
player in this market, there are many large multinational companies with
substantial, existing IT operations in other markets in China, such as IBM and
Hewlett-Packard, that have significantly greater financial, technological,
marketing and human resources. Should they decide to enter the IT services
market for Internet infrastructure, this could hurt our profitability and
erode our market share.
In the CM&B market, we compete with both international and local software
providers. In the online billing segment, we compete primarily with Portal
Software Inc. ("Portal") and Suntek, and in the wireless billing segment, we
compete with more than ten local competitors. The messaging software sector is
highly competitive. Our principal competitors in this sector are Software.com
and Netease. Currently, due in part to a stringent approval system for
providers of wireless billing software in China and competitive pricing
offered by domestic companies, some multinational IT companies have been
deterred from entering this market. In view of the gradual deregulation of the
Chinese telecommunications industry and China's pending entry into the WTO, we
anticipate the entrance of new competitors into the CM&B software market.
Our competitors, some of whom have greater financial, technical and human
resources than us, may be able to respond more quickly to new and emerging
technologies and changes in customer requirements or devote greater resources
to the development, promotion and sale of new products or services. It is
possible that competition in the form of new competitors or alliances, joint
ventures or consolidation among existing competitors may decrease our market
share. Increased competition could result in lower personnel utilization
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<PAGE>
rates, billing rate reductions, fewer customer engagements, reduced gross
margins and loss of market share, any one of which could materially and
adversely affect our business, results of operations and financial condition.
See "Business--Competition."
Rapid technological change may render our products obsolete.
Our success will depend in part on our ability to develop Internet-related
IT solutions and software products that keep pace with rapid and continuing
changes in the IT industry, evolving industry standards and changing customer
preferences. Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
software products obsolete. Our future success will depend on our ability to
develop and introduce a variety of new products and product enhancements to
address the increasingly sophisticated needs of our customers. There can be no
assurance that we will do so in a timely manner or that our new products and
enhancements will ultimately be successful in the marketplace.
Political, Economic and Regulatory Risks
Political and economic policies of the Chinese government could affect our
business.
Since the establishment of the People's Republic of China in 1949, the
Communist Party has been the governing political party in China. The highest
bodies of leadership are the Politburo, the Central Committee and the National
Party Congress. The State Council, which is the highest institution of
government administration, reports to the National People's Congress and has
under its supervision various commissions, agencies and ministries, including
the MII, the telecommunications regulatory body of the Chinese government.
Since the late 1970s, the Chinese government has been reforming the Chinese
economic system. Although we believe that economic reform and the
macroeconomic measures adopted by the Chinese government have had and will
continue to have a positive effect on the economic development in China, there
can be no assurance that the economic reform strategy will not from time to
time be modified or revised. Such modifications or revisions, if any, could
have a material adverse effect on the overall economic growth of China and
investment in the Internet and the telecommunications industry in China. Such
developments could reduce, perhaps significantly, the demand for our products
and services. There is no guarantee that the Chinese government will not
impose other economic or regulatory controls that would have a material
adverse effect on our business. Furthermore, changes in political, economic
and social conditions in China, adjustments in policies of the Chinese
government or changes in laws and regulations could adversely affect our
results of operations and financial condition.
Uncertainties with respect to the Chinese legal system could adversely
affect us.
Our subsidiaries are wholly foreign owned enterprises ("WFOE"), which are
enterprises incorporated in China and wholly-owned by foreign investors. They
are subject to laws and regulations applicable to foreign investment in China
in general and laws applicable to WFOEs in particular. The legislation and
regulations over the past 20 years have significantly enhanced the protections
afforded to various forms of foreign investment in China. However, since the
Chinese legal system is still evolving, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involve uncertainties, which may limit remedies
available to us.
Fluctuations in exchange rates could adversely affect the value of our
shares.
Substantially all our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all our revenues and expenses
relating to the service component of our network solutions business and
software business are denominated in Renminbi. Although in general our
exposure to foreign exchange risks should be limited, the value of your
investment in our shares will be affected by the foreign exchange rate between
the U.S. dollar and the Renminbi because the value of our business is
effectively denominated in
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<PAGE>
Renminbi, while the shares will be traded in U.S. dollars. Furthermore, a
decline in the value of the Renminbi could reduce the U.S. dollar value of
earnings from and our investment in our subsidiaries in China.
Risks Relating to the Shares
No public market for the shares and possible volatility of share price.
Prior to this initial public offering, there was no public market for any
class of our capital stock, including the shares of the common stock being
offered. The initial public offering price for our shares will be determined
by negotiations between AsiaInfo and our underwriters. This price may not be
indicative of the price at which our shares will trade following the offering.
See "Underwriters."
In addition, we cannot guarantee that an active trading market for our
shares of the common stock will develop or, if it does develop, that it will
be sustained following the completion of the offering.
The trading price of our shares may be subject to significant market
volatility due to:
. investor perceptions of us and investments relating to China and Asia;
. developments in Internet and telecommunications industry;
. variations in our operating results;
. announcements of new products or services;
. technological innovations;
. changes in pricing made by us, our competitors or providers of
alternative services;
. the depth and liquidity of the market for our shares of the common
stock; and
. general economic and other factors.
The market price of the common stock could fall below the initial public
offering price. In addition, the high technology sector of the stock market
frequently experiences extreme price and volume fluctuations, which have
particularly affected the market prices of many Internet and computer software
companies and which have often been unrelated to the operating performance of
these companies.
Investors in this offering will suffer immediate and substantial dilution.
The initial public offering price per share is substantially higher than
the net tangible book value per share. Investors purchasing shares in this
offering will therefore incur immediate and substantial net tangible book
value dilution. To the extent that future options or warrants to purchase the
shares are exercised, there will be further dilution. See "Dilution."
Future sales of shares could affect our share price.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
shares of common stock, based upon shares outstanding as of 1999,
assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options or warrants after 1999. Of these
shares, the shares sold in this offering will be freely tradable. This
leaves shares eligible for sale in the public market beginning 180 days
after the date of this prospectus subject in each case to restrictions on
these sales. For a discussion of the lock-up provisions on certain of our
securityholders, see "Shares Eligible for Future Sale" and "Underwriters."
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A small number of shareholders will control us after this offering.
After the offering, our seven largest shareholders, Warburg-Pincus
Ventures, ChinaVest Group, Fidelity International and Intel Pacific, Inc., and
their affiliates, as well as Edward Tian, one of our directors, James Ding,
our Chief Executive Officer, and Louis Lau, our Chairman, in the aggregate,
will control approximately % of our voting stock. As a result, these
shareholders will be able to control all matters requiring shareholder
approval, including election of directors and approval of significant
corporate transactions, such as a sale of our assets and the terms of future
equity financings. The combined voting power of our large shareholders could
have the effect of delaying or preventing a change in control of AsiaInfo.
We have substantial discretion as to how to use the proceeds from this
offering and may apply the proceeds to uses that do not increase our profits
or market value.
Our management has broad discretion as to how to spend the proceeds from
this offering and may spend these proceeds in ways with which our stockholders
may not agree. We cannot predict that investment of the proceeds will yield a
favorable or any return. See "Use of Proceeds."
We are subject to anti-takeover provisions that could delay or prevent an
acquisition of AsiaInfo.
After this offering, the board of directors will have the authority to
issue up to an additional 2,000,000 shares of preferred stock. Further,
without any further vote or action on the part of the stockholders, the board
of directors will have the authority to determine the price, rights,
preferences, privileges and restrictions of the preferred stock. This
preferred stock, if it is ever issued, may have preference over and harm the
rights of the holders of common stock. Although the issuance of this preferred
stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, this issuance may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock.
AsiaInfo currently has authorized the size of its board to be not less than
three nor more than nine directors. The terms of the office of the seven-
member board of directors have been divided into three classes: Class I, whose
term will expire at the annual meeting of the stockholders to be held in 2000;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2001; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. This classification of the board of directors
may have the effect of delaying or preventing changes in control or management
of AsiaInfo.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date when the person became
an interested stockholder unless, subject to exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
transaction" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. See "Description of
Capital Stock."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, all of which
are subject to risks and uncertainties. Forward-looking statements contain
information concerning our possible or assumed business success or future
results of operations. Forward-looking statements include, but are not limited
to, statements as to our expectations regarding:
. our future revenue opportunities;
. the future growth of our customer base;
. our future expense levels, including research and development, sales and
marketing and general and administrative expenses and amortization of
goodwill and other intangibles;
. our future capital needs;
. the effect of the Year 2000 issues;
. our use of net proceeds; and
. future financial pronouncements.
When we use words such as "believe," "expect," "anticipate" or similar
words, we are making forward-looking statements.
You should also be aware that the telecommunications industry and Internet
studies and reports that we refer to in this prospectus also make forward-
looking statements concerning, among other things, the future growth of the
telecommunications industry, Internet usage and Internet applications for
commercial and consumer purposes globally and in China. These industry studies
and reports base their forward-looking statements on a number of different
factors and assumptions, all of which are beyond our control, including the
following:
. a decrease in personal computer costs and growth in the installed base
of personal computers in China;
. a decline in Internet access costs;
. the number and types of devices that are able to access the Internet
will increase, allowing greater accessibility to the Internet;
. the Chinese government will continue to gradually deregulate the
telecommunications sector and large state-owned telecommunications
companies and Internet service providers will maintain present levels of
or increase their investments; and
. increasing investment in broadband network solutions and convergent
communications, which combine voice, data, video and Internet services
using IP technology.
These industry studies and reports are also based on other assumptions,
including assumptions that are specifically identified in the reports. All of
these assumptions are subject to a high degree of uncertainty. One or more of
these assumptions may turn out to be incorrect. Accordingly, actual
developments in the China market may differ materially from the projections
contained in these industry studies and reports. The telecommunications
industry and Internet-related markets in China may not grow at the rates
projected by these studies and reports.
An investment in our securities involves risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth in "Risk Factors" and elsewhere in this prospectus.
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USE OF PROCEEDS
We will receive net proceeds of $ million from the sale of shares of
common stock offered by us, at an assumed initial public offering price of $
per share, after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
We currently intend to use the net proceeds of this offering primarily to:
. fund increased working capital requirements for our Internet
infrastructure and systems integration projects;
. expand our software development efforts, including the addition of
personnel;
. fund capital expenditures, including further development of our
technology and systems; and
. facilitate possible acquisitions of and investments in related
businesses.
To the extent not so applied, we will use the remaining net proceeds for
general corporate purposes.
Pending these uses, the net proceeds will be invested in short-term,
investment grade securities. We do not currently have any agreements with
respect to any acquisitions, investments or similar transactions.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We do
not intend to pay dividends on our shares of common or preferred stock for the
foreseeable future. We intend to retain all future earnings, if any, for use
in our business. Future cash dividends, if any, will be at the discretion of
our board of directors and will depend upon our future operations and
earnings, capital requirements and surplus, general financial condition,
contractual restrictions and other factors as the board of directors may deem
relevant. Any dividends we declare will be paid in U.S. dollars.
As a holding company, our primary source of cash for the payment of
dividends are distributions, if any, from our wholly-owned subsidiaries. Our
wholly-owned subsidiaries were established in China and are able to make
distributions of profits to us only if they satisfy certain conditions under
Chinese law, including the satisfaction of tax liabilities, recovery of losses
from previous years and mandatory contributions to statutory reserves. In
addition, loan agreements and contractual arrangements we enter into in the
future may also restrict our ability of distributing dividends.
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CAPITALIZATION
The following table sets forth our cash, short term debt and total
capitalization as of September 30, 1999:
. on an actual basis; and
. as adjusted to reflect (a) the conversion of all of our outstanding
shares of convertible preferred stock into 6,952,153 shares of common
stock upon the closing of this offering; (b) the issuance of 9,429,226
shares of common stock pursuant to the exercise of all outstanding
warrants issued to holders of our Series A Convertible Preferred Stock
and (c) the application of the net proceeds from the sale of shares
of common stock offered in this offering at an assumed initial public
offering price of $ per share, after deducting an assumed underwriting
discount and estimated expenses.
This table has been prepared on a basis consistent with our principal
accounting policies as set out in our audited consolidated financial
statements as of and for the year ended December 31, 1998 and our unaudited
consolidated financial statements as of and for the nine months ended
September 30, 1999 included elsewhere in this prospectus. You should read this
table in conjunction with our consolidated financial statements and notes to
consolidated financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------
As
Actual Adjusted(/1/)(/2/)
------- ------------------
(Amounts in thousands of
U.S. dollars)
<S> <C> <C>
Cash and cash equivalents ......................... $25,354 $
======= ======
Short-term debt.................................... $ 8,916 $
======= ======
Stockholders' equity:
Convertible preferred stock:
Series A: 3,000,000 shares authorized
(aggregate liquidation value $18,000,000)
$0.01 par value 2,160,864 shares issued and
outstanding................................... $ 22 $ --
Series B: 5,000,000 shares authorized at
September 30, 1999; (aggregate liquidation
value $20,000,000) $0.01 par value; 2,630,425
shares issued and outstanding................. 26 --
Common stock, 50,000,000 shares authorized
$0.01 par value; shares issued and outstanding
September 30, 1999: actual, 15,656,002, pro
forma, 22,608,155............................. 157
Additional paid-in capital....................... 46,014
Deferred stock compensation...................... (4,564) (4,564)
Retained earnings................................ 1,444 1,444
Accumulated other comprehensive loss............. (22) (22)
------- ------
Total stockholders' equity................... 43,077
------- ------
Total capitalization ............................ $43,077 $
======= ======
</TABLE>
- --------
(1) The number of shares of common stock outstanding after this offering has
been adjusted based on the number of shares outstanding as of September
30, 1999 and includes 9,429,226 shares of common stock issued pursuant to
the exercise of all outstanding warrants issued to holders of our Series A
Convertible Preferred Stock and the automatic conversion of all
outstanding shares of our convertible preferred stock into 6,952,153
shares of common stock upon the completion of this offering, but excludes
(a) 7,794,200 shares of common stock underlying options granted under our
stock option plans and outstanding as of September 30, 1999 at a weighted
average exercise price of $1.93 per share, (b) 1,783,300 shares of common
stock available for issuance upon the exercise of future grants under our
stock option plans and (c) 40,000 shares of common stock issuable upon the
exercise of outstanding warrants to purchase shares of common stock at an
exercise price of $0.01 per share.
(2) There has been no material change to our cash, short-term debt and total
capitalization since September 30, 1999 other than as set forth in this
table.
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DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$38,357,792, or $1.70 per share of common stock. Pro forma net tangible book
value per share is calculated by subtracting our total liabilities from our
total tangible assets, which equals total assets less goodwill, and dividing
this amount by the pro forma number of shares of common stock outstanding as
of September 30, 1999, assuming (a) the conversion of all outstanding shares
of convertible preferred stock into shares of common stock upon the closing of
this offering and (b) the exercise of all outstanding warrants held by holders
of our Series A Preferred Stock.
This calculation excludes (a) 7,794,200 shares of common stock underlying
options granted under our stock option plans and outstanding as of September
30, 1999; (b) 1,783,300 shares of common stock available for issuance upon the
exercise of future grants under our stock option plans; and (c) 40,000 shares
of common stock issuable upon the exercise of outstanding warrants to purchase
shares of common stock.
Assuming we sell shares of common stock offered in this offering at an
initial public offering price of $ per share and the application of the
estimated net proceeds from this offering, our pro forma net tangible book
value as of , 1999 would have been $ , or $ per share of common stock.
This represents an immediate increase in the pro forma net tangible book value
of $ per share to our existing stockholders and an immediate dilution in the
pro forma net tangible book value of $ per share to new investors purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C>
Assumed public offering price per share............................... $
----
Pro forma net tangible book value per share as of September 30, 1999.. 1.70
----
Pro forma increase in net tangible book value per share assuming
exercise of outstanding warrants.....................................
----
Pro forma increase in net tangible book value per share attributable
to new investors.....................................................
----
Pro forma net tangible book value per share after this offering and
exercise of outstanding warrants.....................................
----
Pro forma dilution per share to new investors......................... $
====
</TABLE>
The following table summarizes, on a pro forma basis described above as of
September 30, 1999, the total number of shares of common stock purchased from
us, the total consideration paid to us, and the average price per share paid
by existing stockholders and by new investors in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 22,608,155 % $34,537,074 % $1.53
New investors.............. % $ % $
--- ----------- ---
Total....................
</TABLE>
As of September 30, 1999, there were outstanding options to purchase
7,794,200 shares of common stock under our stock option plans at a weighted
average exercise price of $1.93 per share. See "Management--Stock Incentive
Plans." To the extent that the outstanding options, or any options granted in
the future, are exercised, there will be further dilution to new investors.
See "Shares Eligible for Future Sale" and "Underwriters."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
You should read this information together with our consolidated financial
statements, the notes to those statements beginning on page F-1 of this
prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The selected
consolidated balance sheet data and statements of operations data in the table
below as of and for each of the three years ended December 31, 1996, 1997 and
1998 have been derived from our audited consolidated financial statements. The
selected consolidated statement of operations data for the year ended December
31, 1995 and the nine months ended September 30, 1998 and 1999, and the
selected consolidated balance sheet data as of the same dates are derived from
our unaudited consolidated financial statements, which have been prepared on
the same basis as our audited consolidated financial statements and contain
normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for such unaudited periods.
Historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of those for the full year.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------- ------------------------
1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
(Amounts in thousands of U.S. dollars except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network solutions...... $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 17,324 $ 43,598
Software license....... -- 762 775 2,258 1,898 4,643
---------- ----------- ----------- ----------- ----------- -----------
Total revenues......... 1,799 15,543 37,284 44,222 19,222 48,241
---------- ----------- ----------- ----------- ----------- -----------
Cost of revenues
Network solutions...... 1,253 9,098 29,551 32,188 13,709 33,157
Software license....... -- -- 5 1 1 248
---------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenues.............. 1,253 9,098 29,556 32,189 13,710 33,405
---------- ----------- ----------- ----------- ----------- -----------
Gross profit............ 546 6,445 7,728 12,033 5,512 14,836
---------- ----------- ----------- ----------- ----------- -----------
Operating expenses
Sales and marketing.... -- 668 835 2,408 1,424 4,789
General and
administrative........ 1,144 3,008 6,167 6,463 3,653 5,466
Research and
development........... -- 321 394 1,436 859 2,244
Amortization of
deferred stock
compensation.......... -- 262 1,045 1,045 784 2,809
---------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 1,144 4,259 8,441 11,352 6,720 15,308
---------- ----------- ----------- ----------- ----------- -----------
Operating Income
(loss)................. (598) 2,186 (713) 681 (1,208) (472)
Other income (expense),
net................... -- 35 32 477 514 271
Income tax expense
(benefit).............. 10 69 267 (256) (599) 502
Minority interests in
(income) loss of
consolidated
subsidiaries........... 30 (482) 567 122 87 84
Equity in loss of
affiliate.............. -- -- -- -- -- (118)
---------- ----------- ----------- ----------- ----------- -----------
Net income (loss)....... (578) $ 1,670 $ (381) $ 1,536 $ (8) $ (737)
========== =========== =========== =========== =========== ===========
Net income (loss) per
share:
Basic.................. $ (0.07) $ 0.12 $ (0.03) $ 0.11 $ 0.00 $ (0.05)
========== =========== =========== =========== =========== ===========
Diluted(/1/)........... $ (0.07) $ 0.10 $ (0.03) $ 0.05 $ 0.00 $ (0.05)
========== =========== =========== =========== =========== ===========
Shares used in
computation:
Basic.................. 8,154,463 13,530,000 13,530,000 13,616,412 13,594,135 13,937,072
========== =========== =========== =========== =========== ===========
Diluted(/3/)........... 8,154,463 15,999,133 13,530,000 31,765,532 13,594,135 13,937,072
========== =========== =========== =========== =========== ===========
Pro forma net income
(loss) per share(/2/):
Basic.................. $ 0.09 $ (0.04)
=========== ===========
Diluted................ $ 0.05 $ (0.04)
=========== ===========
Shares used in pro forma
computation(/2/):
Basic.................. 17,938,140 18,261,402
=========== ===========
Diluted................ 31,765,532 18,261,402
=========== ===========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------- ------------------
1996 1997 1998 1998 1999
---------------- -------- -------- ---------
(Amounts in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Additional Data:
Total revenues net of
hardware costs.............. $ 6,877 $ 11,684 $ 19,286 $ 9,832 $ 18,734
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1999
-------------------------------------------
1997 1998 Actual As Adjusted(/3/)
--------- ---------------- ----------------
(Amount in thousands of U.S. dollars)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......... $ 24,066 $ 9,749 $25,354 $
Total current assets.............. 36,131 42,805 62,038
Total assets..................... 37,085 45,359 69,611
Total liabilities................. 20,008 26,048 26,535 26,535
Total stockholders' equity
(deficit)........................ 16,179 19,247 43,077
</TABLE>
- --------
(1) In 1997 and for the nine months ended September 30, 1998 and 1999, the
diluted net loss per share computation excludes shares of common stock
issuable under stock option plans, upon the exercise of warrants and upon
the automatic conversion of our convertible preferred stock which, if
included, would have an antidilutive effect on the net loss reported in
these periods. See note 11 of Notes to Consolidated Financial Statements
for a detailed explanation of the determination of the shares used in
computing basic and diluted net income (loss) per share.
(2) The pro forma net income (loss) per share calculations reflect the
automatic conversion of all outstanding shares of convertible preferred
stock into shares of common stock upon the closing of this offering as if
the closing occurred on January 1, 1998 or the date convertible preferred
stock was issued if the issuance had occurred after January 1, 1998.
(3) Fully diluted shares are adjusted to reflect (a) the sale of shares of
common stock offered by AsiaInfo hereby at an initial public offering
price of $ per share and after deducting the underwriting discount and
estimated offering expenses, (b) the conversion of all outstanding shares
of our convertible preferred stock into 6,952,153 shares of common stock
as of the closing of this offering as if the closing occurred on September
30, 1999 and (c) the issuance of 9,429,226 shares of common stock pursuant
to the exercise of all outstanding warrants held by holders of our Series
A Convertible Preferred Stock. Excludes (a) 7,794,200 shares of common
stock underlying options granted under our stock option plans and
outstanding as of September 30, 1999 at a weighted average exercise price
of $1.93 per share, (b) 1,783,300 shares of common stock available for
issuance upon the exercise of future grants under our stock option plans
and (c) 40,000 shares of common stock issuable upon the exercise of
outstanding warrants to purchase shares of common stock at an exercise
price of $0.01 per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and the related notes included elsewhere in this
prospectus. The following discussion contains forward-looking statements
within the meaning of federal securities law. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. Although the management believes that the expectations reflected
in such forward-looking statements are based on reasonable assumptions,
certain factors such as rapid changes in the markets in which we compete or
general economic conditions might cause a difference between actual results
and such forward-looking statements. When considering such forward-looking
statements, prospective investors should consider the "Risk Factors" and other
cautionary statements in this prospectus.
General
We are a leading provider of Internet-related, IT professional services and
software products in China. We offer total network solutions and proprietary
software to meet our customers' Internet and telecommunications infrastructure
and operating needs. Our customers are leading telecommunications service
providers, ISPs and ICPs in China, including the China Telecom system and
China Unicom, the two largest Chinese telecommunications and Internet service
providers, as well as China Mobile, the largest wireless telephony service
provider in China.
We provide network solutions for large Internet and telecommunications
projects. We deliver Internet infrastructure solutions such as backbone and
access networks, operations support solutions using our proprietary and third
party software, service applications such as IP telephony and virtual private
networks, and network performance and security solutions. We offer these
services in the context of total solutions, which include systems integration
and customization of our proprietary and third party software. This total
solutions approach is favored by customers in the China market. We have
historically sold our software products as a part of our network solutions
projects, but we are increasingly selling these products on a stand-alone
basis.
We moved our operations from Texas to China in 1995 and began generating
significant network solutions revenues in 1996 and significant software
product revenues in 1998. We expect our business to continue to evolve as the
Internet and telecommunications markets in China change and expand. In
particular, we are investing substantial personnel and financial resources to
expand our software business, which we expect to account for a significantly
greater portion of our revenues and operating expenses than in the past. For
these reasons, our historical financial data may not be a meaningful basis for
you to evaluate us and our prospects.
On April 5, 1999, we acquired AI Zhejiang, a leading Chinese producer of
wireless CM&B software. The acquisition reflects our strategy to expand the
scope and size of our software operations. With over 7 million user licenses
in China as of December 15, 1999, we believe that we have become one of the
top three wireless CM&B software providers in China. We acquired AI Zhejiang
for $2 million cash and issuance of the 437,500 shares of common stock to AI
Zhejiang's senior management for their past services. A wholly-owned
subsidiary of AsiaInfo, AI Zhejiang's financial results are consolidated in
our financial statements for the nine months ended September 30, 1999 included
in this prospectus. For historical financial information regarding AI
Zhejiang, see its separate financial statements as of and for the years ended
December 31, 1997 and 1998 included in this prospectus.
Sales to various entities of the China Telecom system amounted to
approximately 98% of total revenues in each of 1996, 1997 and 1998 and 90% for
the nine months ended September 30, 1999. During the years ended December 31,
1996, 1997 and 1998, certain provincial entities of the China Telecom system
represented more than 10% of our total revenues. In 1996, four provincial
entities accounted for 42%, 14%, 12% and 11%, respectively, of total revenues.
In 1997, two provincial entities accounted for 20% and 12%, respectively, of
total
24
<PAGE>
revenues. In 1998, three provincial subsidiaries accounted for 27%, 20% and
13%, respectively, of total revenues. At September 30, 1999, over 80% of our
backlog was attributable to orders placed by various entities of the China
Telecom system. Purchasing decisions generally are made by provincial and
local entities of the China Telecom system independently.
Revenues
Our total revenues have grown from $15.5 million in 1996 to $44.2 million
in 1998 and $48.2 million in the first nine months of 1999. We generate our
revenues from our two principal business lines: network solutions and
proprietary software products. Software products have accounted for an
increasing portion of our total revenues, increasing from 4.9% of total
revenues in 1996 to 9.6% of total revenues in the first nine months of 1999.
We expect that software products will account for a growing portion of our
future revenues.
Backlog. Most of our revenues are derived from customers orders under
separate binding contracts for hardware and systems integration services.
These contracts constitute our backlog at any given time. Revenue for
hardware, system integration services and software products are recognized
during the course of the project, explained in more detail below. Our backlog
at September 30, 1999 was $14.6 million, approximately 77% of which related to
network solutions orders and 23% related to software orders. The total backlog
at September 30, 1998 was $33.0 million, approximately 90% of which related to
network solutions orders and 10% related to software orders. This change in
proportion reflects the continuing growth in the contribution by our software
business to our overall revenues.
Network solutions revenues. Network solutions revenues consist of hardware
sales for equipment procured by us on behalf of our customers from hardware
vendors and services for planning, design, systems integration, training and
customization of our proprietary and third party software. Network solutions
revenues also include fees that we earn under service contracts to maintain
and upgrade installed software.
We procure for and sell hardware to our customers as part of our total
solutions strategy. We minimize our exposure to hardware risks by sourcing
equipment from hardware vendors against back-to-back orders and letters of
credit from our customers. We believe that as the Internet-related market in
China develops, our customers will increasingly purchase hardware directly
from hardware vendors and pay us separately for the full value of our
professional services.
Although we account for our network solutions revenues on a gross basis
that includes hardware sales, we manage our business internally based on total
revenues net of hardware costs, which is consistent with our strategy to
increasingly focus on providing our customers high value IT professional
services while gradually outsourcing lower end services such as hardware
installation. The following table shows our revenue breakdown by business line
on this basis:
<TABLE>
<CAPTION>
Nine months
Year Ended December ended
31, September 30,
---------------------- ---------------
1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Business Line
- -------------
Network solutions net of hardware
costs............................... 100% 89% 93% 88% 81% 75%
Software license..................... -- 11% 7% 12% 19% 25%
--- --- --- --- ------ ------
Total revenues net of hardware
costs............................. 100% 100% 100% 100% 100% 100%
=== === === === ====== ======
</TABLE>
We generally charge a fixed price for our network solutions projects. We
tie revenue recognition to three milestones which are representative of the
percentage of completion. The first milestone occurs when the hardware is
delivered, which is usually between three and four months after signing the
contract. At that time, we recognize a portion of the contract's total revenue
which includes most of the revenue relating to hardware on a percentage of
completion basis. The second milestone is at primary testing, which usually
occurs around
25
<PAGE>
five months after hardware delivery. We recognized substantially all the
contract revenue for services between hardware delivery and primary testing as
most of the professional services are incurred during that period. The third
milestone is project acceptance, which occurs when the customer agrees that we
have satisfactorily completed all our work for the project. We recognize the
balance of the contract's revenues during the final period leading up to the
last milestone, which typically occurs around three months after primary
testing but sometimes later. A portion of total network solutions revenues
also consists of fees for training services, the revenues from which are
recognized as the training is performed.
Since a large part of the contract amount of a network solutions project
usually relates to hardware procurement, the timing of hardware delivery can
cause our quarterly revenues to fluctuate significantly. Our quarterly results
are also subject to fluctuations because a significant part of our network
solutions revenues are derived from a limited number of large contracts.
The foregoing revenue recognition policies result in our recognizing
certain revenues even though we are not due to receive the corresponding cash
payment due under the contract. In the case of hardware sales, the customer
typically holds back around 10% and occasionally a higher percentage of the
hardware contract amount at the time of delivery. This amount becomes payable
at the time of final project acceptance when payment of all unpaid contract
amounts is due. When we recognize revenues for which payments are not yet due,
we book unbilled accounts receivable until the corresponding amounts become
payable.
Software license revenues. Software license revenues consist of fees
received from customers for licenses that allow them to use our products in
perpetuity up to a specified maximum number of users. The customer must
purchase additional user licenses from us when the number of users exceeds the
previously licensed limit. Substantially all our software revenues are derived
from our IP billing, wireless CM&B, and messaging software products. We
recognize substantially all software license revenues over the installation
period and the balance upon final acceptance by the customer.
Cost of Revenues
Network solutions costs. Network solutions costs consist primarily of third
party hardware costs, compensation and travel of the professionals involved in
designing and implementing projects, and hardware warranty costs.
We recognize hardware costs in full upon delivery of the hardware to our
customers. In order to minimize our working capital requirements, we generally
obtain from our hardware vendors payment terms that are timed to permit us to
receive payment from our customers for the hardware before our payments to
hardware vendors are due. However, in certain recent large projects, we
obtained less favorable payment terms from our customers, thereby increasing
our working capital requirements.
We recognize compensation and travel costs for project professionals as
incurred. We accrue hardware warranty costs when hardware revenue is
recognized upon final acceptance. We obtain manufacturers' warranties for
hardware we sell which cover a portion of the warranties that we give to our
customers. We currently accrue 1% of hardware sales to cover potential
warranty expenses. This estimate of warranty cost is based on our current
experience of contracts whose warranty period has expired. See "Risk Factors--
We extend warranties to our network solutions customers that expose us to
potential liabilities."
Software license costs. Software license costs consist primarily of
packaging and written manual expenses. Software license costs are negligible,
since most of the costs associated with creating and enhancing software are
classified as research and development under operating expenses.
Operating expenses. Operating expenses are comprised of sales and marketing
expenses, research and development expenses, general and administrative
expenses and amortization expenses of deferred stock compensation.
26
<PAGE>
Research and development expenses relate almost entirely to the development
of new software and the enhancement and upgrading of existing software. We
expense these costs as they are incurred. With the acquisition of AI Zhejiang
in 1999, our research expenses increased significantly both in absolute terms
and as a percentage of sales. As we expand our software business, we expect
these expenses to continue to increase significantly.
Operating expenses (as well as network solution costs, excluding hardware)
consist for the most part of compensation expenses. These overall costs have
risen as we expanded and hired new personnel. In 1998, we undertook a
comprehensive review of human resource policies, including salaries paid by
leading multinational IT companies operating in China. This review resulted in
a special increase in salaries for most of our employees to bring their
compensation to market levels. We do not foresee the need to make similar
increases at least in the near term, but we may be required to do so from time
to time.
We provide many of our employees, directors and consultants with stock
options. Before this offering, we granted a number of options with exercise
prices below the fair market value of the related shares at the time of grant.
The Company does not, however, intend to issue options below fair market value
in the future. The difference between the exercise price and the fair market
value of the related shares is amortized over the vesting period of the
options and reflected on our income statement as amortization of deferred
stock compensation. Deferred stock compensation for options issued to
employees arises because the fair market value of the stock is greater than
the exercise price at the measurement date. Such deferred compensation expense
is charged to earnings over the vesting period of the option. Deferred stock
compensation also generally arises when options are granted to non-employees.
See note 16 in our consolidated financial statements included in this
prospectus.
We provide a 50% bad debt provision for accounts receivable balances older
than twelve months. Because of the generally high creditworthiness of the
leading Chinese telecommunications service providers who are our major
customers, we do not believe that we are exposed to significant bad debt risk.
Generally a majority of our accounts receivable are paid within 90 days of
billing.
Income Taxes
Except for hardware sales, we conduct substantially all our business
through our Chinese subsidiaries. Our Chinese subsidiaries are generally
subject to a 30% state corporate income tax and a 3% local income tax. Our
subsidiaries are classified as "high technology" companies, except AI
Zhejiang. The subsidiaries with the high technology designation are currently
entitled to preferential treatment under Chinese tax law. They operate free of
Chinese state corporate income tax for three years after starting operations
and are entitled to a 50% tax reduction for the subsequent three years. The
tax holiday for our designated subsidiaries expires in 1999 and the 50% tax
reduction expires in 2002. As high technology companies located in the Beijing
New Technology Industry Development Zone, our qualified subsidiaries are also
exempt from local income tax and are subject to a reduced state corporate
income tax at an effective rate of 15% and are exempt from the 3% local income
tax. We cannot guarantee, however, that we will actually realize these
benefits if Chinese tax laws or interpretations change or that our future
operations will qualify for these benefits. AI Zhejiang has yet to be
qualified as a high-technology or new technology enterprise and is currently
subject to the 33% corporate income tax rate. We have historically generated
losses which have resulted in aggregate tax loss carry forwards of $1.7
million as of September 30, 1999 which will expire between 2000 and 2003.
Sales of hardware in China are subject to a 17% value added tax. Most of
our hardware sales are made through our U.S. parent company and thus are not
subject to the value added tax. Sales of software and services are subject to
a 6% and 5% value added tax and business tax, respectively. We effectively
pass these taxes through to our customers and do not include them in revenues
reported in our financial statements.
Foreign Exchange
Substantially all our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all our revenues and expenses
relating to the service component of our network solutions business
27
<PAGE>
and software business are denominated in Renminbi. Although in general, our
exposure to foreign exchange risks should be limited, the value of your
investment in our shares will be affected by the foreign exchange rate between
the U.S. dollars and Renminbi because the value of our business is effectively
denominated in Renminbi, while the shares will be traded in U.S. dollars.
Furthermore, a decline in the value of Renminbi could reduce the U.S. dollar
equivalent of the value of the earnings from and our investment in our
subsidiaries in China. We incur a limited amount of U.S. dollar debt outside
China.
Consolidated Results of Operations
The following table sets forth the consolidated statement of operations
data for the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended September
December 31, 30,
--------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Network solutions..................... 95.1 % 97.9 % 94.9 % 90.1 % 90.4 %
Software license...................... 4.9 2.1 5.1 9.9 9.6
----- ----- ----- ----- -----
Total revenues......................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues....................... 58.5 79.3 72.8 71.3 69.2
----- ----- ----- ----- -----
Gross profits.......................... 41.5 20.7 27.2 28.7 30.8
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing................... 4.3 2.2 5.5 7.4 9.9
Research and development.............. 2.1 1.1 3.2 4.5 4.7
General and administrative............ 19.4 16.5 14.6 19.0 11.3
Deferred stock compensation expenses.. 1.6 2.8 2.4 4.1 5.8
----- ----- ----- ----- -----
Total operating expenses............... 27.4 22.6 25.7 35.0 31.7
----- ----- ----- ----- -----
Operating profit (loss)................ 14.1 (1.9) 1.5 (6.3) (0.9)
Net other income....................... 0.2 0.1 1.1 2.7 0.6
Income tax expense (benefit)........... 0.4 0.7 (0.6) (3.1) 1.1
Minority interest...................... (3.1) 1.5 0.3 0.5 0.2
Equity in loss of affiliate............ -- -- -- -- (0.3)
----- ----- ----- ----- -----
Net income (loss)...................... 10.8 % (1.0)% 3.5 % (0.0)% (1.5)%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998.
Revenues. Total revenues increased 151.0% to $48.2 million in the first
nine months of 1999 from $19.2 million in the first nine months of 1998.
Network solutions accounted for $26.3 million of this increase, primarily due
to a greater number of projects in progress. The 1999 nine month revenues were
substantially higher due to the recognition of revenue in the third quarter of
1999 upon delivery of the hardware for our Guangdong 163 IV project, one of
our largest projects in 1999. Software revenues accounted for the balance of
the increase in total revenue. The growth in software revenues reflected
greater demand for our products and faster development and installation of our
products. AI Zhejiang, which was acquired by us in April 1999, contributed
revenues of $1.9 million.
Cost of revenues. Our cost of revenues increased 143.6% to $33.4 million in
the first nine months of 1999 from $13.7 million in the first nine months of
1998, primarily due to the overall expansion of our business, increased salary
costs for our systems integration and design engineering personnel and costs
associated with AI Zhejiang's products. Costs of revenues were reduced by $1.2
million as a result of a revision to warranty cost estimates. Gross profit as
a percentage of revenues increased from 28.7% in the first nine months of 1998
to 30.8% in the first nine months of 1999, primarily due to the foregoing
revision to warranty cost estimates.
28
<PAGE>
Operating expenses. Operating expenses increased 127.8% to $15.3 million in
the first nine months of 1999 from $6.7 million in the first nine months of
1998, primarily due to the overall expansion of our business, AI Zhejiang's
operating expenses and high personnel compensation costs resulting from the
comprehensive review of human resource policies discussed above. Operating
expenses as a percentage of revenues declined from 35.0% to 31.7% primarily
because of the spreading of general and administrative expenses over a larger
revenue base, which more than offset an increase in sales and marketing
expenses as a percentage of total revenue.
Sales and marketing expenses increased 236.5% to $4.7 million in the first
nine months of 1999 from $1.4 million in the first nine months of 1998
primarily as a result of the implementation of new marketing activities, the
hiring of additional personnel and higher compensation levels.
Research and development expenses increased 161.2% to $2.2 million in the
first nine months of 1999 from $859,000 in the first nine months of 1998
primarily due to increased spending associated with the expansion of our
software business.
General and administrative expenses increased 49.6% to $5.5 million in the
first nine months of 1999 from $3.7 million in the first nine months of 1998
primarily due to the growth of our businesses, higher levels of employee
compensation, higher levels of provisions for bad debts and an increase in the
amortization of goodwill resulting from the acquisition of AI Zhejiang.
Amortization of deferred stock compensation increased from $784,000 in the
first nine months of 1998 to $2.8 million in the first nine months of 1999 for
the reasons described under "Cost of Revenues" above.
Other income and expenses. Other income and expenses, consisting primarily
of net interest income and expense, decreased from income of $514,398 in the
first nine months of 1998 to income of $271,621 in the first nine months of
1999 primarily due to lower interest rates on cash deposits and high levels of
bank debt.
Other. Income taxes increased from a tax benefit of approximately $599,000
in the first nine months of 1998 to a tax expense of approximately $502,000 in
the first nine months of 1999 primarily due to an increase in income generated
by our U.S. holding company.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased 18.6% from $37.3 million in 1997 to
$44.2 million in 1998 primarily due to a greater number of projects in
progress. Growth in software sales from 2% of total revenues in 1997 to 5% of
total revenues in 1998 also contributed to the increase.
Cost of revenues. Our cost of revenues increased 8.9% from $29.6 million to
$32.2 million in 1998 in 1997, primarily due to growth of our business. Gross
profit as a percentage of revenues increased from 20.7% in 1997 to 27.2% in
1998, primarily due to the increase in software sales (which have a higher
gross margin than network solutions sales) as a percentage of total revenue.
Operating expenses. Operating expenses increased 34.5% from $8.4 million in
1997 to $11.4 million in 1998 primarily due to higher levels of business
activity, including personnel compensation, purchase of office equipment,
lease expenses and costs related to the establishment of representative
offices. Operating expenses as a percentage of revenues increased from 22.6%
to 25.7% primarily because of higher levels of sales and marketing and
research and development activities associated with the ramping up of our
business.
Sales and marketing expenses increased 188.3% from $835,268 in 1997 to $2.4
million in 1998 primarily as a result of higher levels of compensation,
travelling costs and selling costs associated with the growth of our business.
Research and development expenses increased 264.8% from $393,468 in 1997 to
$1.4 million in 1998
29
<PAGE>
as a result of increased investment to expand our software business. General
and administrative expenses increased 4.8% from $6.2 million in 1997 to $6.5
million in 1998. We were able to realize significant revenue growth in 1998
over 1997 without substantially increasing the number of administrative
personnel and their compensation costs.
Income (loss) before taxes and minority interest. Due to the foregoing
factors, income before taxes and minority interest increased from a loss of
approximately $682,000 in 1997 to approximately $1.2 million in 1998.
Other. Income taxes decreased from a tax expense of approximately $267,000
in 1997 to a tax benefit of approximately $256,000 in 1998 primarily due to
tax losses of our subsidiaries in China.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenues. Total revenues increased 139.9% from $15.5 million in 1996 to
$37.3 million in 1997 primarily due to a greater number of projects in
progress.
Cost of revenues. Cost of revenues increased 224.9% from $9.1 million in
1996 to $29.6 million in 1997, primarily due to growth of our business.
Gross profit. Due to the foregoing factors, gross profit increased 19.9%
from $6.4 million in 1996 to $7.7 million in 1997.
Operating expenses. Operating expenses increased 98.2% from $4.3 million in
1996 to $8.4 million in 1997, primarily due to growth of our business.
Operating expenses as a percentage of revenues decreased from 27.4% to 22.6%
primarily because of rapid revenue growth.
Income (loss) before taxes and minority interest. Due to the foregoing
factors, loss before taxes and minority interest was approximately $682,000 in
1997 compared to a gain of $2.2 million in 1996.
Other. Minority interests in our consolidated subsidiaries decreased from
earnings of approximately $482,000 in 1996 to a loss of approximately $567,000
in 1997.
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<PAGE>
Selected Unaudited Quarterly Combined Results of Operations
The following table sets forth unaudited quarterly statements of operations
data for the four quarters ended September 30, 1999. We believe this unaudited
information has been prepared substantially on the same basis as the annual
audited combined financial statements appearing elsewhere in this prospectus.
We believe this data includes all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. You should
read the quarterly data together with the consolidated financial statements
and the notes to those statements appearing elsewhere in this prospectus. The
consolidated results of operations for any quarter are not necessarily
indicative of the operating results for any future period. We expect that our
quarterly revenues may fluctuate significantly.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(Amounts in thousands of U.S. Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Network solutions..... $5,119 $7,054 $5,150 $24,640 $ 3,872 $17,893 $21,833
Software license...... 453 250 1,194 360 1,348 1,625 1,669
------ ------ ------ ------- ------- ------- -------
Total revenues.......... 5,572 7,304 6,344 25,000 5,220 19,518 23,502
Cost of revenues........ (3,940) (5,333) (4,437) (18,479) (3,392) (13,816) (16,196)
------ ------ ------ ------- ------- ------- -------
Gross profit............ 1,632 1,971 1,907 6,521 1,828 5,702 7,306
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Sales and marketing... (301) (469) (654) (985) (1,076) (1,406) (2,306)
General and
administrative....... (996) (1,326) (1,331) (2,811) (1,464) (1,530) (2,472)
Research and
development.......... (157) (299) (403) (576) (473) (758) (1,012)
Deferred stock
compensation
expense.............. (261) (261) (261) (261) (589) (373) (1,848)
------ ------ ------ ------- ------- ------- -------
Total operating
expenses............... (1,715) (2,355) (2,649) (4,633) (3,602) (4,067) (7,638)
------ ------ ------ ------- ------- ------- -------
Operating income
(loss)................. (83) (384) (742) 1,888 (1,774) 1,635 (332)
Net interest income
(expenses)............. 139 92 57 76 47 (22) 22
Other income, net 103 74 49 (113) 175 (17) 64
------ ------ ------ ------- ------- ------- -------
Income (loss) before
tax.................... 159 (218) (636) 1,851 (1,552) 1,596 (246)
Income tax expense
(benefit).............. (141) (295) (163) 343 121 160 220
------ ------ ------ ------- ------- ------- -------
Income (loss) before
minority interest...... 300 77 (473) 1,508 (1,673) 1,436 (466)
Minority interest....... 32 45 11 35 32 32 20
Equity in loss of
affiliates............. (118)
------ ------ ------ ------- ------- ------- -------
Net income (loss)....... $ 332 $ 122 $ (462) $ 1,543 $(1,641) $ 1,468 $ (564)
====== ====== ====== ======= ======= ======= =======
</TABLE>
Although actual results from year to year can vary considerably,
particularly as our company grows, we believe that our business is subject to
a certain degree of seasonality. In particular, orders tend to be slow in the
first quarter because of two major Chinese holidays during this period,
including the Chinese Lunar New Year. In addition, the Chinese government
conducts its internal budgetary review and allocation process during this
period, which has the effect of delaying project commitments by our customers.
Our revenues and operating results can vary significantly from quarter to
quarter due to a number of factors. In particular, our business is
characterized by limited numbers of large projects. As discussed above,
recognition of revenues, particularly hardware, occurs at specific points
during the course of the projects. Thus, in any given quarter, we may
recognize exceptionally large or exceptionally small amounts of revenue,
depending on the timing and size of the project. For a further discussion of
the potential variation in quarterly revenues, see "Risk Factors--The
unpredictability of our quarterly results may adversely affect the trading
price of our common stock."
31
<PAGE>
Liquidity and Capital Resources
Our capital requirements relate primarily to financing working capital
requirements for hardware sales and costs associated with the expansion of the
business, such as research and development and sales and marketing expenses.
We have historically financed our working capital and other financing
requirements through careful management of our network solutions billing
cycle, shareholder investments and, to a limited extent, bank loans. However,
we anticipate that our working requirements will increase in the future.
In 1997, we raised working capital through the issuance of $14.0 million of
convertible preferred stock in a private placement. In August 1999, we raised
an additional $20.0 million through the issuance of additional shares of
convertible preferred stock. Total contributed shareholder capital at
September 30, 1999 was $46.2 million.
By successfully reducing the duration of our accounts receivable we have
been able to significantly increase our revenue in 1999 without significantly
increasing our working capital requirements.
We have a $5 million working capital line of credit with the Bank of
China's New York branch and lines of credit of totalling $4.3 million with
local Chinese banks in Beijing. As of September 30, 1999, we had available a
total of $5 million under these lines. We have borrowed $4.6 million, secured
by restricted cash of $5.1 million, from local banks under short-term loans.
The lines of credit and loans carry interest ranging from 5.85% to 7.03% per
annum and are repayable within one year.
As our business continues to expand, we expect our working capital
requirements to grow and we will need to raise additional working capital. We
currently anticipate that the net proceeds of this offering, together with
available funds and cash flows generated from operations and with the proceeds
of our private placements, will be sufficient to meet our anticipated needs
for working capital, capital expenditures and business expansion through 2000.
Thereafter, we may need to raise additional funds. We may need to raise
additional funds sooner, however, in order to fund more rapid expansion and
acquisitions, to develop new or enhanced services or products or to respond to
competitive pressures. We plan to raise additional funds, if necessary,
through new issuances of shares of our equity securities, either through one
or more offerings to the general public, private placements to accredited
investors, or credit facilities extended by lending institutions.
Impact of Year 2000
Many existing computer systems use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We may realize exposure and risk if the systems on which we are
dependent to conduct our operations are not Year 2000 compliant.
We have conducted a limited review of the products for which we currently
provide maintenance, including certain previous versions of our software
products. This review included a search of the software code, and we believe
that we have identified all instances where date specific information is
required. Based on this limited review, we believe the produces for which we
currently provide maintenance and support, when configured, maintained and
used in accordance with the documentation, correctly recognize Year 2000 date
code and function properly. We have no plans to conduct further review of our
currently supported products.
Our software runs on several hardware platforms and operating systems,
including those provided by Hewlett-Packard Company, Microsoft Corporation and
Sun Microsystems, Inc. In addition, our software interfaces with third party
systems, such as credit card processing services and customer-specific
modifications that service providers, third party integrators and customers
have created to be used with our software. Our software is, therefore,
dependent upon the correct processing of dates by these systems, interfaces
and modifications. Some of our customers elect to integrate our software with
interfaces not ordinarily supported by
32
<PAGE>
us. This integration, whether performed by us, the customer or a third party
systems integrator, is not within the scope of our in-house testing efforts.
We have advised our customers that they must independently test these
integrations for Year 2000 compliance.
We use multiple software systems for our internal business purposes,
including accounting, human resources, e-mail, engineering development and
testing tools, customer service and support, professional services and sales
tracking applications. We have adopted a formal plan for determining the Year
2000 compliance of our major internal systems. We already obtained
verification of Year 2000 compliance for our major internal hardware equipment
and software.
We have also taken steps to ensure that our phone systems and most other
non-IT systems are Year 2000 compliant. We believe all non-IT systems upon
which we are materially dependent is Year 2000 compliant. Additionally, with
respect to IT, we believe we have resolved our Year 2000 compliance issues
primarily through normal upgrades of our software or, when it was necessary,
by replacing existing software with Year 2000 compliant applications.
Costs incurred to date, and expected future costs, to address and remedy
Year 2000 compliance issues have not been, and are not expected to be,
material. While we believe that we have taken reasonable precautions to
protect against Year 2000 risks we have no way to predict with certainty the
negative effects, if any, of Year 2000-related problems or whether we have
developed adequate contingency plans if unforeseen problems develop. We expect
our Year 2000 risks to continue well into 2000 and perhaps beyond.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Boards issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement requires companies to record all derivatives on the balance sheet as
assets or liabilities measured at fair value. Gains and losses resulting from
changes in fair market values of those derivative instruments would be
accounted for depending on the use of the instrument and whether it qualifies
for hedge accounting. SFAS No. 133 will be effective for our fiscal year
ending December 31, 2001. We have not yet determined the impact, if any, on
our financial condition, results of operations or cash flows.
33
<PAGE>
BUSINESS
We are a leading provider of Internet-related, IT professional services and
software products in China. We offer total network solutions and proprietary
software to meet our customers' Internet and telecommunications infrastructure
and operating needs. Our customers are leading telecommunications service
providers, ISPs and ICPs in China, including the China Telecom system and
China Unicom, the two largest Chinese telecommunications and Internet service
providers, as well as China Mobile, the largest wireless telephony service
provider in China.
We provide network solutions for large Internet and telecommunications
projects. We deliver Internet infrastructure solutions such as backbone and
access networks, operations support solutions utilizing our proprietary
software and third party software, service applications such as IP telephony
and virtual private networks, and network performance and security solutions.
In response to customer preferences in China, we offer our services as part of
a total solutions package which includes systems integration, and
customization of our proprietary and third party software.
With an early entry into the market, we are now a leading provider of
network solutions for large Internet and telecommunications companies in
China. Our Chinese, western-trained senior management and technical personnel
have a proven track record of delivering high performance, cost effective
solutions tailored to the specific needs of Chinese companies. We designed and
built ChinaNET, China's first commercial and largest national Internet
backbone. We are in the process of designing and building UniNET, China's
second-largest national Internet backbone for China Unicom. We have also built
numerous provincial Internet backbones, including GuangdongNET, the first and
largest provincial Internet backbone in China.
We develop and sell carrier class software products tailored for the
specific needs of the China market. These products include real time, highly
scalable CM&B software and carrier scale messaging software for ISPs, ICPs and
wireless telephony service providers. We have historically sold our software
products as part of our network solutions projects, but we are increasingly
marketing these products on a stand-alone basis. Our software can support up
to millions of users and is designed with an open architecture to facilitate
customization.
We have the largest customer base of CM&B software among large ISPs and
ICPs in China with approximately 1.8 million user licenses as of December 15,
1999. AIMC, the latest version of our messaging software, was launched in
April 1999 and within eight months has been licensed for over 3 million users.
As of December 15, 1999 we had sold over 7 million user licenses for our
wireless telephony CM&B software.
Industry Background
The telecommunications industry and the Internet in China have experienced
rapid growth over the past several years. Fixed line penetration in China
tripled from 1994 to 1998 and Internet users more than doubled from 1997 to
1998. Going forward, we believe these industries will be driven by several
important trends, such as increased deregulation and competition, strong
growth in Internet penetration and usage, increasing demand for high bandwidth
network capacity and the emergence of convergent communications. Over the past
several years, the Chinese government has invested heavily in the
telecommunications sector in an effort to build an advanced fixed line and
wireless communications infrastructure. According to the MII's annual report,
total government investment in the sector in 1998 amounted to approximately
$21.1 billion, a 39.2% increase from 1997. As a result, the sector has become
the fastest developing industry in terms of China's overall economic
development.
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<PAGE>
The following table sets forth certain information relating to the
telecommunications industry in China for the five-year period ended December
31, 1998:
<TABLE>
<CAPTION>
Compound
annual
As of December 31, growth rate
--------------------------------- -----------
1994 1995 1996 1997 1998 1994-1998
----- ----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Population (in millions)....... 1,195 1,211 1,224 1,236 1,248 1.03%
Fixed line subscribers (in
millions)..................... 27.30 40.71 54.95 70.31 87.42 33.77%
Fixed line penetration......... 2.28% 3.38% 4.49% 5.69% 7.00% --
Cellular subscribers (in
millions)..................... 1.57 3.67 6.95 13.66 24.98 99.72%
Cellular penetration........... 0.13% 0.31% 0.57% 1.10% 2.00% --
</TABLE>
- --------
Sources: China Statistical Bureau and estimates of the MII and the DGT.
Prior to 1993, the China Telecom system was under the control of the
predecessor of the MII and its constituent entities were the sole providers of
all public telecommunications services in China. Since 1993, the Chinese
government has taken measures to reform the telecommunications industry and
introduce competition.
In February 1999 the State Council of China approved a plan to separate the
telecommunications operations conducted by entities of the China Telecom
system along four business lines: fixed line communications, wireless
communications, paging and satellite communications services. As a result of
the restructuring, the China Telecom system currently operates only fixed line
networks and provides only fixed line telephony and data communications
services. China Mobile has been established as a state owned company to
operate the wireless telephony business. Due to uncertainty and reorganization
related to this major restructuring, investment decisions by most
telecommunications companies have been delayed. The delays have resulted in a
lower than forecasted level of spending in the telecommunications industry in
1999. The MII estimates that the actual investment in 1999 was approximately
one third of the budgeted amounts and the balance has been postponed to 2000
and beyond.
Today, all major sectors of the communications industry, including fixed
line services, wireless telephony services and Internet services, contain
multiple service providers. More than 200 ISPs competed in the Internet access
services market in 1998, according to IDC. We expect service providers to
invest in technology and infrastructure and offer varying, customer-tailored
services plans and focus on customer care and support to remain competitive in
the increasingly deregulated environment. The following is a list of the major
service providers in different industry sub-sectors:
<TABLE>
<CAPTION>
Industry Sub-Sector Major Service Providers
------------------- -----------------------
<C> <S>
Fixed-line telephony the China Telecom system and China Unicom
Wireless telephony China Mobile and China Unicom
IP telephony the China Telecom system, China Unicom, Jitong
Communications Inc. and China Netcom
Data communications the China Telecom system, China Unicom, Jitong
Communications Inc. and China Netcom
Internet access providers the China Telecom system and Jitong Communications
Inc.
Internet content providers Sina.com, Sohu.com and Netease
</TABLE>
- --------
Sources: IDC and AsiaInfo.
The Internet market in China has been growing rapidly due to increased
access to telecommunications services and declining personal computer prices.
IDC estimates that Internet users in China will reach 3.8 million by the end
of 1999 and 33 million in 2004, representing a compound annual growth rate of
54% from 1999. The strong Internet growth in China is expected to continue due
to several factors. Relatively low personal computer
35
<PAGE>
penetration rates in China, currently at 2%, offer significant growth
potential for the Internet market. Declining personal computer prices and the
increased availability of lower cost Internet access alternatives, such as
WebTV, should further broaden Internet access. We expect online usage charges
to fall in China, which will increase Internet penetration and usage.
Internet Users in China
[BAR CHART]
Million
Users (est.) 1.38 2.40 3.79 7.25 11.70 17.93 25.19 33.14
Year End 1997 1998 1999 2000 2001 2002 2003 2004
Source: IDC.
The strong growth in the Internet market has led to heavy investments in
Internet infrastructure. We estimate a total of $675 million was invested in
Internet infrastructure and related areas in China in 1998. We expect an
increasingly large component of total investment in the telecommunications
industry to be Internet related. Furthermore, we believe that the future
investments in Internet infrastructure will focus on broadband networks to
accommodate multimedia and other potential high-bandwidth applications, such
as increasing commercial use of the Internet, the deployment of corporate
intranets and the use of cable television networks to provide
telecommunications and Internet services.
The wider application of the Internet for commercial and consumer purposes
has led to the global emergence of convergent communications, which combine
voice, data, video and Internet services using IP technology. Currently the
main convergent communications applications include IP telephony and wireless
data and Internet services. The China Telecom system, China Unicom, Jitong and
China Netcom have all completed their trial IP telephony programs and have
begun to offer commercial services. China Mobile plans to offer high speed
wireless data and Internet services early next year.
Since 1986, China has been engaged in negotiations with its major trading
partners in order to gain entry into the WTO. On November 15, 1999, China and
the United States, one of China's principal trading partners and a key member
of the WTO, reached an agreement which is expected to pave the way for China's
eventual entry into the WTO in 2000. Pursuant to this bilateral agreement,
China has agreed, among other things, to allow up to approximately 50% foreign
equity participation in commercial enterprises in the telecommunications
industry within two years of accession to the WTO. China has also agreed that
foreign participation in the Internet services
36
<PAGE>
will be allowed to increase at the same rate as other key telecommunication
services. China's eventual entry into the WTO is likely to introduce
competition from foreign Internet and telecommunications services providers.
Increased competition will force service providers to accelerate their
investments in infrastructure and customer care in order to differentiate
themselves and remain competitive.
Market Opportunities
We believe the important trends in the Internet and the telecommunications
industry in China as described above present major opportunities for us in the
following areas:
High value Internet-related professional services in an increasingly
complex network environment. The deployment of Internet infrastructure in a
complex, multi-vendor environment requires significant expertise that usually
is not internally available to Chinese Internet and telecommunications
services providers. As a result, they increasingly rely on experienced IT
services companies to provide total solutions to their Internet infrastructure
requirements. We believe that as the Internet market develops, our customers
will increasingly require high value IT services such as network design,
network planning and project management.
Real time, scalable CM&B software that meets specific requirements of
Chinese service providers. Increased competition has required service
providers to continually introduce new services and programs to meet varying
needs of their customers and differentiate their services. Moreover, they need
to focus on customer management and support to study customer behavior and
enhance customer satisfaction. Providers of Internet services further require
the capability to scale services to millions of users to facilitate the rapid
growth of their subscriber base. Finally, ISPs and telecommunications carriers
must be able to monitor customer activity and bill customer usage on a real
time basis. These mission-critical needs of ISPs and telecommunications
carriers cannot be met by traditional CM&B solutions that are inflexible,
capable only of period processing and difficult to scale. We believe service
providers in China will increasingly require a real-time and scalable CM&B
solution that is easily adaptable to a vast number of new products and
services. Moreover, the new CM&B solution must also be able to address
specific requirements of the China market.
Broadband network and convergent communications solutions and
software. Rapid growth of Internet and multimedia applications has created
increasing demand from service providers for advanced, high bandwidth voice,
data and video network capacity. As a result, service providers are expected
to significantly accelerate investment in broadband solutions for their
backbone and access networks. The emergence of convergent communications has
created an increasing demand for convergent software solutions. Service
providers of convergent communications services such as IP telephony and
wireless data services require CM&B software that is capable of accounting and
billing customers' voice, data and Internet usage using common architecture.
In addition, they need software products that enable them to provide
convergent communications applications such as unified messaging products
integrating email, voicemail, fax and messaging services.
Our Strategy
Our strategy is to be the leading China-based, world-class provider of
Internet-related IT professional services and software products to enable our
customers to build, maintain, operate and continuously improve their Internet
and communications infrastructures. Key aspects of this strategy are to:
Maintain our leading position in providing Internet infrastructure
solutions in China. We are a leading provider of network solutions to the
largest Internet and telecommunications companies in China, including the
China Telecom system, China Mobile and China Unicom. Total investment in
China's telecommunications industry is expected to continue to grow rapidly,
particularly in Internet infrastructure and related areas. We expect most of
this investment to be made through our customers, which are the largest
Internet and telecommunications service providers in China. We believe that
our close relationships with our customers, our unique understanding of the
China market, our technical capabilities and our proven track record will
allow us to capitalize on these growth opportunities.
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<PAGE>
Focus on high value IT professional services. Currently, we offer our IT
professional services in the context of total solutions which include systems
integration and customization of our proprietary and third party software. We
minimize our exposure to hardware risks by placing orders from hardware
vendors only against a back-to-back order from a customer and having the
equipment delivered by the vendor directly to the customer's premises. As the
IT market matures in China, we will focus on providing our customers high
value IT professional services such as network planning, design and
optimization, while gradually outsourcing lower end services such as hardware
installation and encouraging customers to purchase hardware directly from
equipment vendors.
Grow our software business to maximize opportunities in the Internet
software market in China. We believe that the Chinese Internet software market
offers our software business exceptional opportunities for significant growth.
We expect rapidly expanding Internet usage in China to create increasing
demand for reliable and scalable software products that address the specific
requirements of Chinese ISPs and ICPs. We plan to invest significant financial
and personnel resources to expand our Internet software business and
strengthen our leadership position in the Internet CM&B and messaging software
markets in China. We intend to double our software R&D budget and
significantly increase software-related headcount over the next year. We also
expect software license fees to contribute an increasingly large portion of
our future sales.
Develop broadband and convergent communications solutions. We are committed
to developing solutions and software products to meet the future requirements
of our customers. We expect increasing investment in broadband network
solutions and convergent communications, which combine voice, data, video and
Internet services using IP technology. We plan to develop broadband backbone
and access network solutions and upgrade our CM&B and messaging software to
support convergent communications. Our Internet infrastructure technology
leadership and software experience in both the Internet and wireless services
markets make us well positioned to develop broadband and convergent software
and solutions for the China market.
Leverage our large customer base to generate recurring revenues. We have a
high quality group of network solutions customers and one of the largest
installed software customer bases for leading telecommunications service
providers, ISPs and ICPs in China. Our customers include the DGT and 19 out of
31 Postal and Telecommunications Administrations ("PTAs") of the China Telecom
system, China Unicom and China Netcom, which together have accounted for (and
we expect will continue to account for) a majority of investments in Internet
infrastructure in China. Our large customer base enables us to foster close
relationships with our customers and develop an in-depth understanding of
their specific needs. Furthermore, our customers may face significant costs
and technological risks by switching from our services and products to others.
We intend to generate recurring revenues from our existing customer base
through upgrades of their networks and implementation of new services and
products.
Attract and retain highly qualified personnel. We place high priority on
attracting and retaining highly qualified personnel. In view of the specific
needs of the China market, we target our recruitment effort on Chinese who
have IT and professional competence and extensive exposure to western
education and management practices. We attract and retain qualified personnel
by offering them attractive compensation packages including stock options and
a challenging and rewarding work environment. Our current senior management
consists of Chinese, all of whom were either educated at western universities
or worked for leading international IT companies. We have recently recruited
three additional senior executive officers from the Silicon Valley to
spearhead our software product development. We intend to continue our
aggressive recruiting strategy and attract and retain the best and most
qualified personnel in the IT industry.
Our Competitive Strengths
We believe that we are well positioned to meet our customers' Internet
infrastructure and software applications needs in China. The key factors which
contribute to our strong competitive position are:
38
<PAGE>
Internet technology leadership in China. Our engineering personnel have
state-of-the-art expertise in Internet-based information technologies in
China. This expertise enables us to design and implement Internet technology
that employ high quality design and validated hardware and software components
to deliver solutions with high performance-to-cost ratios for our customers.
Combined international and China expertise. Our senior management is a
Chinese team, a majority of whom have been educated in the United States or
have worked with leading multinational companies in or outside China. They
have an in-depth understanding of the China market combined with a knowledge
of best management practices gained from some of the world's leading IT
companies. We have well defined performance evaluation and reward systems and
a strong emphasis on sound, accountable corporate governance. We believe that
the unique strengths of our management team make us one of the best managed
China-based IT companies and make us well positioned to anticipate and
capitalize on market opportunities for our business in China.
Established customer relationships. We have close relationships with all
leading telecommunications services providers, ISPs and ICPs in China and have
provided services and products to most of them. Our in-depth understanding of
their requirements allows us to successfully deliver customized solutions and
maximize the opportunities created by increased investments in the Internet in
China.
Real time, scalable and adaptable proprietary software. Our proprietary
software allows service providers to monitor user activity and analyze service
usage data in real time. The real time feature enables service providers to
increase billing accuracy, accelerate the time-to-market for new services and
improve the effectiveness of marketing and targeting efforts. All of our
software products are scalable to accommodate up to millions of users. This
capability allows service providers to develop their Internet infrastructures
incrementally as their level of business grows without the need for
architecture re-engineering or large-scale system replacements. Our software
products are also designed with fully documented, open APIs that allow our
customers and third party systems integrators and software developers to
integrate our software with existing applications and services requiring
minimal effort and programming overhead.
Total solutions approach. We provide our services in the context of total
solutions including systems integration and customization of our proprietary
and third party software. This total solutions approach is favored by Chinese
customers and allows us to build and maintain close, long term relationships
with our customers.
Products and Services
We offer network infrastructure solutions to the leading Internet and
telecommunications service providers in China to meet their network
infrastructure requirements. In addition, we develop proprietary software
products to support the operations of ISPs and ICPs and other
telecommunication service providers.
We offer total network solutions to our customers by leveraging our core
strengths in IT services and maintaining close relationships with multiple
hardware and third party software vendors. Substantially all of our network
solutions business is accounted for by the various entities of the China
Telecom system, China Mobile, China Unicom and China Netcom. All our projects
are awarded through a competitive bidding process since a majority of our
customers are state owned enterprises and are required to solicit multiple
proposals before awarding a contract. Our longstanding relationships with
these customers and our understanding of their specific requirements make us
well positioned to respond to their request for proposals ("RFPs"). Over the
last four years, we have been awarded contracts for over 80% of the RFPs we
were invited to respond to.
Our software products were historically marketed as a part of our network
solutions projects. However, the rapid growth of the Internet in China has led
to a sharp increase in demand for sophisticated Internet applications and
scalable software to support our customers' operations. As a result, we are
increasingly selling our software licenses on a stand-alone basis. We
currently offer three main software products to our customers. AsiaInfo Online
Billing System ("AIOBS") is an Internet CM&B product for ISPs and ICPs. AIBCCS
is a CM&B product for providers of wireless telephony services. AIMC is a
carrier-scale messaging product software.
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We believe that our growing software business is a logical extension of our
network solutions business. Our network solutions projects give us an
intricate understanding of our customers' Internet infrastructure requirements
and allow us to understand the software requirements that are needed to
support such infrastructures.
Network Solutions
We have approximately 300 network systems engineers and managers engaged in
providing total network solutions to our customers in China to meet their
Internet infrastructure requirements. Each project is staffed with a dedicated
team of technical engineers and project management professionals. The
technical engineers design and build each project, while the project
management professionals oversee budgetary matters, coordinate the work force,
ensure adequacy of resources and monitor progress and quality to ensure the
timely completion of each project. We expect that our existing capabilities
will enable us to rapidly design and implement broadband network
infrastructure and e-commerce solutions, as demand for these services
increases in China.
Through a combination of one or more of the activities listed below, we
offer our customers turn-key network solutions of the following different
types:
Internet infrastructure solutions. This core area of our current business
includes network access and backbone infrastructure design and implementation
for telecommunications service providers, ISPs and ICPs. Our Internet
infrastructure solutions support a wide array of broadband network
technologies, including ATM, IP over SDH, DWDM, xDSL and cable modem access.
We have designed and built the first commercial and largest national Internet
backbone, and the largest provincial Internet backbone, and have been awarded
a contract to build the second largest national commercial Internet backbone
in China.
Operations Support Solutions. These allow our customers to manage their
network infrastructure utilizing our proprietary and third-party software
tools and applications. We design and implement network management centers for
our clients and install our and third party software products and customized
software applications that allow our clients to perform activities such as
customer management and billing, services offerings and promotions,
provisioning and monitoring network utilization and customer service levels.
For example, the Zhejiang 163 project required us to provide frame-relay-
based, leased line billing capability.
Service applications. We design and provide applications for Internet
access, IP telephony and virtual private networks that allow our clients to
provide commercial services to their customers. We also provide high volume
messaging services and web-based as well as other Internet applications. For
example, we designed and implemented a pilot project for China Unicom in 12
cities to provide Internet telephony.
Network performance and security solutions. These include performing
network performance audits and tuning services to improve overall network
performance, recommending more efficient bandwidth allocation, reducing
network latency and response time for applications and developing software
tools for security improvements.
All our network solutions projects are undertaken on a fixed-time, fixed-
price basis and involve one or more of the following activities:
Network planning. We provide our customers with strategic and tactical
reviews of their current network operations and future network requirements.
We do much of this work before the customer awards the contract to assist them
in developing an appropriate RFP and to improve our chances in winning the
contract. The planning includes defining client business requirements,
developing appropriate information architectures and selecting preferred
technology.
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Network design. We detail the network specifications and implementation
tactics necessary to achieve our customers objectives. We also consider how
the new technology will integrate with the customer existing hardware and
software and how it will be managed on an ongoing basis. Examples of services
include defining functional requirements for the network and its components,
development of multi-vendor integration plans and design of customer-specific
network and services applications.
Network implementation. We install the recommended systems to meet our
customers' network requirements. Key activities include project management,
hardware and software procurement, network staging and pre-testing,
configuration and field installation and testing, system cut-over design and
implementation, building network management centers and development of
customized network and services management applications. We believe that our
expertise in integrating new systems without disrupting ongoing business
operations of our customers adds significant value and reduces risks.
Network optimization. We maximize the efficiency of communications networks
by improving network utilization. Examples of our services include network
traffic analysis and identification of bottlenecks, recommendations for
efficient allocation of bandwidth, fault detection and isolation, performance
testing and tuning and security auditing and improvement.
Maintenance and support services. We provide maintenance and technical
support in connection with all of our network infrastructure and systems
integration projects, content and network access provider platforms and our
proprietary software products. These services currently include assistance
with the implementation of new IT functions and/or features, configuration and
programming services for new business processes, warranty repairs and
assistance in the case of technology upgrading. We believe that our policy of
on-going maintenance and technical support will help foster long-term
relationships with our customers and eventually create significant business
opportunities.
Training. We provide technical training for our customers and strategic
partners to increase their awareness and knowledge of Internet technologies in
the Chinese IT market and to support the operations of our customers'
integrated network systems. Our training courses address issues relating to
daily operations of network systems. Specific topics include daily network
management tasks, advanced network troubleshooting, introductory network
framework reviews and advanced planning and design.
Software Products
Overview. We develop, market and support CM&B software that meets the
complex, mission-critical provisioning, accounting, reporting and marketing
needs of Internet and telecommunications service providers. In addition, we
also sell carrier-scale messaging products to ISPs and ICPs in China.
Our major software products include the following:
Internet CM&B software. The latest version of our Internet CM&B software,
AIOBS 5.0, is a real time, scalable solution that enables service providers to
address the critical business needs of customer management, services support
and accurate and timely billing. AIOBS 5.0 enables service providers to:
. manage, authenticate and register users, create user accounts and check
account status and activate services;
. monitor and analyze user activity, "map" individual user consumer
behavior and perform audit trials on user accounts;
. price and rate a broad array of services, discount services and
promotions using multiple bases and resources, such as time of usage,
bytes transferred, size of server storage and number of page views; and
. perform billing operations based on flexible billing cycles and manage
user accounts receivable.
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AIOBS 5.0 also allows service representatives and customers to access
selected user data to create, search and modify user accounts, change certain
personal information and perform other customer self-care functions using a
browser-based interface.
AIOBS 5.0 also provides many features tailored to the China market
including:
. caller ID usage-based and restricted line services which allow telephone
customers to log on to the Internet without first registering with the
ISPs, with usage-based fees charged to their regular monthly telephone
bills, and to log on only from certain, specified phone numbers;
. a roaming service which allows registered customers from different ISPs
to log on to the Internet from each other's territories, an important
feature since most Chinese ISPs operate and recruit users locally; and
. a restricted credit (pre-paid card) service which allows customers to
use the Internet with monthly monetary or usage-based limits, with real
time cut-off the instant the credit limit is reached.
AIOBS 5.0 and its earlier versions have the largest installed customer base
in China with approximately 1.8 million user licenses. Our Internet CM&B
software is used by the DGT and 19 provincial entities of the China Telecom
system in their Internet services operations. Recently we competed with a
major international software provider and won two major contracts to provide
CM&B solutions for China Unicom's national IP networks and the Internet
service operations of the Heilongjiang PTA of the China Telecom system.
We plan to release newer versions of our Internet CM&B software next year.
The new versions will increase scalability to 10 million users from 5 million,
streamline user functions, improve the overall efficiency of the architecture
and enhance fraud management, credit control and reporting features.
IP Telephony CM&B software. Our IP telephony CM&B software, introduced in
June 1999, incorporates core functionality of our Internet CM&B software while
catering to the specific needs of IP telephony service providers with features
that include IP telephony gateway integration, pre-paid calling card support
and support for zone-based pricing plans.
IP telephony service trial projects conducted by the China Telecom system,
China Unicom and Jitong Communications, Inc. this year have proven very
popular. We expect the IP telephony market in China to develop rapidly and
capture an increasingly large portion of long-distance voice traffic. We
believe the fast growing IP telephony market in China offers us great growth
opportunities since our software can provide IP telephony operators with
features not present in traditional, batch-oriented CM&B software currently
used by telephony service providers in China. Among the four licensed IP
telephony service providers, local entities of the China Telecom system began
a 14 city IP telephony trial network in early 1999 and the China Telecom
system is considering expanding VoIP service nationwide. China Unicom
currently provides IP telephony services in 12 cities and is building its 137
city VoIP backbone network. Within six months of the introduction of the IP
telephony services, the total prepaid cards sold by the China Telecom system,
China Unicom and Jitong Communications, Inc. exceeded 1.8 million and the
traffic volume reached 64 million minutes according to MII.
Wireless and long-distance telephony CM&B software. Our wireless and long-
distance telephony CM&B software, AIBCCS, offer real time, scalable solutions
to customer management and billing operations of wireless and long-distance
telephony service providers including:
. customer management, together with customer service, hierarchies and
rapid report management;
. call center support, including usage processing;
. fraud detection and management;
. billing and revenue management features, including accounts receivable
and collection; and
. inter-carrier settlement.
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With AIBCCS, we pioneered the fraud management market in China, which has
seen increasing customer demand. We believe AIBCCS is also the only CM&B
software used by Chinese operators that supports wireless services based on
Code Division Multiple Access, or CDMA, standard in addition to GSM, the
prevailing wireless standard in China. As China Unicom plans to roll out a
nation-wide wireless network using CDMA technology next year, we are well
positioned to provide CM&B solution for this growing market. AIBCCS and its
earlier versions had a total of 3.4 million installed customer base in China
as of September 30, 1999, making us among the top three wireless CM&B software
providers. We plan to release newer versions of AIBCCS with increased
scalability, enhanced customer service features and convergent billing
functions combining Internet, IP telephony and wireless services.
Messaging software. Our flagship online messaging software, AIMC, is
carrier scale messaging software designed to support electronic mail systems
from small ISPs to large-scale mail hosting providers with millions of
mailboxes and thousands of domains. Its flexible design allows service
providers to offer web-based free e-mail, basic e-mail service and the premium
business secure e-mail to end-users. The ability to scale both horizontally
and vertically allows rapid expansion when more capacity is needed. The system
is built to accommodate clustering technology and is highly fault tolerant.
AIMC has been used by 21cn.com, a Chinese portal site which launched its
service in February 1999. 21cn.com employed free email service as a means of
attracting net traffic and within eight months has become one of the top ten
most visited websites in China. We plan to upgrade AIMC to support the
Wireless Application Protocol (WAP) protocol. Ultimately, we will seek to
develop our existing messaging software to support unified messaging products
which integrate voicemail, email, fax and other messaging services.
Pricing
We currently price our software products based on the number of user
licenses which our customers purchase from us. In addition to these license
fees, our customers may elect to purchase a maintenance contract, which
includes software upgrades, for which they pay a service fee comprised of a
fixed percentage of the total contract amount. We price our customers for
software customization on a time plus materials basis. We historically sold
our wireless CM&B software on a per-project basis, with the price not based on
the number of user licenses. License fees were grouped together and included
with services and customization charges. We are presently changing this
pricing model and will gradually change to the user license number pricing
model for this software line. The pricing of messaging software, AIMC, is
based on the total number of mail boxes purchased by our customers. However,
unit price for each mail box differs among free web-email service, basic ISP-
provided Internet e-mail and business secure e-mail offerings.
Technology
Internet and IP telephony CM&B software. Our Internet and IP telephony CM&B
software is designed to allow maximum flexibility, scalability and
performance. It has state-of-the-art, four-tier client/server architecture
which employs CORBA open standard technology for dynamic, distributed
processing and our proprietary dictionary-based data model to facilitate
flexible management of user information, products, promotion and rating
policies.
The multi-tier architecture, coupled with the other technologies, give our
software the following advantages.
. Flexibility. Because we use data dictionary-based data model to collect
data from databases and other resources, data definitions, such as new
entries of demographic information, can be customized without any code
modification.
. Minimum interruption of existing services. The system is built on
dynamic component modules which can be modified separately when a new
product is introduced and updated without system downtime.
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. 3P model for service management. Our software is built on the 3P model
(product, plan and promotion), which allows service operators to offer
varying plans targeted at different customer segments, bundle services
and offer and manage promotions. AIOBS enables ISPs to manage different
types of services and promotions globally among all subscribers at
certain time periods and for specific user groups.
. Ease of customization. Our software offers fully documented APIs that
support standard scripts. As a result, our customers can build client
applications without compilation and can customize and write new user
interface applications with minimum training.
Wireless and long-distance telephony CM&B software. Our wireless and long-
distance telephony CM&B software also utilizes state-of-art multi-tier
architecture to achieve flexibility, scalability and real-time performance. We
are designing new architecture to support convergent customer care and billing
solutions for combined Internet, IP telephony and traditional voice services.
The technologies we employed have enabled our wireless and long-distance
telephony software to have advantages such as well-designed applications for
high performance under high capacity subscribers and to ensure transaction
integrity.
Messaging software. Our carrier scale messaging software supports service
providers with large number of subscribers and large volumes of messages. We
use the following technologies to achieve scalability and to optimize
performance:
. distributed, multi-thread and multiprocessing software technology which
allows AIMC to scale both horizontally by adding more servers and
vertically by using higher speed or multiple CPUs to handle subscriber
growth and larger number of subscribers without compromising system
performance and hardware investment;
. layer-4 switching technology which distributes workloads in a manageable
and flexible fashion and to allow customers to easily add, remove or
reconfigure running systems without downtime in a live production
environment; and
. storage area network (SAN) technology which offers speedy, reliable and
secured access to the data storage subsystem with multi-terabyte
databases.
Research and Development
We are committed to researching, designing and developing IT solutions and
software products that meet future needs of our customers. In the IT solutions
areas, we focus our research and development efforts on operation support
solutions and broadband network access and applications solutions. We are
currently developing a number of upgrades of our existing software products to
enhance scalability and performance and provide added features and functions.
In addition, we are also designing a wide array of new software products to
address our customers' growing need for convergent communications, such as
unified messaging products and convergent network management solutions.
We closely monitor world-wide technological developments in our service and
product areas. In addition, we have joined forces with research and
development teams of our partner and vendors, such as CISCO, Sun and Intel.
Cooperation with these global technology leaders offers us access to the most
sophisticated technologies, which enables us to provide the latest and best
solutions and products to our customers.
We have approximately 135 employees engaged in research and development, 15
in network solutions and 120 in software. The chief focus of the network
solutions research is on new network technology development and the evaluation
of solutions based on multi-vendor products. Software technology research is
conducted through the Software Infrastructure Department under the leadership
of the Chief Technology Officer. The focus of the software research is on
architecture study, software development platforms, commonly used libraries
and other software management tools. We plan to further expand research and
development efforts by adding more personnel and financial resources and by
setting up R&D departments in selected regional offices.
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Customers
Our customers currently consist primarily of Chinese telecommunication
service providers, ISPs and ICPs, including the various entities of the China
Telecom system, China Unicom, China Netcom and various other Chinese ISPs and
ICPs. We also provide products and services to provincial and local
governmental agencies and financial agencies. We plan to expand our customer
base to include portals, foreign telecommunication companies in China and
enterprises seeking Internet-related services.
China Telecom System. The China Telecom system has been our largest
customer to date. As a result of the restructuring of the telecommunications
industry which began in February 1999, various entities of the China Telecom
system operate only fixed line networks and provide fixed line telephone and
data communications services. The various entities of the China Telecom system
are separate legal entities and generally make purchasing decisions
independent of the DGT, which is headquartered in Beijing. We have derived and
believe that we will continue to derive a significant portion of our revenues
from a limited number of large customers, such as the China Telecom system.
Entities of the China Telecom system accounted for almost all of our revenues
in 1997 and 1998. For the nine months period ended September 30, 1999, the
China Telecom system accounted for over 80% of our total backlog. In the
future, we expect to derive an increasing portion of our revenues from China
Unicom, China Mobile and China Netcom. See "Risk Factor--Our customer base is
highly concentrated and the loss of one or more of our customers could cause
our business to suffer significantly" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General".
China Unicom. China Unicom was established in 1994 and is the second-
largest national public telecommunications network. China Unicom also provides
a wide array of services, including long distance telephone services, local
telephone services, mobile communications services, data communications
services, communications value-added services and other communications
services. China Unicom's existence signaled the beginning of competition in
the Chinese telecommunications industry. The China Telecom system and China
Unicom have each been forced to reduce prices numerous times over the past
several years in response to increasing competition. Those that have benefited
most from the increased competition are the Chinese consumers, however service
providers and software producers including us also have profited from the
resulting expansion of the market. In December 1999 we won a contract from
China Unicom to build the second largest national Internet backbone. This
contract is expected to result in over $18 million of gross revenues to us.
China Mobile. China Mobile was established in July 1999 as a state owned
company and operates mobile telecommunications networks nationwide. China
Mobile is the largest wireless telephony service provider in China. We have
recently been awarded a contract by China Mobile, Tianjin, to design and
construct its wireless data network.
China Netcom. China Netcom, the latest state-owned entrant into the Chinese
telecommunications market, was formed in 1999 to build and operate a high-
speed telecommunications network initially linking fifteen large Chinese
cities. The new network, one of the world's fastest fiber-optic backbones, is
to be constructed based entirely on IP technology. It will also take advantage
of existing cable television networks, which will be linked to the system via
fiber-optic and fixed-wireless technology.
Sales and Marketing
Sales
We market and sell our services and products primarily through our direct
sales force. Our direct sales professionals provide business consulting,
promote pre-sale activity and manage our relations with customers. As of
November 30, 1999, we employed 43 direct sales personnel located in five
regional offices in Beijing, Shanghai, Wuhan, Chengdu and Guangzhou. The
direct sales force is organized into individual account teams. We use a team
selling approach, whereby sales personnel, with network systems engineers and
technical managers work together in analyzing potential projects and marketing
our expertise to potential clients.
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We identify and target market segments and select target sales
opportunities on a national level and we also conduct sales opportunity study
to ensure that adequate regional sales resources are available. Sales quotas
are assigned to all sales personnel according to annual sales plans. We
classify market segments and target opportunities on national and regional
levels. This classification helps us determine our primary sales targets and
prepare monthly and quarterly sales forecasts. We approve target projects,
develop detailed sales promotion strategies and prepare reports on order
forecast, technical evaluation, sales budgeting expense, schedules and
competition analysis. After the report has been approved, a sales team is
appointed consisting of sales personnel, system design engineers and a senior
system architect.
Marketing
Our marketing strategy focuses on building long-term relationships with our
customers, educating them about technological developments and generating
their interest in our services and products. Historically, our marketing and
sales efforts were combined. As our businesses expanded and the marketplace
became increasingly sophisticated, we established a dedicated marketing
department in 1998. As of November 30, 1999, we employed 44 marketing
personnel that conduct market research, analyze user requirements and organize
marketing communications. We engage in a variety of marketing activities,
including:
. managing and maintaining our web site;
. publishing bi-weekly research reports and monthly customer newsletters;
. providing free business consulting services;
. conducting seminars and conferences;
. conducting ongoing public relations programs; and
. creating and placing advertisements.
We actively participate in technology-related conferences and demonstrate
our products at trade shows targeted at our existing and potential customers.
We are also exploring a range of joint-marketing strategies and programs with
our hardware vendors in order to take advantage of their strategic
relationships and resources.
Competition
The Internet-related IT service market in China is new and rapidly
changing. Our competitors in the market mainly include domestic systems
integrators such as Suntek and Aotian. Although we are a leading player in
this market, there are many large multinational companies with substantial,
existing IT operations in other markets in China, such as IBM and Hewlett-
Packard, that have significantly greater financial, technological, marketing
and human resources. Should they decide to enter the Internet-related IT
services market in China, the competition will intensify.
In the CM&B market, we compete with both international and local software
providers. In the online billing segment we compete primarily with Portal and
Suntek and in the wireless billing segment we compete with more than ten local
competitors. The messaging software segment is a highly competitive market.
Currently, we primarily compete with Software.com and Netease. We believe we
have competitive advantages in all of our product and service segments due to
our Internet technology leadership, combined international and China
expertise, established customer relationships and our high performance,
scalable, flexible software.
In view of the gradual deregulation of the Chinese telecommunications
industry and China's pending entry into the WTO, we anticipate continued
growth and competition in the telecommunications industry and online services
and the entrance of new competitors into the CM&B software market.
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Government Regulation
The Chinese government has generally encouraged the development of the IT
industry and the products and services we offer are not currently subject to
extensive government regulations.
The Internet and the telecommunications industry in which our customers
operate, however, have been subject to government regulation and control.
Currently, all large telecommunications and Internet services providers in
China are state owned or state controlled and their business decisions and
strategies are affected by the government's budgeting and spending plans. In
addition, they are required to comply with regulations and rules promulgated
by the MII from time to time. Foreign investors are currently not permitted to
operate telecommunications networks or provide telecommunications services or
manage an entity that operates telecommunications business in China.
Laws and regulations applicable to the Internet in China are still evolving
and unsettled. There are certain approval and registration procedures in place
for Internet users who wish to have access to Internet-related services.
Foreign companies are currently prohibited from engaging in Internet services
provision, Internet content provision and other value-added Internet related
services in China. Due to the increasing popularity and use of the Internet
and other online services, it is possible that more extensive and restrictive
regulations may be adopted with respect to the Internet and other related
services. The MII is currently reviewing its telecommunications regulations,
particularly as they relate to Internet activities. While we are not aware of
any existing or proposed regulations that have a significant direct adverse
effect on our business, a restrictive regulatory policy regarding the Chinese
Internet industry would have a material direct adverse effect on us by
retarding the industry's growth in China.
In view of China's pending entry into the WTO, we expect a majority of
these restrictions will be phased out and eventually eliminated. However,
until then, a restrictive regulatory environment for our customers could
adversely affect our business.
Intellectual Property
Our success and ability to compete depends substantially upon our
intellectual property rights, which we protect through a combination of
copyright, trade secret law and trademark law. We have filed five trademark
applications with the United States Trademark Office, two of which have been
granted and three are still pending. In addition, our trademark application
covering AsiaInfo's logo and design has been granted by the Trademark Bureau
of the State Administration of Industry and Commerce in China. We have also
been granted copyrights by the State Copyright Bureau in China with respect to
Internet-related software products. However, we have not applied for copyright
protection elsewhere (including the United States). We do not own any patents
and have not filed any patent applications, as we do not believe that the
benefits of patent protection outweigh the costs of filing and updating
patents for our software products.
We enter into confidentiality agreements with our employees and
consultants, and control access to and distribution of our documentation and
other licensed information. Despite these precautions, it may be possible for
a third party to copy or otherwise obtain and use our licensed services or
technology without authorization, or to develop similar technology
independently. Since the Chinese legal system in general and the intellectual
property regime in particular is relatively weak, it is often difficult to
enforce intellectual property rights in China. In addition, there are other
countries where effective copyright, trademark and trade secret protection may
be unavailable or limited, and the global nature of the Internet makes it
virtually impossible to control the ultimate destination of our products.
Policing unauthorized use of our licensed technology is difficult and there
can be no assurance that the steps taken by us will prevent misappropriation
or infringement of our proprietary technology. In addition, litigation may be
necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others, which could result in substantial costs and
diversion of our resources and could have a material adverse effect on our
business, results of operations and financial condition.
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Legal Proceedings
We are not involved in any material legal proceedings.
Employees
As of November 30, 1999 we had a total of 450 employees, with 161 in
engineering, including our professional services organizations, 122 in
software research and development, 87 in sales and marketing and 80 in
administrative roles. Our employees are represented by a labor union and, thus
far, our operations have not been significantly disrupted by labor disputes.
We devote significant resources to recruiting professionals with both IT
system integration and relevant industry experience. Most of our senior
management and technical employees are western educated Chinese professionals
with substantial expertise in IT systems integration and application software
development. We believe that our success in attracting and retaining highly
skilled technical employees and sales and marketing personnel is largely a
product of our commitment to providing a motivating and interactive work
environment that features continuous and extensive professional development
opportunities as well as frequent and open communications at all levels of the
organization. As an incentive, we have created an employee stock option plan
which includes vesting provisions designed to encourage long term employment.
Facilities
Our principal sales, marketing and development facilities and
administrative offices are currently located on two premises comprising
approximately 3,560 square meters and 627 square meters, respectively, in
Beijing, China. The leases for our existing premises will be terminated in
February 2000.
We have leased new offices comprising approximately 6,400 square meters in
a new building located in the Beijing Zhongguancun Science Park. This new
lease has a term of five years expiring in February 2005, subject to
termination after three years if an agreement on the adjustment of rent cannot
be reached at that time. In addition, we have regional field support offices
in various cities in China, namely Shanghai, Guangzhou, Chengdu and Wuhan, as
well as a regional office in Santa Clara, California.
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MANAGEMENT
Directors and Executive Officers
The following tables set forth information regarding our directors and
executive officers as of December 1, 1999.
<TABLE>
<CAPTION>
Board of Directors Age Position
- ------------------ --- --------
<S> <C> <C>
Louis Lau............... 63 Chairman of the Board and Board Member
James Ding.............. 34 Chief Executive Officer and Board Member
Michael Zhao............ 34 Senior Vice President, Chief Strategy Officer and Board Member
Alan Bickell............ 63 Board Member
Patrick L. Keen......... 50 Board Member
Chang Sun............... 43 Board Member
Edward Tian............. 36 Board Member
<CAPTION>
Executive Officers Age Position
- ------------------ --- --------
<S> <C> <C>
James Ding.............. 34 Chief Executive Officer
Frank Yong.............. 41 President and Chief Operating Officer
Ying Han................ 45 Executive Vice President and Chief Financial Officer
Michael Zhao............ 34 Senior Vice President and Chief Strategy Officer
Larry Huang............. 36 Vice President and Chief Technology Officer
</TABLE>
Louis Lau has served as our Chairman of the board of directors since the
inception of AsiaInfo. Mr. Lau has been President of Louis Lau Investments, a
commercial real estate firm, since 1987. He has held a variety of positions in
the commercial real estate and management business in Texas since 1970. Mr.
Lau served as a special U.S. Department of Commerce invitee and advisor to the
1998 U.S. Computer Industry Trade Mission to China and as a special U.S.
Department of Commerce advisor at China Computerworld Expo 1998 in Beijing. He
is presently a member of both the Trade Finance Committee and the
International Trade Advisory Council of the Greater Dallas Chamber of
Commerce. Mr. Lau received a Master of Science degree in biology from Texas
Southern University in 1968 and a Bachelor of Science degree in chemistry from
Mississippi College in 1965.
James Ding has served as our Chief Executive Officer since May 1999 and has
been a member of the board since our inception. He was also our Vice President
for Business and Chief Technology Officer from 1997 to 1999. Prior to that,
Mr. Ding was our Senior Vice President and Chief Technology Officer from 1993
to 1997. Mr. Ding received a masters degree in information science from the
University of California at Los Angeles in 1990.
Alan Bickell has served as member of the board of directors of AsiaInfo
since March 1999. Mr. Bickell retired in November 1999 as a corporate senior
vice president of Hewlett-Packard Company and managing director of Geographic
Operations, a position he had held since 1992. Mr. Bickell originally joined
Hewlett-Packard in 1964. He is a member of the board of directors of Power
Integrators Inc. and Junior Achievement International. In 1998 he became an
advisory Professor at Beijing University. He holds a degree in marketing and
finance from Menlo College and an M.B.A. from Santa Clara University.
Patrick L. Keen has served as member of the board of directors of AsiaInfo
since January 1999. Mr. Keen is a Partner of the ChinaVest Group and has been
with the firm since 1981. He received both a bachelor's and master's degree in
Business Administration from the University of Texas at Austin.
Chang Sun has served as member of the board of directors of AsiaInfo since
December 1997. Mr. Sun has been a Managing Director of Warburg, Pincus since
1995. Prior to that position, he was an Executive Director of Goldman Sachs
(Asia) LLC. Mr. Sun holds a B.A. from the Beijing Foreign Language Institute,
a Master of Science degree from the Joseph Lauder Institute of International
Management at the University of Pennsylvania and an M.B.A. from the Wharton
School of the University of Pennsylvania.
49
<PAGE>
Edward Tian has served as member of the board of directors of AsiaInfo
since our inception. Dr. Tian is the President and CEO of China Netcom, a
position he has held since June of 1999. Prior to joining China Netcom, he and
James Ding co-founded AsiaInfo in Dallas, Texas in 1993 and Dr. Tian served as
AsiaInfo's President through May 1999. Dr. Tian has a Master of Science degree
from the Graduate School of the Chinese Academy of Science in Beijing and a
Ph.D. in Environmental Management from Texas Tech University.
Frank Yong has been our President since May 1999 and our Chief Operations
Officer from November 1998. From June 1997 to November 1998, Mr. Yong was Vice
President of Bull Information (Beijing) Co. Prior to that position, Mr. Yong
served as the General Manager of Mitel (China) Co., from November 1995 to
November 1997. In addition, he was Deputy General Managing Director of Nortel
(China) Co. from July 1988 to September 1995. Mr. Yong received a degree in
wireless communications from North China Communications University in 1982 and
a P.M.D. degree from the Harvard Business School in 1995.
Ying Han has been our Executive Vice President and Chief Financial Officer
since June 1998. Ms. Han was Chief Controller and Business Development
Director from 1996 to June 1998 of Hewlett Packard (China) and their Finance
Manager from 1993 to 1996. Ms. Han received an undergraduate degree in Western
Accounting from Xiamen University in 1985.
Michael Zhao has served as a member of the board of directors of AsiaInfo
since November 1999 and has been our Senior Vice President and Chief Strategy
Officer since January 1997 and our General Manager from October 1996 to
December 1997. He was also our Deputy Chief Engineer from February 1996 to
January 1997. Mr. Zhao holds a Ph.D. in engineering from the State University
of New York at Buffalo, which he received in 1994.
Larry Huang has been Vice President and Chief Technology Officer of
AsiaInfo since November 1999 and was Vice President of the Software Products
Division from February 1998. Prior to joining AsiaInfo, Mr. Huang was Chief
Scientist & Architect for FileTek, Inc. from February 1997 to February 1998.
From August 1995 to February 1997, Mr. Huang was Manager and Architect, also
at FileTek, Inc. From September 1993 to August 1995, Mr. Huang served as a
Senior System Analyst in Star Technologies, Inc. Mr. Huang was Program Manager
at General Computing System Inc. from September 1991 to August 1993 and Senior
Programmer at Unitrac Inc. from July 1988 to August 1991. Mr. Huang holds a
Ph.D. in Computer Science from the University of Maryland at College Park,
which he received in 1993.
Board of Directors
AsiaInfo currently has authorized its board to consist of not less than
three nor more than nine directors. The terms of the office of the seven-
member board of directors have been divided into three classes: Class I, whose
term will expire at the annual meeting of the stockholders to be held in 2000;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2001; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. The Class I directors are Messrs. Bickell and
Ding, the Class II directors are Messrs. Keen and Lau and the Class III
directors are Messrs. Tian, Sun and Zhao. At each annual meeting of
stockholders after the initial classification, each elected director will
serve from the time of his election and qualification until the third annual
meeting following his election. This classification of the board of directors
may have the effect of delaying or preventing changes in control or management
of AsiaInfo. All of our officers serve at the discretion of the board of
directors. There are no family relationships among the directors and officers
of AsiaInfo.
Our board of directors has an audit committee, a compensation committee and
a finance committee. The audit committee consists of Messrs. Keen (Chair) and
Bickell. The audit committee makes recommendations to the board of directors
regarding the selection of independent accountants, reviews the results and
scope of audit and other services provided by our independent accountants and
reviews and evaluates our audit and control functions. The compensation
committee consists of Messrs. Bickell (Chair), Keen and Sun. The compensation
50
<PAGE>
committee administers our stock plans, including the 1999 Stock Incentive
Plan, and makes decisions concerning salaries and incentive compensation for
our employees. The finance committee consists of Messrs. Sun (Chair) and
Bickell. The finance committee makes recommendations to the board of directors
with respect to our capital position and financing requirements.
Currently we do not provide our directors with cash compensation for their
services as members of the board of directors. However, each member of the
board of directors receives a sum of $1,000 in lieu of expenses for each
meeting he attends.
None of the members of our compensation committee is currently or has been
at any time since the formation of AsiaInfo, an officer or employee of
AsiaInfo. No member of our compensation committee serves as a member of the
board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.
Executive Compensation
The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1998 received by our Chief Executive
Officer and our four other most highly compensated executive officers,
collectively referred to as the Named Executive Officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------
Other Annual Total
Name and Principal Position Salary Bonus Compensation Compensation
- --------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
James Ding
Chief Executive Officer............ $145,000 $12,083 $24,000 $181,083
Frank Yong
President and Chief Operating Offi-
cer................................ 129,217 59,639 11,928 200,784
Ying Han
Executive Vice President and Chief
Financial Officer.................. 139,241 34,337 12,853 186,431
Michael Zhao
Senior Vice President and Chief
Strategy Officer................... 145,000 12,083 24,000 181,083
Larry Huang
Vice President and Chief Technology
Officer............................ 142,000 -- 24,000 166,000
</TABLE>
During the first eleven months of 1999, Ying Han, our Executive Vice
President and Chief Financial Officer was granted options to purchase 225,000
shares of common stock at a weighted average exercise price of $5.69 per
share. These options expire in 2009. Also during the first eleven months of
1999, Frank Yong, our President and Chief Operating Officer, was granted
options to purchase 220,000 shares of common stock at a weighted average
exercise price of $5.26 per share. These options expire in 2009. No other
options were granted to Named Executive Officers in 1999.
51
<PAGE>
The following table provides summary information regarding share option
awards granted to each of the Named Executive Officers during the fiscal year
ended December 31, 1998. We calculated the amounts listed in the following
table under the heading "Potential Realizable Value at Assumed Annual Rates of
Stock Price Appreciation for Option Term" based on the ten-year term of the
option at the time of grant. For purposes of these columns, we assumed stock
price appreciation of 5% and 10% pursuant to rules promulgated by the
Securities and Exchange Commission. These rates of appreciation do not
represent our prediction of our stock price performance.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
Percent of
Total Options Potential Realizable Value
Granted to at Assumed Annual Rates
Number of Employees of Stock Price
Securities during Fiscal Appreciation for Option Value At
Underlying Year Ended Exercise Market Term Grant Date
Options December 31, Price Price Expiration --------------------------- ----------
Name Granted 1998 ($/share) ($/share) Date 5% 10% 0%
- ---- ---------- ------------- --------- --------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Ding.............. -- -- -- -- -- -- -- --
Frank Yong.............. 100,000 17.39% 3.00 2.80 11/01/08 $ 156,000 $426,000 --
Ying Han................ 100,000 17.39% 3.00 2.80 06/01/08 156,000 426,000 --
Michael Zhao............ -- -- -- -- -- -- -- --
Larry Huang............. 100,000 17.39% 2.50 2.80 02/01/08 $ 206,000 $ 476,000 $30,000
</TABLE>
Aggregated Option Exercises and Fiscal Year 1998 Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for each of the Named Executive Officers during the fiscal
year ended December 31, 1998. No options were exercised by the Named Executive
Officers during the fiscal year ended December 31, 1998. The numbers in the
column entitled "Value of Unexercised In-the-Money Options at December 31,
1998" are based on the fair market value of our common stock at August 31,
1999 as determined by our board of directors, $7.60, less the exercise price
payable for such shares. The fair market value of our common stock at August
31, 1999 was estimated by the board of directors on the basis of the purchase
price paid by investors for shares of our preferred stock (taking into account
the liquidation preferences and other rights, privileges and preferences
associated with the preferred stock) and an evaluation by the board of
directors of our revenues, operating history and prospects.
<TABLE>
<CAPTION>
Fiscal Year End Option Values
---------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James Ding.................. 550,000 200,000 $1,260,500 $10,000
Frank Yong.................. -- 100,000 -- --
Ying Han.................... -- 100,000 -- --
Michael Zhao................ 425,000 200,000 938,375 60,000
Larry Huang................. -- 100,000 -- 30,000
</TABLE>
Employment Agreements
We have entered into two-year employment agreements with James Ding, our
Chief Executive Officer, Frank Yong, our President and Chief Operating
Officer, Ying Han, our Executive Vice President and Chief Financial Officer,
Michael Zhao, our Senior Vice President and Chief Strategy Officer, and Larry
Huang, our Vice President and Chief Technology Officer, which provide for
annual base salaries of $145,000, $129,217, $139,241, $145,000 and $142,000,
respectively.
52
<PAGE>
On July 21, 1999, our board of directors adopted a resolution on severance
policy for departing employees. In the event that AsiaInfo terminates the
employment of employees at the levels of vice presidents and above, the
employee will receive six month severance pay based on his base salary at the
time of termination. The employee has 120 days to exercise his or her vested
options. Unvested options are forfeited. Subject to our board of director's
discretion, the employee may receive 12 month severance pay and accelerated
vesting of option grants.
Each of the Named Executive Officers has entered into a non-compete
agreement with AsiaInfo, pursuant to which they are prevented from engaging in
any commercial activities in competition with AsiaInfo for two years after the
termination of their employment with AsiaInfo. In addition, they are required
to disclose all their patent and copyright applications to AsiaInfo during
their employment with AsiaInfo and within one year after the termination of
their employment.
Stock Incentive Plans
1999 Stock Incentive Plan. AsiaInfo's 1999 Stock Incentive Plan was adopted
by the board and became effective on June 1, 1999. 1,340,000 shares of
AsiaInfo's common stock have been authorized for issuance under the 1999 Stock
Incentive Plan. Shares to be optioned and sold may be available from either
authorized but unissued common stock or common stock held by AsiaInfo in its
treasury. Shares which relate to the expiration or cancellation of an option
granted under the plan may be reoffered under the plan. Stock options may not
be granted to an employee who owns more than 5% of the total combined voting
power of all classes of stock of AsiaInfo or its subsidiaries, unless the
exercise price is at least 110% of the fair market value of the common stock
on the date of grant and the option period is not greater than 5 years from
the date of grant. In addition, no participant in AsiaInfo's 1999 Stock
Incentive Plan may be granted stock options or direct stock issuances for more
than 1,000,000 shares of common stock in total in any calendar year.
AsiaInfo's 1999 Stock Incentive Plan consists of a discretionary option
grant program, under which eligible individuals in AsiaInfo's employ may be
granted options to purchase shares of common stock at an exercise price not
less than the fair market value of those shares on the grant date.
AsiaInfo's 1999 Stock Incentive Plan provides that all options under the
plan will be granted by the board and are intended to be incentive stock
options. Although the plan must be submitted to AsiaInfo's stockholders for
approval, the board can grant options under the plan prior to the time of
stockholder approval. The individuals eligible to participate in AsiaInfo's
1999 Stock Incentive Plan include AsiaInfo and its subsidiaries' employees
whose judgment, initiative and efforts contributed or may be expected to
contribute to a successful performance of AsiaInfo.
AsiaInfo's 1999 Stock Incentive Plan is administered by the compensation
committee. The compensation committee will determine which eligible
individuals are to receive option grants under the plan, the number of shares
subject to each option grant and other decisions necessary to administer the
plan.
AsiaInfo's 1999 Stock Incentive Plan includes the following features:
. The exercise price for any options granted under the plan may be paid in
cash or, at the option of the board, a combination of cash and shares of
common stock valued at fair market value on the exercise date.
. Employees of another company holding options in the stock of that
company may be granted stock options under AsiaInfo's 1999 Stock
Incentive Plan in substitution for those options relating to the stock
of the other company where they become employees of AsiaInfo as the
result of a merger, consolidation or acquisition.
. The board will specify the dates each option will begin and terminate
and may also accelerate the date on which the options may be exercised.
The options may not, however, terminate later than 10 years from the
date of grant.
53
<PAGE>
1998 Incentive Stock Option Plan. Our 1998 Incentive Stock Option Plan was
adopted by the board and became effective in July 1998 and will terminate no
later than July 20, 2008. The plan was designed to attract employees to us and
our subsidiaries and to provide eligible employees with a proprietary interest
in AsiaInfo through the granting of incentive stock options. The board is
authorized to grant options to purchase up to 800,000 shares of common stock
which may be made available from authorized but unissued common stock or
common stock held by AsiaInfo in treasury.
1997 Incentive Stock Option Plan. Our 1997 Incentive Stock Option Plan was
adopted by the board and became effective in November 1997 and will terminate
on the tenth anniversary of its adoption. The plan is designed to attract
employees to us and our subsidiaries and to provide eligible employees with a
proprietary interest in AsiaInfo through the granting of incentive stock
options. The board is authorized to grant options to purchase up to 3,000,000
shares of common stock which may be made available from authorized but
unissued common stock or common stock held by AsiaInfo in treasury.
1996 Incentive Stock Option Plan. Our 1996 Incentive Stock Option Plan was
adopted by the board and became effective in October 1996 and will terminate
on September 29, 2003. The plan was designed to attract employees to us and
our subsidiaries and to provide eligible employees with a proprietary interest
in AsiaInfo through the granting of incentive stock options. The board is
authorized to grant up to 3,600,000 shares of common stock which may be made
available from authorized but unissued common stock or common stock held by
AsiaInfo in treasury.
1995 Incentive Stock Option Plan. Our 1995 Incentive Stock Option Plan was
adopted by the board and became effective in October 1995 and will terminate
on September 29, 2003. The plan became effective immediately on the date it
was approved and adopted by the board. The plan was designed to attract
employees to us and our subsidiaries and to provide eligible employees with a
proprietary interest in AsiaInfo through the granting of incentive stock
options. The board is authorized to grant up to 3,200,000 shares of common
stock which may be available from authorized but unissued common stock or
common stock held by AsiaInfo in treasury.
Common features of the 1998, 1997, 1996 and 1995 Incentive Stock Option
Plans. Any or our employees whose judgment, initiative and efforts have
contributed to or can be expected to contribute to the successful performance
of AsiaInfo are eligible to participate in the plans. The board or the
compensation committee will determine which eligible employees will be granted
options from time to time.
Should AsiaInfo be acquired by merger or consolidation then each share of
common stock covered by unexercised options will be substituted for the number
of shares of each class of stock or other securities or cash, property or
assets of the surviving or consolidated company which were distributable to
the stockholders of AsiaInfo in respect of their shares of common stock.
The following provisions are also in effect under the plans:
. The board may at any time amend or discontinue the plans. Certain
amendments may require stockholder approval.
. The plans will be administered by the board or by a committee appointed
by the board.
. Options may not be granted to employees who own more than 10% of the
total combined voting power of all classes of stock of AsiaInfo or its
subsidiaries, unless the exercise price is at least 110% of the fair
market value of the common stock on the date the option is granted and
the option period is not more than 5 years from the date of the grant.
54
<PAGE>
CERTAIN TRANSACTIONS
Stock Option Grants
The following table summarizes as of December 1, 1999 the option grants
made to our executive officers, directors and 5% stockholders since January 1,
1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Options Exercise Price
Name Granted ($/Share) Date of Grant
- ---- -------------------- -------------- -------------
<S> <C> <C> <C>
Alan Bickell.................. 50,000 3.00 03/23/99
Ying Han...................... 100,000 3.00 06/01/98
125,000 4.17 06/01/99
100,000 7.60 11/19/99
Larry Huang................... 100,000 2.50 02/01/98
Patrick Keen.................. -- -- --
Louis Lau..................... -- -- --
Chang Sun..................... -- -- --
Frank Yong.................... 100,000 3.00 11/01/98
150,000 4.17 06/01/99
70,000 7.60 11/19/99
</TABLE>
Transactions Relating to AI Zhejiang
In connection with the acquisition of AI Zhejiang, we will grant to
management and employees of AI Zhejiang performance options provided that in
the year 2000, AI Zhejiang's earnings before interest and taxes exceeds its
earnings before interest and taxes for 1999 and AI Zhejiang's combined
earnings before interest and taxes for 1999 and 2000 exceed $3,000,000. The
total number of performance options we will grant will be calculated as the
amount by which AI Zhejiang's earnings before interest and taxes for 1999 and
2000 exceeds $3,000,000, expressed as a percentage and multiplied by 187,500.
Each performance option will represent the right to purchase one share of our
common stock at the weighted average exercise price for stock options granted
at that time.
During 1998, we made a loan to AI Zhejiang with an interest rate of 12% per
year. On December 31, 1998, the total amount of the loan was $781,686.
Private Placements
In December 1997 we sold 2,160,864 shares of Series A Convertible Preferred
Stock in a private placement at a pre-split price of $8.33 per share to
Warburg Pincus Ventures, L.P., Warburg Pincus Ventures International, L.P.,
Fidelity Ventures Limited, Fidelity International Limited, Fidelity Investors
Limited Partnership, ChinaVest IV, L.P., ChinaVest IV-A, L.P. and ChinaVest
IV-B, L.P. (collectively, the "Series A Investors"). Each share of preferred
stock will be automatically converted into two shares of common stock upon the
closing of this offering. The preferred stockholders are entitled to vote on
an "as converted" basis together with the common stockholders. At the same
time as this private placement, certain of our existing shareholders sold
approximately $2.2 million of their holdings to the Series A Investors.
Patrick Keen, a member of our board of directors, is a managing director of
ChinaVest. Chang Sun, a member of our board of directors, is a managing
director of Warburg, Pincus.
In December 1997 we issued 9,429,226 stock purchase warrants to the Series
A Investors. Each warrant represents the right to purchase one share of our
common stock. The stock purchase warrants are exercisable in whole at any time
after December 31, 1999 at an exercise price of $0.01 per warrant. The warrant
agreements provide that, upon exercise of the warrant and payment of the
exercise price, the holder will be entitled to acquire the number of shares of
common stock calculated by reference to the appropriate earnings before
interest, taxes,
55
<PAGE>
depreciation and amortization for the year ending December 31, 1999. The
warrants are protected by anti-dilution provisions which adjust the exercise
price and the number of shares of common stock issuable upon the occurrence of
certain events. The warrants are non-transferable and will be void on the day
six months following the delivery of our audited financial statements for the
year ending December 31, 1999. No warrants had been exercised as of December
6, 1999. In December 1999, the warrant agreements for the Series A Investors
were amended. The revised warrant agreements provide for exercise of the
warrants prior to the closing of this offering.
On May 26, 1998 our common stock was split 2-for-1 by way of a dividend of
one share of common stock for each outstanding share of common stock. In
August 1999 we sold 2,630,425 shares of Series B Convertible Preferred Stock
in a private placement at a price of $7.60 per share to Intel Pacific, Inc.
The preferred stockholders are entitled to vote on an "as converted" basis
together with the common stockholders and have the right, at their option, to
convert any of the shares of preferred stock at a conversion rate of one share
of common stock for each share of preferred stock. The preferred stock will
automatically convert into common stock upon the closing of this offering
provided that certain valuation and other requirements are met.
On November 16, 1999, certain employees and founding stockholders of
AsiaInfo sold an aggregate of 815,790 shares of common stock in an
unregistered private placement to twelve institutional investors, some of
which are affiliates, at a price per share of $7.60. Morgan Stanley Dean
Witter Equity Funding, Inc. was an investor in the private placement. See
"Underwriters."
Other. In April 1999, James Ding and Edward Tian each pledged their
interests in shares of common stock held by them to a bank to obtain a short-
term revolving credit facility of $5.0 million. This pledge was released as of
September 30, 1999.
On October 13, 1999, HTC Investments, a Delaware corporation formed solely
for the purpose of holding shares of common stock of AsiaInfo owned by certain
founders, was merged with and into AsiaInfo by means of a tax free, share for
share exchange effected in the form of a share dividend.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of November 30, 1999 and as
adjusted to reflect the sale of the common stock offered hereby for:
. each person or entity known by us to beneficially own more than 5% of
the common stock;
. each of our directors;
. each of the Named Executive Officers; and
. all of our directors and executive officers as a group.
It assumes conversion of all outstanding shares of preferred stock into
shares of common stock and no exercise of the underwriters' over-allotment
option. Except as otherwise indicated, we believe that the beneficial owners of
the common stock listed below, based on information furnished by those owners,
have sole voting and investment power with respect to such shares. The number
of shares of common stock listed below includes only those shares of common
stock subject to options and warrants currently exercisable or exercisable
within sixty days of November 30, 1999. Unless otherwise indicated, the address
of each stockholder identified below is: c/o AsiaInfo Holdings, Inc., 11
Bashiqiao Road, Haidan District, Beijing 100081, China.
<TABLE>
<CAPTION>
Percentage of Total Voting Power
Options & ---------------------------------------
Warrants Before Offering After Offering
Number of Included ------------------- -------------------
Shares in Excluding Including Excluding Including
Beneficially Beneficial Options/ Options/ Options/ Options/
Owned Ownership Warrants Warrants Warrants Warrants
Name of Beneficial Owners ------------ ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chang Sun(/1/)............. -- --
Warburg Pincus Ventures,
L.P.(/2/)................. 4,025,105 2,619,230
Warburg Pincus Ventures
International, L.P.(/2/).. 4,025,105 2,619,230
11/F St. George's Building
2 Ice House Street
Central, Hong Kong
Subtotal..................... 8,050,210 5,238,460 12% 21% % %
HTCC Trust(/3/)............ 2,250,000 --
Edward Tian(/3/)(/4/)...... 3,417,708 1,250,000
Subtotal..................... 5,667,708 1,250,000 19% 15% % %
China Technology Investment
Trust(/5/)................ 2,650,000 --
James Ding(/5/)(/6/)....... 2,417,708 650,000
Subtotal..................... 5,067,708 650,000 19% 13% % %
Patrick L. Keen(/7/)....... -- --
ChinaVest IV, L.P.(/2/).... 4,127,516 2,703,042
ChinaVest IV-A, L.P.(/2/).. 475,147 311,166
ChinaVest IV-B, L.P.(/2/).. 196,779 128,868
19/F, 11 Duddell Street
Central, Hong Kong
Subtotal..................... 4,799,442 3,143,076 7% 13% % %
Fidelity Ventures
Limited(/3/).............. 518,065 349,230
Fidelity International
Limited(/3/).............. 518,066 349,230
Fidelity Investors Limited
Partnership(/3/).......... 518,066 349,230
16th Floor, Citibank Tower
3 Garden Road
Central, Hong Kong
Subtotal..................... 1,554,197 1,047,690 2% 4% % %
</TABLE>
(footnotes on next page)
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total Voting Power
Options & ---------------------------------------
Warrants Before Offering After Offering
Number of Included ------------------- -------------------
Shares in Excluding Including Excluding Including
Beneficially Beneficial Options/ Options/ Options/ Options/
Owned Ownership Warrants Warrants Warrants Warrants
Name of Beneficial Owners ------------ ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Intel Pacific,
Inc.(/8/)............. 2,630,425 -- 11% 7% % %
Louis Lau.............. 2,220,029 -- 10% 6% % %
Michael Zhao........... 776,000 200,000 3% 2% % %
Larry Huang............ 30,000 30,000 -- * % %
Alan D. Bickell(/9/)... 100,000 -- * * % %
Ying Han............... 20,000 20,000 -- * % %
Frank Yong............. 20,000 20,000 -- * % %
All directors and
executive officers as
a group............... 26,751,097 10,551,536 71% 70% % %
</TABLE>
- --------
* Less than 1%.
(1) Consists solely of shares and warrants owned by affiliates of Warburg
Pincus, of which firm Mr. Sun, a director of the Company, is a Managing
Director.
(2) Consists partially of shares of our Series A Preferred Stock, par value
$0.01 per share, all of which shares are automatically convertible into
shares of our common stock on a one-for-one basis upon consummation of
this offering. See "Description of Capital Stock-Preferred Stock" for a
description of the rights and privileges of the Series A Preferred Stock.
(3) HTCC Trust is a revocable trust formed for the benefit of Edward Tian. All
of the shares held by HTCC Trust are beneficially owned by Edward Tian.
(4) Includes 4,000 shares held by the Stephanie Tian Trust which are
beneficially owned by Edward Tian.
(5) China Technology Investment Trust is a revocable trust formed for the
benefit of James Ding. All of the shares held by China Technology
Investment Trust are beneficially owned by James Ding.
(6) Includes 4,000 shares held by the Rene Ding Trust which are beneficially
owned by James Ding.
(7) Consists solely of shares and warrants owned by affiliates of ChinaVest,
of which firm Mr. Keen, a director of the Company, is a Managing Director.
(8) Consists solely of shares of our Series B Preferred Stock, par value $0.01
per share, all of which shares are automatically convertible into shares
of our common stock on a one-for-one basis upon consummation of this
offering. See "Description of Capital Stock-Preferred Stock" for a
description of the rights and privileges of the Series B Preferred Stock.
(9) Includes 95,000 shares held by the Alan D. Bickell Family Trust which are
beneficially owned by Alan D. Bickell.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 60,000,000 shares, comprised of
50,000,000 shares of common stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share, of which 3,000,000
shares have been designated as Series A shares and 5,000,000 shares have been
designated as Series B shares. The following summary of certain provisions of
the common stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our Certificate of
Incorporation and by-laws and by the provisions of applicable Delaware law.
Common Stock
As of November 30, 1999, there were 16,011,705 shares of common stock
outstanding held of record by 67 stockholders. There will be shares of
common stock outstanding, assuming the automatic conversion of all outstanding
shares of our Series A and Series B Convertible Preferred Stock, the exercise
of all outstanding warrants held by holders of Series A Preferred Stock and no
exercise of the underwriters' over-allotment option, after giving effect to
the sale of common stock offered to the public hereby. The holders of common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. See "Risk Factors--A small number of
shareholders will control us after this offering." Subject to preferences that
may be applicable to any outstanding shares of our preferred stock, the
holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the board of directors out of funds legally
available for the payment of dividends. See "Dividend Policy". In the event of
liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive rights or rights to convert their
common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock.
All outstanding shares of common stock are fully paid and non-assessable,
and the shares of common stock to be outstanding upon completion of this
offering will be fully paid and non-assessable.
Preferred Stock
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of preferred stock of AsiaInfo. Our board is
expressly vested with authority to fix by resolution or resolutions the
designations and the powers, preferences and participating, optional or other
special rights, and qualifications and limitations, including the voting
power, dividend rate, conversion rights, redemption prices or liquidation
preference of any series of the preferred stock. The rights of the holders of
common stock may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Issuance of a new series of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
entrenching our board of directors and making it more difficult for a third
party to acquire, or discouraging a third party from acquiring a majority of
the outstanding voting common stock of AsiaInfo. We have no present plans to
issue any shares of or designate any series of preferred stock.
Anti-takeover Effects of Certain Provisions of Our Certificate of
Incorporation and Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more
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<PAGE>
of a corporation's voting stock. The existence of this provision would be
expected to have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging takeover
attempts that might result in a premium over the market price for the shares
of common stock held by stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is The Bank of New
York.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock and there can be no assurance that a significant public market for the
common stock will be developed or be sustained after this offering. Sales of
substantial amounts of common stock in the public market after this offering,
or the possibility of such sales occurring, could adversely affect prevailing
market prices for our common stock or our future ability to raise capital
through an offering of equity securities.
After this offering, we will have outstanding shares of common stock.
Of these shares, the shares offered hereby will be freely tradable in the
public market without restriction under the Securities Act, unless such shares
are held by our "affiliates", as that term is defined in Rule 144 under the
Securities Act.
The remaining shares of common stock outstanding upon completion of
this offering will be "restricted securities," as that term is defined in Rule
144 ("Restricted Shares"). The Restricted Shares were issued and sold by us in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted Shares may be sold in the public market only if
they are registered or if they qualify for an exemption from registration
under Rules 144 or 701 under the Securities Act, which are summarized below.
Pursuant to certain "lock-up" agreements, each of AsiaInfo, our executive
officers, directors, certain holders of Restricted Shares, have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any equity securities of AsiaInfo or any securities convertible
into or exchangeable for any such equity securities for a period of 180 days
from the date of this prospectus. See "Underwriters".
On the date of the expiration of the lock-up agreements described below,
of the Restricted Shares will be eligible for immediate sale (of which
shares will be subject to certain volume, manner of sale and other limitations
under Rule 144). Approximately remaining shares will be eligible for sale
pursuant to Rule 144 on the expiration of one-year holding periods.
Following the expiration of such lock-up periods, certain shares upon
exercise of options granted by us prior to the date of this prospectus will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 but without compliance with certain restrictions, including the holding
period requirement, imposed under Rule 144.
In general, under Rule 144 as in effect at the closing of this offering,
beginning 90 days after the date of this prospectus, a person (or persons
whose shares of we are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
who is not our affiliate) would be entitled to sell within any three month
period a number of shares that does not exceed the greater of (i) one percent
of the then outstanding shares of common stock (approximately shares
immediately after this offering) or (ii) the average weekly trading volume of
the common stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner who is not our affiliate) is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We intend to file after the effective date of this offering a registration
statement on Form S-8 to register approximately shares of common stock
reserved for issuance under our stock option plans. Such registration
statement will become effective automatically upon filing. Shares issued under
the foregoing plan, after the filing of a registration statement on Form S-8,
may be sold in the open market, subject, in the case of certain holders, to
the Rule 144 limitations applicable to affiliates, the above-referenced lock-
up agreements and vesting restrictions imposed by us.
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In connection with the December 1997 private placement of Series A
Preferred Stock, we entered into a registration rights agreement dated
December 29, 1997, with the Series A Investors. The registration rights
agreement grants one demand registration right and piggyback registration
rights with respect to all the shares sold to the Series A Investors,
including the shares of common stock issuable upon conversion of the Series A
Convertible Preferred Stock. As of the date of this prospectus such
registration rights cover a total of 4,321,728 shares of common stock.
On August 31, 1999, in connection with the August 1999 private placement of
Series B Preferred Stock, we entered into a registration rights agreement with
Intel Pacific, Inc. The registration rights agreement grants Intel Pacific,
Inc. one demand registration right and piggyback registration rights with
respect to all the shares sold to Intel Pacific, Inc. in the private
placement, including the shares of common stock issuable upon conversion of
the Series B Convertible Preferred Stock. As of the date of this prospectus
such registration rights cover a total of 2,630,425 shares of common stock.
On November 16, 1999, in connection with the sale by certain employees and
founding stockholders of AsiaInfo of shares of common stock, we entered into a
registration rights agreement with twelve institutional purchasers of such
shares. The registration rights agreement grants the purchasers one demand
registration right and piggyback registration rights with respect to an
aggregate of 815,790 shares of common stock.
The foregoing registration rights relate only to the registration of the
shares under the Securities Act. The piggyback registration rights granted
provide that if we propose to register any of our securities under the
Securities Act, either for our own account or the account of other
stockholders, the holders of the shares under the registration rights
agreement are entitled to notice of such registration and are entitled to
include their shares in the registration. In addition, the demand registration
rights granted provide that the holders may request that we register the
shares under the Securities Act under certain circumstances. The holders'
rights with respect to all these registrations are subject to certain
conditions, including the right of the underwriters of any of these offerings
to limit the number of shares included in any of these registrations.
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TAXATION
United States Federal Income Taxation
General
The following summary is based on the advice of Rogers & Wells LLP and,
subject to the limitations stated below, describes certain of the material
U.S. federal income tax consequences resulting from the purchase, ownership
and disposition of the shares. This summary does not purport to consider all
the possible U.S. federal tax consequences of the purchase, ownership and
disposition of the Shares and is not intended to reflect the individual tax
position of any beneficial owner thereof. The summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative
history, existing and proposed U.S. Treasury regulations promulgated
thereunder, published rulings by the U.S. Internal Revenue Service ("IRS") and
court decisions, all in effect as of the date hereof, all of which authorities
are subject to change or differing interpretations, which changes or differing
interpretations could apply retroactively. This summary is limited to
investors who hold the Shares as "capital assets" within the meaning of
section 1221 of the Code (i.e., generally, property held for investment) and
does not purport to deal with investors in special tax situations, such as
financial institutions, tax exempt organizations, insurance companies,
regulated investment companies, dealers in securities or currencies, persons
holding shares as a hedge against currency risks or as a position in a
"straddle," "conversion transaction," or "constructive sale" transaction for
tax purposes, or persons whose functional currency (as defined in section 985
of the Code) is not the U.S. dollar. The summary does not include any
description of the tax laws of any state, local or foreign governments that
may be applicable to the notes or the holders thereof.
Prospective purchasers of the shares should consult their own tax advisors
concerning the application of U.S. federal income tax laws to their particular
situations as well as any consequences of the purchase, ownership and
disposition of the shares arising under the laws of any other taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of Shares
who or which is (i) an individual who is a citizen or resident of the United
States, (ii) a corporation created or organized in or under the laws of the
United States or of any state thereof (including the District of Columbia), or
(iii) any other person who is subject to U.S. federal income taxation on a net
income basis with respect to the Shares. As used herein, the term "Non-U.S.
Holder" means a beneficial owner of Shares that is not a U.S. Holder. In the
case of a beneficial owner of Shares that is a partnership for U.S. federal
income tax purposes, each partner will take into account its allocable share
of income or loss from the Shares, and will take such income or loss into
account under the rules of taxation applicable to such partner, taking into
account the activities of the partnership and the partner.
U.S. Holders of Shares
Taxation of Distributions. A U.S. Holder generally will be required to
include in gross income as ordinary dividend income the amount of any
distributions paid on the Shares to the extent that such distributions are
paid out of our current or accumulated earnings and profits as determined for
U.S. federal income tax purposes. Such dividends will generally qualify for
the dividends-received deduction available to certain U.S. corporations.
Distributions in excess of our earnings and profits will be applied against
and will reduce the U.S. Holder's tax basis in its Shares and, to the extent
in excess of such tax basis, will be treated as gain from a sale or exchange
of such Shares.
Sale or Other Disposition of Shares. In general, upon the sale or other
disposition of Shares, a U.S. Holder generally will recognize gain or loss
equal to the difference between the amount realized on such sale or
disposition and the U.S. Holder's adjusted tax basis in the Shares. A U.S.
Holder's tax basis in its Shares will generally equal its purchase price of
such Shares. Capital gain recognized by an individual U.S. Holder generally
will be long-term capital gain and subject to U.S. federal income tax at a
rate of 20% if the U.S. Holder held the Shares for more than one year before
sale or disposition. U.S. Holders that are corporations are taxed on their net
capital gains at the regular corporate income tax rates.
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Non-U.S. Holders of Shares
Taxation of Distributions. In general, subject to the discussion below of
special rules that may apply to certain Non-U.S. Holders and the discussion
below of backup withholding, payments of dividends to Non-U.S. Holders will be
subject to U.S. withholding tax at a rate of 30% unless such rate is reduced
under an applicable income tax treaty. Non-U.S. Holders are urged to consult
their own tax advisors with respect to their eligibility, if any, for a
reduced rate of U.S. withholding tax under a tax treaty.
Sale or Other Disposition of Shares. In general, subject to the discussion
below of special rules that may apply to certain Non-U.S. Holders and the
discussion below of backup withholding, (a) payments of sale proceeds by us or
any paying agent to a Non-U.S. Holder will not be subject to U.S. federal
income or withholding tax and (b) gain realized by a Non-U.S. Holder on the
sale or other disposition of the Shares will not be subject to U.S. federal
income tax or withholding tax.
Special rules may apply in the case of Non-U.S. Holders (i) that are
engaged in a United States trade or business, (ii) that are former citizens or
long-term residents of the United States, "controlled foreign corporations,"
"foreign personal holding companies," corporations which accumulate earnings
to avoid U.S. federal income tax, and certain foreign charitable
organizations, each within the meaning of the Code, or (iii) certain non-
resident alien individuals who are present in the U.S. for 183 days or more
during a taxable year and meet certain other conditions. Such Non-U.S. Holders
are urged to consult their own tax advisors before purchasing the Shares.
Backup Withholding and Information Reporting
For each calendar year in which the Shares are outstanding, each Depository
Trust Company participant or indirect participant holding Shares on behalf of
a beneficial owner of Shares and each paying agent making payments in respect
of Shares will generally be required to provide the IRS with certain
information, including such beneficial owner's name, address, taxpayer
identification number (either such beneficial owner's Social Security number,
its employer identification number or its IRS individual taxpayer
identification number, as the case may be), and the aggregate amount of
dividends and sale proceeds paid to such beneficial owner during the calendar
year. These reporting requirements, however, do not apply with respect to
certain beneficial owners, including Non-U.S. Holders who file IRS Form W-8
(or successor Form W-8BEN) as described below, corporations, securities
broker-dealers, other financial institutions, tax-exempt organizations,
qualified pension and profit sharing trusts and individual retirement
accounts.
In the event that a beneficial owner of Shares fails to establish its
exemption from such information reporting requirements or is subject to the
reporting requirements described above and fails to supply its correct
taxpayer identification number in the manner required by applicable law, or
underreports its tax liability, as the case may be, the DTC participant or
indirect participant holding such interest on behalf of such beneficial owner
or paying agent making payments in respect of Shares may be required to
"backup" withhold a tax equal to 31% of each payment of interest and sale
proceeds with respect to Shares. This backup withholding tax is not an
additional tax and may be credited against the beneficial owner's U.S. federal
income tax liability if the required information is furnished to the IRS.
Compliance with the identification procedures contained in IRS Form W-8 (or
successor Form W-8BEN) will establish an exemption from information reporting
and backup withholding for those Non-U.S. Holders who are not exempt
recipients.
The Treasury Department issued final regulations relating to withholding,
information reporting and backup withholding that unify current certification
procedures and forms and clarify reliance standards (the "Regulations"). The
Regulations generally will be effective with respect to payments made after
December 31, 2000. Prospective purchasers of the Shares should consult their
own tax advisors concerning the effect of the Regulations on their purchase,
ownership and disposition of the Shares.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc. are
acting as representatives, have severally agreed to purchase, and AsiaInfo has
agreed to sell to them, severally, the number of shares indicated below:
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated............................
Deutsche Bank Securities Inc.................................
----
Total......................................................
====
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from AsiaInfo and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to specified conditions. The
underwriters are obligated to take and pay for all of the shares of common
stock offered by this prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents
a concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
AsiaInfo has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the additional shares of
common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of common stock listed
next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public would
be $ , the total underwriters' discounts and commissions would be $ and
total proceeds to AsiaInfo would be $ .
The underwriters have informed AsiaInfo that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We intend to submit an application to have our shares of the common stock
approved for quotation, subject to official notice of issuance, on the NASDAQ
National Market under the symbol "ASIA."
Each of AsiaInfo and the directors, executive officers and certain
stockholders and option holders of AsiaInfo have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, they will not (and will not publicly announce any intention to),
during the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or
dispose of directly or indirectly, any shares of common stock or any
securities convertible into, or exercisable or exchangeable for, common
stock owned by them; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
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whether any transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by AsiaInfo of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing; or
. transactions by any person other than AsiaInfo relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
In order to facilitate the offering of the shares of the common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the shares of the common stock. Specifically, the
underwriters may over-allot in connection with the offering, creating a short
position in the common stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in the
offering, if the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. The underwriters have reserved the right to reclaim selling
concessions in order to encourage underwriters and dealers to distribute the
common stock for investment, rather than short-term profit taking. Increasing
the proportion of the offering held for investment may reduce the supply of
common stock available for short-term trading. Any of these activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
AsiaInfo and the underwriters have agreed to indemnify each other against
certain losses, claims, damages or liabilities, including liabilities under
the Securities Act.
On November 16, 1999, Morgan Stanley Dean Witter Equity Funding Inc. ("MSDW
Equity Funding"), an affiliate of Morgan Stanley & Co. Incorporated, purchased
131,579 shares of common stock from certain selling shareholders of AsiaInfo
at $7.60 per share. In connection with the purchase, MSDW Equity Funding and
AsiaInfo, among others, have entered into a registration rights agreement,
pursuant to which MSDW Equity Funding, with other investors, will be offered
the opportunity to register their shares, subject to certain specified
conditions, if AsiaInfo proposes to file a registration statement under the
Securities Act with respect to an offering by AsiaInfo for its own account or
for the account of any security holder of any class of AsiaInfo's common or
preferred stock or a registration statement filed in connection with an
exchange offer. As at the date of this prospectus, MSDW Equity Funding holds
less than 1% of AsiaInfo's common stock.
At our request, the underwriters have reserved for sale up to % of the
common stock to be issued by us and offered for sale in this offering, at the
initial public offering price, to directors, officers, employees, business
associates and persons otherwise related to AsiaInfo. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these persons purchase reserved shares. Any reserved shares which are
not purchased will be offered by the underwriters to the general public on the
same basis as the other shares offered in this offering.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives of the underwriters. Among the factors to
be considered in determining the initial public offering price will be the
future prospects of AsiaInfo and its industry in general, sales, earnings and
certain other financial operating information of AsiaInfo in recent periods,
and the price-earnings ratios, price-sales ratios, market prices of securities
and certain financial and operating information of companies engaged in
activities similar to those of AsiaInfo. The estimated initial public offering
price range set forth on the cover page of this preliminary prospectus is
subject to change as a result of market conditions and other factors.
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LEGAL MATTERS
The validity of the shares and certain other legal matters will be passed
upon for us by Rogers & Wells LLP, Hong Kong. Certain legal matters will be
passed upon for the underwriters by Milbank, Tweed, Hadley & McCloy LLP, Hong
Kong. Certain matters relating to Chinese law will be passed upon for us and
the underwriters by Haiwen & Partners and Commerce & Finance Law Offices,
respectively.
EXPERTS
The consolidated financial statements of AsiaInfo as of December 31, 1997
and 1998 and for each of the years in the three-year period ended December 31,
1998, have been audited by Deloitte Touche Tohmatsu, independent auditors, as
stated in their report appearing herein and have been so included in reliance
upon the report of that firm given upon their authority as experts in
accounting and auditing.
The financial statements of AI Zhejiang as of December 31, 1997 and 1998,
and for each of the years then ended, have been audited by Deloitte Touche
Tohmatsu Shanghai CPA, independent auditors, as stated in their report
appearing herein and have been so included in reliance upon the report of that
firm given upon their authority as experts in accounting and auditing.
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ENFORCEABILITY OF CIVIL LIABILITIES
AsiaInfo is incorporated in the State of Delaware. However, a majority of
AsiaInfo's directors, executive officers and shareholders and some of the
experts named in this prospectus live outside the United States, principally
in Hong Kong and Beijing, China. Also, all or most of our assets are located
outside the United States. As a result, you may not be able to:
. effect service of process upon us or these persons within the United
States, or
. enforce against us or these persons in United States courts, judgments
obtained in United States courts, including judgments relating to the
federal securities laws of the United States.
Haiwen & Partners, AsiaInfo's Chinese counsel, have advised us that there
is doubt as to whether Chinese courts will enforce judgments of United States
courts based only upon the civil liability provisions of the federal
securities laws of the United States or the securities laws of any state of
the United States.
We have appointed James Zhang, the General Manager of our Santa Clara,
California office, as our agent to receive service of process with respect to
any action brought against us in a court of proper jurisdiction in the United
States.
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ADDITIONAL FILING AND COMPANY INFORMATION
We have filed a registration statement on Form S-1 with the Commission.
This prospectus, which is a part of the registration statement, does not
contain all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. You may review a copy of the registration statement, including
exhibits, at the Commission's public reference room at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 or Seven World Trade Center, 13th
Floor, New York, New York 10048 or Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-
0330 for further information on the operation of the public reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Commission.
Our Commission filings and the registration statement can also be reviewed
by accessing the Commission's Internet site at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ASIAINFO HOLDINGS, INC.
Independent auditors' report.............................................. F-2
Consolidated balance sheets as of December 31, 1997 and 1998 and September
30, 1999 (unaudited)..................................................... F-3
Consolidated statements of operations for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999
(unaudited).............................................................. F-4
Consolidated statements of stockholders' equity and comprehensive income
(loss) for the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999 (unaudited).............................. F-5
Consolidated statements of cash flows for the years ended December 31,
1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999
(unaudited).............................................................. F-7
Notes to consolidated financial statements................................ F-9
ZHEJIANG ASIAINFO TELECOMMUNCATION TECHNOLOGY CO., LTD.
Independent auditors' report.............................................. F-27
Balance sheets as of December 31, 1997 and 1998........................... F-28
Statements of operations for the years ended December 31, 1997 and 1998... F-29
Statements of owner's equity for the years ended December 31, 1997 and
1998..................................................................... F-30
Statements of cash flows for the years ended December 31, 1997 and 1998... F-31
Notes to financial statements............................................. F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of AsiaInfo Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of AsiaInfo
Holdings, Inc. and its subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for the three years in the period
ended December 31, 1998. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company and its subsidiaries at December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
Hong Kong
May 16, 1999
F-2
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In US dollars)
<TABLE>
<CAPTION>
December 31, September
------------------------ 30,
1997 1998 1999
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............. $24,065,882 $ 9,749,374 $25,354,202
Restricted cash....................... -- 6,000,000 9,690,136
Accounts receivable, trade, net of
allowance for doubtful accounts of
$70,444, $62,685 and $587,647 at
December 31, 1997 and 1998 and
September 30, 1999, respectively).... 9,623,140 23,292,881 24,819,251
Inventories........................... 1,102,047 566,383 102,151
Amount due from a related party....... -- 781,686 --
Other receivables..................... 781,188 1,349,034 1,412,804
Deferred income taxes................. 38,000 16,266 28,114
Prepaid expenses and other current
assets............................... 521,171 1,049,246 631,368
----------- ----------- -----------
Total current assets................ 36,131,428 42,804,870 62,038,026
Investment in affiliate................. -- -- 252,617
Property, plant, and equipment--net..... 953,903 1,745,354 1,949,177
Goodwill, at cost less accumulated
amortization........................... -- 421,417 4,719,069
Deferred income taxes................... -- 387,238 652,488
----------- ----------- -----------
Total Assets........................ $37,085,331 $45,358,879 $69,611,377
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans................. $ 2,416,000 $ 5,677,130 $ 8,915,704
Accounts payable...................... 5,761,997 10,117,535 8,401,906
Deferred revenue...................... 3,176,205 3,583,569 164,326
Other payables........................ 509,335 114,718 360,633
Accrued employee benefit.............. 1,021,436 2,615,028 4,641,943
Accrued expenses...................... 1,428,257 1,604,277 1,269,200
Convertible loan...................... 250,000 -- --
Payable to stockholders............... 2,191,790 -- --
Other taxes payable................... 2,995,435 2,043,194 2,165,994
Income taxes payable.................. 257,500 292,468 614,810
----------- ----------- -----------
Total current liabilities........... 20,007,955 26,047,919 26,534,516
----------- ----------- -----------
Minority interest....................... 898,363 64,279 --
----------- ----------- -----------
Commitments and contingencies (Note 12)
Stockholders' Equity:
Convertible preferred stock:
Series A: 3,000,000 shares authorized;
$0.01 par value; 2,160,864 shares
issued and outstanding (aggregate
liquidation value $18,000,000)....... 21,609 21,609 21,609
Series B: 5,000,000 shares authorized
at September 30, 1999; $0.01 par
value; 2,630,425 shares issued and
outstanding (aggregate liquidation
value $20,000,000)................... -- -- 26,304
Common stock, 50,000,000 shares
authorized, $0.01 par value, shares
issued and outstanding: 1997,
13,831,760; 1998, 14,160,002;
September 30, 1999: actual,
15,656,002........................... 138,318 141,600 156,560
Additional paid-in capital............ 17,159,881 17,667,474 46,014,093
Deferred stock compensation........... (1,828,667) (783,334) (4,563,903)
Retained earnings..................... 645,018 2,180,828 1,443,796
Accumulated other comprehensive income
(loss)............................... 42,854 18,504 (21,598)
----------- ----------- -----------
Total stockholders' equity.......... 16,179,013 19,246,681 43,076,861
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity............................. $37,085,331 $45,358,879 $69,611,377
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In US dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Network solutions...... $14,780,893 $36,508,751 $41,964,244 $17,323,897 $43,598,069
Software license....... 761,751 774,684 2,258,148 1,897,780 4,642,523
----------- ----------- ----------- ----------- -----------
Total revenues......... 15,542,644 37,283,435 44,222,392 19,221,677 48,240,592
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Network solutions...... 9,097,778 29,551,059 32,188,695 13,709,411 33,156,641
Software license....... -- 4,819 819 706 247,793
----------- ----------- ----------- ----------- -----------
Total cost of
revenues.............. 9,097,778 29,555,878 32,189,514 13,710,117 33,404,434
----------- ----------- ----------- ----------- -----------
Gross profit............ 6,444,866 7,727,557 12,032,878 5,511,560 14,836,158
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.... 667,908 835,268 2,408,031 1,423,419 4,789,148
General and
administrative........ 3,008,042 6,166,993 6,463,454 3,652,952 5,466,217
Research and
development........... 321,438 393,468 1,435,487 859,146 2,243,750
Amortization of
deferred stock
compensation.......... 262,000 1,045,333 1,045,333 784,000 2,809,148
----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 4,259,388 8,441,062 11,352,305 6,719,517 15,308,263
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. 2,185,478 (713,505) 680,573 (1,207,957) (472,105)
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income........ 49,846 173,601 758,533 585,764 499,018
Interest expense....... (28,752) (184,998) (394,398) (297,735) (451,780)
Other income, net...... 14,181 43,043 113,532 226,369 224,383
----------- ----------- ----------- ----------- -----------
Total other income,
net................... 35,275 31,646 477,667 514,398 271,621
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
minority interests..... 2,220,753 (681,859) 1,158,240 (693,559) (200,484)
Income tax expense
(benefit).............. 68,456 267,000 (255,504) (598,704) 502,296
----------- ----------- ----------- ----------- -----------
Income (loss) before
minority interests..... 2,152,297 (948,859) 1,413,744 (94,855) (702,780)
Minority interests in
(income) loss of
consolidated
subsidiaries........... (482,450) 566,840 122,066 87,340 84,131
Equity in loss of
affiliate.............. -- -- -- -- (118,383)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 1,669,847 $ (382,019) $ 1,535,810 $ (7,515) $ (737,032)
=========== =========== =========== =========== ===========
Net income (loss) per
share:
Basic.................. $ 0.12 $ (0.03) $ 0.11 $ 0.00 $ (0.05)
=========== =========== =========== =========== ===========
Diluted................ $ 0.10 $ (0.03) $ 0.05 $ 0.00 $ (0.05)
=========== =========== =========== =========== ===========
Shares used in
computation:
Basic.................. 13,530,000 13,530,000 13,616,412 13,594,135 13,937,072
=========== =========== =========== =========== ===========
Diluted................ 15,999,133 13,530,000 31,765,532 13,594,135 13,937,072
=========== =========== =========== =========== ===========
Pro forma net income
(loss) per share (note
3):
Basic.................. $ 0.09 $ (0.04)
=========== ===========
Diluted................ $ 0.05 $ (0.04)
=========== ===========
Shares used in pro forma
computation (note 3):
Basic.................. 17,938,140 18,261,402
=========== ===========
Diluted................ 31,765,532 18,261,402
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(In US dollars)
<TABLE>
<CAPTION>
Convertible Retained Accumulated Total
preferred stock Common stock Additional Deferred earnings other stockholders'
----------------- -------------------- paid-in stock (accumulated comprehensive equity
Shares Amount Shares Amount capital compensation deficit) income (loss) (deficiency)
--------- ------- ---------- -------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996.. -- $ -- 13,680,880 $136,809 $ (64,784) $ -- $ (642,810) $ -- $ (570,785)
Comprehensive
income:
Net income...... -- -- -- -- -- -- 1,669,847 -- 1,669,847
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (29,702) (29,702)
Unrealized loss
on investment... -- -- -- -- -- -- -- (871) (871)
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Deferred stock
compensation..... -- -- -- -- 3,136,000 (3,136,000) -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- -- 262,000 -- -- 262,000
Contributions
(miscellaneous).. -- -- -- -- 2,500 -- -- -- 2,500
--------- ------- ---------- -------- ---------- ----------- ---------- -------- -----------
Balance at
December 31,
1996............. -- -- 13,680,880 136,809 3,073,716 (2,874,000) 1,027,037 (30,573) 1,332,989
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- (382,019) -- (382,019)
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- 72,556 72,556
Unrealized gain
on investment... -- -- -- -- -- -- -- 871 871
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Proceeds received
on issuance of
convertible
preferred stock.. 1,860,744 18,608 -- -- 15,481,392 -- -- -- 15,500,000
Issuance cost.... -- -- -- -- (1,502,368) -- -- -- (1,502,368)
Issuance of stock
on exercise of
employee stock
options.......... -- -- 451,000 4,510 107,141 -- -- -- 111,651
Transfer to
convertible
preferred stock.. 300,120 3,001 (300,120) (3,001) -- -- -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- -- 1,045,333 -- -- 1,045,333
--------- ------- ---------- -------- ---------- ----------- ---------- -------- -----------
Balance at
December 31,
1997............. 2,160,864 21,609 13,831,760 138,318 17,159,881 (1,828,667) 645,018 42,854 16,179,013
<CAPTION>
Comprehensive
income (loss)
-------------
<S> <C>
Balance at
January 1, 1996..
Comprehensive
income:
Net income...... $1,669,847
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... (29,702)
Unrealized loss
on investment... (871)
-------------
Comprehensive
loss............ $1,639,274
=============
Deferred stock
compensation.....
Amortization of
deferred stock
compensation.....
Contributions
(miscellaneous)..
Balance at
December 31,
1996.............
Comprehensive
loss:
Net loss........ $ (382,019)
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... 72,556
Unrealized gain
on investment... 871
-------------
Comprehensive
loss............ $ (308,592)
=============
Proceeds received
on issuance of
convertible
preferred stock..
Issuance cost....
Issuance of stock
on exercise of
employee stock
options..........
Transfer to
convertible
preferred stock..
Amortization of
deferred stock
compensation.....
Balance at
December 31,
1997.............
</TABLE>
F-5
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(In US dollars)--Continued
<TABLE>
<CAPTION>
Convertible Retained Accumulated
preferred stock Common stock Additional Deferred earnings other Total
----------------- -------------------- paid-in stock (accumulated comprehensive stockholders'
Shares Amount Shares Amount capital compensation deficit) income (loss) equity
--------- ------- ----------- -------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive
income:
Net income...... -- $ -- -- $ -- $ -- $ -- $1,535,810 $ -- $ 1,535,810
Other
comprehensive
loss, net of
tax:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (24,350) (24,350)
Comprehensive
income.......... -- -- -- -- -- -- -- -- --
Issuance of stock
on conversion of
convertible
loan............. -- -- 153,242 1,532 508,468 -- -- -- 510,000
Issuance of stock
on exercise of
employee stock
options.......... -- -- 175,000 1,750 (875) -- -- -- 875
Amortization of
deferred stock
compensation..... -- -- -- -- -- 1,045,333 -- -- 1,045,333
--------- ------- ----------- -------- ----------- ----------- ---------- -------- -----------
Balance at
December 31,
1998............. 2,160,864 $21,609 14,160,002 $141,600 $17,667,474 $ (783,334) $2,180,828 $ 18,504 $19,246,681
Comprehensive
loss:*
Net loss*....... -- $ -- -- $ -- $ -- $ -- $ (737,032) $ -- (737,032)
Other
comprehensive
income, net of
tax*:
Foreign currency
translation
adjustments*.... -- -- -- -- -- -- -- (40,102) (40,102)
Comprehensive
loss*........... -- -- -- -- -- -- -- -- --
Issue of common
stock*........... -- -- 437,500 4,375 1,876,875 -- -- -- 1,881,250
Proceeds received
on issuance of
convertible
preferred
stock*........... 2,630,425 26,304 -- -- 19,973,696 -- -- -- 20,000,000
Issuance cost*... -- -- -- -- (150,000) -- -- -- (150,000)
Issuance of stock
on exercise of
employee stock
options*......... -- -- 1,038,500 10,385 56,331 -- -- -- 66,716
Warrants
exercised*....... -- -- 20,000 200 -- -- -- -- 200
Deferred stock
compensation*.... -- -- -- -- 6,589,717 (6,589,717) -- -- --
Amortization of
deferred stock
compensation*.... -- -- -- -- -- 2,809,148 -- -- 2,809,148
--------- ------- ----------- -------- ----------- ----------- ---------- -------- -----------
Balance at
September 30,
1999*............ 4,791,289 $47,913 15,656,002 $156,560 $46,014,093 $(4,563,903) $1,443,796 $(21,598) $43,076,861
========= ======= =========== ======== =========== =========== ========== ======== ===========
<CAPTION>
Comprehensive
income (loss)
-------------
<S> <C>
Comprehensive
income:
Net income...... $1,535,810
Other
comprehensive
loss, net of
tax:
Foreign currency
translation
adjustments..... (24,350)
-------------
Comprehensive
income.......... $1,511,460
=============
Issuance of stock
on conversion of
convertible
loan.............
Issuance of stock
on exercise of
employee stock
options..........
Amortization of
deferred stock
compensation.....
Balance at
December 31,
1998.............
Comprehensive
loss:*
Net loss*....... $ (737,032)
Other
comprehensive
income, net of
tax*:
Foreign currency
translation
adjustments*.... (40,102)
-------------
Comprehensive
loss*........... $ (777,134)
=============
Issue of common
stock*...........
Proceeds received
on issuance of
convertible
preferred
stock*...........
Issuance cost*...
Issuance of stock
on exercise of
employee stock
options*.........
Warrants
exercised*.......
Deferred stock
compensation*....
Amortization of
deferred stock
compensation*....
Balance at
September 30,
1999*............
</TABLE>
See notes to consolidated financial statements.
*Unaudited
F-6
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $1,669,847 $ (382,019) $ 1,535,810 $ (7,515) $ (737,032)
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation........... 142,608 219,386 351,175 190,932 365,824
Amortization of
goodwill.............. -- -- 46,824 35,118 520,719
Amortization of
deferred stock
compensation.......... 262,000 1,045,333 1,045,333 784,000 2,809,148
Deferred income taxes.. 4,000 17,000 (365,504) (365,504) (277,099)
Minority interest in
income (loss) of
subsidiaries.......... 482,450 (566,840) (122,066) (87,340) (84,131)
Equity in loss of
affiliate............. -- -- -- -- (118,383)
(Gain) loss on disposal
of property, plant,
and equipment......... (17,717) 694,859 408,309 (9,888) --
Gain on sale of
investment in
subsidiary............ -- -- -- -- 112,045
Gain on sale of
marketable
securities............ -- (1,760) -- -- --
Bad debt expense
(recovery)............ -- 753,839 (7,759) (7,759) 640,103
Changes in operating
assets and
liabilities:
Restricted cash....... -- -- (6,000,000) (6,000,000) (3,690,136)
Accounts receivable... (2,531,041) (7,044,478) (11,841,151) (3,627,939) (660,883)
Inventories........... (464,945) 916,486 885,318 749,018 484,339
Amount due from a
related party........ (745,929) -- (781,685) (240,964) 56,829
Other receivables..... (456,010) (320,164) (160,332) (1,937,028) 561,947
Prepaid expenses and
other current
assets............... (162,116) (257,213) (92,889) (967,076) (167,693)
Accounts payable...... 1,224,880 3,993,303 4,056,441 (3,916,014) (3,765,335)
Deferred revenue...... (1,069,800) 2,034,687 (160,861) 4,938,019 (3,655,488)
Other payables........ 118,756 22,791 (399,174) 1,040,024 (8,738)
Accrued employee
benefit.............. 305,258 711,542 1,334,758 385,283 2,026,915
Accrued expenses...... 53,327 783,808 174,451 (638,447) (546,780)
Other taxes payables.. 967,531 2,023,974 (1,575,764) (2,464,050) 123,373
Income taxes
payables............. 59,446 119,524 34,969 (312,732) 322,343
---------- ---------- ----------- ----------- ----------
Net cash (used in)
provided by operating
activities............. (157,455) 4,764,058 (11,633,797) (12,459,862) (5,688,113)
---------- ---------- ----------- ----------- ----------
Cash flows from
investing activities:
Purchases of property,
plant, and equipment.. (1,381,032) (965,497) (1,415,289) (484,225) (335,913)
Purchases of the
remaining equity
interest of a
subsidiary (net of
cash acquired)........ -- -- (169,571) (169,571) --
Purchase of marketable
securities............ (6,783) -- -- -- --
Increase in investment
of a subsidiary....... -- -- -- -- (239,000)
Proceeds from disposal
of a subsidiary, net.. -- -- -- -- 33,477
Proceeds on disposal of
marketable
securities............ 393,717 -- -- -- --
Proceeds on disposal of
property, plant, and
equipment............. -- 42,271 43,708 27,647 --
Purchase of a
subsidiary............ -- -- -- -- (1,297,184)
Prepayment for
acquisition of a
subsidiary............ -- -- (400,000) -- --
---------- ---------- ----------- ----------- ----------
Net cash used in
investing activities... (994,098) (923,226) (1,941,152) (626,149) (1,838,620)
---------- ---------- ----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In US dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
financing activities:
Net proceeds from
issuance of
convertible preferred
stock................. -- 13,997,632 -- -- 20,000,000
Increase in short-term
bank loans............ 958,777 2,416,000 9,464,044 5,783,132 11,585,624
Repayment of short-term
bank loans............ -- (964,064) (7,280,114) (4,698,020) (8,498,943)
Convertible loan....... -- 250,000 -- -- --
Proceeds on exercise of
stock options......... -- 111,651 875 875 66,716
Payable to
stockholders.......... -- 2,191,790 (2,191,790) (2,191,790) --
Warrants exercised..... -- -- -- -- 200
Contributions
(miscellaneous)....... 2,500 -- -- -- --
Investment from
minority interest..... 982,753 -- -- -- --
Repurchase of minority
interest.............. (295,000) -- (712,018) (712,018) --
---------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............. 1,649,030 18,003,009 (719,003) (1,817,821) 23,153,597
---------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents: 497,477 21,843,841 (14,293,952) (14,903,832) 15,626,864
Cash and cash
equivalents at
beginning of period.... 1,731,608 2,220,891 24,065,882 24,065,882 9,749,374
Effect of exchange rate
changes on cash and
cash equivalents....... (8,194) 1,150 (22,556) (28,892) (22,036)
---------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $2,220,891 $24,065,882 $ 9,749,374 $ 9,133,158 $25,354,202
========== =========== =========== =========== ===========
Supplemental cash flow
information:
Cash paid during the
year:
Interest............... $ 27,359 $ 184,998 $ 369,343 $ 277,243 $ 441,492
Income taxes........... -- 130,476 75,032 75,032 457,010
========== =========== =========== =========== ===========
Noncash investing and
financing activities:
Deferred stock
compensation.......... $3,136,000 $ -- $ -- $ -- $ 6,589,717
Issue of common stock
for convertible debt
and accrued interest.. -- -- 510,000 -- --
========== =========== =========== =========== ===========
</TABLE>
Acquisitions and disposal of interests in subsidiaries:
In connection with the acquisition in 1998 of the remaining 45% equity
interest of AI CTC for cash at $1,204,819, the Company acquired assets with a
fair value of $3,584,210 and assumed liabilities of $2,847,632.
In March 1999 the Company acquired for cash of $2,000,000, of which
$400,000 had been paid as a deposit in 1998, and issuance of 437,500 shares of
common stock to AI Zhejiang's senior management for their past services and
acquired assets with a fair value of $2,879,853 and assumed liabilities of
$3,816,974 (unaudited).
In connection with the disposal in 1999 of a 16.5% interest of AI Data for
cash of $278,600, the Company disposed of assets with a fair value of $61,103
and assumed liabilities of $88,234 (unaudited).
See notes to consolidated financial statements.
F-8
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
AsiaInfo Holdings, Inc. (the "Company") was incorporated in Texas, United
States ("US"), on June 17, 1993 and was subsequently changed to Delaware in
June 1998. The Company operates through four subsidiaries, AsiaInfo Services
Inc. ("AI Services"), AsiaInfo Computer Network (Beijing) Co., Ltd., which was
renamed as AsiaInfo Technologies (China), Inc. ("AI Technology"), AsiaInfo-CTC
Network Systems, Inc. ("AI CTC") and Zhejiang AsiaInfo Telecommunication
Technology Co., Ltd. ("AI Zhejiang"). Except for AI Services, which is
incorporated in the US, all of the subsidiaries are incorporated in the
People's Republic of China ("PRC"). As of September 30, 1999, all consolidated
subsidiaries were wholly-owned. In August 1999 the Company reduced its
interest from 55% to 38.5% in Beijing AsiaInfo Data Communications Technology
Co., Ltd., now renamed General Data System Co., Ltd., ("AI Data"), also
incorporated in the PRC. On June 24, 1999, the Company agreed, subject to
government approval, to sell its remaining interest.
The Company acts as a holding company and sources computer related
equipment in the US for sale to customers in the PRC.
AI Technology was established as a wholly foreign owned enterprise with an
initial term of operation of 15 years commencing May 2, 1995 (date of
establishment). Its principal activities are conducted in the PRC and comprise
the provision of Internet-related information technology professional services
and software products.
AI CTC is a wholly foreign owned enterprise with an initial term of
operation of 15 years commencing from December 14, 1995 (date of
establishment) and was previously engaged in network systems integration, sale
of related computer and equipment, and repair and maintenance services. AI
CTC's business is now conducted by AI Technology. On February 13, 1998, the
Company bought the 45% equity interest in AI CTC then held by its former joint
venture partner, China Communication Technical Service Center ("CTC"), for a
cash consideration of approximately $1.2 million. The acquisition of AI CTC
minority interest has been accounted for by the purchase method of accounting.
The excess of the purchase price over the fair value of net assets of the
minority interest of AI CTC of $468,241 has been recorded in goodwill which is
being amortized over 5 years. In 1997, the Company had a receivable from CTC
of $745,929 which was written off in 1997 as a bad debt. As of September 30,
1999, AI CTC is being liquidated.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on January 1,
1997.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenue......................................... $37,283,435 $44,222,392
Net income (loss)............................... (1,042,507) 1,413,744
Net income (loss) per share:
Basic......................................... (0.08) 0.10
Diluted....................................... (0.08) 0.04
Shares used in computation:
Basic......................................... 13,530,000 13,616,412
Diluted....................................... 13,530,000 31,765,532
</TABLE>
F-9
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
On April 5, 1999, the Company acquired the entire issued share capital of
AI Zhejiang, a company incorporated in the PRC, for cash of $2 million and
issuance of the 437,500 shares of common stock to AI Zhejiang's senior
management at a fair value of $4.30 per share for their past services. The
total consideration was $3,881,250. The acquisition of AI Zhejiang has been
accounted for by the purchase method of the accounting and, accordingly, the
results of operations for the period from April 5, 1999 are included in the
accompanying unaudited consolidated financial statements. Assets acquired and
liabilities assumed have been recorded at their estimated fair values. The
excess of the purchase price over the fair value of net assets of AI Zhejiang
of approximately $5 million has been recorded in goodwill, which is being
amortized over 5 years.
The following unaudited pro forma information presents the results of
operations of the Company and AI CTC as if the acquisition had taken place on
January 1, 1998.
<TABLE>
<CAPTION>
Nine months ended
1998 September 30, 1999
----------- ------------------
<S> <C> <C>
Revenue................................... $46,867,064 $49,940,245
Net income (loss)......................... (189,598) (1,551,977)
Net income (loss) per share:
Basic................................... (0.01) (0.11)
Diluted................................. (0.01) (0.11)
Shares used in computation:
Basic................................... 14,053,912 14,082,905
Diluted................................. 14,053,912 14,082,905
</TABLE>
These pro forma results of operations for each of the acquisitions have
been presented for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions occurred on the dates indicated, or which may result in the
future.
AI Services, which had been inactive since 1996, was dissolved on May 24,
1999.
AI Data is an equity joint venture in the PRC with an initial term of
operation of 15 years commencing from September 27, 1996 (date of
establishment) and it principally provides internet technical training
services to external customers and network systems integration.
2. BASIS OF PREPARATION
These financial statements of the Company and its subsidiaries in China are
prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"). This basis of accounting differs from
that used in the statutory financial statements of the PRC subsidiaries which
are prepared in accordance with the accounting principles and the relevant
financial regulations applicable to enterprises with foreign investment as
established by the Ministry of Finance of China.
The principal adjustments made to conform the statutory financial
statements of these subsidiaries to U.S. GAAP included the following:
(i) Adjustment to depreciation expense for property, plant and equipment to
reflect more accurately the economic useful life of the assets;
F-10
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
(ii) Adjustment to recognize sales and cost of sales in accordance with the
Company's revenue recognition accounting policy;
(iii) Adjustment to record goodwill and amortization on business
acquisition; and
(iv) Adjustment to recognize compensation expense on the issue of stock
options.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation--The consolidated financial statements include
the financial statements of the Company and its subsidiaries. All significant
intercompany transactions and balances are eliminated on consolidation.
Affiliated companies (20% to 50% owned companies) in which the Company does
not have a controlling interest, or for which control is expected to be
temporary, are accounted for using the equity method. The Company's share of
earnings (losses) of these companies is included in the accompanying
consolidated statement of operations. The Company's share of losses amounted
to $118,383 for the nine months ended September 30, 1999. There were no
amounts in prior periods.
Cash and cash equivalents--Cash and cash equivalents include cash on hand,
demand deposits and highly liquid investments with a maturity of three months
or less at the time of purchase.
Inventories--Inventories of hardware and parts are stated at the lower of
cost, determined principally by the specific identification method, or market.
Cost includes the purchase price of computer-related equipment,
transportation, insurance expense, import and other taxes, and other related
expenses. Direct costs incurred for system integration contracts are stated at
the lower of cost and net realizable value. These amounts are included as work
in progress in inventories and are charged to cost of sales when the related
revenue is recognized.
Property, plant and equipment--Property, plant and equipment is stated at
cost less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives, after deducting the
estimated residual value of 5% of cost, as follows:
<TABLE>
<S> <C>
Furniture, fixtures and electronic
equipment........................ 5 years
Motor vehicles.................... 5 years
Leasehold improvements............ Shorter of the lease term or 5 years
Accounting software............... 3 years
</TABLE>
Goodwill--Goodwill is capitalized and amortized on a straight-line basis
over its expected useful economic life of 5 years. Accumulated amortization
was nil at December 31, 1997, $46,824 at December 31, 1998 and $567,543 at
September 30, 1999.
Impairment--The Company reviews its long-lived assets, including goodwill,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. An impairment loss,
measured based on the fair value of the asset, is recognized if expected
future undiscounted cash flows are less than the carrying amount of the
assets.
Revenue recognition--Revenue from network solutions contracts, which
includes the procurement of hardware on behalf of the customer, systems
design, planning, consulting, systems integration services and software
license revenue, is recognized over the contract term based on the percentage
of completion. Estimates of hardware warranty costs are included in
determining project costs. Revisions in estimated profits are made in
F-11
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
the period in which the circumstances requiring the revision become known.
Provisions, if any, are made currently for anticipated losses on uncompleted
contracts. Revenue from maintenance is recognized over the contractual period.
Revenue in excess of billings on service contracts is recorded as unbilled
receivables and included in trade accounts receivable, and amounted to
$7,971,092 at December 31, 1997, $10,135,662 at December 31, 1998 and
$12,283,742 at September 30, 1999. Billings in excess of revenues recognized
on service contracts are recorded as deferred income until the above revenue
recognition criteria are met.
Software development costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Computer
Software To Be Sold, Leased or Otherwise Marketed." To date, the Company has
essentially completed its software development concurrently with the
establishment of technological feasibility, and, accordingly, no costs have
been capitalized.
Foreign currency translation--The Company uses the United States dollar as
its reporting currency. Monetary assets and liabilities denominated in
currencies other than United States dollars are translated into United States
dollars at the rates of exchange ruling at the balance sheet date.
Transactions in currencies other than United States dollars during the year
are converted into United States dollars at the rates of exchange ruling at
the transaction dates. Transaction differences are recognized in the statement
of operations.
The financial records of the Company's PRC subsidiaries are maintained in
Renminbi, the functional currency. Their balance sheets are translated into
United States dollars based on the rates of exchange ruling at the balance
sheet date. Their statements of operations are translated using a weighted
average rate for the period. Translation adjustments are reflected as
cumulative translation adjustments in stockholders' equity.
The Renminbi is not fully convertible into United States dollars or other
foreign currencies. The rate of exchange quoted by the People's Bank of China
on December 31, 1998 was US$1.00=RMB8.2787. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States
dollars at that rate or at any other rate.
Income taxes--Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are recognized for
all significant temporary differences and classified as current or non-current
based upon the classification of the related asset or liability in the
financial statements. A valuation allowance is provided to reduce the amount
of deferred tax assets if it is considered more likely than not that some
portion of, or all of, the deferred tax asset will not be realized.
Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-based compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
F-12
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
Net income (loss) per share ("EPS")--Basic EPS excludes dilution and is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants to
purchase common stock and common stock options and warrants using the treasury
stock method) were exercised or converted into common stock. Potential common
shares in the diluted EPS computation are excluded in net loss periods as
their effect would be antidilutive. EPS for all periods presented have been
computed in accordance with SFAS No. 128 "Earnings Per Share".
Pro forma net income (loss) per share--Basic pro forma net income (loss)
per share is computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding for
the period and the weighted average number of shares resulting from the
assumed conversion of outstanding shares of convertible preferred stock.
Diluted pro forma net income (loss) per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Potential common shares in the
diluted pro forma net income (loss) per share computation are excluded in net
loss periods as that effect would be antidilutive.
Stock split--Share and per share amounts have been restated to reflect the
10:1 stock split in 1996 and 2:1 stock split which was effected in the form of
a dividend in 1998.
Unaudited pro forma information--Upon the closing of a qualified initial
public offering the Company's preferred stock automatically converts into
6,952,153 shares of common stock. The following unaudited pro forma
information assumes the conversion of the convertible preferred stock at
September 30, 1999:
<TABLE>
<CAPTION>
Actual Pro forma
----------- -----------
<S> <C> <C>
Stockholders' Equity:
Convertible preferred stock:
Series A, 2,160,864 shares
Issued and outstanding.............................. $ 21,609 $ --
Series B, 2,630,425 shares
Issued and outstanding.............................. $ 26,304 --
Common stock, shares
Issued and outstanding
actual 15,656,002 pro forma 22,608,155 156,560 226,082
Additional paid-in capital........................... 46,014,093 45,992,484
Deferred stock compensation.......................... (4,563,903) (4,563,903)
Retained earnings.................................... 1,443,796 1,443,796
Accumulated other comprehensive loss................. (21,598) (21,598)
----------- -----------
Total stockholders' equity........................... $43,076,861 $43,076,861
=========== ===========
</TABLE>
No other balance sheet caption is adjusted.
Unaudited interim financial information--The interim financial information
as of September 30, 1999 and for the nine months ended September 30, 1998 and
1999 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999.
F-13
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
Comprehensive income--In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display
of comprehensive income, its components and accumulated balance. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Comprehensive income (loss)
for the periods presented has been disclosed within the consolidated
statements of stockholders' equity and comprehensive income (loss).
Financial instruments--The carrying value of financial instruments, which
consist of cash and cash equivalents, accounts receivable, accounts payable
and short-term bank loans are carried at cost which approximates fair value
due to the short-term nature of these instruments.
New accounting standard not yet adopted--In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires companies to
record all derivatives on the balance sheet as assets or liabilities measured
at fair value. Gains and losses resulting from changes in fair market values
of those derivative instruments would be accounted for depending on the use of
the instrument and whether it qualifies for hedge accounting. SFAS 133 will be
effective for the Company's year ending December 31, 2001. The Company has not
yet determined the impact, if any, on its financial position, results of
operations or cash flows.
Reclassifications--Certain prior year amounts in the accompanying financial
statements have been reclassified to conform to current year presentation.
These reclassifications had no effect on the results of operations or
financial position for any year presented.
4. INVENTORIES
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Hardware and parts.................... $ 353,509 $ 289,015 $ 82,634
Work in progress...................... 748,538 277,368 19,517
---------- ---------- ----------
$1,102,047 $ 566,383 $ 102,151
========== ========== ==========
</TABLE>
5. AMOUNT DUE FROM A RELATED PARTY
The balance represented a loan made to AI Zhejiang during 1998 bearing
interest at 12% per annum. Following the acquisition of AI Zhejiang the loan
has been eliminated on consolidation.
6. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Furniture, fixtures and electronic
equipment......................... $ 568,388 $1,324,596 $1,722,423
Motor vehicles..................... 203,924 285,259 308,544
Leasehold improvements............. 389,225 391,734 406,414
Accounting software................ -- 209,018 254,764
---------- ---------- ----------
Total............................ 1,161,537 2,210,607 2,692,145
Less: Accumulated depreciation..... 207,634 465,253 742,968
---------- ---------- ----------
Net book value..................... $ 953,903 $1,745,354 $1,949,177
========== ========== ==========
</TABLE>
F-14
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
7. SHORT-TERM BANK LOANS
At December 31, 1997 short-term bank loans represent unsecured bank loans
of $2,416,000. At December 31, 1998 short-term bank loans represent an
unsecured bank loan of $603,960 and secured bank loans of $5,073,170. At
September 30, 1999, all loans were secured. The loans carry interest ranging
from approximately 5.85% to 7.029% per annum and are repayable within one
year. In 1997 and 1998, the unsecured bank loans were guaranteed at no cost to
the Company by independent third parties. The secured bank loans and short-
term credit facilities were secured by bank deposits of $6 million as of
December 31, 1998 and $9.69 million as of September 30, 1999, which are
presented as restricted cash in the consolidated balance sheets. In April
1999, certain senior management pledged their holdings in shares of the
Company's common stock to a bank for a short-term revolving credit facility of
$5 million. This pledge has been released as of September 30, 1999.
Unused short-term credit facilities were approximately $362,000 as of
December 31, 1998, expiring in July 1999. In 1999, the Company entered into
new credit facility arrangements expiring in April and July 2000 for working
capital purposes under which the Company may borrow up to $9.3 million. As of
September 30, 1999, unused short-term credit facilities were $5 million.
8. OTHER TAXES PAYABLE
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Business tax payable................. $ 228,425 $ 340,174 $ 248,208
Value added taxes payable, net....... 2,767,010 1,703,020 1,917,786
---------- ---------- ----------
$2,995,435 $2,043,194 $2,165,994
========== ========== ==========
</TABLE>
The Company's PRC subsidiaries are subject at a rate of 17% to value added
tax on revenue from procurement of hardware on behalf of customers, which is
payable by offset against the input value added tax on purchases, and are
subject to business tax and value added tax at the rate of 5% and 6% on other
service revenues from network solutions and software license, respectively.
9. INCOME TAXES
The components of income (loss) before income taxes and minority interests
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1997 1998
---------- --------- -----------
<S> <C> <C> <C>
US.................................... $ (109,597) $(562,378) $(1,277,546)
---------- --------- -----------
PRC................................... 2,330,350 (119,481) 2,435,786
---------- --------- -----------
$2,220,753 $(681,859) $ 1,158,240
========== ========= ===========
</TABLE>
The Company and a subsidiary, AI Services, are subject to US federal and
state income taxes. The Company's other subsidiaries are incorporated in the
PRC and are subject to PRC income taxes.
F-15
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- ---------
<S> <C> <C> <C>
Current
United States:
Federal...................................... $55,000 $218,750 $ 96,300
State........................................ 6,000 31,250 13,700
Foreign:
PRC.......................................... 3,456 -- --
------- -------- ---------
Total current income taxes................. 64,456 250,000 110,000
------- -------- ---------
Deferred
United States:
Federal...................................... 4,500 14,875 33,250
State........................................ (500) 2,125 4,750
Foreign:
PRC.......................................... -- -- (403,504)
------- -------- ---------
Total deferred income taxes................ 4,000 17,000 (365,504)
------- -------- ---------
Total income tax expense (benefit)......... $68,456 $267,000 $(255,504)
======= ======== =========
</TABLE>
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998
------------------------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently deductible... $ 38,000 $ --
Net operating loss carry forwards................ -- 336,947
Depreciation..................................... -- 66,557
----------- ------------
Total gross deferred tax assets.................... 38,000 403,504
Valuation allowance................................ -- --
----------- ------------
Total deferred tax assets.......................... $ 38,000 $ 403,504
=========== ============
</TABLE>
Deferred income taxes result principally from differences in the
recognition of certain assets and liabilities for tax and financial reporting
purposes and the tax effect of tax loss carry forwards. At December 31, 1998,
tax loss carry forwards under the PRC jurisdiction amounted to approximately
$2,246,000, which expire December 31, 2003, resulting in a deferred tax credit
of $336,947.
The subsidiaries incorporated in the PRC are governed by the Income Tax Law
of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises
and various local income tax laws (the "Income Tax Laws"). Under the Income
Tax Laws, foreign investment enterprises ("FIE") generally are subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in
specially designated regions or cities for which more favorable effective
rates apply. Upon approval by the PRC tax
F-16
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
authorities, FIEs scheduled to operate for a period of 10 years or more and
engaged in manufacturing and production may be exempt from income taxes for
two years, commencing with their first profitable year of operations, and
thereafter with a 50% exemption for the next three years.
Pursuant to the Income Tax Laws, FIEs approved as high-tech or new
technology enterprises which are established in the Beijing New Technology
Industry Development Zone ("BDZ") are subject to income tax at the reduced
rate of 15%. High technology enterprises are also eligible for a three-year
exemption from income tax followed by a 50% reduction of income tax for the
next three years. This relief commences from the date of commencement of the
enterprise's business operations. AI Technology and AI CTC have been approved
as new technology enterprises and as they are established in the BDZ, they
enjoy the preferential tax treatment described above. In 1998 all of the
Company's PRC subsidiaries, except for AI Technology, were exempt from income
taxes. AI Technology's income tax exemption expired and in 1998 was subject to
income tax at rate of 7.5%. No provision for taxation has been made for AI
Technology as it does not have any assessable income for 1998. In the absence
of such income tax exemptions, income tax of $nil in 1996, $329,202 in 1997,
and $150,402 in 1998 would otherwise have been payable and the effect on net
(loss) per share would be to increase basic and diluted loss per share by
$0.02 in 1997 and to decrease basic income per share and diluted income per
share by $0.01 in 1998. The latest full exemption will expire in 1999 and the
latest 50% exemption will expire in 2002.
Undistributed earnings of the Company's PRC subsidiaries amounted to
approximately $623,000 at December 31, 1998. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes or foreign withholding taxes has been made. Upon
distribution of those earnings, the Company would be subject to US income
taxes (subject to a reduction for foreign tax credits) and withholding taxes
payable to China, if any. If the Company distributed the undistributed
earnings as of December 31, 1998, the US income tax liability would be
approximately $249,000.
A reconciliation between the provision for income taxes computed by
applying the US federal tax rate to loss before income taxes and the actual
provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
US federal rate........................... 35% 35% 35%
State tax rate (net of federal benefit)... 5 5 5
Tax exempt foreign income................. (42) (18) (84)
Expenses not deductible for tax purposes
--Deferred stock compensation expenses... 5 (61) 22
-------- -------- --------
3% (39)% (22)%
======== ======== ========
</TABLE>
Tax exempt foreign income represents the effect of adjustments made to
conform PRC statutory accounts in U.S. GAAP. Such adjustments are expected to
reverse during the period of the tax holidays.
10. CONVERTIBLE LOAN
On June 30, 1997 the Company issued a $250,000 convertible loan due June
30, 2002, which is callable by the holder from June 30, 1999, bearing interest
at 8% payable annually in arrears. The holder has the right to convert the
loan into common stock at 80% of the Company's preferred stock price as
defined in the agreement.
F-17
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
The holder had also been given the right to purchase a second loan of $250,000
on or before December 1, 1998 on the same terms as the existing loan except
that the second loan will have a maturity of four years and a non-callable
period of two years from the date of issuance of the second loan. In 1998 the
holder converted the loan of $250,000 and the second loan of $250,000, into
153,242 shares of common stock.
11. CAPITAL STOCK
In December 1997 the Company raised additional capital through the issuance
of 1,860,744 shares of Series A Convertible Preferred Stock in a private
placement at a price of $8.33 per share raising net proceeds of $13,997,632.
At the same time, certain existing common stockholders converted 300,120
shares of common stock into Series A Convertible Preferred Stock which were
sold by the holders and the amount, net of expenses, of $2,191,790 was paid to
the Company and subsequently repaid to the selling stockholders.
According to the Certificate of Designations of Series A Convertible
Preferred Stock of the Company dated December 23, 1997 (the "Certificate A"),
the holders of convertible preferred stock are entitled to participate in all
dividends paid to the common stockholders, on an as converted base, when such
dividends are declared by the Board. While convertible preferred stock is
outstanding, the Company may not pay any dividend with regard to any share of
common stock of the Company unless and until all dividends on the convertible
preferred stock have been paid. The holders of convertible preferred stock are
entitled to the same voting rights as that of common stockholders. This Series
A Convertible Preferred Stock had a liquidation preference value of $18
million as of December 31, 1998 and September 30, 1999 and is senior to all
common stock. The holders of shares of Series A Convertible Preferred Stock
have the right at any time, at the holders' option, to convert all or any of
the shares of common stock equal to the number of shares of Series A
Convertible Preferred Stock surrendered for conversion multiplied by the
Conversion Rate. The "Conversion Rate" as defined in the Certificate A is
initially one share of common stock for each share of preferred stock, and was
adjusted to two shares of common stock for each share of convertible preferred
stock effective immediately after the stock split in the form of a stock
dividend in 1998.
The Company's certificate of incorporation authorizes the issuance of
10,000,000 shares of preferred stock of which 3,000,000 have been designated
as Series A Convertible Preferred Stock and 5,000,000 of which have been
designated as Series B Convertible Preferred Stock. The board could designate
another class of convertible preferred shares from the remaining 2,000,000
convertible preferred shares .
On May 26, 1998 the issued and outstanding shares of the Company's common
stock, $0.01 par value, were split as effected in the form of a dividend on
the basis of two shares for each issued and outstanding share of common stock.
In August 1999, the Company raised additional capital through the issuance
of 2,630,425 shares of Series B Convertible Preferred Stock in a private
placement at a price of $7.60 per share raising net proceeds of approximately
$19.8 million.
According to the Certificate of Designations of Series B Convertible
Preferred Stock of the Company dated August 27, 1999 (the "Certificate B"),
the holders of convertible preferred stock are entitled to participate in all
dividends paid to the Series A Convertible Preferred Stockholders and the
common stockholders, on an as converted base, when such dividends are declared
by the Board. While convertible preferred stock is outstanding, the Company
may not pay any dividend with regard to any share of common stock of the
Company unless and
F-18
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
until all dividends on the convertible preferred stock have been paid. The
holders of convertible preferred stock are entitled to the same voting rights
as that of common stockholders. This Series B Convertible Preferred Stock has
a liquidation preference value of $20 million as of December 31, 1998 and
September 30, 1999, rank on a parity with Series A Convertible Preferred Stock
and is senior to all common stock. The holders of shares of Series B
Convertible Preferred Stock have the right at any time, at their option, to
convert all or any of the shares of preferred stock. The "Conversion Rate" as
defined in the Certificate B is one share of common stock for each share of
convertible preferred stock. The "Conversion Rate" as defined in the
Certificate B is one share of common stock for each share of convertible
preferred stock.
Both the Series A and the Series B Convertible Preferred Stock automatically
convert into common stock upon the closing of an initial public offering
provided that certain valuation and other requirements are met.
Net income (loss) per share
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)
(numerator):
Net income (loss)
Basic and diluted..... $ 1,669,847 $ (382,019) $ 1,535,810 $ (7,515) $ (737,032)
=========== =========== =========== =========== ===========
Shares (denominator):
Weighted average
Common Stock
Outstanding........... 13,530,000 14,272,530 14,016,852 13,969,135 15,201,794
Outstanding subject to
repurchase........... -- 742,530 400,440 375,000 1,264,722
----------- ----------- ----------- ----------- -----------
Basic................. 13,530,000 13,530,000 13,616,412 13,594,135 13,937,072
Contingent shares..... -- -- 400,441 -- --
Convertible preferred
stock................ -- -- 4,321,728 -- --
Options............... 2,424,313 -- 3,971,617 -- --
Warrants.............. 44,820 -- 9,455,334 -- --
----------- ----------- ----------- ----------- -----------
Diluted............... 15,999,133 13,530,000 31,765,532 13,594,135 13,937,072
=========== =========== =========== =========== ===========
Net income (loss) per
share:
Basic................. $ 0.12 $ (0.03) $ 0.11 $ 0.00 $ (0.05)
Diluted............... $ 0.10 $ (0.03) $ 0.05 $ 0.00 $ (0.05)
</TABLE>
F-19
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
In 1997, and for the nine months ended September 30, 1998 and 1999, the
Company had securities outstanding which could potentially dilute basic EPS in
the future, but were excluded in the computation of diluted EPS in such
periods, as their effect would have been antidilutive due to the net loss
reported in these periods. Such outstanding securities consist of the
following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended September 30,
----------------- -------------------------------
December 31, 1997 1998 1999
----------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Convertible preferred
stock................... 4,321,728 4,321,728 6,952,153
Shares of common stock
subject to repurchase... 301,760 476,760 1,515,260
Outstanding options...... 7,448,000 7,583,000 7,794,200
Warrants................. 9,489,224 9,489,224 9,469,224
---------- --------------- ---------------
21,560,712 21,870,712 25,730,837
========== =============== ===============
</TABLE>
12. COMMITMENTS
Operating Leases-- As of December 31, 1998, the Company was committed under
certain operating leases, requiring annual minimum rentals as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 1,181,425
2000.......................................................... 904,501
2001.......................................................... 910,948
2002.......................................................... 917,540
2003.......................................................... 937,342
Thereafter.................................................. 7,432,682
-----------
$12,284,438
===========
</TABLE>
The leased properties are principally located in the PRC and are used for
administration and research and development. The expiration dates of such
leases range from November 30, 1999 to May 31, 2016, and are renewable subject
to negotiation.
The leases, which account for 90% of the above payments are cancelable at
December 31, 1998 with a penalty of approximately $118,000. As the Company
early terminated the leases in 1999, such penalty was charged to the
consolidated statement of operations for the nine months ended September 30,
1999. Rental expense for the three years in the period ended December 31, 1998
and for the nine months ended September 30, 1999 was $284,476, $772,794,
$1,390,811 and $1,044,708, respectively.
Performance options--In connection with the acquisition of AI Zhejiang, the
Company has granted management and employees of AI Zhejiang performance
options if in the year 2000, AI Zhejiang's earnings before interest and taxes
("EBIT") exceeds AI Zhejiang's EBIT for 1999 and AI Zhejiang's combined EBIT
for 1999 and 2000 exceeds $3,000,000. The total number of performance options
granted will equal the amount by which AI Zheijiang's EBIT for 1999 and 2000
exceeds $3,000,000, expressed as a percentage and multiplied by 187,500. Each
performance option will represent the right to purchase one share of the
Company's common stock at the weighted average exercise price for stock
options granted at such time. The performance options will be granted within
30 days of the determination of AI Zhejiang's EBIT for 2000.
F-20
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
13. RETIREMENT BENEFITS AND POST RETIREMENT
The Company's employees in the PRC are entitled to retirement benefits
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed benefits plan. The
PRC government is responsible for the benefit liability to these retired
staff. The Company is required to make contributions to the state retirement
plan at 20% of the monthly basic salaries of the current employees. The
expense of such arrangements to the Company for the three years in the period
ended December 31, 1998 and for the nine months ended September 30, 1999 was
$143,126, $354,819, $537,593 and $577,658, respectively.
In addition, the Company is required by law to contribute 39% of basic
salaries of the PRC employees for staff welfare, housing, medical and
education benefits. The Company does not have any post retirement benefit
plans.
The Company has not established any retirement benefit plans for US
employees in the US.
14. DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations for foreign investment
enterprises, the Company's PRC subsidiaries are required to make
appropriations to reserve funds which include a general reserve fund, an
enterprise expansion fund and a staff welfare and bonus fund at the discretion
of the board of directors. The subsidiaries may use the general reserve fund
to make up losses. The subsidiaries may, upon a resolution passed by the
stockholders, convert the statutory surplus reserve into capital. The staff
welfare and bonus fund is used for the collective welfare of the employees of
the subsidiaries. The enterprise expansion fund is used for expansion of the
subsidiaries' operations and can be converted to capital subject to approval
by the relevant authorities. There were no appropriations to the reserve funds
by the Company's PRC subsidiaries during any of the periods presented.
15. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of temporary cash
investments and trade accounts receivable.
The Company places its temporary cash investments with various financial
institutions in the PRC and the US. At December 31, 1998 the amounts were
placed principally with a US financial institution.
The recorded carrying amount of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and debt obligations
approximate fair value.
The Company's business activities and accounts receivable are principally
in the PRC with a limited number of large customers, principally various
entities of the China Telecom system. Although these provincial and local
entities of the China Telecom system are separate legal entities and generally
make their own purchase decisions, such decisions are nonetheless affected by
the DGT. Sales to various entities of the China Telecom system amounted to
approximately 98% of total revenues in each of 1996, 1997 and 1998. During the
years ended December 31, 1996, 1997 and 1998, certain entities of the China
Telecom system represented more than 10% of total revenues. In 1996,
provincial entity A, provincial entity B, provincial entity C and provincial
entity D accounted for 42%, 14%, 12% and 11%, respectively, of total revenues.
In 1997, provincial entity E and
F-21
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
provincial entity F accounted for 20% and 12%, respectively, of total
revenues. In 1998, provincial entity G, provincial entity H and provincial
entity I accounted for 27%, 20% and 13%, respectively, of total revenues.
Details of the amounts receivable from the customers with the largest
receivable balances at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Percentage of
accounts receivable
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Five largest receivables balances....................... 59% 67%
</TABLE>
The Company maintains allowances for estimated potential bad debt losses.
The Company believes that no significant credit risk exists as credit losses,
when realized, have been within the range of management's expectations.
The Company's business growth is indirectly dependent on government
budgetary policy for the telecommunications and Internet industries in China.
The laws and regulations applicable to the Internet industry in China remain
unsettled and could have a material adverse effect on the Company's business.
The Company's customer base is concentrated and the loss of one or more
customers could cause the business to suffer.
16. STOCK OPTION PLANS
General--Under the Company's Stock Option Plans (the "Plans"), as amended
and restated, the Company may grant options to purchase up to 11,194,000
shares of common stock to employees, directors and consultants at prices not
less than the fair market value at the date of grant for incentive stock
options ("ISO") and nonqualified options ("NQO") and the terms of the options
are determined based on individual stock option agreements.
Options granted prior to 1998 generally vest and become exercisable over
three one-year cliffs at an equal rate.
Exercise terms on options granted in 1998 and 1999 are substantially
comparable to options granted prior to 1998 except for the options vesting and
exercisable period which is over four one-year cliffs at a rate of 20%, 20%,
30% and 30%. However, for common shares issued upon exercise of ISO's granted
in 1998 and 1999, the Company retains a right of repurchase at the exercise
price. Such right of repurchase expires 60 days after termination of
employment. Accordingly, these ISO awards are accounted for as variable
awards. Subsequent to September 30, 1999 the Company amended the terms of
these ISOs to eliminate the Company's right of repurchase. Vesting terms on
NQO's granted in 1998 and 1999 are substantially comparable to options granted
prior to 1998.
Total number of options exercisable and the weighted average exercise price
were 1,222,084, 2,342,100, 4,573,400 and $0.005, $0.44 and $0.83 as of
December 31, 1996, 1997 and 1998, respectively.
F-22
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
Option activity for the Plans is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Weighted
average
Number of exercise price
Shares per share
---------- --------------
<S> <C> <C>
Outstanding, January 1, 1996......................... 2,965,000 $0.01
Granted (weighted average fair value of $1.72)....... 2,164,000 1.05
----------
Outstanding, December 31, 1996....................... 5,129,000 0.45
Granted (weighted average fair value of $1.02)..... 3,384,000 2.16
Cancelled.......................................... (163,000) 1.17
Exercised.......................................... (902,000) 0.13
----------
Outstanding, December 31, 1997....................... 7,448,000 1.24
Granted (weighted average fair value of $2.80)....... 575,000 3.00
Canceled........................................... (146,000) 1.64
Exercised.......................................... (175,000) 0.005
----------
Outstanding, December 31, 1998....................... 7,702,000 1.39
Granted*........................................... 1,174,200 3.86
Cancelled*......................................... (43,500) 2.81
Exercised*......................................... (1,038,500) 0.06
----------
Outstanding, September 30, 1999*..................... 7,794,200 $1.93
==========
</TABLE>
- --------
*Unaudited
Additional information on options outstanding at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding as of December 31, 1998 as of December 31, 1998
------------------------------------------- -----------------------
Weighted average
Range of remaining Weighted
exercise Number contractual life average Number Weighted average
prices outstanding (yrs.) exercise price exercisable exercise price
- --------- ----------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.005
to
0.01... 1,962,800 6.75 $0.01 1,962,800 $0.01
$0.25 to
0.75... 398,600 7.50 0.66 240,600 0.63
$1.00 to
1.50... 2,392,600 7.10 1.11 1,628,600 1.06
$2.00 to
2.75... 2,373,000 8.86 2.55 741,400 2.57
$3.00... 575,000 9.47 3.00 -- --
--------- ---- ----- --------- -----
Total.. 7,702,000 8.00 $1.39 4,573,400 $0.83
========= ==== ===== ========= =====
</TABLE>
At December 31, 1998 and September 30, 1999, 1,821,000 and 2,030,300
options were available for future grant under the Plans.
Deferred stock compensation--As discussed in Note 3, the Company accounts
for its stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25. Accordingly, the Company recorded deferred
compensation expense equal to the difference between the grant price and
deemed fair value of the
F-23
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
Company's common stock for options granted prior to December 31, 1997 which
were all fixed awards. Such deferred compensation expense aggregated
$3,136,000 and is being amortized to expense over the three year vesting
period of the options.
As discussed above, ISO grants to employees in 1998 and 1999 were variable
awards. Accordingly, the Company recorded deferred compensation expense at the
grant date equal to the difference between the grant price and deemed fair
value of the Company's common stock at the grant date and adjusts the deferred
compensation expense at the end of each period based on the deemed fair value
of the Company's common stock at the end of the period. The related
amortization of deferred compensation expense, which is recognized over the
four year exercise period of the options, is also adjusted accordingly. At
December 31, 1998 and September 30, 1999, such deferred compensation expense
aggregated $ nil and $6,091,111, respectively.
During the nine months ended September 30, 1999, the Company issued NQO's
to nonemployees to purchase 96,000 shares of common stock at a price ranging
from $3.00 to $4.17 per share. In accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," and its related interpretations, the Company
accounted for this transaction under the fair value method and as a variable
award. Accordingly, the Company recorded deferred compensation expense at the
grant date equal to the fair value of the options (using the Black-Scholes
option pricing model) at the grant date and adjusts the deferred compensation
expense at the end of the period. The related amortization of deferred
compensation expense, which is recognized over the four year exercise period
of the options, is also adjusted accordingly. At September 30, 1999, such
deferred compensation expense aggregated $498,606.
In late 1999 we removed the rights to repurchase shares issuable under the
existing plans, which for the 1998 and 1999 plans gave us the right to
repurchase at the exercise price resulting in additional deferred compensation
expense in 1999 of $6.1 million which is being amortized over the four year
exercise period of the options.
Additional stock plan information--Since the Company continues to account
for its stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25, SFAS No. 123 requires the disclosure of pro forma
net income (loss) and earnings (loss) per share had the Company adopted the
fair value method. The Company's calculations were made using the minimum
value pricing model which requires subjective assumptions, including expected
time to exercise, which affects the calculated values. The following weighted
average assumptions were used: expected life, seven years; risk free interest
rate, 6.0% in 1996, 5.7% in 1997 and 4.6% in 1998; and no dividends during the
expected term. The Company's calculations are based on a single option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996, 1997 and 1998 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would have
been approximately $1,632,721 ($0.12 per basic share and $0.10 per diluted
share) in 1996, and pro forma net loss would have been approximately
$(558,093) ($(0.04) per share, basic and diluted) and $(1,710,703) ($(0.13)
per share, basic and diluted) in 1997 and 1998, respectively.
17.WARRANTS
Convertible preferred stock
In connection with a private placement in December 1997, the Company issued
9,429,224 stock purchase warrants ("Warrants") to its Series A Convertible
Preferred Stock holders ("the Holder"), which are exercisable
F-24
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
in whole at any time after December 31, 1999 at an initial value of $0.01 per
Warrant. Each Warrant represents the right to purchase one share of the
Company's common stock. There are anti dilution provisions that adjust the
exercise price and the number of shares of common stock issuable upon the
occurrence of certain events. Upon the exercise of these Warrants and payment
of the exercise price, the Holder shall be entitled to acquire the number of
share of common stock calculated by reference to the appropriate earnings
before interest, taxes, depreciation and amortization for the year ending
December 31, 1999 as set forth in the Warrants agreement dated December 29,
1997. The Warrants are non-transferable and Warrants will be void on the day
six months following the delivery of audited financial statements of the
Company for the year ending December 31, 1999. No warrants have been exercised
as of September 30, 1999.
Common stock
At December 31, 1997 and 1998 and September 30, 1999, warrants to purchase
30,000, 60,000 and 40,000 shares of common stock, respectively, were
outstanding related to the following arrangement.
In April 1996, the Company entered into an arrangement with a consultant
for the issuance of warrants to purchase 30,000 shares of common stock at
$0.01 per share. Warrants to purchase 10,000 shares of common stock would vest
and become immediately exercisable on June 30 of 1997, 1998 and 1999
contingent upon continued service to the Company at those dates. The warrants
expire two years from the vesting date and common shares issued on conversion
may not be sold for a period of three years from the date of issuance of the
common shares. Warrants to purchase an additional 30,000 shares of common
stock were granted, under the same terms, in May 1998 in accordance with
certain anti-dilution provisions in the arrangement. During 1999, warrants to
purchase 20,000 shares of common stock were exercised.
The arrangement was accounted for as a variable award and the fair values
of the warrants issued were insignificant to the results of operations for the
years ended December 31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1999.
18.SEGMENT AND GEOGRAPHIC OPERATING INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major
customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker. By this definition, the Company has
two operating segments (separate lines of business): network solutions net of
hardware costs and software license. Each business line has separate operating
data and separate management individuals responsible for the sales, marketing
and development efforts. The network solutions business provides customers the
necessary hardware (e.g. network routers and servers from third party original
equipment manufacturers) and consulting and systems integration services to
develop a network system. The Company manages its business internally based on
total revenues net of hardware costs. The software business sells software
products which include Internet CM&B, wireless CM&B and messaging software.
These software products can be sold on a stand alone basis or in connection
with a systems integration arrangement. AI Zhejiang, which was acquired in
1999, has been presented as a separate operating segment. There are no
differences in accounting treatment
F-25
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999 (Unaudited)
(In US dollars)
between the Company and AI Zhejiang. Costs and expenses allocated between
operating segments are generally on an actual basis and for those common
expenses, allocation is made proportionally to the revenue of network
solutions net of hardware costs and software licence.
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 31,
----------------------------------- --------------------------------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -------------------------------------
(Unaudited)
Company
excluding
AI Zhejiang AI Zhejiang Total
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues net of hardware
cost:
Network solutions net of
hardware cost.......... $6,114,805 $10,909,554 $17,027,372 $ 7,933,864 $14,011,383 $ 80,216 $14,091,599
Software license........ 761,751 774,684 2,258,148 1,897,780 3,283,979 1,358,544 4,642,523
---------- ----------- ----------- ----------- ----------- ---------- -----------
Consolidated revenues
net of hardware cost... 6,876,556 11,684,238 19,285,520 9,831,644 17,295,362 1,438,760 18,734,122
Consolidated cost of
sales net of hardware
cost................... 431,690 3,956,681 7,252,642 4,320,084 3,652,985 244,979 3,897,964
---------- ----------- ----------- ----------- ----------- ---------- -----------
Consolidated gross
profit................. $6,444,866 $ 7,727,557 $12,032,878 $ 5,511,560 $13,642,377 $1,193,781 $14,836,158
========== =========== =========== =========== =========== ========== ===========
Gross profit:
Network Solutions....... $5,683,115 $ 6,957,692 $ 9,775,549 $ 3,614,486 $10,361,212 $ 80,216 $10,441,428
Software license........ 761,751 769,865 2,257,329 1,897,074 3,281,165 1,113,565 4,394,730
---------- ----------- ----------- ----------- ----------- ---------- -----------
Consolidated gross
profit................. $6,444,866 $ 7,727,557 $12,032,878 $ 5,511,560 $13,642,377 $1,193,781 $14,836,158
========== =========== =========== =========== =========== ========== ===========
Income (loss) from
operations:
Network Solutions....... $1,938,165 $ (922,687) $ 365,118 $(1,667,283) $(1,158,139) $ (207,658) $(1,365,797)
Software license........ 247,313 209,182 $ 315,455 459,326 926,542 (32,850) 893,692
---------- ----------- ----------- ----------- ----------- ---------- -----------
Consolidated income
(loss) from
operations............. $2,185,478 $ (713,505) $ 680,573 $(1,207,957) $ (231,597) $ (240,508) $ (472,105)
========== =========== =========== =========== =========== ========== ===========
</TABLE>
For the years ended December 31, 1996, 1997 and 1998 and for the nine
months ended September 30, 1998 and 1999, all of the Company's revenues have
been derived from sales to customers in the People's Republic of China.
Revenues are attributed to the country based on the country of installation of
hardware and performance of system integration work. Also, as of December 31,
1997 and 1998 and as of September 30, 1999, 98%, 99% and (unaudited) 99%,
respectively, of the Company's long-lived assets are located in the People's
Republic of China.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Zhejiang Asiainfo Telecommunication Technology
Co., Ltd.:
We have audited the accompanying balance sheets of Zhejiang AsiaInfo
Telecommunication Technology Co., Ltd. as of December 31, 1997 and 1998 the
related statements of operations, owner's equity and cash flows for the years
then ended (expressed in Renminibi). The 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Zhejiang AsiaInfo Telecommunication
Technology Co., Ltd. as of December 31, 1997 and 1998 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/Deloitte Touche Tohmatsu Shanghai CPA
Shanghai
March 12, 1999
F-27
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------- December 31,
1997 1998 1998
---------- ---------- ------------
Rmb Rmb US$
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ 1,622,415 3,812,171 460,479
Accounts receivable...................... 5,676,381 18,425,218 2,225,617
Advances to suppliers.................... 4,410,109 4,391,052 530,404
Inventories.............................. 86,804 118,809 14,351
Other receivables and prepaid expenses... 812,432 447,703 54,079
---------- ---------- ----------
Total current assets..................... 12,608,141 27,194,953 3,284,930
Property, plant, and equipment--net........ 1,408,758 1,744,046 210,667
---------- ---------- ----------
Total assets............................. 14,016,899 28,938,999 3,495,597
========== ========== ==========
LIABILITIES AND OWNER'S EQUITY (DEFICIENCY)
Current Liabilities:
Short-term borrowings.................... 1,100,000 7,350,000 887,821
Accounts payable......................... 2,244,785 20,833,524 2,516,521
Amount due to a related party............ -- 471,443 56,947
Other payables and accrued expenses...... 5,884,375 4,917,316 593,972
---------- ---------- ----------
Total current liabilities................ 9,229,160 33,572,283 4,055,261
---------- ---------- ----------
Commitments and contingencies (note 11)
Owner's Equity (deficiency):
Paid-in capital.......................... 4,158,750 4,158,750 502,343
Retained earnings (accumulated deficit).. 628,989 (8,792,034) (1,062,007)
---------- ---------- ----------
Total owners' equity (deficiency)........ 4,787,739 (4,633,284) (559,664)
---------- ---------- ----------
Total liabilities and owner's equity
(deficiency)............................ 14,016,899 28,938,999 3,495,597
========== ========== ==========
</TABLE>
See notes to financial statements
F-28
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1997 1998 1998
---------- ---------- ----------
Rmb Rmb US$
<S> <C> <C> <C>
Net sales.................................... 26,716,666 21,894,450 2,644,672
Cost of revenues............................. 20,253,125 23,556,410 2,845,424
---------- ---------- ----------
Gross profit (loss).......................... 6,463,541 (1,661,960) (200,752)
Selling and administrative expenses.......... 5,025,548 7,454,100 900,395
Interest expense, net........................ 127,127 167,811 20,270
---------- ---------- ----------
Income (loss) from operations................ 1,310,866 (9,283,871) (1,121,417)
Other income (loss).......................... 154,075 (137,152) (16,567)
---------- ---------- ----------
Net income (loss)............................ 1,464,941 (9,421,023) (1,137,984)
========== ========== ==========
</TABLE>
See notes to financial statements
F-29
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
STATEMENTS OF OWNER'S EQUITY
<TABLE>
<CAPTION>
(Accumulated
Paid-in deficit) retained
capital earnings Total
---------- ----------------- -----------
Rmb Rmb Rmb
<S> <C> <C> <C>
Balance at January 1, 1997............ 4,158,750 (835,952) 3,322,798
Net income............................ -- 1,464,941 1,464,941
---------- ------------- -----------
Balance at December 31, 1997.......... 4,158,750 628,989 4,787,739
Net loss.............................. -- (9,421,023) (9,421,023)
---------- ------------- -----------
Balance at December 31, 1998.......... 4,158,750 (8,792,034) (4,633,284)
---------- ------------- -----------
US$ equivalent........................ US$502,343 US$(1,062,007) US$(559,664)
========== ============= ===========
</TABLE>
See notes to financial statements
F-30
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1998 1998
---------- ----------- ----------
Rmb Rmb US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... 1,464,941 (9,421,023) (1,137,984)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation.......................... 154,031 95,228 11,503
Loss on disposal of property, plant
and equipment........................ 3,003 -- --
Changes in operating assets and
liabilities:
Accounts receivable................... (6,174,235) (12,748,837) (1,539,956)
Advances to suppliers................. 141,620 19,057 2,302
Inventories........................... 107,170 (32,005) (3,866)
Other receivables and prepaid
expenses............................. (674,781) 364,729 44,056
Accounts payable...................... 2,209,010 18,588,739 2,245,369
Amount due to a related party......... -- 471,443 56,947
Other payables and accrued expenses... 4,188,494 (967,059) (116,813)
---------- ----------- ----------
Net cash provided by (used in) operating
activities............................... 1,419,253 (3,629,728) (438,442)
---------- ----------- ----------
Cash flows from investing activities:
Purchases of property, plant and
equipment.............................. (1,027,154) (430,516) (52,003)
---------- ----------- ----------
Cash flows from financing activities:
Short-term borrowings................... 1,670,000 7,000,000 845,543
Repayment of short-term borrowings...... (820,000) (750,000) (90,594)
---------- ----------- ----------
Net cash provided by financing
activities............................... 850,000 6,250,000 754,949
---------- ----------- ----------
Net increase in cash and cash
equivalents.............................. 1,242,099 2,189,756 264,504
Cash and cash equivalent at beginning of
year..................................... 380,316 1,622,415 195,975
---------- ----------- ----------
Cash and cash equivalent at end of year... 1,622,415 3,812,171 460,479
========== =========== ==========
</TABLE>
See notes to financial statements
F-31
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1997 and 1998
1.ORGANIZATION AND PRINCIPAL ACTIVITIES
Zhejiang AsiaInfo Telecommunication Technology Co., Ltd. ("the Company") is
a wholly foreign owned enterprise located in Hangzhou, Zhejiang province, the
People's Republic of China ("PRC"). It was established on April 5, 1995, under
the name of Zhejiang Dekang Communication Technology Co., Ltd., by Tecsun
Hongkong Limited (hereinafter referred to as "Tecsun Hongkong") the sole
shareholder at December 31, 1998, with an operating period of 20 years. The
registered capital of US$500,000 has been fully paid up. On November 26, 1998,
AsiaInfo Holdings, Inc. entered into a conditional agreement to acquire all
the Company's share capital and the Company was renamed Zhejiang AsiaInfo
Telecommunication Technology Co., Ltd.
The Company principally engages in developing and selling communication
hardware and software as well as providing related technology services.
The Company's books of accounts are maintained in Renminbi ("Rmb"), the
currency in which the majority of its transactions is denominated.
2.BASIS OF PREPARATION
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP").
This basis of accounting differs from that used in the statutory accounts of
the Company, which are prepared in accordance with the accounting principles
and the relevant financial regulations applicable to wholly foreign owned
enterprises, as established by the Ministry of Finance of China. The principal
adjustments made to the statutory accounts of the Company in order to achieve
conformity with U.S. GAAP are to charge the expenses incurred during the pre-
operating period to the statement of operations and to recognize sales and
cost of sales in accordance with the Company's revenue recognition policy.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents--Cash and cash equivalents include cash and
highly liquid investments with a maturity of three months or less at the time
of purchase.
Inventories--Inventories are stated at the lower of cost, determined by the
specific identification method, or market.
Property, plant and equipment--Property, plant and equipment is stated at
cost less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives, after deducting the
estimated residual value of 10% of cost, as follows:
<TABLE>
<S> <C>
Buildings........................................................ 20 years
Motor vehicles................................................... 5 years
Office equipment................................................. 5 years
</TABLE>
Impairment--The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may no longer be recoverable. An impairment loss, measured based
on the fair value of the asset, is recognized if expected future undiscounted
cash flows are less than the carrying amount of the assets.
F-32
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997 and 1998
Revenue recognition--Revenue from systems contracts, which includes the
procurement of hardware on behalf of the customer, systems design, planning,
consulting, systems integration services and software license revenue, is
recognized over the contract term based on the percentage of completion.
Estimates of hardware warranty costs are included in determining project
costs. Revisions in estimated profits are made in the period in which the
circumstances requiring the revision become known. Provisions, if any, are
made currently for anticipated losses on uncompleted contracts. Revenue from
maintenance is recognized over the contractual period. Revenue in excess of
billings on service contracts is recorded as unbilled receivables and included
in trade accounts receivable, and amounted to Rmb5,223,981 at December 31,
1997 and Rmb17,670,497 (US$2,134,453) at December 31, 1998. Billings in excess
of revenues recognized on service contracts are recorded as deferred income
until the above revenue recognition criteria are met.
Software development costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Computer Software To Be
Sold, Leased or Otherwise Marketed". To date, the Company has essentially
completed its software development concurrently with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
Income tax--Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are recognized for
all significant temporary differences and classified as current or non-current
based upon the classification of the related asset or liability in the
financial statements. A valuation allowance is provided to reduce the amount
of deferred tax assets if it is considered more likely than not that some
portion of, or all of, the deferred tax asset will not be realized.
Use of estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of estimates.
Actual results could differ from those estimates.
Foreign currency translation--The Company maintains its books and records
in Renminbi ("Rmb"), which is its functional currency. Monetary assets and
liabilities denominated in currencies other than Rmb are translated into Rmb
at the rates of exchange in effect at the balance sheet date. Transactions in
currencies other than Rmb are recorded in Rmb at the rates of exchange
prevailing at the transaction dates. Transaction differences are recognized in
the statement of operations.
Convenience translation into United States Dollars--The financial
statements are presented in Renminbi. The translation of Renminbi amounts into
United States dollars has been made for the convenience of the reader and has
been made at the rate of exchange quoted by the People's Bank of China on
December 31, 1998 of RMB8.2787 to US$1.00. Such translation amounts should not
be construed as representations that the Renminbi amounts could be converted
into United States dollars at that rate or any other rate.
4.RELATED PARTY TRANSACTIONS
In 1998 the Company purchased property, plant and equipment of Rmb366,443
from AsiaInfo Technologies (China), Inc. ("AI Technology"), a subsidiary of
AsiaInfo Holdings, Inc. AI Technology also provided a loan of Rmb 6,000,000
(see note 7) and the Company incurred interest expense on the loan of
Rmb105,000 in 1998.
F-33
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997 and 1998
5.INVENTORIES
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
Rmb Rmb
<S> <C> <C>
Raw materials....................................... 41,909 116,325
Consumables......................................... 44,895 2,484
--------- ---------
86,804 118,809
========= =========
6.PROPERTY, PLANT AND EQUIPMENT, NET
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
Rmb Rmb
<S> <C> <C>
At cost:
Buildings........................................... 606,156 624,560
Motor vehicles...................................... 200,029 200,029
Office equipment.................................... 932,972 1,345,084
--------- ---------
1,739,157 2,169,673
Less: Accumulated depreciation...................... (330,399) (425,627)
--------- ---------
Net book value...................................... 1,408,758 1,744,046
========= =========
7.SHORT-TERM BORROWINGS
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
Rmb Rmb
<S> <C> <C>
Bank loan........................................... -- 100,000
Loan from AI Technology............................. -- 6,000,000
Loan from shareholder............................... 1,100,000 1,250,000
--------- ---------
1,100,000 7,350,000
========= =========
</TABLE>
The bank loan is unsecured with an average annual interest rate of 8.487%.
The loan from AI Technology carries interest at 12% per annum and has no
specific terms of repayment. The loan from the shareholder is interest free
and has no specific terms of repayment.
8.INCOME TAXES
The Company is subject to PRC income tax at a rate of 33%. There was no
assessable income in 1997 and 1998 as the Company incurred losses during these
years. Tax loss carry forwards at December 31, 1998 amounted to approximately
Rmb2.2 million which expire from 2000 to 2003. A valuation allowance of
Rmb720,000 has been established for the full amount of the tax loss carried
forward, an increase of Rmb690,000 from 1997.
F-34
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997 and 1998
9. DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations for foreign investment
enterprises, the Company is required to make appropriations to reserve funds
which include a general reserve fund, an enterprise expansion fund and a staff
welfare and bonus fund at the discretion of the board of directors. The
Company may use the general reserve fund to make up losses. The Company may,
upon a resolution passed by the board of directors, convert the statutory
surplus reserve into capital. The staff welfare and bonus fund is used for the
collective welfare of the employees of the Company. The enterprise expansion
fund is used for expansion of the subsidiaries' operations and can be
converted to capital subject to approval by the relevant authorities. There
were no appropriations to the reserve funds by the Company during any of the
periods presented.
10.RETIREMENT BENEFITS AND POST RETIREMENT BENEFITS
In accordance with regulations issued by the Hangzhou local government the
Company is required to make contributions to the state retirement plan at 23%
of the basic salaries of its current employees and employees contribute 4% of
their basic salary. The Company has no material obligation for pension
payments or any post-retirement benefits beyond these annual contributions.
The retirement benefits are paid directly from the fund to the retired
employees and are calculated by reference to their monthly basic salaries and
periods of service rendered. The expense of the Company was Rmb58,028 in 1997
and Rmb270,700 in 1998. In addition, the Company is required by law to
contribute 18% of basic salaries of its PRC employees for staff welfare, union
fees and educational benefits. The Company does not have any post retirement
benefit plans.
11. LEASE COMMITMENTS
As of December 31, 1998, the Company was obligated under non-cancellable
operating leases requiring minimum rentals as follows:
<TABLE>
<CAPTION>
Rmb
-------
<S> <C>
1999................................. 417,852
2000................................. 212,805
-------
630,657
=======
</TABLE>
Rental expense was Rmb424,846 in 1997 and Rmb410,809 in 1998.
F-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate (except for the registration fee) of the
fees and expenses payable by the registrant in connection with the issuance
and distribution of the shares of common stock:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................... $13,200
NASD Filing Fee........................................................ 5,500
Printing and Engraving Expenses........................................ *
Marketing Expenses..................................................... *
Blue Sky Qualification Fees and Expenses............................... *
Legal Fees and Expenses................................................ *
Accounting Fees........................................................ *
Transfer Agent and Registrar Fees...................................... *
Listing Fees........................................................... *
Miscellaneous Expenses and Administrative Costs........................ *
-------
Total................................................................. $ *
=======
</TABLE>
- --------
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers
The Certificate of Incorporation and Bylaws of the Registrant provide for
the limitation of liability and indemnification of directors and officers to
the maximum extent allowed by the Delaware General Corporation Law for losses,
damages, costs and expenses incurred in their capacities as such, except for
liability for (i) any breach of a director's duty of loyalty to the Registrant
or its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided in
Section 174 of the Delaware General Corporation Law or (iv) any transaction
from which the director derives any improper personal benefit.
The Registrant's bylaws further provide for indemnification of directors to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under our bylaws provide that
the Registrant shall indemnify its directors and officers against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such directors or officers in connection with an action, suit or
proceeding involving such directors or officers in their capacity as such.
Prior to the consummation of this offering, the Registrant will obtain an
insurance policy covering directors and officers for claims they might
otherwise be required to pay or for which the Registrant is required to
indemnify them, subject to certain limited exclusions.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Form of Underwriting Agreement.......................................... 1.1
Certificate of Incorporation of the Registrant.......................... 3.1
By-Laws of the Registrant .............................................. 3.2
</TABLE>
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since AsiaInfo's inception in 1993, AsiaInfo has issued and sold the
following securities:
1. In April 1996 AsiaInfo issued warrants to purchase 30,000 shares of
common stock to a consultant at an exercise price of $0.01 per share.
2. In May 1998 AsiaInfo issued warrants to purchase 30,000 shares of common
stock to a consultant at an exercise price of $0.01per share.
3. In December 1997 AsiaInfo issued and sold 1,860,744 shares of Series A
Preferred Stock to Warburg Pincus Ventures, L.P., Warburg Pincus
Ventures International, L.P., Fidelity Ventures Limited, Fidelity
International Limited, Fidelity Investors Limited Partnership, ChinaVest
IV, L.P., ChinaVest IV-A, L.P. and ChinaVest IV-B, L.P. for aggregate
consideration prior to the stock split of $15,499,997 received on
December 29, 1997 in a transaction not subject to the registration
requirements of the Securities Act pursuant to Regulation S thereunder.
At the same time as this private placement, certain existing
shareholders of AsiaInfo sold approximately $2.2 million of their
holdings to the Series A investors.
4. In December 1997 AsiaInfo issued 9,429,224 stock purchase warrants to
the holders of AsiaInfo's Series A Preferred Stock, in a transaction not
subject to the registration requirements of the Securities Act pursuant
to Regulation S thereunder.
5. In August 1999 AsiaInfo sold 2,630,425 shares of Series B Convertible
Preferred Stock to Intel Pacific, Inc. for aggregate consideration of
$20,000,000 received on August 31, 1999 in a transaction not subject to
the registration requirements of the Securities Act pursuant to
Regulation S thereunder.
6. In November 1999, certain employees and founders of AsiaInfo sold an
aggregate of 815,790 shares of common stock to twelve institutional
investors for aggregate consideration of $6,200,004 received on November
16, 1999 in a transaction not subject to the registration requirements
of the Securities Act pursuant to Regulation S thereunder.
We have granted to certain of our executive officers, directors, employees
and 5% stockholders options to purchase shares of common stock in
consideration of services undertaken on our behalf. As of November 30, 1999,
options to purchase an aggregate of 7,521,024 shares of common stock were
held, directly or indirectly, by all of AsiaInfo's directors, officers,
employees and 5% stockholders as a group.
The weighted average exercise price of such options is $2.07 per share and
the expiration dates for such options range from 2003 to 2009.
The foregoing issuances were made in reliance on the exemptions from
registration under the Securities Act provided by Section 4(2) thereof and
Rule 701 thereunder or in transactions not subject to the registration
requirements of the Securities Act pursuant to Regulation S thereunder.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following exhibits are filed as a part of this Registration Statement
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Registrant, dated June 8, 1998
3.2 By-Laws of the Registrant, dated June 8, 1998
3.3 Certificate of Amendment to Certificate of Incorporation of the
Registrant, dated August 27, 1999
4.1 Specimen Share Certificate representing the shares of common stock*
4.2 Certificate of Designations of Series A Convertible Preferred Stock of
the Registrant, dated June 8, 1998
4.3 Certificate of Designations for Series B Convertible Preferred Stock
of the Registrant, dated August 27, 1999
4.4 Certificate of Correction to Certificate of Designations for Series B
Convertible Preferred Stock of the Registrant, dated September 2, 1999
5 Form of Opinion of Rogers & Wells LLP, U.S. counsel to the Registrant
as to the legality of the shares of the common stock offered hereby*
8.1 Form of Opinion of Rogers & Wells LLP, U.S. counsel to the Registrant
as to certain tax matters*
10.1 Certificate of Merger of AsiaInfo Holdings, Inc., a Texas corporation
with and into the Registrant, a Delaware corporation, dated June 8,
1998
10.2 Certificate of Merger of HTC Investments, Inc., a Delaware
corporation, with and into the Registrant, a Delaware corporation,
dated October 13, 1999
10.3 Agreement and Plan of Merger dated as of June 8, 1998 by and among the
Registrant, a Delaware corporation and AsiaInfo Holdings, Inc., a
Texas corporation
10.4 1999 Incentive Stock Option Plan approved and adopted as of June 1,
1999
10.5 Lease of the Registrant's headquarters at 11 Bashiqiao Road, Beijing,
as supplemented, dated
August 31, 1999
11.1 Statement regarding computation of per share earnings, included in the
consolidated Financial Statements of Deloitte Touche Tohmatsu
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Deloitte Touche Tohmatsu
23.2 Consent of Deloitte Touche Tohmatsu Shanghai CPA
23.3 Consent of Rogers & Wells LLP, U.S. counsel to the Registrant,
included in Exhibit 5*
27 Financial Statement Schedules Attached
24.1 Power of Attorney (contained on signature pages to the Registration
Statement)
99.1 Articles of Association of AsiaInfo Technology (China) Inc., dated
July 26, 1999
99.2 Business License of Enterprise Legal Person of The People's Republic
of China for AsiaInfo Technology (China) Inc., dated September 21,
1999
99.3 Articles of Association of Zhejiang AsiaInfo Telecommunication
Technology Co. Ltd., dated May 3, 1998
99.4 Business License of Enterprise Legal Person of Zhejiang AsiaInfo
Telecommunication Technology Co. Ltd., dated September 23, 1999
99.5 Form of Executive Employment Agreement for AsiaInfo Computer Networks
(Beijing) Co. Ltd.
99.6 Form of Confidentiality and Non-competition Agreement of AsiaInfo
Computer Networks (Beijing) Co. Ltd.
</TABLE>
- --------
* To be supplied by amendment
II-3
<PAGE>
(b) Financial Statements
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 hereof, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by its
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Beijing, on the 20th
day of, December 1999.
ASIAINFO HOLDINGS, INC.
By: /s/ James Ding
-------------------
James Ding
Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that each person whose signature papers
below constitutes and appoints James Ding his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
Amendments (including pre-effective and post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, and the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis Lau Board Member and Chairman of December 20, 1999
______________________________________ the Board
Louis Lau
/s/ James Ding Board Member and Chief December 20, 1999
______________________________________ Executive Officer
James Ding (principal executive
officer)
/s/ Ying Han Executive Vice President and December 20, 1999
______________________________________ Chief Financial Officer
Ying Han (principal financial
officer and principal
accounting officer)
/s/ Michael Zhao Board Member, Senior Vice December 20, 1999
______________________________________ President and Chief
Michael Zhao Strategy Officer
/s/ Alan Bickell Board Member December 20, 1999
______________________________________
Alan Bickell
/s/ Patrick Keen Board Member December 20, 1999
______________________________________
Patrick Keen
/s/ Chang Sun Board Member December 20, 1999
______________________________________
Chang Sun
/s/ Edward Tian Board Member December 20, 1999
______________________________________
Edward Tian
</TABLE>
II-5
<PAGE>
Exhibit 27
Schedule II -- VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
<TABLE>
<S> <C>
Balance, January 1, 1996.............................................. $ 62,533
Bad Debt Expense...................................................... 0
--------
Balance, December 31, 1996............................................ 62,533
Bad Debt Expense...................................................... 7,911
--------
Balance, December 31, 1997............................................ 70,444
Bad Debt Expense...................................................... --
Bad Debt Recovery..................................................... (7,759)
--------
Balance, December 31, 1998............................................ 62,685
Bad Debt Expense...................................................... 524,962
--------
Balance, September 30, 1999........................................... $587,647
========
</TABLE>
II-6
<PAGE>
EXHIBIT 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 06/08/1998
981220220 - 2897577
CERTIFICATE OF INCORPORATION
OF
ASIAINFO HOLDINGS, INC.
FIRST. The name of the corporation is ASIAINFO HOLDINGS, INC. (the
"Corporation").
SECOND. The address of the registered office of the Corporation in the
State of Delaware is located at CorpAmerica, Inc., 30 Old Rudnick Lane, Dover,
Kent County, Delaware, 19901. The name of the registered agent of the
Corporation at that address is CorpAmerica, Inc.
THIRD. The purpose for which the Corporation is organized is to promote
the information technology business and the transaction of any or all lawful
business for which corporation's may be incorporated under the Delaware General
Corporation Law.
FOURTH. The Corporation shall have the authority to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock."
Each outstanding share of Common Stock, regardless of class, shall be
entitled to one (1) vote on each matter submitted to a vote at a meeting of
shareholders.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is expressly vested with authority to fix by
resolution or resolutions the designations and the powers, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations and restrictions thereof, including, without limitation the voting
powers, if any, the dividend rate, conversion rights, redemption price, or
liquidation preference, of any series of shares of Preferred Stock, and to fix
the number of shares constituting any such series, and to increase or decrease
the number of shares of any such series (but not below the number of shares
thereof then authorized). In case the number of shares of any such series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution or resolutions originally
fixing the number of shares of such series.
FIFTH. The aggregate number of shares which the Corporation shall have
authority to issue is 30,000,000 Common and Preferred shares; the total number
of shares of Common Stock shall be 25,000,000 with par value of one cent ($.01)
per share and the total number of shares of Preferred Stock shall be 5,000,000
with par value of one cent ($.01) per share.
SIXTH. The business and affairs of the Corporation shall be managed by
or under the direction of the board of directors, and the directors need not be
elected by written ballot unless required by the by-laws of the Corporation.
SEVENTH. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the board of directors is expressly
authorized to make, amend and repeal the by-laws.
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EIGHTH. The Corporation reserves the right to alter, amend or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereinafter prescribed by the laws of the State of Delaware. All rights herein
conferred are granted subject to this reservation.
NINTH. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as director, except for liability (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after the filing of
the Certificate of Incorporation of which this article is a part to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
TENTH. The incorporator is Wilson Chu, whose mailing address is 901
Main Street, 3100 NationsBank Plaza, Dallas, Texas, 75202.
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 8th day of June 1998.
/S/ Wilson Chu
---------------------------------
WILSON CHU, Incorporator
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EXHIBIT 3.2
BY-LAWS
OF
ASIAINFO HOLDINGS, INC.
(the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be located in the State of Delaware at CorpAmerica, Inc., 30 Old Rudnick
Lane, Dover, Kent County, Delaware 19901.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes, may be called by either (i) the Chairman, if there be one, or (ii)
the President, (iii) any Vice President, if there be one, (iv) the Secretary or
(v) any Assistant Secretary, if there be one, and shall be called by any such
officer at the request in writing of a majority of the Board of Directors or at
the request in writing of stockholders owning a majority of the capital stock of
the Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting. Written notice of a
Special Meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten or
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting.
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Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder. Such votes
may be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
Section 7. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
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ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors shall
consist of not less than three nor more than nine members, the exact number of
which shall initially be fixed by the Incorporator and thereafter from time to
time by the Board of Directors. Except as provided in Section 2 of this Article,
directors shall be elected by a plurality of the votes cast at Annual Meetings
of Stockholders, and each director so elected shall hold office until the next
Annual Meeting and until his successor is duly elected and qualified, or until
his earlier resignation or removal. Any director may resign at any time upon
notice to the Corporation. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and qualified,
or until their earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President, or any directors. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail not less than forty-eight (48) hours before the date of the
meeting, by telephone or telegram on twenty-four (24) hours' notice, or on such
shorter notice as the person or persons calling such meeting may deem necessary
or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these By-Laws, at all meetings of the Board
of Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the Certificate
of Incorporation or these By-Laws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of
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Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member of
a committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any absent or
disqualified member. Any committee, to the extent allowed by law and provided in
the resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 10. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall consist of a
President, a Secretary, and a Treasurer. The Board of Directors, in its
discretion, may also choose a Chairman of the Board of Directors (who must be a
director) and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these By-Laws. The officers of the Corporation need
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not be stockholders of the Corporation nor, except in the case of the Chairman
of the Board of Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the President or any Vice President and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board
of Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. He shall be the Chief Executive Officer of the
Corporation, and except where by law the signature of the President is required,
the Chairman of the Board of Directors shall possess the same power as the
President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. During the
absence or disability of the President, the Chairman of the Board of Directors
shall exercise all the powers and discharge all the duties of the President.
The Chairman of the Board of Directors shall also perform such other duties and
may exercise such other powers as from time to time may be assigned to him by
these By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the control of the
Board of Directors and, if there be one, the Chairman of the Board of Directors,
have general supervision of the business of the Corporation and shall see that
all orders and resolutions of the Board of Directors are carried into effect.
He shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except that
the other officers of the Corporation may sign and execute documents when so
authorized by these By-Laws, the Board of Directors or the President. In the
absence or disability of the Chairman of the Board of Directors, or if there be
none, the President shall preside at all meetings of the stockholders and the
Board of Directors. If there be no Chairman of the Board of Directors, the
President shall be the Chief Executive Officer of the Corporation. The
President shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these By-Laws or by the
Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one (in the order designated by the Board of Directors)
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President. Each
Vice President shall perform such other duties and have such
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other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he shall be. If the Secretary shall be
unable or shall refuse to cause to be given notice of all meetings of the
stockholders and special meetings of the Board of Directors, and if there be no
Assistant Secretary, then either the Board of Directors or the President may
choose another officer to cause such notice to be given. The Secretary shall
have custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature. The Secretary
shall see that all books, reports, statements, certificates and other documents
and records required by law to be kept or filed are properly kept or filed, as
the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided in
these By-Laws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his disability
or refusal to act, shall perform the duties of the Secretary, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of Directors,
an Assistant Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the
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duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
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ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board of Directors, the President or a Vice President
and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares owned by
him in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other Signature on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has bean placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these By-Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of
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the meeting; provided however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given
personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
Than Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director or officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section 1 or
Section 2 of this Article VIII, as the case may be. Such determination shall be
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders. To the extent, however, that a director
or officer of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding described above, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith, without the necessity of authorization in the specific
case.
9
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Section 4. Good Faith Defined. For purposes of any determination
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was unlawful,
if his action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 4 shall mean
any other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise of which such person is or was serving at the request
of the Corporation as a director, officer, employee or agent. The provisions of
this Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this Article VIII. The basis of such indemnification by a court
shall be a determination by such court that indemnification of the director or
officer is proper in the circumstances because he has met the applicable
standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the director
or officer seeking indemnification has not met any applicable standard of
conduct. Notice of any application for indemnification pursuant to this Section
5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that indemnification of the persons
specified in Sections 1 and 2 of this Article VIII shall be made to the fullest
extent permitted by law. The provisions of this Article VIII shall not be
deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the
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Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes
of this Article VIII, references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes duties on,
or involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. These By-Laws may be altered, amended or repealed, in
whole or in part, or new By-Laws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new By-Laws be contained in the notice of such
meeting of stockholders or Board of Directors, as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
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Section 2. Entire Board of Directors. As used in this Article IX and
in these By-Laws generally the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
CERTIFICATION
I, Edward S. Tian, Secretary of the Corporation, do hereby certify
that the foregoing is a full, true and correct copy of the Corporation's By-Laws
in full force and effect as of June 8, 1998.
/s/ EDWARD S. TIAN
----------------------------------
EDWARD S. TIAN, Secretary
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EXHIBIT 3.3
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 08/21/1999
991359770 - 2897577
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ASIAINFO HOLDINGS, INC.
AsiaInfo Holdings, Inc., a Delaware corporation (the "Corporation"), does
hereby certify that the following amendment to the Corporation's Certificate of
Incorporation was approved by written consent of stockholders entitled to vote
thereon pursuant to Section 228(d) of the Delaware General Corporation Law and
was duly adopted in accordance with the provisions of Section 242 of the
Delaware General Corporation Law:
Article FIFTH of the Corporation's Certificate of Incorporation is hereby
amended in its entirety as follows:
"FIFTH: The aggregate number of shares which the Corporation shall
have authority to issue is 60,000,000 Common and Preferred shares; the
total number of shares of Common Stock shall be 50,000,000 with par
value of one cent ($.01) per share and the total number of shares of
Preferred Stock shall be 10,000,000 with par value of one cent ($.01)
per share."
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its duly authorized officers on this 27/th/ day of August, 1999.
ASIAINFO HOLDINGS, INC.
By: /s/ James Ding
------------------------------
James Ding, Vice Chairman
<PAGE>
EXHIBIT 4.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:02 ON 06/08/1998
981220225 - 2697577
CERTIFICATE OF DESIGNATIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ASIAINFO HOLDINGS, INC.
ASIAINFO HOLDINGS, INC., a company organized and existing by virtue of
the Delaware General Corporation Law ("DGCL") of the State of Delaware (the
"Company"), pursuant to Section 151 of the DGCL, DOES HEREBY CERTIFY that:
1. The name of the Company is ASIAINFO HOLDINGS, INC.
2. Pursuant to authority conferred upon the Board of Directors of the
Company by its Articles of Incorporation, as amended from time to time and in
accordance with Section 228 of DGCL, the Board of Directors of the Company, by
a unanimous written consent dated as of June 8, 1998 duly adopted a resolution
fixing the voting powers, designations, preferences and rights relating to its
Series A Convertible Preferred Stock, $.01 par value, as follows:
"RESOLVED, that the Board of Directors (the "Board") of the Company
authorizes the issuance of a series of preferred stock consisting of 3,000,000
shares and the Board fixes the voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of such preferences and/or rights, of the shares of
that series as follows:
Section 1. Designation and Amount.
----------------------
The shares of the series "A" Preferred Stock will be designated
Series A Convertible Preferred Stock ("Series A Preferred Stock"). The total
number of authorized shares of the Series A Preferred Stock will be 3,000,000
shares and each share of Series A Preferred Stock will have a par value of $.01.
Section 2. Dividends and Distributions.
---------------------------
(a) The holders of Series A Preferred Shares shall be entitled
to participate on a pro rata basis with the holders of the Company's Common
Stock, par value $.01 per share (the "Common Stock") in all dividends paid to
the holders of the Company's Common Stock, on an as converted basis, when, as
and if such dividends are declared by the Board out of funds legally available
for the payment of dividends. Other than as described in this Section 2(a), the
Company shall have no obligation to pay dividends to holders of shares of Series
A Preferred Stock. Each dividend will be payable to holders of record of the
Series A Preferred Stock on a date (a "Record Date") selected by the Board which
is not more than sixty (60) nor less than ten (10) days before the date on which
the dividend is to be paid. No Record Date will precede the date when the
resolution fixing the Record Date is adopted.
(b) While any shares of Series A Preferred Stock are
outstanding, (i) the Company may not pay any dividend, or set aside any funds
for the payment of a dividend, with regard to any shares of any class or series
of stock of the Company which ranks on a parity with the Series A
<PAGE>
Preferred Stock as to payment of dividends unless at least a proportionate
payment is made with regard to dividends on the Series A Preferred Stock and
(ii) the Company may not pay any dividend, or set aside any funds for the
payment of a dividend, with regard to any shares of any class or series of stock
of the Company which ranks junior to the Series A Preferred Stock unless and
until all dividends on the Series A Preferred Stock have been paid. A payment of
dividends with regard to the Series A Preferred Stock will be proportionate to a
payment of a dividend with regard to another class or series of stock if the
dividend per share of Series A Preferred Stock is the same percentage of the
dividends payable with regard to a share [of Series A Preferred Stock that the
dividend paid with regard to a share] of stock of the other class or series [is
of the dividends payable with regard to a share of stock of that other class or
series].
(c) Any dividend paid with regard to shares of Series A
Preferred Stock will be paid equally with regard to each outstanding share of
Series A Preferred Stock.
Section 3. Voting Rights.
-------------
The only voting rights which the holders of shares of Series A
Preferred Stock will have will be any voting rights to which they may be
entitled under the laws of the State of Delaware, and the following:
(a) With regard to each matter presented for the vote of the
holders of Common Stock, the holders of shares of Series A Preferred Stock will
be entitled to vote together with the holders of the Common Stock, and together
with the holders of any other class or series of stock the holders of which vote
together with the holders of the Common Stock, with the same effect as though
the Series A Preferred Stock were part of the same class as the Common Stock,
with each holder of record of shares of Series A Preferred Stock on the record
date for determining the holders of the Common Stock entitled to vote with
regard to the matter being entitled to the number of votes with regard to share
of Series A Preferred Stock held of record on that record date equal to the
number of shares of Common Stock into which those shares of Series A Preferred
Stock could be converted (or could have been converted if the Series A Preferred
Stock were convertible at that time) at the Conversion Rate (as defined in
Subparagraph 5(d)) in effect on that record date.
(b) A holder of shares of Series A Preferred Stock will have the
same right to act by written consent as a holder of Common Stock.
(c) While any shares of Series A Preferred Stock are
outstanding, the Company will not, directly or indirectly, without the
affirmative vote at a meeting or the written consent of the holders of at least
a majority of the outstanding shares of Series A Preferred Stock, (i) amend,
alter or repeal any of the provisions of the Articles of Incorporation or By-
laws of the Company, or of this resolution, so as to affect adversely the
preferences, special rights or powers of the Series A Preferred Stock or (ii)
authorize any reclassification of the Series A Preferred Stock. This Subsection
will not prevent the issuance of any Series A Preferred Stock which has been
authorized in Section 1.
(d) So long as each of Warburg, Pincus Ventures, L.P., Warburg,
Pincus Ventures International, L.P., Fidelity Ventures Limited, Fidelity
International Limited, Fidelity Investors Limited Partnership, China Vest IV,
L.P., China Vest IV-A, L.P., and China Vest IV-B, L.P. (the "New Shareholders")
or their permitted transferees are holders of Series A Preferred Stock, the
Company shall not take any of the following actions unless such action has been
approved by the New Shareholders and such permissible transferees, voting as a
single unit:
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(i) Any sale or issuance of any capital stock or any
security convertible into capital stock of the Company to any person or entity,
other than (x) any sale or issuance of the Company's capital stock pursuant to
the terms of the Stock Purchase Agreement dated December 17, 1997 and Warrants
issued by the Company to the New Shareholders, (y) conversion of Series A
Preferred Stock to Common Stock in accordance with the terms of the Company's
Articles of Incorporation and (z) any sale or issuance of the Company's capital
stock pursuant to the terms of the Company's employee stock option plan existing
on December 17, 1997 or other options or warrants outstanding on the Closing
Date, as defined in the Stock Purchase Agreement up to a total of 3,664,320
Common Shares;
(ii) Declare or pay any dividends or make any other
distributions on the Company's outstanding capital stock;
(iii) Any redemption or repurchase of its capital stock in
excess of US$100,000 in the aggregate;
(iv) Any acquisition, merger, consolidation, joint venture
or partnership arrangement involving the Company and Subsidiaries (as defined in
the Stock Purchase Agreement) or the dissolution or liquidation of the Company;
(v) Any sale, lease, transfer, or other disposition of
all or any substantial portion of the Company's assets outside the ordinary
course of business in excess of US$100,000 in the aggregate;
(vi) Any incurrence, issuance, assumption, guarantee or
other creation of liability for borrowed money in excess of US$100,000 in the
aggregate at any time outstanding except if such liability is incurred pursuant
to a business plan approved by the Board;
(vii) The making of any capital expenditure in any year in
excess of US$250,000 in the aggregate except if such capital expenditure is made
pursuant to a business plan approved by the Board;
(viii) Any change in the fundamental nature of its business
other than as described in a business plan approved by the Board;
(ix) Any increase (in excess of 10% per annum) in the
compensation and benefits of Company's senior executives;
(x) Any voluntary material changes in the Company
accounting methods or policies;
(xi) Any appointment or removal of the Company's auditors;
(xii) The amendment of Company's Articles of Incorporation
or By-Laws;
(xiii) The approval of any material amendments to the
Company's annual business plan;
3
<PAGE>
(xiv) The appointment or termination of the Company's Chief
Financial Officer, Chief Operations Officer and Chief Executive Officer;
(xv) The selection of the lead underwriter in connection
with the proposed initial public offering of the Company's capital stock; or
(xvi) The appointment or removal of any Independent
Director.
Section 4. Liquidation.
-----------
Upon the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the holders of the Series A Preferred Stock
will be entitled to receive out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or earnings,
before any distribution is made to holders of any class or series of stock to
which the Series A Preferred Stock ranks senior an amount equal to US$8.33 per
share plus all accrued and unpaid dividends on shares of Series A Preferred
Stock outstanding as of the date of such liquidation, dissolution or winding-up
(the "Liquidation Preference"). If, upon any liquidation, dissolution or
winding-up of the Company, the assets of the Company, or proceeds of those
assets, available for distribution to the holders of Series A Preferred Stock
and of the shares of all other classes or series which are on a parity as to
distributions on liquidation with the Series A Preferred Stock are not
sufficient to pay in full the preferential amount required to be distributed to
the holders of the Series A Preferred Stock and of all other classes or series
which are on a parity as to distributions on liquidation with the Series A
Preferred Stock, then the assets, or the proceeds of those assets, which are
available for distribution to the holders of Series A Preferred Stock and of the
shares of all other classes or series which are on a parity as to distributions
on liquidation with the Series A Preferred Stock will be distributed to the
holders of the Series A Preferred Stock and of the shares of all other classes
or series which are on a parity as to distributions on liquidation with the
Series A Preferred Stock ratably in accordance with the respective amounts of
the liquidation preferences of the shares held by each of them. After payment
of the full amount of the Liquidation Preference the holders of Series A
Preferred Stock will not be entitled to any further distribution of assets of
the Company. For the purposes of this Section, neither a consolidation or
merger of the Company with another Company, nor a sale or transfer of all or any
part of the Company's assets for cash or securities, will be considered a
liquidation, dissolution or winding-up of the Company.
Section 5. Option Conversion.
-----------------
(a) Each holder of shares of Series A Preferred Stock will have
the right at any time, at the holder's option, to convert all or any of the
shares of Series A Preferred Stock held of record by the holder into a number of
fully paid and non-assessable shares of Common Stock equal to the number of
shares of Series A Preferred Stock surrendered for conversion multiplied by the
Conversion Rate (as defined in Subparagraph 5(d)), or such other securities or
assets as the holder is entitled to receive in accordance with Subparagraph
5(d).
(b)(i) In order to exercise the conversion privilege, the holder
of each share of Series A Preferred Stock to be converted must surrender the
certificate representing that share to the conversion agent for the Series A
Preferred Stock appointed by the Company (which may be the Company itself), with
the Notice of Election to Convert on the back of that certificate duly completed
and signed, at the principal office of the conversion agent. No additional
amount shall be payable to the Company upon exercise of the conversion
privilege. If the shares issuable on conversion are to be issued in a name
4
<PAGE>
other than the name in which the Series A Preferred Stock is registered, each
share surrendered for conversion must be accompanied by an instrument of
transfer, in form satisfactory to the Company, duly executed by the holder or
the holder's duly authorized attorney and by funds in an amount sufficient to
pay any transfer or similar tax which is required to be paid in connection with
the transfer or evidence that tax has been paid.
(ii) Each conversion will be at the Conversion Rate in
effect at the close of business on the day when all the conditions in
Subparagraph 5(b)(i) have been satisfied.
(iii) The Company will make no payment or adjustment for any
unpaid dividends on shares of Series A Preferred Stock, whether or not in
arrears, on conversion of those shares, or for dividends on the shares of Common
Stock issued upon the conversion; provided, that any dividends declared but
unpaid in respect of shares as of the date of conversion shall be deemed to be
dividends declared and unpaid with respect to the shares of Common Stock issued
upon the conversion.
(iv) As promptly as practicable after the surrender by a
holder of certificates representing shares of Series A Preferred Stock in
accordance with this Subsection 5(b), the Company will issue and will deliver to
the holder at the office of the conversion agent, or on the holder's written
order, a certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of the shares of Series A Preferred Stock.
Any fractional interest in respect of a share of Common Stock arising upon a
conversion will be settled as provided in Subsection 5(c).
(v) Each conversion will be deemed to have been effected
immediately prior to the close of business on the date on which all the
conditions specified in Subparagraph 5(b)(i) have been satisfied, and the person
in whose name a certificate for shares of Common Stock is to be issued upon a
conversion will be deemed to have become the holder of record of the shares of
Common Stock represented by that certificate at that time. All shares of Common
Stock delivered upon conversion of Series A Preferred Stock will upon delivery
be duly and validly issued and fully paid and nonassessable, free of all liens
and charges and not subject to any preemptive rights. Upon the surrender of
certificates representing shares of Series A Preferred Stock for conversion and
compliance with all the other requirements of Subparagraph 5(b)(i), the shares
represented by those certificates will no longer be deemed to be outstanding and
all rights of the holder with respect to those shares will immediately
terminate, except the right to receive the Common Stock or other securities,
cash or other assets to be issued or distributed as a result of the conversion.
(c) No fractional shares of Common Stock will be issued upon
conversion of Series A Preferred Stock. Any fractional interest in a share of
Common Stock resulting from conversion of shares of Series A Preferred Stock
will be paid in cash (computed to the nearest cent) based on the Current Market
Price (as defined in Subparagraph 5(d)(vii)) of the Common Stock on the Trading
Day (as defined in Subparagraph 5(d)(vii)) next preceding the day of conversion.
If more than one share of Series A Preferred Stock is surrendered for conversion
at substantially the same time by the same holder, the number of full shares of
Common Stock issuable upon the conversion will be computed on the basis of all
the shares of Series A Preferred Stock surrendered at that time by that holder.
(d) The "Conversion Rate" will initially be one share of Common
Stock for each share of Series A Preferred Stock, and will be adjusted as
follows from time to time if any of the events described below shall have
occurred after the date hereof.
5
<PAGE>
(i) If the Company (A) pays a dividend or makes a
distribution on its Common Stock in shares of its Common Stock, (B) subdivides
its outstanding Common Stock into a greater number of shares, or (C) combines
its outstanding Common Stock into a smaller number of shares, the Conversion
Rate in effect immediately prior to that event will be adjusted so that the
holder of a share of Series A Preferred Stock surrendered for conversion after
that event will receive the number of shares of Common Stock of the Company
which the holder would have received if the share of Series A Preferred Stock
had been converted immediately before the happening of the event (or, if there
is more than one such event, if the share of Series A Preferred Stock had been
converted immediately before the first of those events and the holder had
retained all the Common Stock or other securities or assets received after the
conversion). An adjustment made pursuant to this Subparagraph 5(d)(i) will
become effective immediately after the record date in the case of a dividend or
distribution, except as provided in Subparagraph 5(d)(xi), and will become
effective immediately after the effective date in the case of a subdivision or
combination. If any such dividend or distribution is declared but is not paid or
made, the Conversion Rate then in effect will be appropriately readjusted.
However, a readjustment of the Conversion Rate will not affect any conversion
which takes place before the readjustment.
(ii) If the Company issues rights or warrants to the
holders of its Common Stock as a class entitling them (for a period expiring
within 45 days after the record date for issuance of the rights or warrants) to
subscribe for or purchase Common Stock at a price per share less than the
Current Market Price of the Common Stock at the record date for the
determination of stockholders entitled to receive the rights or warrants, the
Conversion Rate in effect immediately before the issuance of the rights or
warrants will be reduced so that it will be the amount determined by multiplying
the Conversion Rate in effect immediately before the record date for the
issuance of the rights or warrants by a fraction of which the numerator is the
number of shares of Common Stock outstanding on the record date for the issuance
of the rights or warrants plus the number of shares of Common Stock which the
aggregate exercise price of all the rights or warrants would purchase at the
Current Market Price of the Common Stock at that record date, and of which the
denominator is the number of shares of Common Stock outstanding on the record
date for the issuance of the rights or warrants plus the number of additional
shares of Common Stock issuable on exercise of all the rights or warrants. The
adjustment provided for in this Subparagraph 5(d)(ii) will be made successively
whenever any rights or warrants are issued, and will become effective
immediately, except as provided in Subparagraph 5(d)(xi), after each record
date. In determining whether any rights or warrants entitle the holders of the
Common Stock to subscribe for or purchase shares of Common Stock at less than
the Current Market Price of the Common Stock, in determining the aggregate sale
price of the shares of Common Stock issuable on the exercise of rights or
warrants, there will be taken into account any consideration received by the
Company for the rights or warrants, with the value of that consideration, if
other than cash, to be determined by the Board of Directors of the Company
(whose determination, if made in good faith, will be conclusive). If any rights
or warrants which lead to an adjustment of the Conversion Rate expire or
terminate without having been exercised, the Conversion Rate then in effect will
be appropriately readjusted. However, a readjustment of the Conversion Rate will
not affect any conversions which take place before the readjustment.
(iii) If the Company distributes to the holders of its
Common Stock as a class any shares of capital stock of the Company (other than
Common Stock) or evidences of indebtedness or assets (other than cash dividends
or distributions of cash paid from retained earnings of the Company) or rights
or warrants (other than those referred to in Subparagraph 5(d)(ii)) to subscribe
for or purchase any of its securities, then, in each such case, other than a
case in which the Company is required by Section 2(b) to pay a dividend with
regard to the Series A Preferred Stock equal to the dividend paid with regard to
the number of shares of Common Stock into which the Series A Preferred
6
<PAGE>
Stock could be converted, the Conversion Rate will be reduced so that it will
equal the number determined by multiplying the Conversion Rate in effect
immediately prior to the record date for the distribution by a fraction of which
the numerator is the Current Market Price of the Common Stock on the record date
for the distribution less the then fair market value (as determined by the
Company's auditors, whose determination, if made in good faith, will be
conclusive) of the capital stock, evidences of indebtedness, assets, rights or
warrants which are distributed with respect to one share of Common Stock, and of
which the denominator is the Current Market Price of the Common Stock on that
record date. Each adjustment will, except as provided in Subparagraph 5(d)(x),
become effective immediately after the record date for the determination of the
stockholders entitled to receive the distribution. If any distribution is
declared but not made, or if any rights or warrants expire or terminate without
having been exercised, effective immediately after the decision is made not to
make the distribution or the rights or warrants expire or terminate, the
Conversion Rate then in effect will be appropriately readjusted. However, a
readjustment will not affect any conversions which take place before the
readjustment.
(iv) If the Company issues or sells any equity or debt
securities which are convertible into or exchangeable for shares of Common Stock
("Convertible Securities") or any rights, options (other than stock options
issued to employees or directors of the Company or its subsidiaries under a plan
approved by the Company's Board of Directors) or warrants to purchase Common
Stock at a conversion, exchange or exercise price per share which is less than
the then-Current Market Price of the Common Stock, unless the provisions of
Subparagraph 5(d)(ii) or (iii) are applicable, the Company will be deemed to
have issued or sold, on the later of the date on which the Convertible
Securities, rights, options or warrants are issued or the date on which they
first may be converted, exchanged or exercised, the maximum number of shares of
Common Stock into or for which the Convertible Securities may be converted or
exchanged or which are issuable upon the exercise of the rights, options or
warrants immediately prior to the close of business on the later of the date on
which the Convertible Securities, rights, options or warrants are issued or the
date on which they may first be converted, exchanged or exercised, and no
further adjustment of the Conversion Rate will be made as a result of the actual
issuance of shares of Common Stock upon conversion, exchange or exercise of the
Convertible Securities, rights, options or warrants. If any Convertible
Securities, rights, options or warrants to which this Subparagraph applies are
redeemed, retired or otherwise extinguished or expire without any shares of
Common Stock having been issued upon conversion, exchange or exercise thereof,
effective immediately after the Convertible Securities, rights, options or
warrants expire, the Conversion Rate then in effect will be readjusted to what
it would have been if those Convertible Securities, rights, options or warrants
had not been issued. However, a readjustment will not affect any conversion
which takes place before the readjustment. For the purposes of this Subparagraph
5(d)(iv), (x) the price of shares of Common Stock issued or sold upon conversion
or exchange of Convertible Securities or upon exercise of rights, options or
warrants will be (A) the consideration paid to the Company for the Convertible
Securities, rights, options or warrants, plus (B) the consideration paid to the
Company upon conversion, exchange or exercise of the Convertible Securities,
rights, options or warrants, with the value of the consideration, if other than
cash, to be determined by the Company's auditors (whose determination, if made
in good faith, will be conclusive) and (y) any change in the conversion or
exchange price of Convertible Securities or the exercise price of rights,
options or warrants will be treated as an extinguishment when the change becomes
effective, of the Convertible Securities, rights, options or warrants which had
the old conversion, exchange or exercise price and an immediate issuance of new
Convertible Securities, rights, options or warrants with the new conversion,
exchange or exercise price.
(v) If the Company issues or sells any Common Stock
(other than on conversion or exchange of Convertible Securities or exercise of
rights, options or warrants to which Subparagraph 5(d)(ii), (iii) or (iv)
applies) for a consideration per share less than the Current Market Price
7
<PAGE>
of the Common Stock on the date of the issuance or sale (or on exercise of
options or warrants, for less than the Current Market Price of the Common Stock
on the day the options or warrants are issued), upon consummation of the
issuance or sale, the Conversion Rate in effect immediately prior to the
issuance or sale will be adjusted so it will equal the amount determined by
multiplying that Conversion Rate by a fraction of which the numerator is the
number of shares of Common Stock outstanding immediately prior to the issuance
or sale plus the number of shares of Common Stock which the aggregate
consideration received by the Company as a result of the issuance or sale could
have purchased at the Current Market Price of the Common Stock in effect on the
date of the issuance or sale, and of which the denominator is the number of
shares of Common Stock outstanding immediately prior to the issuance or sale
plus the number of additional shares of Common Stock issued or sold.
(vi) If there is a reclassification or change of
outstanding shares of Common Stock (other than a change in par value, or as a
result of a subdivision or combination), or a merger or consolidation of the
Company with any other entity that results in a reclassification, change,
conversion, exchange or cancellation of outstanding shares of Common Stock, or a
sale or transfer of all or substantially all of the assets of the Company, upon
any subsequent conversion of Series A Preferred Stock, each holder of the Series
A Preferred Stock will be entitled to receive the kind and amount of securities,
cash and other property which the holder would have received if the holder had
converted the shares of Series A Preferred Stock into Common Stock immediately
before the first of those events and had retained all the securities, cash and
other assets received as a result of all those events.
(vii) For the purpose of any computation under this
Subsection 5(d), the "Current Market Price" of the Common Stock on any date will
be the average of the last reported sale prices per share of the Common Stock on
each of the twenty consecutive Trading Days (as defined below) preceding the
date of the computation. The last reported sale price of the Common Stock on
each day will be (A) the last reported sale price of the Common Stock on the
principal stock exchange on which the Common Stock is listed, or (B) if the
Common Stock is not listed on a stock exchange, the last reported sale price of
the Common Stock on the principal automated securities price quotation system on
which sale prices of the Common Stock are reported, or (C) if the Common Stock
is not listed on a stock exchange and sale prices of the Common Stock are not
reported on an automated quotation system, the mean of the high bid and low
asked price quotations for the Common Stock as reported by National Quotation
Bureau Incorporated if at least two securities dealers have inserted both bid
and asked quotations for the Common Stock on at least five of the ten preceding
Trading Days. If the Common Stock is not traded or quoted as described in any of
clause (A), (B) or (C), the Current Market Price of the Common Stock on a day
will be the fair market value of the Common Stock on that day as determined by a
member firm of the New York Stock Exchange, Inc. selected by the Board of
Directors. As used with regard to the Series A Preferred Stock, the term
"Trading Day" means (x) if the Common Stock is listed on at least one stock
exchange, a day on which there is trading on the principal stock exchange on
which the Common Stock is listed, (y) if the Common Stock is not listed on a
stock exchange, but sale prices of the Common Stock are reported on an automated
quotation system, a day on which trading is reported on the principal automated
quotation system on which sales of the Common Stock are reported, or (z) if the
Common Stock is not listed on a stock exchange and sale prices of the Common
Stock are not reported on an automated quotation system, a day on which
quotations are reported by National Quotation Bureau Incorporated.
(viii) No adjustment in the Conversion Rate will be required
unless the adjustment would require a change of at least 3% in the Conversion
Rate; provided, however, that any adjustments which are not made because of this
-------- -------
Subparagraph 5(d)(viii) will be carried forward and taken into account in any
subsequent adjustment; and provided, further, that any adjustment must
-------- -------
be made in
8
<PAGE>
accordance with this Section 5 (without regard to this Subparagraph 5(d)(viii))
not later than the time the adjustment may be required in order to preserve the
tax-free nature of a distribution to the holders of shares of Common Stock. All
calculations under this Section 5 will be made to the nearest cent or to the
nearest one hundredth of a share, as the case may be.
(ix) Whenever the Conversion Rate is adjusted, the Company
will promptly send each holder of record of Series A Preferred Stock a notice of
the adjustment of the Conversion Rate setting forth the adjusted Conversion Rate
and the date on which the adjustment becomes effective and containing a brief
description of the events which caused the adjustment.
(x) In any case in which this Subsection 5(d) provides
that an adjustment will become effective immediately after a record date for an
event, the Company may defer until the occurrence of the event (A) issuing to
the holder of any share of Series A Preferred Stock converted after the record
date and before the occurrence of the event the additional shares of Common
Stock issuable upon the conversion by reason of the adjustment over and above
the Common Stock issuable upon the conversion before giving effect to the
adjustment and (B) paying to the holder any cash in lieu of any fractional share
pursuant to Subsection 5(c).
(e) If:
(i) the Company declares a dividend (or any other
distribution) on the Common Stock (other than in cash out of retained earnings);
or
(ii) the Company authorizes the granting to the holders of
the Common Stock of rights or warrants to subscribe for or purchase any shares
of any class or any other rights or warrants; or
(iii) the Company issues, or changes the conversion,
exchange or exercise price of, any Convertible Securities, rights, options
(other than stock options issued to employees or directors of the Company or its
subsidiaries under a plan approved by the Company's Board of Directors); or
(iv) the Company sells any Common Stock for less than the
Current Market Price of the Common Stock on the date of the sale; or
(v) there is any reclassification of the Common Stock
(other than a subdivision or combination of the outstanding Common Stock and
other than a change in the par value, or from par value to no par value, or from
no par value to par value), or any consolidation, merger, or statutory share
exchange to which the Company is a party and for which approval of any
stockholders of the Company is required, or any sale or transfer of all or
substantially all the assets of the Company; or
(vi) there is a voluntary or an involuntary dissolution,
liquidation or winding up of the Company;
then the Company will mail to the holders of record of the Series A Preferred
Stock, at least 15 days before the applicable date specified below, a notice
stating the applicable one of (A) the date on which a record is to be taken for
the purpose of the dividend, distribution or grant of rights or warrants, or, if
no record is to be taken, the date as of which the holders of Common Stock of
record who will be entitled to the dividend, distribution or rights or warrants
will be determined, (B) the date on which it is expected
9
<PAGE>
the Convertible Securities will be issued or the date on which the change in the
conversion, exchange or exercise price of the Convertible Securities, rights,
options or warrants will be effective, (C) the date on which the Company
anticipates selling Common Stock for less than the Current Market Price of the
Common Stock on the date of the sale (except that no notice need be given of the
anticipated date of sale of Common Stock upon exercise of options or warrants
which have been described in a notice to the holders of record of the Series A
Preferred Stock given at least 15 days before the options or warrants are
exercised), or (D) the date on which the reclassification, consolidation,
merger, share exchange, sale, transfer, dissolution, liquidation or winding up
is expected to become effective, and the date as of which it is expected that
holders of record of Common Stock will be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon the
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up. Failure to give any such notice or any
defect in the notice will not affect the legality or validity of the
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up.
(f) (i) The Company will at all times reserve and keep
available, free from preemptive rights, out of the authorized but unissued
shares of Common Stock or the issued shares of Common Stock held in its
treasury, or both, for the purpose of effecting conversion of the Series A
Preferred Stock, the maximum number of shares of Common Stock which the Company
would be required to deliver upon the conversion of all the outstanding shares
of Series A Preferred Stock. For the purposes of this Subsection 5(f), the
number of shares of Common Stock which the Company would be required to deliver
upon the conversion of all the outstanding shares of Series A Preferred Stock
will be computed as if at the time of the computation all the outstanding shares
were held by a single holder.
(ii) Prior to the delivery of any securities which the
Company will be obligated to deliver upon conversion of the Series A Preferred
Stock, the Company will endeavour, in good faith and as expeditiously as
possible, to comply with all federal and state laws and regulations requiring
the registration of those securities with, or any approval of or consent to the
delivery of those securities by, any governmental authority.
(g) The Company will pay any documentary stamp or similar issue
or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on conversion of Series A Preferred Stock; provided, however, that
-------- -------
the Company will not be required to pay any tax which may be payable in respect
of any transfer involved in the issue or delivery of shares of Common Stock in a
name other than that of the holder of record of the Series A Preferred Stock to
be converted and no such issue or delivery will be made unless and until the
person requesting the issue or delivery has paid to the Company the amount of
any such tax or has established, to the satisfaction of the Company, that the
tax has been paid.
Section 6. Mandatory Conversion.
--------------------
(a) The Company may, by a notice (a "Notice of Mandatory
Conversion") given to the holders of the Series A Preferred Stock upon an
Initial Public Offering (as defined below), require the holders of all (but not
less than all) the outstanding Series A Preferred Stock to convert their Series
A Preferred Stock into Common Stock on a date specified in the notice (which may
be the date the notice is given or any other date which is not more than 60 days
after the date the notice is given) at the Conversion Rate in effect on the day
the notice is given. For purposes of this Section 6, "Initial Public Offering"
means the first time a registration statement filed by the Company under the
U.S. Securities Act of 1933, as amended, in respect of a firm commitment
underwritten public offering of the Common Stock is declared effective by the
U.S. Securities and Exchange Commission and the sale of Common Stock by
10
<PAGE>
the Company in such offering (with gross proceeds of at least US$15 million and
a pre-share price of at least US$25) is consummated (other than a registration
statement filed on Form S-4 or Form S-8, or any successor form thereto, with
respect to the issuance of Common Stock or Convertible Securities granted or to
be granted to employees or directors of the Company.
(b) If the Company gives a Notice of Mandatory Conversion as
provided in Subparagraph 6(a), the holders of the outstanding Series A Preferred
Stock will be deemed to have surrendered the certificates representing their
shares of Series A Preferred Stock for conversion at the close of business on
the conversion date specified in the Notice of Mandatory Conversion, and,
regardless of whether they do or do not surrender those shares for conversion,
at the close of business on that date (i) the certificates representing the
shares of Series A Preferred Stock will cease to represent anything other than
the right to receive the shares of Common Stock or cash, other securities or
other assets issuable upon conversion of the shares of Series A Preferred Stock
and (ii) the Company may, at its option (the exercise of which will be described
in the Notice of Mandatory Conversion), either (A) issue the shares of Common
Stock, or distribute the cash, other securities or other assets, to which the
holders of the Series A Preferred Stock are entitled without requiring the
surrender of the certificates which formerly represented shares of Series A
Preferred Stock, or (B) set aside in trust for the respective holders of
certificates which formerly represented Series A Preferred Stock, the cash,
securities and other assets (other than Common Stock, which need not be set
aside) to which those holders are entitled and issue or distribute the Common
Stock, cash, other securities or other assets which each former holder of Series
A Preferred Stock is entitled to receive, without interest, when the former
holder surrenders the certificates which represented the Series A Preferred
Stock and complies with the other requirements of Subparagraph 5(b)(i). Any
interest on funds set aside for distribution to former holders of Series A
Preferred Stock will belong to the Company.
(c) If the Company presents to the holders of the Series A
Preferred Stock a form of firm commitment underwriting agreement or other
purchase contract relating to the Initial Public Offering, which underwriting
contract or other purchase contract contains customary terms and conditions (but
requires no representations or warranties from a selling stockholder other than
representations that, when Common Stock is issued to that selling stockholder on
conversion of the Series A Preferred Stock, the selling stockholder will own
that Common Stock and have the right and ability to sell it to the buyer or
group of buyers free and clear of any liens or encumbrances, and will impose no
obligations on a selling stockholder other than (x) the obligation to deliver
certificates representing the Common Stock (assuming they are issued) upon
payment of the purchase price for them, and (y) the obligation to indemnify the
buyer or group of buyers against liability or damages resulting from any
misstatement by the selling stockholder of a material fact regarding the selling
stockholder, or omission by the selling stockholder to state a material fact
necessary to make the statements made by the selling stockholder regarding the
selling stockholder not misleading), and the Company notifies the holders of the
Series A Preferred Stock that the buyer or group of buyers has signed, or agreed
to sign, the contract subject to signature by the holders of the Series A
Preferred Stock, the condition in clause (ii) of subparagraph 6(a) will be
deemed waived, and not to be a prerequisite to required conversion, by each
holder of Series A Preferred Stock who does not, within 10 days after the
contract is presented to the holder, agree to sign a copy of the contract, or
authorize the Company to sign a copy of the contract as attorney in fact for the
holder.
Section 7. Status.
------
Upon any conversion, exchange or redemption of shares of Series A
Preferred Stock, the shares of Series A Preferred Stock which are converted,
exchanged or redeemed will have the
11
<PAGE>
status of authorized and unissued shares of preferred stock, and the number of
shares of preferred stock which the Company will have authority to issue will
not be decreased by the conversion, exchange or redemption of shares of Series A
Preferred Stock, but the number of shares of Series A Preferred Stock which the
Company will have authority to issue will be reduced so that the shares of
Series A Preferred Stock which were converted, exchanged or redeemed may not be
re-issued.
Section 8. Ranking.
-------
The shares of Series A Preferred Stock will, with respect to the
payment of dividends and the distribution of assets on liquidation, dissolution
or winding-up of the Company, unless otherwise provided in the Company's
Certificate of Incorporation or a Certificate of Designations, Rights and
Preferences relating to a subsequently issued series of preferred stock of the
Company, rank (i) on a parity with any other class or series of preferred stock
issued by the Company and (ii) prior to the Common Stock.
Section 9 Miscellaneous.
-------------
(a) Except as otherwise expressly provided in this resolution,
whenever a notice or other communication is required or permitted to be given to
holders of shares of Series A Preferred Stock, the notice or other communication
will be deemed properly given if deposited in the United States mail, postage
prepaid, addressed to the persons shown on the books of the Company as the
holders of the shares at the addresses as they appear in the books of the
Company, as of a record date or dates determined in accordance with the
Company's Certificate of Incorporation and By-laws, these resolutions and
applicable law, as in effect from time to time.
(b) The holders of the Series A Preferred Stock will not have
any preemptive right to subscribe for or purchase any shares or any other
securities which may be issued by the Company as a sole consequence of their
ownership of Series A Preferred Stock.
(c) Except as may otherwise be required by law, shares of Series
A Preferred Stock will not have any designations, preferences, limitations or
relative rights, other than those specifically set forth in this resolution and
in the Certificate of Incorporation.
(d) The headings of the various subdivisions of this resolution
are for convenience only and will not affect the meaning or interpretation of
any of the provisions of this resolution.
(e) The preferences, special rights or powers of the Series A
Preferred Stock may be waived, and any of the provisions of the Series A
Preferred Stock may be amended, by the affirmative vote at a meeting or the
written consent of holders of record of at least a majority of the outstanding
shares of Series A Preferred Stock."
3. The foregoing resolution was adopted by all necessary action on the
part of the Company.
12
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be by
its duly authorized officer, this 8th day of June, 1998.
ASIAINFO HOLDINGS, INC.
By: /s/ Edward S. Tian
------------------------------
Name: Edward S. Tian
----------------------------
Title: President
--------------------------
<PAGE>
EXHIBIT 4.3
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:01 AM 08/27/1999
991359773 - 2897577
CERTIFICATE OF DESIGNATIONS
FOR
SERIES B CONVERTIBLE PREFERRED STOCK
AsiaInfo Holdings, Inc., a company organized and existing by virtue of the
Delaware General Corporation Law ("DGCL") of the State of Delaware (the
"Company"), DOES HEREBY CERTIFY that:
1. The name of the Company is ASIAINFO HOLDINGS, INC.
2. Pursuant to authority conferred upon the Board of Directors of the
Company by its Articles of Incorporation, as amended through the date hereof,
and in accordance with Section 151 of the DGCL, the Board of Directors of the
Company, by a unanimous written consent dated as of August 27, 1997, duly
adopted a resolution fixing the voting powers, designations, preferences and
rights relating to its Series B Convertible Preferred Stock, $.01 par value per
share, as follows:
"RESOLVED, that the Board of Directors (the "Board") of the Company
authorizes the issuance of a series of preferred stock consisting of 5,000,000
shares and the Board fixes the voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of such preferences and/or rights, of the shares of
that series as follows:
Section 1 Designation and Amount.
-----------------------
The shares of the series "B" Preferred Stock will be
designated Series B Convertible Preferred Stock ("Series B Preferred Stock").
The total number of authorized shares of the Series B Preferred Stock will be
5,000,000 shares and each share of Series B Preferred Stock will have a par
value of $.01.
Section 2 Dividends and Distributions.
----------------------------
(a) The holders of record of Series B Preferred Stock (the
"Series B Holders") shall be entitled to participate on a pro rata basis with
the holders of record (the "Series A Holders") of the Company's Series A
Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock"), and the holders of the Company's Common Stock, par value $.01 per share
(the "Common Stock"), in all dividends paid to the holders of the Series A
Preferred Stock and the Common Stock, on an as converted basis, when, as and if
such dividends are declared by the Board out of funds legally available for the
payment of dividends. Other than as described in this Section 2(a), the Company
shall have no obligations to pay dividends to the Series B Holders. Each
dividend will be payable to the Series B Holders on a date (a "Record Date")
selected by the Board which is not less than ten
<PAGE>
(10) nor more than sixty (60) days before the date on which the dividend is to
be paid. No Record Date will precede the date when the resolution fixing the
Record Date is adopted.
(b) While any shares of Series B Preferred Stock are
outstanding, (i) the Company may not pay any dividend, or set aside any funds
for the payment of a dividend, with regard to any shares of any class or series
of stock of the Company which ranks on a parity with the Series B Preferred
Stock as to payment of dividends unless at least a proportionate payment is made
with regard to dividends on the Series B Preferred Stock and (ii) the Company
may not pay any dividend, or set aside any funds for the payment of a dividend,
with regard to any shares of any class or series of stock of the Company which
ranks junior to the Series B Preferred Stock unless and until all dividends on
the Series B Preferred Stock have been paid. A payment of dividends with regard
to the Series B Preferred Stock will be proportionate to a payment of a dividend
with regard to another class or series of stock if the dividend per share of
Series B Preferred Stock is the same percentage of the dividends payable with
regard to a share of Series B Preferred Stock that the dividend paid with regard
to a share of stock of the other class or series is of the dividend payable with
regard to a share of stock of that other class or series.
(c) Any dividend paid with regard to shares of Series B
Preferred Stock will be paid equally with regard to each outstanding share of
Series B Preferred Stock.
Section 3 Voting Rights.
--------------
The only voting rights which the Series B Holders will have will
be any voting rights to which they may be entitled under theDGCL, and the
following:
(a) With regard to each matter presented for the vote of the
holders of Common Stock, the Series B Holders will be entitled to vote together
with the Series A Holders and the holders of Common Stock, and together with the
holders of any other class or series of stock the holders of which vote together
with the holders of Common Stock, with the same effect as though the Series B
Preferred Stock were part of the same class as the Common Stock, with each
Series B Holder on the record date for determining the holders of the Common
Stock entitled to vote with regard to the matter being entitled to the number of
votes with regard to share of Series B Preferred Stock held of record on that
record date equal to the number of shares of Common Stock into which those
shares of Series B Preferred Stock could be converted (or could have been
converted if the Series B Preferred Stock were convertible at that time) at the
Conversion Rate (as defined in Subparagraph 5(d)) in effect on that record date.
(b) A Series B Holder will have the same right to act by written
consent as a holder of Common Stock.
(c) While any shares of Series B Preferred Stock are
outstanding, the Company will not, directly or indirectly, without the
affirmative vote at a meeting or the written consent of the holders of at least
a majority of the outstanding shares of
<PAGE>
Series B Preferred Stock, (i) amend, alter or repeal any of the provisions of
the Certificate of Incorporation or By-laws of the Company, or of this
resolution, so as to affect adversely the preferences, special rights or powers
of the Series B Preferred Stock or (ii) authorize any reclassification of the
Series B Preferred Stock. This Subsection will not prevent the issuance of any
Series B Preferred Stock which has been authorized in Section 1.
(d) The Company shall not take any of the following actions
unless such action has been approved by the Series B Holders and the Series A
Holders (together, the "Preferred Shareholders"), voting as a single unit:
(i) Any sale or issuance of any capital stock or any
security convertible into capital stock of the Company to any person or entity,
other than (aa) any sale or issuance of Company's capital stock pursuant to the
terms of any Stock Purchase Agreement between the Company and Intel Pacific,
Inc. (the "Investor"), (bb) any sale or issuance of the Company's capital stock
pursuant to the terms of Warrants issued by the Company to the Series A Holders,
(cc) any sale of shares of Common Stock by employees of the Company resulting in
aggregate net proceeds to such employees not in excess of $5,000,000, (dd)
conversion of Series B Preferred Stock to Common Stock in accordance with the
terms of the Company's Certificate of Incorporation, (ee) the sale by the
Company of additional shares (the "Additional Series B Shares") of Series B
Preferred Stock to the Investor for a purchase price of up to US$10 million and
(ff) any sale or issuance of Company's capital stock pursuant to the terms of
the Company's employee stock option plan existing on August 26, 1999 or other
options or warrants outstanding on the Closing Date, as defined in the Stock
Purchase Agreement up to a total of 2,000,000 Common Shares;
(ii) Declare or pay any dividends or make any other
distributions on the Company's outstanding capital stock;
(iii) Any redemption or repurchase of its capital stock in
excess of US$100,000 in the aggregate;
(iv) Any acquisition, merger, consolidation, joint
venture or partnership arrangement involving the Company and Subsidiaries (as
defined in the Stock Purchase Agreement) or the dissolution or liquidation of
the Company;
(v) Any sale, lease, transfer, or other disposition of
all or any substantial portion of the Company's assets outside the ordinary
course of business in excess of US$100,000 in the aggregate;
(vi) Any incurrence, issuance, assumption, guarantee or
other creation of liability for borrowed money in excess of US$100,000 in the
aggregate at any time outstanding except if such liability is incurred pursuant
to a business plan approved by the Board;
(vii) The making of any capital expenditure in any year in
excess of US$250,000 in the aggregate except if such capital expenditure is made
pursuant to a business plan approved by the Board;
<PAGE>
(viii) Any change in the fundamental nature of its business
other than as described in a business plan approved by the Board;
(ix) Any increase (in excess of 10% per annum) in the
compensation and benefits of the Company's senior executives;
(x) Any voluntary material changes in the Company
accounting methods or policies;
(xi) Any appointment or removal of the Company's
auditors;
(xii) The amendment of Company's Certificate of
Incorporation, any Certificate of Designations or By-Laws;
(xiii) The approval of any material amendments to the
Company's annual business plan;
(xiv) The appointment or termination of the Company's Chief
Financial Officer, Chief Operations Officer and Chief Executive Officer;
(xv) The selection of the lead underwriter in connection
with the proposed initial public offering of the Company's capital stock; or
(xvi) The appointment or removal of any independent
director.
(e) The Company shall not take any of the following actions
unless such action has been approved by the holders of record of at least 66.66%
of the outstanding shares of Series B Preferred Stock:
(i) Any amendment or change of the rights, preferences,
privileges or powers of, or the restrictions provided for the benefit of, the
Series B Preferred Stock;
(ii) The authorization, creation or issuance of any shares
of any class or series of stock having preferences superior to or on a parity
with the Series B Preferred Stock with respect to voting, dividends or
liquidation, including but not limited to additional shares of Series B
Preferred Stock, other than the Additional Series B Shares;
(iii) Any action that would reclassify any shares of the
Company's outstanding capital stock into shares having preferences or priority
as to voting, dividends or assets senior to or on parity with the preferences
and priority of the Series B Preferred Stock; or
(iv) Any amendment of the Company's Certificate of
Incorporation or any Certificate of Designations that would adversely affect the
rights of the Series B Preferred Stock.
<PAGE>
Section 4 Liquidation.
------------
Upon the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the Series B Holders will be entitled to
receive out of the assets of the Company available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of any class or series of stock to which the Series B
Preferred Stock ranks senior an amount equal to US$7.5419 per share plus all
accrued and unpaid dividends on shares of Series B Preferred Stock outstanding
as of the date of such liquidation, dissolution or winding-up (the "Liquidation
Preference"). If, upon any liquidation, dissolution or winding-up of the
Company, the assets of the Company, or proceeds of those assets, available for
distribution to the Series B Holders and of the shares of all other classes or
series which are on a parity as to distributions on liquidation with the Series
B Preferred Stock are not sufficient to pay in full the preferential amount
required to be distributed to the Series B Holders and of all other classes or
series which are on a parity as to distributions on liquidation with the Series
B Preferred Stock, then the assets, or the proceeds of those assets, which are
available for distribution to the Series B Holders and of the shares of all
other classes or series which are on a parity as to distributions on liquidation
with the Series B Preferred Stock will be distributed to the holders of the
Series B Preferred Stock and of the shares of all other classes or series which
are on a parity as to distributions on liquidation with the Series B Preferred
Stock rateably in accordance with the respective amounts of the liquidation
preferences of the shares held by each of them. After payment of the full
amount of the Liquidation Preference the Series B Holders will not be entitled
to any further distribution of assets of the Company. For the purposes of this
Section, neither a consolidation or merger of the Company with another Company,
nor a sale or transfer of all or any part of the Company's assets for cash or
securities, will be considered a liquidation, dissolution or winding-up of the
Company.
Section 5 Optional Conversion.
--------------------
(a) Each holder of shares of Series B Preferred Stock will have
the right at any time, at the holder's option, to convert all or any of the
shares of Series B Preferred Stock held of record by the holder into a number of
fully paid and non-assessable shares of Common Stock equal to the number of
shares of Series B Preferred Stock surrendered for conversion multiplied by the
Conversion Rate (as defined in Subparagraph 5(d)), or such other securities or
assets as the holder is entitled to receive in accordance with Subparagraph
5(d).
(b)(i) In order to exercise the conversion privilege, the
holder of each share of Series B Preferred Stock to be converted must surrender
the certificate representing that share to the conversion agent for the Series B
Preferred Stock appointed by the Company (which may be the Company itself), with
the Notice of Election to Convert on the back of that certificate duly completed
and signed, at the principal office of the conversion agent. No additional
amount shall be payable to the Company upon exercise of the conversion
privilege. If the shares issuable on conversion are to be issued in a number
other than the name in which the Series B Preferred Stock is registered, each
share surrendered for conversion must be accompanied by an instrument of
transfer in form satisfactory to the
<PAGE>
Company, duly executed by the holder or the holder's duly authorized attorney
and by funds in an amount sufficient to pay any transfer or similar tax which is
required to be paid in connection with the transfer or evidence that tax has
been paid.
(ii) Each conversion will be at the Conversion Rate in
effect at the close of business on the day when all the conditions in
Subparagraph 5(b)(i) have been satisfied.
(iii) The Company will make no payment or adjustment for
any unpaid dividends on shares of Series B Preferred Stock, whether or not in
arrears, on conversion of those shares, or for dividends on the shares of Common
Stock issued upon the conversion; provided, that any dividends declared but
unpaid in respect of shares as of the date of conversion shall be deemed to be
dividends declared and unpaid with respect to the shares of Common Stock issued
upon the conversion.
(iv) As promptly as practicable after the surrender by a
holder of certificates representing shares of Series B Preferred Stock in
accordance with this Subsection 5(b), the Company will issue and will deliver to
the holder at the office of the conversion agent, or on the holder's written
order, a certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of the shares of Series B Preferred Stock.
Any fractional interest in respect of a share of Common Stock arising upon a
conversion will be settled as provided in Subsection 5(c).
(v) Each conversion will be deemed to have been effected
immediately prior to the close of business on the date on which all the
conditions specified in Subparagraph 5(b)(i) have been satisfied, and the person
in whose name a certificate for shares of Common Stock is to be issued upon a
conversion will be deemed to have become the holder of record of the shares of
Common Stock represented by that certificate at that time. All shares of Common
Stock delivered upon conversion of Series B Preferred Stock will upon delivery
be duly and validly issued and fully paid and nonassessable, free of all liens
and charges and not subject to any pre-emptive rights. Upon the surrender of
certificates representing shares of Series B Preferred Stock for conversion and
compliance with all the other requirements of Subparagraph 5(b)(i), the shares
represented by those certificates will no longer be deemed to be outstanding and
all rights of the holder with respect to those shares will immediately
terminate, except the right to receive the Common Stock or other securities,
cash or other assets to be issued or distributed as a result of the conversion.
(c) No fractional shares of Common Stock will be issued upon
conversion of Series B Preferred Stock. Any fractional interest in a share of
Common Stock resulting from conversion of shares of Series B Preferred Stock
will be paid in cash (computed to the nearest cent) based on the then effective
Series B Conversion Price (as defined in Subparagraph 5(d)(i)) multiplied by
such fraction on the Business Day next preceding the day of conversion. If more
than one share of Series B Preferred Stock is surrendered for conversion at
substantially the same time by the same holder, the number of full shares of
Common Stock issuable upon the conversion will be computed on the basis of all
the shares of Series B Preferred Stock surrendered at that time by that holder.
<PAGE>
(d)(i) The "Conversion Rate" as used herein is a ratio, the
numerator of which is $7.5419 and the denominator of which is the "Series B
Conversion Price" in effect at the time of the conversion. The Series B
Conversion Price will initially be $7.5419 and will be adjusted as follows from
time to time if any of the events described below shall have occurred after the
date hereof.
(ii) If the Company (A) pays a dividend or makes a
distribution on its Common Stock in shares of its Common Stock, (B) subdivides
its outstanding Common Stock into a greater number of shares, or (C) combines
its outstanding Common Stock into a smaller number of shares, the Conversion
Rate in effect immediately prior to that event will be adjusted so that the
holder of a share of Series B Preferred Stock surrendered for conversion after
that event will receive the number of shares of Common Stock of the Company
which the holder would have received if the share of Series B Preferred Stock
had been converted immediately before the happening of the event (or, if there
is more than one such event, if the share of Series B Preferred Stock had been
converted immediately before the first of those events and the holder had
retained all the Common Stock or other securities or assets received after the
conversion). An adjustment made pursuant to this Subparagraph 5(d)(ii) will
become effective immediately after the record date in the case of a dividend or
distribution, except as provided in Subparagraph 5(d)(xi), and will become
effective immediately after the effective date in the case of a subdivision or
combination. If any such dividend or distribution is declared but is not paid or
made, the Conversion Rate then in effect will be appropriately readjusted.
However, a readjustment of the Conversion Rate will not affect any conversion
which takes place before the readjustment.
(iii) If the Company issues rights or warrants to the
holders of its Common Stock as a class entitling them (for a period expiring
within 45 days after the record date for issuance of the rights or warrants) to
subscribe for or purchase Common Stock at a price per share less than the Series
B Conversion Price at the record date for the determination of stockholders
entitled to receive the rights or warrants, the Series B Conversion Price in
effect immediately before the issuance of the rights or warrants will be reduced
so that it will be the amount determined by multiplying the Series B Conversion
Price in effect immediately before the record date for the issuance of the
rights or warrants by a fraction of which the numerator is the number of shares
of Common Stock outstanding on the record date for the issuance of the rights or
warrants plus the number of shares of Common Stock which the aggregate exercise
price of all the rights or warrants would purchase at the Series B Conversion
Price at that record date, and of which the denominator is the number of shares
of Common Stock outstanding on the record date for the issuance of the rights or
warrants plus the number of additional shares of Common Stock issuable on
exercise of all the rights or warrants. The adjustment provided for in this
Subparagraph 5(d)(iii) will be made successively whenever any rights or warrants
are issued, and will become effective immediately, except as provided in
Subparagraph 5(d)(xi), after each record date. In determining whether any rights
or warrants entitle the holders of the Common Stock to subscribe for or purchase
shares of Common Stock at less than the Series B Conversion Price, in
determining the aggregate sale price of the shares of Common Stock issuable on
the exercise of rights or warrants, there will be taken into account any
consideration received by
<PAGE>
the Company for the rights or warrants, with the value of that consideration, if
other than cash, to be determined by the Board of Directors of the Company
(whose determination, if made in good faith, will be conclusive), provided,
however, that no value shall be attributed to any services performed by any
employee, officer or director of the Company. If any rights or warrants which
lead to an adjustment of the Series B Conversion Price expire or terminate
without having been exercised, the Series B Conversion Price then in effect will
be appropriately readjusted. However, a readjustment of the Series B Conversion
Price will not affect any conversions which take place before readjustment.
(iv) If the Company distributes to the holders of its Common
Stock as a class any shares of capital stock of the Company (other than Common
Stock) or evidences of indebtedness or assets (other than cash dividends or
distributions of cash paid from retained earnings of the Company) or rights or
warrants (other than those referred to in Subparagraph 5(d)(iii)) to subscribe
for or purchase any of its securities, then, in each such case, other than a
case in which the Company is required by Section 2(b) to pay a dividend with
regard to the Series B Preferred Stock equal to the dividend paid with regard to
the number of shares of Common Stock into which the Series B Preferred Stock
could be converted, the Series B Conversion Price will be reduced so that it
will equal the number determined by multiplying the Series B Conversion Price in
effect immediately prior to the record date for the distribution by a fraction
of which the numerator is the Series B Conversion Price on the record date for
the distribution less the then fair market value (as determined by the Company's
auditors, whose determination, if made in good faith, will be conclusive) of the
capital stock, evidences of indebtedness, assets, rights or warrants which are
distributed with respect to one share of Common Stock, and of which the
denominator is the Series B Conversion Price on that record date. Each
adjustment will, except as provided in Subparagraph 5(d)(xi), become effective
immediately after the record date for the determination of the stockholders
entitled to receive the distribution. If any distribution is declared but not
made, or if any rights or warrants expire or terminate without having been
exercised, effective immediately after the decision is made not to make the
distribution or the rights or warrants expire or terminate, the Series B
Conversion Price then in effect will be appropriately readjusted. However, a
readjustment will not affect any conversions which take place before the
readjustment.
(v) If the Company issues or sells any equity or debt
securities which are convertible into or exchangeable for shares of Common Stock
("Convertible Securities") or any rights, options (other than an aggregate of up
to 2,000,000 stock options issued to employees or directors of the Company or
its subsidiaries under a plan approved by the Company's Board of Directors) or
warrants to purchase Common Stock at a conversion, exchange or exercise price
per share which is less than the Series B Conversion Price in effect at such
time, unless the provisions of Subparagraph 5(d)(iii) or (iv) are applicable,
the Company will be deemed to have issued or sold, on the later of the date on
which the Convertible Securities, rights, options or warrants are issued or the
date on which they first may be converted, exchanged or exercised, the maximum
number of shares of Common Stock into or for which the Convertible Securities
may be converted or exchanged or which are issuable upon the exercise of the
rights, options or warrants immediately prior to the close of
<PAGE>
business on the later of the date on which the Convertible Securities, rights,
options or warrants are issued or the date on which they may first be converted,
exchanged or exercised, and the Series B Conversion Price will be adjusted in
the manner provided for in Subparagraph 5(d)(iii); no further adjustment of the
Series B Conversion Price will be made as a result of the actual issuance of
shares of Common Stock upon conversion, exchange or exercise of the Convertible
Securities, rights, options or warrants. If any Convertible Securities, rights,
options or warrants to which this Subparagraph applies are redeemed, retired or
otherwise extinguished or expire without any shares of Common Stock having been
issued upon conversion, exchange or exercise thereof, effective immediately
after the Convertible Securities, rights, options or warrants expire, the Series
B Conversion Price then in effect will be readjusted to what it would have been
if those Convertible Securities, rights, options or warrants had not been
issued. However, a readjustment will not affect any conversion which takes place
before the readjustment. For the purposes of this Subparagraph 5(d)(v), (x) the
price of shares of Common Stock issued or sold upon conversion or exchange of
Convertible Securities or upon exercise of rights, options or warrants will be
(A) the consideration paid to the Company for the Convertible Securities,
rights, options or warrants, plus (B) the consideration paid to the Company upon
conversion, exchange or exercise of the Convertible Securities, rights, options
or warrants, with the value of the consideration, if other than cash, to be
determined by the Company's auditors (whose determination, if made in good
faith, will be conclusive) and (y) any change in the conversion or exchange
price of Convertible Securities or the exercise price of rights, options or
warrants will be treated as an extinguishment when the change becomes effective,
of the Convertible Securities, rights, options or warrants which had the old
conversion, exchange or exercise price and an immediate issuance of new
Convertible Securities, rights, options or warrants with the new conversion,
exchange or exercise price.
(vi) If the Company issues or sells any Common Stock (other
than on conversion or exchange of Convertible Securities or exercise of rights,
options or warrants to which Subparagraph 5(d)(iii), (iv) or (v) applies) for a
consideration per share less than the Series B Conversion Price on the date of
the issuance or sale (or on exercise of options or warrants, for less than the
Series B Conversion Price on the day the options or warrants are issued), upon
consummation of the issuance or sale, the Series B Conversion Price in effect
immediately prior to the issuance or sale will be adjusted so it will equal the
amount determined by multiplying that Series B Conversion Price by a fraction of
which the numerator is the number of shares of Common Stock outstanding
immediately prior to the issuance or sale plus the number of shares of Common
Stock which the aggregate consideration received by the Company as a result of
the issuance or sale could have purchased at the Series B Conversion Price in
effect on the date of the issuance or sale, and of which the denominator is the
number of shares of Common Stock outstanding immediately prior to the issuance
or sale plus the number of additional shares of Common Stock issued or sold.
(vii) If there is a reclassification or change of outstanding
shares of Common Stock (other than a change in par value, or as a result of a
subdivision or combination), or a merger or consolidation of the Company with
any other entity that results
<PAGE>
in a reclassification, change, conversion, exchange or cancellation of
outstanding shares of Common Stock, or a sale or transfer of all or
substantially all of the assets of the Company, upon any subsequent conversion
of Series B Preferred Stock, each holder of the Series B Preferred Stock will be
entitled to receive the kind and amount of securities, cash and other property
which the holder would have received if the holder had converted the shares of
Series B Preferred Stock into Common Stock immediately before the first of those
events and had retained all the securities, cash and other assets received as a
result of all those events.
(viii) No adjustment in the Series B Conversion Price will be
required unless the adjustment would require a change of at least 1% in the
Series B Conversion Price; provided, however, that any adjustments which are not
-----------------
made because of this Subparagraph 5(d)(vii) will be carried forward and taken
into account in any subsequent adjustment; and provided, further, that any
-----------------
adjustment must be made in accordance with this Section 5 (without regard to
this Subparagraph 5(d)(viii)) not later than the time the adjustment may be
required in order to preserve the tax-free nature of a distribution to the
holders of shares of Common Stock. All calculations under this Section 5 will
be made to the nearest cent or to the nearest one hundredth of a share, as the
case may be.
(ix) Whenever the Series B Conversion Price and the
Conversion Rate are adjusted, the Company will promptly send each holder of
record of Series B Preferred Stock a notice of the adjustment of the Series B
Conversion Price and the Conversion Rate and setting forth the adjusted Series B
Conversion price and the adjusted Conversion Rate and the date on which the
adjustment becomes effective and containing a brief description of the events
which caused the adjustment.
(x) In any case in which this Subsection 5(d) provides that
an adjustment will become effective immediately after a record date for an
event, the Company may defer until the occurrence of the event (A) issuing to
the holder of any share of Series B Preferred Stock converted after the record
date and before the occurrence of the event the additional shares of Common
Stock issuable upon the conversion by reason of the adjustment over and above
the Common Stock issuable upon the conversion before giving effect to the
adjustment and (B) paying to the holder any cash in lieu of any fractional share
pursuant to Subsection 5(c).
(e) If:
(i) the Company declares a dividend (or any other
distribution) on the Common Stock (other than in cash out of retained earnings);
or
(ii) the Company authorizes the granting to the
holders of the Common Stock of rights or warrants to subscribe for or purchase
any shares of any class or any other rights or warrants; or
(iii) the Company issues, or changes the conversion,
exchange or exercise price of, any Convertible Securities, rights, options
(other than an
<PAGE>
aggregate of 2,000,000 stock options issued to employees or directors of the
Company or its subsidiaries under a plan approved by the Company's Board of
Directors) or warrants; or
(iv) the Company sells any Common Stock for less
than the Series B Conversion Price on the date of the sale; or
(v) there is any reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value, or from par value to no par value, or
from no par value to par value), or any consolidation, merger, or statutory
share exchange to which the Company is a party and for which approval of any
stockholders of the Company is required, or any sale or transfer of all or
substantially all the assets of the Company; or
(vi) there is a voluntary or an involuntary
dissolution, liquidation or winding up of the Company;
then the Company will mail to the holders of record of the Series B Preferred
Stock, a least 15 days before the applicable date specified below, a notice
stating the applicable one of (A) the date on which a record is to be taken for
the purpose of the dividend, distribution or grant of rights or warrants, or, if
no record is to be taken, the date as of which the holders of Common Stock of
record who will be entitled to the dividend, distribution or rights or warrants
will be determined, (B) the date on which it is expected the Convertible
Securities will be issued or the date on which the change in the conversion,
exchange or exercise price of the Convertible Securities, rights, options or
warrants will be effective, (C) the date on which the Company anticipates
selling Common Stock for less than the Series B Conversion Price on the date of
the sale (except that no notice need be given of the anticipated date of sale of
Common Stock upon exercise of options or warrants which have been described in a
notice to the holders of record of the Series B Preferred Stock given at least
15 days before the options or warrants are exercised), or (D) the date on which
the reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of record of Common Stock will be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon the reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up. Failure to
give such notice or any defect in the notice will not affect the legality or
validity of the reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up.
(f)(i) The Company will at all times reserve and keep
available, free from preemptive rights, out of the authorized but unissued
shares of Common Stock or the issued shares of Common Stock held in its
treasury, or both, for the purpose of effecting conversion of the Series B
Preferred Stock, the maximum number of shares of Common Stock which the Company
would be required to deliver upon the conversion of all the outstanding shares
of Series B Preferred Stock. For the purposes of this Subsection 5(f), the
number of shares of Common Stock which the Company would be required to deliver
upon the conversion of all the outstanding shares of Series B Preferred Stock
will be computed as if at the time of the computation all the outstanding shares
were held by a single holder.
<PAGE>
(ii) Prior to the delivery of any securities which the
Company will be obligated to deliver upon conversion of the Series B Preferred
Stock, the Company will endeavour, in good faith and as expeditiously as
possible, to comply with all federal and state laws and regulations requiring
the registration of those securities with, or any approval of or consent to the
delivery of those securities by, any governmental authority.
(g) The Company will pay any documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Common Stock on conversion of Series B Preferred Stock; provided, however, that
the Company will not be required to pay any tax which may be payable in respect
of any transfer involved in the issue or delivery of shares of Common Stock in a
name other than that of the holder of record of the Series B Preferred Stock to
be converted and no such issue or delivery will be made unless and until the
person requesting the issue or delivery has paid to the Company the amount of
any such tax or has established, to the satisfaction of the Company, that the
tax has been paid.
Section 6 Mandatory Conversion.
---------------------
(a) The Company may, by a notice (a "Notice of Mandatory
Conversion") given to the Series B Holders upon an Initial Public Offering (as
defined below), require the holders of all (but not less than all) the
outstanding Series B Preferred Stock to convert their Series B Preferred Stock
into Common Stock on a date specified in the notice (which may be the date the
notice is given or any other date which is not more than 60 days after the date
the notice is given) at the Conversion Rate in effect on the day the notice is
given. For purposes of this Section 6, "Initial Public Offering" means the first
time a registration statement filed by the Company under the U.S. Securities Act
of 1933, as amended, in respect of a firm commitment underwritten public
offering of the Common Stock is declared effective by the U.S. Securities and
Exchange Commission and the sale of Common Stock by the Company in such offering
with respect to which (i) the Company shall have received gross proceeds of at
least US$15 million (ii) the per share price shall be at least US$10.00 and
(iii) the enterprise value of the Company (on a pre-Initial Public Offering
basis) shall be equal to or greater than $280 million is consummated (other than
a registration statement filed on Form S-4 or Form S-8, or any successor form
thereto, with respect to the issuance of Common Stock or Convertible Securities
granted or to be granted to employees or directors of the Company.
(b) If the Company gives a Notice of Mandatory Conversion as
provided in Subparagraph 6(a), the holders of the outstanding Series B Preferred
Stock will be deemed to have surrendered the certificates representing their
shares of Series B Preferred Stock for conversion at the close of business on
the conversion date specified in the Notice of Mandatory Conversion, and,
regardless of whether they do or do not surrender those shares for conversion,
at the close of business on that date (i) the certificates representing the
shares of Series B Preferred Stock will cease to represent anything other than
the right to receive the shares of Common Stock or cash, other securities or
other assets issuable upon conversion of the shares of Series B Preferred Stock
and (ii) the Company may, at its option (the exercise of which will be described
in the Notice of Mandatory Conversion), either (A) issue the shares of Common
Stock, or distribute the cash, other securities or other assets, to which the
holders
<PAGE>
of the Series B Preferred Stock are entitled without requiring the surrender of
the certificates which formerly represented shares of Series B Preferred Stock,
or (B) set aside in trust for the respective holders of certificates which
formerly represented Series B Preferred Stock, the cash, securities and other
assets (other than Common Stock, which need not be set aside) to which those
holders are entitled and issue or distribute the Common Stock, cash, other
securities or other assets which each former holder of Series B Preferred Stock
is entitled to receive, without interest, when the former holder surrenders the
certificates which represented the Series B Preferred Stock and complies with
the other requirements of Subparagraph 5(b)(i). Any interest on funds set aside
for distribution to former Series B Holders will belong to the Company.
(c) If the Company presents to the Series B Holders a form of
firm commitment underwriting agreement or other purchase contract relating to
the Initial Public Offering, which underwriting contract or other purchase
contract contains customary terms and conditions (but requires no
representations or warranties from a selling stockholder other than
representations that, when Common Stock is issued to that selling stockholder on
conversion of the Series B Preferred Stock, the selling stockholder will own
that Common Stock and have the right and ability to sell it to the buyer or
group of buyers free and clear of any liens or encumbrances, and will impose no
obligations on a selling stockholder other than (x) the obligation to deliver
certificates representing the Common Stock (assuming that they are issued) upon
payment of the purchase price for them, and (y) the obligation to indemnify the
buyer or group of buyers against liability or damages resulting from any
misstatement by the selling stockholder of a material fact regarding the selling
stockholder, or omission by the selling stockholder to state a material fact
necessary to make the statements made by the selling stockholder regarding the
selling stockholder not misleading), and the Company notifies the holders of the
Series B Preferred Stock that the buyer or group of buyers has signed, or agreed
to sign, the contract subject to signature by the holders of the Series B
Preferred Stock, the condition in clause (ii) of subparagraph 6(a) will be
deemed waived, and not to be a prerequisite to required conversion, by each
holder of Series B Preferred Stock who does not, within 10 days after the
contract is presented to the holder, agree to sign a copy of the contract, or
authorize the Company to sign a copy of the contract as attorney in fact for the
holder.
Section 7 Status.
-------
Upon any conversion, exchange or redemption of shares of Series B
Preferred Stock, the Series B Preferred Stock which are converted, exchanged or
redeemed will have the status of authorized and unissued shares of preferred
stock, and the number of shares of preferred stock which the Company will have
authority to issue will not be decreased by the conversion, exchange or
redemption of shares of Series B Preferred Stock, but the number of shares of
Series B Preferred Stock which the Company will have authority to issue will be
reduced so that the shares of Series B Preferred Stock which were converted,
exchanged or redeemed may not be re-issued.
Section 8 Ranking.
--------
<PAGE>
The Shares of Series B Preferred Stock will, with respect to the
payment of dividends and the distribution of assets on liquidation, dissolution
or winding-up of the Company, unless otherwise provided in the Company's
Certificate of Incorporation or a Certificate of Designations relating to a
subsequently issued series of preferred stock of the Company, rank (i) on a
parity with any other class or series of preferred stock issued by the Company,
including the Series A Preferred Stock and (ii) prior to the Common Stock.
Section 9 Miscellaneous.
--------------
(a) Except as otherwise provided in this resolution, whenever a
notice or other communication is required or permitted to be given to holders of
shares of Series B Preferred Stock, the notice or other communication will be
deemed properly given if deposited in the United States mail, postage prepaid,
addressed to the persons shown on the books of the Company as the holders of the
shares at the addresses as they appear in the books of the Company, as of a
record date or dates determined in accordance with the Company's Certificate of
Incorporation and By-laws, these resolutions and applicable law, as in effect
from time to time.
(b) The holders of the Series B Preferred Stock will not have
any preemptive right to subscribe for or purchase any shares or any other
securities which may be issued by the Company as a sole consequence of their
ownership of Series B Preferred Stock.
(c) Except as may otherwise be required by law, shares of Series
B Preferred Stock will not have any designations, preferences, limitations or
relative rights, other than those specifically set forth in this resolution and
in the Certificate of Incorporation.
(d) The headings of the various subdivisions of this resolution
are for convenience only and will not affect the meaning or interpretation of
any of the provisions of this resolution.
(e) The preferences, special rights or powers of the Series B
Preferred Stock may be waived, and any of the provisions of the Series B
Preferred Stock may be amended, by the affirmative vote at a meeting or the
written consent of holders of record of at least a majority of the outstanding
shares of Series B Preferred Stock.
3. The foregoing resolution was adopted by all necessary action on the
part of the Company.
[Signature page follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be executed
by its duly authorized officer, this 27 day of August, 1999.
ASIAINFO HOLDINGS, INC.
By: /s/ Ying Han
----------------------------------
Name: Ying Han
--------------------------------
Title: Vice President and Secretary
-------------------------------
<PAGE>
EXHIBIT 4.4
CERTIFICATE OF CORRECTION
TO
CERTIFICATE OF DESIGNATIONS FOR SERIES B CONVERTIBLE PREFERRED STOCK
OF
ASIAINFO HOLDINGS, INC.
ASIAINFO HOLDINGS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
1. The name of the corporation is AsiaInfo Holdings, Inc.
2. That a Certificate of Designations for Series B Convertible Preferred
Stock (the "Certificate of Designations") was filed with the Delaware Secretary
of State on 27 August 1999 and that such Certificate of Designations requires
corrections as permitted by Section 103 of the General Corporation Law of the
State of Delaware.
3. The inaccuracies or defects to be corrected in the Certificate of
Designations are contained in Sections 4 and 5(d)(i) and are set forth as
follows:
Section 4:
Upon the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the Series B Holders will be
entitled to receive out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or
earnings, before any distribution is made to holders of any class or
series of stock to which the Series B Preferred Stock ranks senior an
amount equal to US$7.5419 per share plus all accrued and unpaid
dividends on shares of Series B Preferred Stock outstanding as of the
date of such liquidation, dissolution or winding-up (the "Liquidation
Preference").
...
Section 5(d)(i):
The "Conversion Rate" as used herein is a ratio, the numerator of
which is $7.5419 and the denominator of which is the "Series B
Conversion Price" in effect at the time of the conversion. The Series
B Conversion Price will initially be $7.5419 and will be adjusted as
follows from time to time if any of the events described below shall
have occurred after the date hereof.
4. Such provisions contain typographical errors that incorrectly state an
amount of US$7.5419 instead of the correct amount of US$7.6033.
1
<PAGE>
5. Sections 4 and 5(d)(i) of the Certificate of Designations in corrected
form are as follows:
Section 4:
Upon the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the Series B Holders will be
entitled to receive out of the assets of the Company available for
distribution to its stockholders, whether from capital, surplus or
earnings, before any distribution is made to holders of any class or
series of stock to which the Series B Preferred Stock ranks senior an
amount equal to US$7.6033 per share plus all accrued and unpaid
dividends on shares of Series B Preferred Stock outstanding as of the
date of such liquidation, dissolution or winding-up (the "Liquidation
Preference").
...
Section 5(d)(i):
The "Conversion Rate" as used herein is a ratio, the numerator of
which is $7.6033 and the denominator of which is the "Series B
Conversion Price" in effect at the time of the conversion. The Series
B Conversion Price will initially be $7.6033 and will be adjusted as
follows from time to time if any of the events described below shall
have occurred after the date hereof.
[signature page follows]
-2-
<PAGE>
IN WITNESS WHEREOF, AsiaInfo Holdings, Inc. has caused this Certificate to
be signed by James Ding, its Chief Executive Officer, this 2/nd/ day of
September, 1999.
/s/ JAMES DING
-------------------------------
James Ding
Chief Executive Officer
<PAGE>
EXHIBIT 10.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILLED 09:01 AM 06/08/1998
981220223 - 2897577
CERTIFICATE OF MERGER
OF
ASIAINFO HOLDINGS, INC.,
a Texas corporation
with and into
ASIAINFO HOLDINGS, INC.,
a Delaware corporation
Pursuant to the provisions of Articles 5.04 of the Texas Business
Corporation Act ("TBCA") and Section 252 of the Delaware General Corporation Law
("DGCL"), ASIAINFO HOLDINGS, INC., a Texas corporation ("TEXCORP") and ASIAINFO
HOLDINGS, INC., a Delaware corporation ("DELCORP"), hereby certify as follows:
FIRST: The names of the constituent corporations participating in the
merger and the states under the laws which they were respectively organized are
as follows:
Corporation State
ASIAINFO HOLDINGS, INC. Texas
ASIAINFO HOLDINGS, INC. Delaware
SECOND: An Agreement and Plan of Merger (the "Plan of Merger") has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with TBCA Article 5.03 and DGCL Section
252.
THIRD: The name of the surviving corporation is "ASIAINFO HOLDINGS, INC.",
a Delaware corporation.
FOURTH: The Certificate of Incorporation of DELCORP shall be the surviving
corporation's Certificate of Incorporation.
FIFTH: The executed Plan of Merger is on file at the principal place of
business of the surviving corporation at 5201 Great American Parkway, Suite 226,
Santa Clara, California 95054. Pursuant to the Plan of Merger, the surviving
corporation will be responsible for, and obligated to pay, all applicable Texas
franchise tax and related fees of TEXCORP, if the same are not timely paid.
SIXTH: A copy of the Plan of Merger will be furnished by the surviving
corporation, on request and without cost, to any holder of capital stock of
either constituent corporation.
<PAGE>
SEVENTH: The authorized capital stock of TEXCORP is 30,000,000 shares,
consisting of 25,000,000 shares of Common Stock, $0.01 and 5,000,000 shares of
Preferred Stock, $0.01.
EIGHTH: The Plan of Merger was duly approved by all the shareholders of
TEXCORP by written consent dated the date hereof.
NINTH: The Plan of Merger was duly approved by the sole stockholder of
DELCORP by written consent dated the date hereof
TENTH: As to TEXCORP, the Plan of Merger and performance of its terms were
duly authorized by all action required by the TBCA and TEXCORP's constituent
documents.
ELEVENTH: As to DELCORP, approval of the Plan of Merger was duly authorized
by all action required under the DGCL and DELCORP's constituent documents.
TWELFTH: The effective date of the merger contemplated by the Plan of
Merger and this Certificate and Articles of Merger is June 8, 1998.
Dated: June 8, 1998.
TEXCORP:
ASIAINFO HOLDINGS, INC.,
a Texas corporation
By: /s/ Edward S. Tian
------------------------------
EDWARD S. TIAN, President
DELCORP:
ASIAINFO HOLDINGS, INC.,
a Delaware corporation
By: /s/ Edward S. Tian
------------------------------
EDWARD S. TIAN, President
<PAGE>
EXHIBIT 10.2
CERTIFICATE OF MERGER
OF
HTC INVESTMENTS, INC.,
a Delaware corporation
with and into
ASIAINFO HOLDINGS, INC.,
a Delaware corporation
Pursuant to the provisions of Section 251 of the General Corporation Law of
the State of Delaware ("DGCL"), the undersigned entities adopt and certify to
the following Certificate of Merger for the purpose of effecting a merger (the
"Merger") in accordance with the provisions of Section 251 of the DGCL:
FIRST: The names of the constituent business corporations participating in
the Merger are as follows:
Name of Corporation State of Incorporation
AsiaInfo Holdings, Inc. ("AsiaInfo") Delaware
HTC Investments, Inc. ("HTC") Delaware
SECOND: An Agreement and Plan of Merger (the "Merger Agreement") has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the provisions of subsection (c) of
DGCL Section 251.
THIRD: The name of the surviving corporation is AsiaInfo Holdings, Inc.,
a Delaware corporation, which will continue its existence as the surviving
corporation under its present name upon the effective time of the Merger.
FOURTH: The Certificate of Incorporation of AsiaInfo Holdings, Inc., as
now in force and effect, shall be the surviving corporation's Certificate of
Incorporation until amended and changed pursuant to the provisions of the DGCL.
FIFTH: The executed Merger Agreement is on file at the offices of
AsiaInfo Holdings, Inc., the surviving corporation, the address of which is 5210
Great American Parkway, Suite 429, Santa Clara, CA 95054.
SIXTH: A copy of the Merger Agreement will be furnished by the surviving
corporation, on written request and without cost, to any holder of capital stock
of either constituent corporation.
SEVENTH: As contemplated by the Merger Agreement, the Merger will become
effective upon the filing of this Certificate of Merger with the Delaware
Secretary of State.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the undersigned corporations have executed this
Certificate of Merger as of the 13/th/ day of October, 1999.
ASIAINFO HOLDINGS, INC.,
a Delaware corporation
By: /s/ James Ding
---------------------------------
Name: JAMES DING
-------------------------------
Title: CEO/Vice Chairman
------------------------------
HTC INVESTMENTS, INC.,
a Delaware corporation
By: /s/ Yadong Liu
---------------------------------
Name: YADONG LIU
-------------------------------
Title: Director/VP
------------------------------
2
<PAGE>
EXHIBIT 10.3
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of June 8, 1998 (the
"Agreement"), is entered into by and among ASIAINFO HOLDINGS, INC. a Delaware
corporation ("DELCORP") and ASIAINFO HOLDINGS, INC., a Texas corporation
("TEXCORP").
Recitals
A. The respective Boards of Directors of TEXCORP and DELCORP have
approved the business combination transaction provided for herein in which
TEXCORP would merge with and into DELCORP (the "Merger") on the terms and
subject to the conditions set forth in this Agreement in order to change
TEXCORP's place of organization from Texas to Delaware.
B. Pursuant to the Merger, each issued and outstanding share of TEXCORP
Stock (as defined below) will be converted into the right to receive the Merger
Consideration (as defined below).
C. For Federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended (the "Code").
Agreement
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereby agree as follows:
ARTICLE I - DEFINITIONS
Capitalized terms used in this Agreement are used as defined in this
Article I or elsewhere in this Agreement.
"Closing" has the meaning set forth in Section 2.02.
"Closing Date" has the meaning set forth in Section 2.02.
"DELCORP Common Stock" means shares of the ASIAINFO HOLDINGS, INC.'s, a
Delaware Corporation, Common Stock, $.01 par value.
"DELCORP Preferred Stock" means shares of ASIAINFO HOLDINGS, INC.'s, a
Delaware Corporation, Preferred Stock, $.01 par value.
"DGCL" means the Delaware General Corporation Law, as amended.
"Effective Time" has the meaning set forth in Section 2.03.
<PAGE>
"Merger Consideration" means, in respect of each share of (i) TEXCORP
Common Stock, the right to receive one (1) fully-paid and nonassessable share of
DELCORP Common Stock; and (ii) TEXCORP Preferred Stock, the right to receive one
(1) fully paid and nonassessable share of DELCORP Preferred stock.
"Surviving Corporation" means, upon effectiveness of the Merger, DELCORP.
"TBCA" means the Texas Business Corporation Act, as amended.
"TEXCORP Common Stock" means ASIAINFO HOLDINGS, INC.'s, a Texas
Corporation, Common Stock, $.01 par value.
"TEXCORP Preferred Stock" means ASIAINFO HOLDINGS, INC.'s, a Texas
Corporation, Preferred Stock, $.01 par value.
ARTICLE II - THE MERGER
2.01 The Merger. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the DGCL and TBCA, TEXCORP shall be
merged with and into DELCORP at the Effective Time of the Merger. Following the
Merger, the separate corporate existence of TEXCORP shall cease and DELCORP
shall continue as the surviving corporation and shall succeed to and assume all
the rights and obligations of TEXCORP in accordance with the DGCL and TBCA.
2.02 Closing. The Closing of the Merger (the "Closing") will take
place at TEXCORP's principal office at 10:00 a.m. on the date hereof or another
a date to be mutually agreed upon between the parties (the date of the Closing
being referred to herein as the "Closing Date"). At the Closing (a) the
Certificates required by Article III shall be delivered, (b) the appropriate
officers of TEXCORP and DELCORP shall execute and acknowledge the Certificate of
Merger (as described below), and (c) the parties shall take such further action
as is required to consummate the transactions described in this Agreement and
the Certificate of Merger.
2.03 Effective Time. As soon as practicable on or after the Closing
Date, the parties shall file a certificate of merger substantially in the form
of Exhibit A hereto (the "Certificate of Merger") executed in accordance with
the relevant provisions of the DGCL and TBCA and shall make all other filings or
recordings required under the DGCL and TBCA. The Merger shall become effective
upon the last to occur of the filing of the Certificate of Merger with the
Delaware Secretary of State or the Texas Secretary of State (the time the Merger
becomes effective being the "Effective Time" of the Merger).
2.04 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL and Section 5.06 of the TBCA.
2.05 Certificate of Incorporation and By-laws.
(a) The Certificate of Incorporation of DELCORP as in effect at the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
(b) The By-laws of DELCORP as in effect at the Effective Time of the
Merger shall be the By-laws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
2
<PAGE>
2.06 Directors. The directors of TEXCORP at the Effective Time of the
Merger shall be the directors of the Surviving Corporation until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
2.07 Officers. The officers of TEXCORP at the Effective Time of the
Merger shall be the officers of the Surviving Corporation until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
ARTICLE III - EFFECT OF MERGER ON CAPITAL STOCK
OF THE PARTIES; EXCHANGE OF CERTIFICATES
3.01 Effect on Capital Stock. As of the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of TEXCORP or any shares of capital stock of DELCORP the
following shall occur:
(a) Conversion of TEXCORP Stock. Each share of TEXCORP Common and
Preferred Stock issued and outstanding as of the Effective Time of the Merger
shall be converted into the right to receive the Merger Consideration. As of
the Effective Time of the Merger, all shares of TEXCORP Common and Preferred
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate representing
any shares of TEXCORP Common or Preferred Stock shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration in
exchange therefor.
(b) Cancellation of Treasury Stock. All shares of TEXCORP Common and
Preferred Stock, if any, that are owned as treasury stock as of the Effective
Time of the Merger shall be canceled and retired and shall cease to exist and no
capital stock of DELCORP or other consideration shall be delivered in exchange
therefor.
(c) DELCORP Stock Held by TEXCORP. All shares of DELCORP capital
stock, if any, owned by TEXCORP immediately before the Effective Time shall, by
virtue of the Merger and as of the Effective Time, cease to exist and all
certificates representing such shares shall be surrendered by TEXCORP for
cancellation.
3.02 Exchange of Certificates; Payment of Merger Consideration. Each holder
of record of a certificate or certificates that immediately prior to the
Effective Time of the Merger represented issued and outstanding shares of
TEXCORP Common or Preferred Stock (the "Certificates") whose shares were
converted into the right to receive the Merger Consideration pursuant to Section
3.01 shall surrender such Certificates for cancellation to DELCORP, duly
executed, and immediately following the Effective Time. DELCORP shall issue to
such holder in exchange therefor a certificate representing the number of shares
of DELCORP Common or Preferred Stock that such holder has the right to receive
pursuant to the provisions of Section 3.01. Upon payment of the Merger
Consideration, the Certificates so surrendered shall forthwith be canceled.
3.03 Shareholder Approval. To the extent required under the TBCA and DGCL,
each party, acting through its respective Board of Directors, shall as soon as
practicable after the date hereof, duly call, prepare and give written notice
of, convene and hold a special meeting of its shareholders for the purpose of
considering and taking action upon this Agreement and all transactions
contemplated hereby; provided, however, that such shareholder action may be
taken pursuant to a written consent in lieu of a special meeting.
3
<PAGE>
3.04 Fees and Franchise Taxes. DELCORP shall be responsible for the payment
of all fees and franchise taxes and will be obligated to pay such fees and
franchise taxes if the same are not timely paid.
[Signatures on Following Page]
4
<PAGE>
EXECUTED as of the date first written above.
DELCORP:
ASIAINFO HOLDINGS, INC.
a Delaware corporation
By: /s/ Edward S. Tian
------------------------------
EDWARD S. TIAN, President
TEXCORP:
ASIAINFO HOLDINGS, INC.
a Texas corporation
By: /s/ Edward S. Tian
------------------------------
EDWARD S. TIAN, President
5
<PAGE>
EXHIBIT 10.4
ASIAINFO HOLDINGS, INC.
1999 INCENTIVE STOCK OPTION PLAN
ARTICLE 1
PURPOSE
The purpose of the Plan is to attract employees to AsiaInfo Holdings, Inc.,
a Delaware corporation (the "Company") and to its Subsidiaries (hereafter
defined), and to provide such persons and employees of the Company and its
Subsidiaries with a proprietary interest in the Company through the granting of
Incentive Stock Options that will:
(a) increase the interest of the employees in the Company's welfare;
(b) furnish an incentive to the employees to continue their services
for the Company; and
(c) provide a means through which the Company may attract able
persons to enter its employ.
ARTICLE 2
DEFINITIONS
For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
"Board" means the board of directors of the Company and, to the extent
applicable, such members thereof as are delegated powers under Article 3 of
this Plan.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the Common Stock, $.01 par value, which the
Company is currently authorized to issue or may in the future be authorized
to issue.
"Company" means AsiaInfo Holdings, Inc., a Delaware corporation.
"Date of Grant" means the effective date on which an option is awarded
to an employee as set forth in the stock option agreement.
"Incentive Stock Option" means an option to purchase Common Stock of
the Company granted under this Plan and which is intended to qualify as an
incentive stock option under Section 422 of the Code.
"Option Period" means the period during which an option may be
exercised.
"Plan" means this AsiaInfo Holdings, Inc., 1999 Incentive Stock Option
Plan, as amended from time to time.
"Subsidiary" means any corporation, partnership, limited liability
company, or other entity (for the purposes of this definition, a _company_)
in an unbroken chain of companies beginning with the Company if, at the
time of the granting of a Stock Option, each of the companies other than
the last company in the unbroken chain owns stock possessing 50% or more
<PAGE>
of the total combined voting power of all classes of stock or other
interests in one of the other companies in the chain, and "Subsidiaries"
means more than one of any such companies.
ARTICLE 3
ADMINISTRATION
The Plan shall be administered by the Board; provided, however, that the
Board in its discretion may appoint a Stock Option Committee (the "Committee")
or designate the Compensation Committee of the Board as the Committee, the
Committee consisting of not fewer than two persons, for the purpose of
administering the Plan (hereafter, for convenience only, all references to
administration will be to the Board). The Board may upon resolution delegate
some or all of its powers with respect to the administration of the Plan to the
Committee. The Committee shall have only such powers as may be so delegated.
If the Board delegates some or all of its powers to the Committee as
provided hereunder, any member of the Committee (or all members in the event the
Board elects to assume direct responsibility for administration of the Plan) may
be removed at any time, with or without cause, by resolution of the Board. Any
vacancy occurring in the membership of the Committee may be filled by
appointment by the Board. The Committee shall select one of its members to act
as its Chairman and shall make such rules and regulations for its operation as
it deems appropriate. A majority of the Committee shall constitute a quorum, and
the act of a majority of the members of the Committee present at a meeting at
which a quorum is present shall be the act of the Committee. The Committee shall
determine and designate from time the employees to whom options will be granted,
the number of shares subject to each option, interpret the Plan, prescribe,
amend, and rescind any rules and regulations necessary or appropriate for the
administration of the Plan, and make such other determinations and take such
other action as it deems necessary or advisable. Any interpretation,
determination, or other action made or taken by the Committee shall be final,
binding, and conclusive on all interested parties. If no Committee is appointed,
the Board shall have the powers described in this Section.
ARTICLE 4
ELIGIBILITY
Any employee of the Company or any of its Subsidiaries whose judgment,
initiative and efforts contributed or may be expected to contribute to a
successful performance of the Company is eligible to participate in the Plan.
--2--
<PAGE>
ARTICLE 5
SHARES SUBJECT TO PLAN
The Board may not grant options under the Plan for more than One Million
Three Hundred Forty Thousand (1,340,000) shares of Common Stock of the Company
(as may be adjusted in accordance with Article 20 hereof). Shares to be optioned
and sold may be made available from either authorized but unissued Common Stock
or Common Stock held by the Company in its treasury. Shares that by reason of
the expiration or cancellation of an option granted under the Plan may be
reoffered under the plan.
ARTICLE 6
STOCK OWNERSHIP LIMITATION
No option may be granted to an employee who owns more than 5% of the total
combined voting power of all classes of stock of the Company or its
Subsidiaries; provided, however, that this limitation will not apply if the
exercise price is at least 110% of the fair market value of the Company Stock on
the Date of Grant and the Option Period is not greater than five years from the
Date of Grant.
ARTICLE 7
LIMITATION ON EXERCISES
To the extent required by the Code, the exercise of options granted under
the Plan shall be subject to the $100,000 calendar-year limit set forth in
Section 422(d) of the Code.
ARTICLE 8
ALLOTMENT OF SHARES
The Board shall determine the number of shares of Common Stock to be
offered from time to time by grant of options to participants under the Plan.
The grant of an option to a participant shall not be deemed either to entitle
the participant to, or to disqualify the participant from, participation in any
other grant of options under the Plan.
--3--
<PAGE>
ARTICLE 9
GRANT OF OPTIONS
All options under the Plan shall be granted by the Board and are intended
to be Incentive Stock Options. The grant of options shall be evidenced by stock
option agreements setting forth the total number of shares subject to the
option, the exercise price, the term of the option, the Date of Grant, and such
other terms and provisions as are approved by the Board, but not inconsistent
with the Plan, including provisions that may be necessary to assure that the
option is an Incentive Stock Option under the Code. The Company shall execute
stock option agreements with the participants after approval of the issuance of
stock option grants. The Plan shall be submitted to the Company's stockholders
for approval; however, the Board may grant options under the Plan prior to the
time of stockholder approval.
ARTICLE 10
EXERCISE PRICE
The exercise price shall not be less than 100% of the fair market value per
share of the Common Stock on the Date of Grant. The Board shall determine the
fair market value of the Common Stock on the Date of Grant and shall set forth
the determination in its minutes, using any reasonable valuation method.
ARTICLE 11
OPTION PERIOD
The Option Period of each option will begin and terminate on the dates
specified by the Board, but may not terminate later than ten years from the Date
of Grant. No option granted under the Plan may be exercised at any time after
its term. The Board may provide for exercise of options immediately or in
installments and upon such other terms, conditions and restrictions as it may
determine, including granting the Company the right to repurchase shares issued
upon exercise of options.
ARTICLE 12
TERMINATION OF EMPLOYMENT
In the event a participant shall cease to be employed by the Company or its
Subsidiaries, such participant's Incentive Stock Options shall be terminated as
follows:
(a) Death. In the event of death while employed, the option may be
exercised, for a period of ninety (90) days after the participant's death
or until expiration of the Option Period (if sooner) to the extent of the
shares with respect to which the option could have been exercised by the
participant on the date of the participant's death; such option may only be
exercised by the personal representative of the participant's estate or by
the person who acquired the right to exercise the option by bequest or
inheritance or by reason of the participant's death.
--4--
<PAGE>
(b) Disability. In the event of termination of employment as the result of
a total and permanent disability (as defined in Section 22(e) of the Code), the
option may be exercised by the participant or his guardian for a period of
ninety (90) days after such termination or until expiration of the Option Period
(if sooner), to the extent of the shares with respect to which the option could
have been exercised by the participant on the date of such termination.
(c) Termination for Other Reasons. In the event of termination of
employment (for reasons other than as set forth in subparagraphs (a) and (b)
above), the option may be exercised by participant for a period of 30 days after
the participant's termination or until expiration of the Option Period (if
sooner), to the extent of the shares with respect to which the option could have
been exercised by the participant on the date of termination.
--5--
<PAGE>
ARTICLE 13
PAYMENT
Full payment for shares purchased upon exercise of an option shall be made
in cash, at the option of the Board by the participant's delivery to the Company
of shares of Common Stock which have a fair market value equal to the exercise
price, or at the option of the Board in any combination of cash and shares of
Common Stock having an aggregate fair market value equal to the exercise price.
No shares may be issued until full payment of the purchase price thereof has
been made, and a participant will have none of the rights of a stockholder until
shares are issued to him.
ARTICLE 14
EXERCISE OF OPTIONS
Options granted under the Plan may be exercised during the Option Period,
at such times and in such amounts, in accordance with the terms and conditions
and subject to such restrictions as are set forth in the applicable stock option
agreements. If the Board imposes conditions upon exercise, then subsequent to
the Date of Grant the Board may, also in its sole discretion, accelerate the
date on which all or any portion of the options may be exercised. In no event
may an option be exercised or shares be issued pursuant to an option if
necessary listing of the shares on a stock exchange or any registration under
state or federal securities laws required under the circumstances has not been
accomplished.
ARTICLE 15
NON-ASSIGNABILITY
An option granted to a participant may not be transferred or assigned other
than by will or by the laws of descent and distribution or pursuant to the terms
of a qualified domestic relations order as defined in Code Section 411(a)(13).
If the participant attempts to alienate, assign, pledge, hypothecate or
otherwise dispose of his option or any right thereunder, except as provided for
in this Plan or the stock option agreement, or in the event of any levy,
attachment, execution or similar process upon the right or interest conferred by
this Plan or the stock option agreement, the Board may terminate the
participant's option by notice to him, and it shall thereupon become null and
void.
--6--
<PAGE>
ARTICLE 16
DISQUALIFYING DISPOSITION
If stock acquired upon exercise of an Incentive Stock Option is disposed of
by a participant prior to the expiration of either two years from the Date of
Grant of such option or one year from the transfer of shares to the participant
pursuant to the exercise of such option, or in any other disqualifying
disposition within the meaning of Section 422 of the Code, such participant
shall notify the Company in writing of the date and terms of such disposition. A
disqualifying disposition by a participant shall not affect the status of any
other option granted under the Plan as an Incentive Stock Option within the
meaning of Section 422 of the Code.
ARTICLE 17
AMENDMENT OR DISCONTINUANCE
The Plan may be amended or discontinued by the Board without the approval
of the stockholders of the Company, unless stockholders approval is required to
maintain the special tax treatment for Incentive Stock Options under the Code or
by any stock exchange on which the shares to be issued upon exercise of the
options are listed. No amendment may adversely affect an outstanding option
without the consent of the participant.
ARTICLE 18
EFFECT OF THE PLAN
Neither the adoption of this Plan nor any action of the Board or the
Committee shall be deemed to give any officer or employee any right to be
granted an option to purchase Common Stock of the Company or any other rights
except as may be evidenced by a stock option agreement, or any amendment
thereto, duly authorized by the Board and executed on behalf of the Company and
then only to the extent and upon the terms and conditions expressly set forth
therein.
ARTICLE 19
TERM
Unless sooner terminated by action of the Board, the Plan will terminate on
[tenth] anniversary of the Effective Date, but options granted before the date
will continue to be effective in accordance with their terms and conditions.
--7--
<PAGE>
ARTICLE 20
RECAPITALIZATION, MERGER AND CONSOLIDATION
(a) The existence of this Plan and options granted hereunder shall
not affect in any way the right or power of the Company or its stockholders
to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure and its
business, or any merger or consolidation of the Company, or any issue of
bonds, debentures, preferred or preference stocks ranking prior to or
otherwise affecting the Common stock or the rights thereof (or any rights,
options or warrants to purchase same), or the dissolution of liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether or a similar
character or otherwise.
(b) The number of shares of Common Stock available under the Plan
described in Article 5, the number of shares of Common Stock that may be
purchased pursuant to options granted under the Plan, and the consideration
payable per share upon exercise, shall be proportionately adjusted by the
Board for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares or other
capital adjustment, or the payment of a stock dividend or other increase or
decrease in such shares, effected without receipt of consideration by the
Company; provided, however, that any fractional shares resulting from any
such adjustment shall be eliminated for the purposes of such adjustment.
(c) Subject to any required action by the stockholders, if the
Company shall be the surviving or resulting corporation in any merger or
consolidation, any option granted hereunder shall pertain to and apply to
the securities or rights (including cash, property or assets) to which a
holder of the number of shares of Common Stock subject to the option would
have been entitled.
(d) In the event of any merger or consolidation pursuant to which the
Company is not the surviving or resulting corporation, there shall be
substituted for each share of Common Stock subject to the unexercised
portions of such outstanding options, that number of shares of each class
of stock or other securities or that amount of cash, property or assets of
the surviving or consolidated company which were distributed or
distributable to the stockholders of the Company in respect to each share
of Common Stock held by them, such outstanding options to be thereafter
exercisable (subject to appropriate adjustment, if appropriate, as to the
per share exercise prices for such stock, securities, cash or property, as
determined under subsection [b] above) in accordance with their terms.
Notwithstanding the foregoing, however, all such options may be canceled by
the Company as of the effective date of any such reorganization, merger or
consolidation or of any dissolution or liquidation of the Company by giving
notice to each holder thereof or his personal representative of its
intention to do so and by permitting the purchase during the thirty (30)
day period next preceding such effective date of all of the shares subject
to such outstanding options.
--8--
<PAGE>
(e) In the event that either sufficient shares of the Company's
Common Stock are purchased, or any tender, exchange or similar offer is
commenced which would, if successful (i) result in any of the events
described in sections 20(c) and (d) or (ii) materially alter the structure
or business of the Company, then, notwithstanding any other provision in
its Plan to the contrary, all unmatured installments of options outstanding
shall thereupon automatically be accelerated and exercisable in full and
any right the Company may have to repurchase shares issued upon exercise of
options shall terminate. The determination of the Board that any of the
foregoing conditions has been met shall be binding and conclusive an all
parties.
(f) Expect as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for labor or
services either upon direct sale or upon the exercise of rights or warrants
to subscribe therefor, or upon conversion of shares or obligations of the
Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to options granted
pursuant to this Plan.
(g) Upon the occurrence of each event requiring an adjustment of the
price or the number of shares purchasable pursuant to options granted
pursuant to the terms of this Plan, the Company shall mail forthwith to
each participant a copy of its computation of such adjustment which shall
be conclusive and shall be binding upon each such participant.
ARTICLE 21
LIQUIDATION OR DISSOLUTION
In case the Company shall, at any time while any option under this Plan
shall be in force and remain unexpired, (i) sell all or substantially all its
property, or (ii) dissolve, liquidate, or wind up its affairs, then each
participant may thereafter receive upon exercise hereof (in lieu of each share
of Common Stock of the Company which such participant would have been entitled
to receive) the same kind and amount of any securities or assets as may be
issuable, distributable or payable upon any such sale, dissolution, liquidation,
or winding up with respect to each share of Common Stock of the Company. If the
Company shall, at any time prior to the expiration of any option, make any
partial distribution of its assets, in the nature of a partial liquidation,
whether payable in cash or in kind (but excluding the distribution of a cash
dividend payable out of earned surplus and designated as such) then in such
event the prices then in effect with respect to each option shall be reduced, on
the payment date of such distribution, in proportion to the percentage reduction
in the tangible book value of the shares of the Company's Common Stock
(determined in accordance with generally accepted accounting principles)
resulting by reason of such distribution.
--9--
<PAGE>
ARTICLE 22
OPTIONS IN SUBSTITUTION FOR
STOCK OPTIONS GRANTED BY OTHER CORPORATIONS
Stock options may be granted under the Plan from time to time in
substitution for such options held by employees of a corporation who become or
are about to become employees of the Company or its Subsidiaries as the result
of a merger or consolidation of the employing entity with the Company or the
acquisition by the Company of stock of the employing entity. The terms and
conditions of the substitute options so granted may vary from the terms and
conditions set forth in this Plan to such extent as the Board at the time of
grant may deem appropriate to conform, in whole or in part, to the provisions
of the options in substitution for which they are granted.
ARTICLE 23
INVESTMENT INTENT
The Company may require that there be presented to and filed with it by any
participant under the Plan, such evidence as it may deem necessary to establish
that the options granted or the shares of Common Stock to be purchased or
transferred are being acquired for investment and not with a view to their
distribution.
--10--
<PAGE>
ARTICLE 24
NO RIGHT TO CONTINUE EMPLOYMENT
Nothing in the Plan or the grant of any option confers upon any employee
the right to continue in the employ of the Company or its Subsidiaries or
interferes with or restricts in any way the right of the Company or its
Subsidiaries to discharge any employee at any time (subject to any contract
rights of such employee).
ARTICLE 25
INDEMNIFICATION OF BOARD AND COMMITTEE
No member of the Board or the Committee, nor any officer or employee of
the Company acting on behalf of the Board or the Committee, shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Plan, and all members of the Board or the Committee
and each and any officer or employee of the Company acting on their behalf
shall, to the extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action, determination or interpretation. This
obligation shall survive any termination of this Plan.
ARTICLE 26
TAX REQUIREMENTS
The Company shall have the right to deduct from all amounts hereunder paid
in cash any taxes required by United States (including state and local taxes) or
other applicable law to be withheld with respect to such cash payments. The
employee receiving shares issued upon exercise of any stock option shall be
required to pay the Company the amount of any taxes which the Company is
required to withhold with respect to such shares of Common Stock. Such payments
shall be required to be made prior to the delivery of any certificate
representing such shares of Common Stock. Such payment may be made in cash, by
check, or through the delivery of shares of Common Stock owned by the employee
(which may be effected by the actual delivery of shares of Common Stock by the
employee or by the Company's withholding a number of shares to be issued upon
the exercise of the stock option), which shares have an aggregate fair market
value equal to the required withholding payment, or any combination thereof.
ARTICLE 27
EFFECTIVE DATE
The effective date (the _Effective Date_) of the Plan shall be 1 June 1999,
that is, the date the plan was approved and adopted by the Board.
--11--
<PAGE>
[signature page follows]
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
as of the effective date, by its President pursuant to prior action taken by the
Board.
ASIAINFO HOLDINGS, INC.
By: James Ding
Title: CEO and Company Secretary
Signature /s/ James Ding
-----------------------
--12--
<PAGE>
EXHIBIT 10.5
LEASE CONTRACT
Lessor: China Electronic Information Industry Group Corporation
("Party A")
Registration Domicile: Beijing, China
Legal Representative: Wang Jincheng
Address: 27, Wanshou Road, Haidian District, Beijing
Telephone No: 62171563
Fax No: 68213745
Lessee: Asiainfo Computer Network (Beijing) Co., Ltd.
("Party B")
[renamed to "AsiaInfo Technology (China) Inc."]
Registration Domicile: Beijing, China
Legal Representative: Yong Yimin
Address: 11, Baishiqiao Road, Haidian District, Beijing
Telephone No: 68427711
Fax No: 68467050
1 SUBJECT MATTER FOR LEASE
1.1 Party A agrees to lease to Party B under good status the third and fourth
floors of China Electronic Information Building located at 18, Baishiqiao
Road, Haidian District, with the aggregated area under the lease six
thousand three hundred forty-six point four seven square metres
(6,346.47m2) (which is gross area, including shared area for common use),
with the particular position as delineated by the red lines on the drawing
of Appendix 1.
1.2 Party A shall provide the interior decoration, with the standard as: the
ground of the third and fourth floors shall be cement flooring, general
gypsum board suspended ceiling, emulsion paint wall, wood skirting board,
general insert fluorescent lighting.
1.3 The premises mentioned above shall only be used for office purpose.
<PAGE>
2 LEASE TERM
2.1 The premises mentioned above shall be of a lease term of five (5)
years, commencing from 16 February 2000 to and ending on 15 February 2005.
2.2 Upon expiration of the lease term, Party A shall have the right to take
back the premises under the lease and Party B shall return the premises
timely. In the event that Party B wishes to renew the lease, Party B shall
handle the renewal procedures with Party A three (3) months prior to the
expiration of this Contract.
2.3 Party A and Party B agree that the leasing price for the premises
mentioned above shall, from the fourth year of the lease term, be
appropriately adjusted according to the leasing price condition on the
market then. Party A and Party B shall, two (2) months prior to the
beginning of the fourth year of the lease term, enter into a supplementary
agreement in respect of the adjustment scale of the leasing price and rent
payment method for the last two years of the lease term. In case both
Parties can not reach agreement on the issue of the adjustment scale at
that time, this Contract shall be terminated on 15 February 2003.
3 RENT AND PAYMENT
3.1 During the lease term, the leasing price shall be three point nine
Renminbi (RMB3.9) per square metre for each day (which is gross area,
including property management fee), with the lease term to be calculated
according to calendar days.
3.2 Payment of the rent for the first three (3) years shall be as: the rent
shall be paid quarterly, with the whole rent to be paid in twelve (12)
instalments and the first instalment to be two million two hundred twenty
seven thousand six hundred and ten point nine seven Renminbi
(RMB2,227,610.97) to be paid by Party B to Party A within five (5) working
days of the date of this Contract, and the other instalments to be paid
with their respective amount and date as follows:
- -------------------------------------------------------------------------------
No. of Instalment Date of Payment Amount of Payment
(RMB)
- -------------------------------------------------------------------------------
2 5 May 2000 - 15 May 2000 2,277,113.44
- -------------------------------------------------------------------------------
3 5 August 2000 - 15 August 2000 2,277,113.44
- -------------------------------------------------------------------------------
4 5 November 2000 - 15 November 2000 2,277,113.44
- -------------------------------------------------------------------------------
5 5 February 2001 - 15 February 2001 2,202,859.74
- -------------------------------------------------------------------------------
6 5 May 2001 - 15 May 2001 2,277,113.44
- -------------------------------------------------------------------------------
7 5 August 2001 - 15 August 2001 2,277,113.44
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
8 5 November 2001 - 15 November 2001 2,277,113.44
- -------------------------------------------------------------------------------
9 5 February 2002 - 15 February 2002 2,202,859.74
- -------------------------------------------------------------------------------
10 5 May 2002 - 15 May 2002 2,277,113.44
- -------------------------------------------------------------------------------
11 5 August 2002 - 15 August 2002 2,277,113.44
- -------------------------------------------------------------------------------
12 5 November 2002 - 15 November 2002 2,277,113.44
- -------------------------------------------------------------------------------
4 EARLY WITHDRAWAL FROM THE LEASE
In case either Party A or Party B wishes, during the valid term of this
Contract, to withdraw early from the lease for some particular reason, it shall
notify the other Party in writing three (3) months in advance and also pay the
other Party a liquidated damage for an amount equivalent to fifty percent (50%)
of the annual rent. Party A shall also return to Party B the rent which is
already paid but not actually incurred.
5 MANAGEMENT FEES AND OTHERS
5.1 All the fees during the lease term in connection with the premises
mentioned above for electricity, deposit of telephone lines, telephone and
charges in connection with the lease and use of the premises mentioned
above shall be paid by Party B in full amount and timely according to the
provisions and requirements of the Building Property Management Company
(the "Company") or other relevant departments.
5.2 Any taxes and fees payable by the owner of the premises mentioned above
(Party A) according to the laws or relevant provisions in connection with
the lease of the premises mentioned above shall be paid by Party A.
6 PARTY A'S RIGHTS AND OBLIGATIONS
6.1 In the event of default by Party B of this Contract, Party A may
authorise, with no further notice otherwise, the Company to procure the
rectification by Party B of its default and its compensation of
corresponding losses.
6.2 During the three (3) months prior to the expiration of the lease term,
Party A may enter the premises with any person who has the intention to
lease the premises for the purpose of inspection, subject to notification
to Party B and obtaining Party B's agreement.
6.3 In the event that Party B has not removed all or any part of its own
private property or self-installed equipment and articles out of the
premises within fifteen (15) days of the expiration or termination and
discharge of this Contract, Party A will charge Party B an extra rent for
the delay according to the actual days elapsed.
<PAGE>
6.4 In the event of any damage to the fixed apparatus and facilities such
as roof, main structure, floor and drainage pipes, gas pipelines, power
cables, etc which are not attributable to Party B, Party A shall assume the
cost for the maintenance. When such damage occurs, Party B shall notify
Party A (or the agent authorised by Party A) timely for the Company to
arrange for the maintenance.
6.5 Party A shall declare and pay taxes and fees by itself in connection
with its lease out of the premises.
6.6 Party A shall guarantee that the Building has already been granted the
approval to be in operation and has passed the acceptance examination by
the relevant department.
6.7 Party A shall deliver the premises to Party B strictly in accordance
with the time and standards agreed in this Contract.
7 PARTY B'S RIGHTS AND OBLIGATIONS
7.1 Party B shall have the right to use the premises mentioned above and
the common areas and common equipment of the Building and assume the
corresponding liabilities and obligations in accordance with the provisions
of this Contract and the rules and regulations of the Building.
7.2 Party B shall adopt necessary preventive measures as to prevent fire
occurring to the premises.
7.3 In the event of any damage to the premises due to Party B's improper
use, management and maintenance, Party B shall notify Party A or the
Company of the same timely and shall assume the maintenance cost and
compensation which occurs as a result thereof.
7.4 Party B shall decide by itself on issues of insurance for the property
Party B places within the premises mention above or Party B may authorise
the Company to handle such issues on its behalf.
7.5 Party B may not transfer, sublease or otherwise let other people use
all or any part of or share the premises mentioned above with other people.
7.6 Party B agrees that Party A may, within reasonable time and subject to
giving prior notice (or under urgent circumstances, without giving prior
notice), enter the premises mentioned above for the purpose of inspection
and examination of the status of the facilities originally installed within
the premises, or handling contingency issues. In case the facilities are
damaged due to Party B's fault, Party B shall repair promptly such damage
according to Party A's requirement and at its own cost, or Party A shall
have the right to carry out the repair for Party B and the cost thereof
shall be borne by Party B.
7.7 Party B may carry out by itself necessary decoration and reform of the
air-conditioning and fire-fighting systems and non-bearing partition walls
of the premises mentioned
<PAGE>
above, but such reform on the principle shall not
damage the monolithic structure and facilities of the premises.
7.8 In the event of any damage to other people's property or injury to
individuals due to Party B's improper use, management, maintenance, etc of
the premises mentioned above, Party B shall solve by itself the dispute
arising therefrom and assume by itself the liability to compensate such
damage.
7.9 Upon expiration of the lease term, Party B shall remove its own private
property and self-installed equipment and articles out of the premises
mentioned above, hand back the premises mentioned above under clean and
good status to Party A. Articles as a result of Party B's decoration may
remain to be owned by Party A, and Party A does not have to pay
compensation for such decoration. In the event of any damage to the
interior and outside of the premises mentioned above due to Party B's
dismantlement, carrying-away, etc, Party B shall be liable for repair and
compensation of such damage.
7.10 Any act of negligence of duty, of default and of infringement on the
part of Party B's employees, visitors and other people permitted to enter
the premises mentioned above in connection with their management,
maintenance and use of the premises mentioned above shall all be deemed as
Party B's act, and Party B shall be liable to Party A therefor.
8 FORCE MAJEURE
In the event of earthquake, typhoon, storm, fire, war and other force majeure
events which are unforeseen, with their occurrence and consequences
unpreventable and unavoidable, and which prevent performance by either Party of
this Contract or performance of this Contract according to the terms and
conditions agreed in this Contract, the Party encountering such force majeure
shall promptly inform the other Party by telegram or fax and shall furnish
within fifteen (15) days details of such force majeure and valid proof documents
as to this Contract being unable to be performed in whole or in part, or to be
delayed for its performance. The proof documents shall be issued by the local
notary institution where the force majeure occurs. The Parties shall consult
with each other to decide whether this Contract shall, in accordance with the
extension to which the performance of this Contract is affected, be terminated,
partly discharged of the performance liabilities or delayed for its performance.
9 LIABILITY FOR BREACHING CONTRACT
If Party B fails to pay the rent to Party A timely according to this Contract,
Party A shall have the right to notify Party B in writing for immediate payment.
For delay in payment, Party B shall pay Party A the surcharge at the rate of
five percent (5%) of the monthly rent for each day. In case the delay in
payment exceeds thirty (30) days, Party A shall have the right to discharge this
Contract, with the date of issue of the written notice for discharge being the
date of such discharge, and this shall be regarded as the termination of this
Contract by Party B's breaching contract and Article 4 of this Contract shall
then apply. Apart from the rent Party B has delayed to pay, Party B shall also
pay all the surcharge in accordance with this Article.
<PAGE>
10 PRE-EMPTIVE RIGHT
10.1 Party B may propose to renew the lease three (3) months prior to the
expiration of the lease term and, if Party A intends to continue to lease
out the premises mentioned above and Party B has no material default during
the lease term, Party B shall have the pre-emptive right to enter into the
renewal lease contract for the premises mentioned above under the same
conditions and terms.
10.2 During the lease term or upon expiration of the lease term, if Party A
intends to sell the premises mentioned above and Party B has no material
default during the lease term, Party B shall have the pre-emptive right to
purchase the premises mentioned above under the same conditions and terms.
11 GOVERNING LAW AND SETTLEMENT OF DISPUTE
11.1 The formation, validity, interpretation, implementation and dispute
settlement of this Contract shall be governed by the laws of the People's
Republic of China.
11.2 Any dispute arising out of the performance of this Contract or in
connection with this Contract shall be settled by the Parties through
friendly consultations between them. Failing it, such dispute shall be
referred to and finally settled by arbitration of the Beijing Arbitration
Commission.
12 MISCELLANEOUS PROVISIONS
12.1 In the event that any provision of this Contract is made invalid,
illegal or unenforceable in accordance with the laws, the validity,
legality and enforceability of all other provisions of this Contract shall
not be affected thereby and the Parties shall continue to perform such
valid provisions of this Contract.
12.2 Any notice, request or other communication in connection with this
Contract shall be in writing and shall be sent to the other Party by
registered mail, personal delivery or fax at the addresses of the Parties
set forth above first. Mails to Party B may also sent to the address of
the premises mention above.
12.3 Anything not covered in this Contract shall be dealt with in the
Supplementary Agreement otherwise entered into between Party A and Party B,
which shall be an appendix to this Contract. The appendix to this Contract
and the various rules and regulations set forth by the Company in relation
to the management of the Building and the premises mention above shall be
an integral part of this Contract.
12.4 This Contract shall have its Chinese version as the authentic version.
12.5 Upon agreement by the Parties, the execution of this Contract may be
witnessed by the lawyers who shall further supervise the performance of
this Contract. The legal fees incurred therefor shall be borne by Party B.
12.6 This Contract shall be executed in four (4) copies, with the lessor and
lessee each keeping two (2) versions. Each of the four (4) copies of this
Contract shall be equal in legal force.
<PAGE>
12.7 This Contract shall become effective on the date of its signature.
IN WITNESS WHEREOF each of the Parties hereto have caused this Contract to be
executed by its duly authorised representative on the date set forth below.
Party A: (Contract Seal of China Electronic Information Industry Group
Corporation)
Representative of Party A: (signature)
Dated: 31 August 1999
Party B: (Contract Seal of Asiainfo Computer Network (Beijing) Co., Ltd.)
Representative of Party B: (signature)
Dated: 31 August 1999
<PAGE>
SUPPLEMENTARY AGREEMENT (1)
Upon consultation between Party A and Party B, Party A undertakes to Party B
that the following special terms shall apply.
1 RENT FREE PERIOD FOR DECORATION
1.1 There shall be a rent free period of five (5) months for decoration of
the premises mentioned above, which commences from 15 September 1999 and
continues to end on 14 February 2000, provided that Party B shall still pay
to Party A during the rent free period the property management fee which is
1 Renminbi (RMB1) per square metre per day.
1.2 Party A shall, from 15 September 1999, provide Party B with the
necessary conditions for decoration, such as work site, temporary water and
electricity supply, lifts and traffic access for goods and personnel. In
the event of the decoration being delayed due to Party A's fault, the rent
free period for decoration shall be calculated according to the actual days
spent for the decoration and the rent free period for decoration shall be
extended according to the actual days thus delayed.
1.3 Party A shall assist Party B to handle the procedures with the relevant
government authorities for approval to the decoration work, such as the
fire-fighting bureau, designing institution, quality inspection station,
etc. In the event of the decoration being delayed due to Party A's fault,
the rent free period for decoration shall be extended according to the
actual days thus delayed.
1.4 In the event of the rent free period for decoration being delayed due
to Party B's fault or the authorised decoration company being unable to
submit timely the decoration plan to the Beijing fire-fighting department
for examination and approval, or the decoration plan being unable to be
approved by the fire-fighting department or relevant government, the rent
free period for decoration shall not be extended and Party A shall not bear
any liabilities.
2 FREE PARKING SPACE
Party A shall provide Party B with twenty (20) to thirty (30) ground parking
spaces free of charge, and Party B shall have the option to choose such parking
spaces.
3 LIFTS
3.1 During the lease term, Party A shall provide Party B with one (1)
passenger lift for its internal decoration work and, when Party B requires,
for Party B's exclusive use. In respect of other lifts, the third and
fourth floor bottoms thereof may be changed to those with Party's sign,
with the cost needed to be borne by Party B. Party B guarantees that
<PAGE>
it shall not violate the relevant provisions by Party A and the Building
Property Management Company.
3.2 During the lease term, Party A shall permit Party B to control and use
the elevator between the third and fourth floors, with the cost of
electricity to be borne by Party B.
4 TOILET
Party A shall, before 30 October 1999, provide Party B on each of the third and
fourth floors respectively with one (1) toilet room for male and one (1) toilet
room for female, with the cost for general decoration to be borne by Party A and
the cost for fine decoration to be borne by Party B.
5 SIGNBOARD IN THE HALL
During the lease term, Party A shall permit Party B to have its sign visibly
placed at the signboard in the hall.
6 ADVERTISEMENT
During the lease term, Party B shall be permitted, under Party A's overall
arrangement, to erect at outside of the Building (e.g. top, periphery, parking
lot, etc) signs and signboards of Party B, and shall have the option, after
China Electronic Group and Xihua Group in precedence, in respect of sign
position selection provided it shall pay relevant fees in accordance with the
relevant provisions.
7 FLAGPOLE
Party A agrees that Party B may, when its has such need, use the flagpole on the
plaza of the China Electronic Information Building during the lease term.
8 PARTITION
During the lease term, Party A shall permit Party B to have partitions of closed
type between the second and third floors (which shall be subject to the Beijing
municipal fire-fighting standards and guarantee the unblocked status of the
passages for fire-fighting).
9 PARTITION
During the lease term, Party A shall guarantee that the electricity supply to
the third and fourth floors reaches 260KW.
10 DDN SPECIFIC LINES
Party A shall guarantee that the DDN specific lines provided to Party B comply,
before 30 October 1999, with the technical requirements by the Telecommunication
Bureau for transmission data. Where necessary, Party A shall establish nodal
equipment. In case that Party B is not able to be provided timely with DDN
specific lines in compliance with the
<PAGE>
technical requirements by the Telecommunication Bureau for transmission data,
Party B shall be granted an extension of the rent free period for the same days
as those being delayed for failing to provide the DDN specific lines.
11 TELEPHONE REQUIREMENTS
During the lease term, Party A shall guarantee to provide Party B with three
hundred (300) trunk and direct lines, and shall assist Party B to carry out such
work as equipment relocation, etc.
12 STORAGE ROOM
During the lease term, Party A shall provide Party B with a space of two hundred
to three hundred square metres (200~300m2) at the underground room of the China
Electronic Information Building for Party B's use as its storage room, with the
fees to be agreed otherwise.
13 OTHERS
During the lease term, Party A agrees that Party B shall be given preferential
treatment when it uses such accessory facilities as the multi-function hall,
meeting hall, etc of the China Electronic Information Building.
Party A: (Contract Seal of China Electronic Information Industry Group
Corporation)
Representative of Party A: (signature)
Dated: 31 August 1999
Party B: (Contract Seal of Asiainfo Computer Network (Beijing) Co., Ltd.)
Representative of Party B: (signature)
Dated: 31 August 1999
<PAGE>
SUPPLEMENTARY AGREEMENT (2)
In order to guarantee the implementation of the provisions set out in
Supplementary Agreement (1), Party A undertakes, upon consultation between Party
A and Party B, to Party B that the following special terms shall apply.
1 During the lease term, Party B shall pay, on a lump sum basis, to Party
A's subsidiary China Electronic Weihua Industrial Development Company an
amount at the rate of zero point zero eight Renminbi (RMB0.08) per day per
gross square metre calculated daily for a period of three (3) years.
The total amount to be paid shall be five hundred fifty six thousand four
hundred fifty eight point four nine Renminbi (RMB556,458.49), which shall
be paid within five (5) working days of the signature of this Contract.
2 Party B undertakes to keep confidential the terms in relation to commercial
transaction in this Contract.
Party A: (Contract Seal of China Electronic Information Industry Group
Corporation)
Representative of Party A: (signature)
Dated: 31 August 1999
Party B: (Contract Seal of Asiainfo Computer Network (Beijing) Co., Ltd.)
Representative of Party B: (signature)
Dated: 31 August 1999
<PAGE>
LAYOUT OF THIRD FLOOR
OF
CHINA ELECTRONIC INFORMATION BUILDING
<PAGE>
LAYOUT OF FOURTH FLOOR
OF
CHINA ELECTRONIC INFORMATION BUILDING
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF ASIAINFO HOLDINGS, INC.
<TABLE>
<CAPTION>
Name under which the State or other jurisdiction of
Subsidiaries subsidiary does business incorporation
- ------------ ------------------------ -------------
<S> <C> <C>
AsiaInfo Services Inc. AI Services Texas, United States of America
AsiaInfo Technologies (China), AI Technology People's Republic of China
Inc.
AsiaInfo-CTC Network Systems, AI CTC People's Republic of China
Inc.
Zhejiang AsiaInfo AI Zhejiang People's Republic of China
Telecommunication
Technology Co. Ltd.
General Data System Co., Ltd. AI Data People's Republic of China
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of AsiaInfo Holdings Inc.
on Form S-1 of our report dated May 16, 1999, appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Hong Kong
December 21, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of AsiaInfo Holdings Inc.
on Form S-1 of our report dated March 20, 1999 (relating to the financial
statements of Zhejiang AsiaInfo Telecommunication Technology Co., Ltd.),
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte Touche Tohmatsu Shanghai CPA
Deloitte Touche Tohmatsu Shanghai CPA
Shanghai
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,749,374
<SECURITIES> 0
<RECEIVABLES> 23,292,881
<ALLOWANCES> (62,685)
<INVENTORY> 566,383
<CURRENT-ASSETS> 42,804,870
<PP&E> 1,745,354
<DEPRECIATION> (465,253)
<TOTAL-ASSETS> 45,358,879
<CURRENT-LIABILITIES> 26,047,919
<BONDS> 0
0
21,609
<COMMON> 141,600
<OTHER-SE> 19,083,472
<TOTAL-LIABILITY-AND-EQUITY> 45,358,879
<SALES> 0
<TOTAL-REVENUES> 44,222,392
<CGS> 32,189,514
<TOTAL-COSTS> 11,352,305
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394,398
<INCOME-PRETAX> 1,158,240
<INCOME-TAX> (255,504)
<INCOME-CONTINUING> 1,413,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,535,810
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.07
</TABLE>
<PAGE>
EXHIBIT 99.1
DATED 26 July 1999
ARTICLES OF ASSOCIATION
OF
ASIAINFO TECHNOLOGY (CHINA) INC.
<PAGE>
CONTENTS
CHAPTER ONE GENERAL PROVISIONS................................................1
CHAPTER TWO PURPOSE AND BUSINESS SCOPE........................................2
CHAPTER THREE TOTAL INVESTMENT AND REGISTERED CAPITAL.........................2
CHAPTER FOUR BOARD OF DIRECTORS...............................................3
CHAPTER FIVE MANAGEMENT ORGANISATION..........................................5
CHAPTER SIX FINANCIAL ISSUES..................................................6
CHAPTER SEVEN PROFIT DISTRIBUTION.............................................7
CHAPTER EIGHT STAFF...........................................................7
CHAPTER NINE WORKERS UNION....................................................7
CHAPTER TEN TERM, TERMINATION AND LIQUIDATION.................................9
CHAPTER ELEVEN RULES AND REGULATIONS..........................................9
CHAPTER TWELVE INSURANCE.....................................................10
CHAPTER THIRTEEN GOVERNING LAW...............................................10
CHAPTER FOURTEEN SUPPLEMENTARY PROVISIONS....................................10
<PAGE>
CHAPTER ONE
GENERAL PROVISIONS
Article 1
In accordance with the Law of the People's Republic of China on Wholly Foreign
Owned Enterprises and other relevant regulations, Asiainfo Holdings Inc. decides
to establish with its sole capital in Haidian District, Beijing Asiainfo
Technology (China) Inc. (the "Company").
Article 2
The name of the Company shall be [ ] in Chinese.
The English name of the Company shall be AsiaInfo Technology (China) Inc..
Registered address: 4th Floor, Science and Technology Building, No 11,
Bai Shi Qiao Road, Haidian District, Beijing.
Postcode: 100081
Legal Representative: Yong Yimin
Position: Board Chairman
Nationality: Chinese
Article 3
The background of the Investor shall be as follows.
The name of the Investor is [ ] in Chinese.
The English name of the Investor is AsiaInfo Holdings Inc.
Country of Registration: America
Registered address: [ ] in Chinese.
Address in English: Techmart of Santa Clara, 5201 Great America Parkway
Suite 429, Santa Clara, CA 95054, USA.
Legal Representative: Louis Lau
Position: Board Chairman
Nationality: American
<PAGE>
Article 4
The Company shall be a limited liability company.
Article 5
The Company shall be a Chinese legal person, to be governed and protected by the
Chinese laws. All activities of the Company shall be subject to the laws,
decrees and relevant regulations of the Chinese government.
CHAPTER TWO
PURPOSE AND BUSINESS SCOPE
Article 6
The purpose of the Company shall be to introduce into China the foreign advanced
science and technology, to manufacture and sell software of internationally
advanced level for computer integrated network system and equipment and parts
for computer integrated network, to have a share on the international market and
to train high-tech personnel for China. Also, the Company aims to become the
advanced technology enterprise and product-export enterprise and to obtain
satisfactory economic benefits.
Article 7
The business scope of the Company shall be to develop and manufacture software
for computer network systems, computer network integration systems, equipment
and parts for computer network; to sell self-manufactured products; and to
provide technical service for self-manufactured products.
Article 8
The business scale of the Company shall be to manufacture annually twelve (12)
sets of software for computer integration network.
CHAPTER THREE
TOTAL INVESTMENT AND REGISTERED CAPITAL
Article 9
The total investment of the Company shall be nine million US dollars
(US$9,000,000) and the registered capital shall be eight million and five
hundred thousand US dollars (US$8,500,000), with the difference between the two
to be solved by bank loans.
Article 10
The registered capital shall consist of eight million and one hundred thousand
US dollars (US$8,100,000) in cash and four hundred thousand US dollars
(US$400,000) in equipment,
<PAGE>
with an aggregated amount of the two being eight million and five hundred
thousand US dollars (US$8,500,000).
Article 11
Any increase and transfer of the registered capital of the Company shall be
subject to, upon consent of Asiainfo Holdings Inc., approval by the original
examination and approval authority and registration procedures for the change
shall then be carried out at the original registration authority. During its
business term as a wholly foreign funded enterprise the Company shall not reduce
its registered capital.
CHAPTER FOUR
BOARD OF DIRECTORS
Article 12
The Company shall have a Board of Directors which shall be the highest authority
of the Company.
Article 13
The Board of Directors shall decide all the major issues of the Company, with
its duties and authorities mainly as follows:
- - to decide and approve the important reports proposed by the General
Manager;
- - to approve the annual financial statements, income and expenditure
budget, annual profit distribution plan;
- - to adopt the important rules and regulations of the Company;
- - to decide to establish branch institutions;
- - to amend the Articles of Association of the Company;
- - to discuss and decide the winding-up and termination of the Company,
or its merger with another economic organisation;
- - to engage the General Manager, Chief Engineer, Chief Accountant and
other senior staff;
- - to be responsible for the liquidation issues of the Company when it is
terminated or expired;
- - other major issues to be decided by the Board of Directors.
Article 14
The Board of Directors shall consist of four (4) directors for a term of four
(4) years.
<PAGE>
Article 15
The Board of Directors shall have one (1) Chairman who shall be appointed by the
Investor and be the legal representative of the Company for a term of four (4)
years. The Company shall have no Vice-Chairman for the time being.
Article 16
When directors are to be appointed or replaced, the Board of Directors shall be
give prior written notice.
Article 17
The Board of Directors shall convene once every half a year. Upon the request of
one third (1/3) or more directors, an interim meeting of the Board may be
convened.
Article 18
The Board of Directors shall convene in principle at the address of the Company.
Article 19
Meetings of the Board of Directors shall be convened and presided over by the
Chairman, or a director authorised by the Chairman in writing when the Chairman
is unable to do so.
Article 20
The Chairman shall notify each director in writing of the agenda, time and place
of the Board meeting to be convened thirty (30) days prior to such meeting.
Article 21
Where the director is unable to attend the Board meeting for whatever reason, he
may authorise in writing a proxy to attend such meeting for him; where the
director does not attend the meeting in person nor authorises a proxy to attend
such meeting on his behalf, he shall be deemed to have waived his right to
attend the meeting.
Article 22
Each Board meeting requires a quorum of two-thirds (2/3) of all the directors,
and no resolution passed at any Board meeting shall be valid when such a quorum
of two-thirds (2/3) is not present at the meeting.
Article 23
Each Board meeting shall have a detailed written board minute which shall be
signed by all the directors at the meeting or by the proxy when a director is
represented by such proxy. The board minute shall be in Chinese and shall be
kept by the Company for filing.
<PAGE>
Article 24
Where the Board meeting is to pass resolution on issues of a general nature,
such resolution requires a two-thirds (2/3) affirmative votes of all the
directors at the meeting, and for issues of the followings a unanimous
affirmative votes of all the directors at the meeting are required:
1. amendment to the Articles of Association of the Company;
2. increase and transfer of the registered capital of the Company;
3. merger of the Company with another economic organisation; and
4. termination or dissolution of the Company.
CHAPTER FIVE
MANAGEMENT ORGANISATION
Article 25
The Company shall adopt the system of General Manager assuming responsibilities.
The Company shall have one (1) General Manager and two (2) Deputy General
Managers, who shall be engaged by the Board of Directors for a term of office
for four (4) years.
Article 26
The General Manager shall be responsible for the daily business operations of
the Company, represent the Company in dealings with other enterprises and
appoint and dismiss personnel in charge of various departments and other
subordinates within the Company.
Article 27
The General Manager shall have the duties as follows:
1. to carry out the Articles of Association of the Company and the
resolutions adopted by the Board of Directors;
2. within the authority granted by the Investor, to deal with other
enterprises in various issues of business and be responsible for any
and all issues of administration and business within the Company;
3. to submit work report to the Investor;
4. to convene and preside over General Manager Business Meeting;
5. to formulate and adopt the main rules and regulations of the Company
and amendments thereto;
6. to decide to establish branch institutions;
<PAGE>
7. to appoint and dismiss Chief Engineer, Accountants and approve the
annual financial budgets and final statements;
8. to be responsible for liquidation issues of termination and expiration
of the Company;
9. to examine and decide the sales price of the Company's products on the
domestic and international markets; and
10. to make final administrative decision on issues of rewards and penalty
for staff of the Company.
The duties of the Deputy General Managers are to assist the General Manager in
his work, and to exercise the authorities of the General Manager when the
General Manager is not available.
CHAPTER SIX
FINANCIAL ISSUES
Article 28
The Company shall establish its accounting items within China, keep separate
accounts, submit accounting statements according to relevant regulations and be
subject to the supervision of the relevant financial and taxation departments.
Article 29
The Company shall adopt the calendar year for its accounting year, which shall
commence from 1 January and continue to end on 31 December.
Article 30
The Company shall adopt Renminbi as its book-keeping currency and all accounts,
vouchers and statements shall be written in Chinese.
Article 31
The Company shall open its Renminbi and foreign exchange bank accounts in
relevant banks in China and shall be subject to the regulations of foreign
exchange control in China.
Article 32
The Company shall pay various taxes and fees in accordance with the relevant tax
laws of China. The staff of the Company shall pay individual income tax and
adjustment taxes in accordance with the laws.
<PAGE>
Article 33
The Company shall be subject to the audit of relevant departments in its
financial issues, and the annual final financial statements and profit
distribution plan of the Company shall be examined and verified by the account
registered in China.
CHAPTER SEVEN
PROFIT DISTRIBUTION
Article 34
The Company shall allocate from its profit after payment of income tax for the
Reserve Fund, Enterprise Development Fund and Staff Bonus and Welfare Fund.
Article 35
The Company shall distribute profit once each year. The profit distribution plan
and amount of profit distributable shall be made public within three (3) months
after each accounting year.
Article 36
The Company shall not distribute profit of the current accounting year in case
the Company has not yet made up the losses in the preceding accounting year. Any
undistributed profit of the preceding accounting year may be combined into the
profit of the current accounting year for distribution.
CHAPTER EIGHT
STAFF
Article 37
The Company shall employ Chinese and overseas staff according to its
requirement, enter with them into labour contract in accordance with the laws to
specify matters relating to the employment, dismissal, remuneration, welfare,
labour protection, insurance, etc and file such contract with the local labour
administration department.
Article 38
The standard of wage and welfare treatment for staff of the Company shall be
decided by the General Manager in view of the business operation status of the
Company and in accordance with the relevant provisions of the Chinese
government.
CHAPTER NINE
WORKERS UNION
<PAGE>
Article 39
The staff of the Company may establish workers union and carry out activities of
the workers union according to the laws as to maintain the legal rights of the
staff, and the Company shall provide the workers union with necessary conditions
for its activities.
<PAGE>
Article 40
The Company shall allocate an amount equal to two percent (2%) of the total
amount of the actual wages of the Company's staff to the workers union for its
fund, which shall be used by the workers union of the Company in accordance with
the provisions of the Measures of Management of Workers Union Fund of China.
CHAPTER TEN
TERM, TERMINATION AND LIQUIDATION
Article 41
The Company shall have a term of fifteen (15) years, commencing from the date of
the issue of the business licence of the Company.
Article 42
In case the Company is to, upon expiration, extend its term, the Company shall
submit a written application to the original examination and approval authority
one hundred and eighty (180) days prior to the expiration and shall, upon
approval by such authority, handle the extension formalities with the original
registration authority to eventually effect the extension.
Article 43
In case the Company runs into losses, insolvency, the Company shall terminate
ahead of schedule its business term. Where termination or expiration occurs, the
Company shall carry out liquidation in accordance with the legal procedures,
make announcement to the public and handle the cancellation formalities with the
original registration authority.
CHAPTER ELEVEN
RULES AND REGULATIONS
Article 44
The Company shall adopt the following rules and regulations through the General
Manager:
1. business operation regulation;
2. staff rules;
3. wage and salary regulation;
4. staff rewards and penalty regulation;
5. financial affair regulation; and
6. other necessary rules and regulations.
<PAGE>
CHAPTER TWELVE
INSURANCE
Article 45
Issues of insurance concerning the Company shall be decided by the Board of the
Directors.
CHAPTER THIRTEEN
GOVERNING LAW
Article 46
The formulation, validity, interpretation, performance and dispute settlement
shall be governed by the laws of the People's Republic of China.
CHAPTER FOURTEEN
SUPPLEMENTARY PROVISIONS
Article 47
These Articles of Association shall be written in Chinese.
Article 48
These Articles of Association shall come into effect upon approval by the
relevant examination and approval authority of the Chinese government.
ASIAINFO HOLDINGS, INC. (corporate seal)
Dated: 26 July 1999
<PAGE>
EXHIBIT 99.2
BUSINESS LICENCE
OF
ENTERPRISE LEGAL PERSON
OF
THE PEOPLE'S REPUBLIC OF CHINA
(copy)
Registration Number: Qi Du Jing Zong Zi No. 010138
This enterprise, upon examination and verification, is registered as a qualified
legal person to commence business
<PAGE>
No. 0652347
Enterprise Name: (Chinese) [AsiaInfo Technology (China) Inc.]
(English) [blank]
Address: 3rd Floor, South Area of Science and Technology
Building, No 11, Bai Shi Qiao Road, Haidian District,
Beijing, 100081
Enterprise Type: Wholly Foreign-owned Enterprise
Business Scope: Development and manufacturing of software for computer
network systems; computer network integration systems;
equipment and parts for computer network; sales of
self-manufactured products; technical service for
self-manufactured products.
Registered Capital: Eight million and five hundred thousand US dollars
(US$8,500,000), with eight million and five hundred
thousand US dollars (US$8,500,000) actually paid.
Board Chairman: Yong Yimin
Board Vice Chairman: none
General Manager: Yong Yimin
Deputy General Manager: none
Business Term: from 2 May 1995 to 1 May 2010
Licence Valid Term: from 2 May 1995 to 1 May 2010
Director: Wang Zhongfu
State Administration of Industry and Commerce
of the People's Republic of China
(Official Seal of SAIC of PRC)
Dated:21 September 1999
<PAGE>
EXHIBIT 99.3
ARTICLES OF ASSOCIATION
OF
ZHEJIANG ASIAINFO TELECOMMUNICATION
TECHNOLOGY CO. LTD.
CHAPTER ONE
GENERAL PROVISIONS
Article 1
In accordance with the Law of the People's Republic of China on Wholly Foreign
Owned Enterprises and other relevant regulations, AsiaInfo Holdings Inc. decides
to establish with its sole capital in Hangzhou, Zhejiang Province, AsiaInfo
Telecommunication Technology Co. Ltd.
(the "Company").
Article 2
The name of the Company shall be [ ] in Chinese.
The English name of the Company shall be AsiaInfo Telecommunication Technology
Co. Ltd.
Registered address: Yao Jiang International Building, No 100, Mo Gan
Shan Road, Hangzhou, Zhejiang Province.
Postcode: 310006
Legal Representative: Tian Suning [changed to Gong Hongjia]
Position: Board Chairman
Nationality: Chinese
Article 3
The background of the Investor shall be as follows:
The name of the Investor is [ ] in Chinese.
The English name of the Investor is AsiaInfo Holdings Inc.
Country of Registration: U.S.A.
Registered address: [ ] in Chinese.
1
<PAGE>
Address in English: 5201 Great America Parkway Suite 429, Santa Clara, CA
95054, U.S.A.
Legal Representative: Louis Lau
Position: Board Chairman
Nationality: American
2
<PAGE>
Article 4
The Company shall be a limited liability company.
Article 5
The Company shall be a Chinese legal person, to be governed and protected by the
Chinese laws. All activities of the Company shall be subject to the laws,
decrees and relevant regulations of the Chinese government.
CHAPTER TWO
PURPOSE AND BUSINESS SCOPE
Article 6
The purpose of the Company shall be, with the sincere wish to strengthen
economic co-operation and develop high-tech communication products, to introduce
into China and absorb the foreign advanced science and technology, to display
fully the Company's advantage in its scientific exploration and scientific
management, to be devoted to the research and development of communication
products and system software, as to make contribution to the development of the
communication trade.
Article 7
The business scope of the Company shall be the development and sales of
telecommunication computer software and hardware products, and provision of
relevant technical services.
Article 8
The operating revenues of the Company shall be ten million US dollars
(US$10,000,000).
CHAPTER THREE
TOTAL INVESTMENT AND REGISTERED CAPITAL
Article 9
The total investment of the Company shall be three million US dollars
(US$3,000,000) and the registered capital of the Company shall be two million
and one hundred thousand US dollars (US$2,100,000).
Article 10
The registered capital shall be one hundred sixty thousand US dollars
(US$160,000) in cash and the original registered capital five hundred thousand
US dollars (US$500,000) as acquired by Asiainfo Holdings Inc., with an
aggregated amount of the two being two million and one hundred thousand US
dollars (US$2,100,000). The newly increased registered capital one
3
<PAGE>
hundred sixty thousand US dollars (US$160,000) in cash shall be injected into
the Company within six (6) months of the issue of the business licence, of which
sixty thousand US dollars (US$60,000) shall be contributed within three (3)
months and one hundred US dollars (US$100,000) shall be contributed within six
(6) months.
Article 11
Any increase and transfer of the registered capital of the Company shall be
subject to, upon consent of Asiainfo Holdings Inc., approval by the original
examination and approval authority and registration procedures for the change
shall then be carried out at the original registration authority. During its
business term as a wholly foreign funded enterprise the Company shall not reduce
its registered capital.
CHAPTER FOUR
BOARD OF DIRECTORS
Article 12
The Company shall have a Board of Directors which shall be the highest authority
of the Company.
Article 13
The Board of Directors shall decide all the major issues of the Company, with
its duties and authorities mainly as follows:
1. to decide and approve the important reports proposed by the General
Manager;
2. to approve the annual financial statements, income and expenditure budget,
annual profit distribution plan;
3. to adopt the important rules and regulations of the Company;
4. to decide to establish branch institutions;
5. to amend the Articles of Association of the Company;
6. to discuss and decide the winding-up and termination of the Company, or its
merger with another economic organisation;
7. to engage the General Manager, Chief Engineer, Chief Accountant and other
senior staff;
8. to be responsible for the liquidation issues of the Company when it is
terminated or expired;
9. other major issues to be decided by the Board of Directors.
4
<PAGE>
Article 14
The Board of Directors shall consist of seven (7) directors for a term of four
(4) years (see Appendix 1 for the name list of the directors of the first
Board).
Article 15
The Board of Directors shall have one (1) Chairman and one (1) Vice-Chairman who
shall be appointed by the Investor. The Chairman shall be the legal
representative of the Company. The Chairman and Vice-Chairman shall serve a term
of four (4) years.
Article 16
When directors are to be appointed or replaced, the Board of Directors shall be
given three (3) months prior written notice.
Article 17
The Board of Directors shall convene twice every half a year. Upon the request
of one third (1/3) or more directors, an interim meeting of the Board may be
convened.
Article 18
The Board of Directors shall convene in principle at the address of the Company.
Article 19
Meetings of the Board of Directors shall be convened and presided over by the
Chairman, or the Vice-Chairman authorised by the Chairman when the Chairman is
unable to do so.
Article 20
The Chairman shall notify each director in writing of the agenda, time and place
of the Board meeting to be convened thirty (30) days prior to such meeting.
Article 21
Where the director is unable to attend the Board meeting for whatever reason, he
may authorise in writing a proxy to attend such meeting for him; where the
director does not attend the meeting in person nor authorises a proxy to attend
such meeting on his behalf, he shall be deemed to have waived his right to
attend the meeting.
Article 22
Each Board meeting requires a quorum of two-thirds (2/3) of all the directors,
and no resolution passed at any Board meeting shall be valid when such a quorum
of two-thirds (2/3) is not present at the meeting.
5
<PAGE>
Article 23
Each Board meeting shall have a detailed written board minute which shall be
signed by all the directors at the meeting or by the proxy when a director is
represented by such proxy. The board minute shall be in Chinese and shall be
kept by the Company for filing.
Article 24
Where the Board meeting is to pass resolution on issues of a general nature,
such resolution requires a two-thirds (2/3) affirmative votes of all the
directors at the meeting, and for issues of the followings a unanimous
affirmative votes of all the directors at the meeting are required:
1. amendment to the Articles of Association of the Company;
2. increase and transfer of the registered capital of the Company;
3. merger of the Company with another economic organisation;
4. termination or dissolution of the Company; and
5. other issues deemed by the Board as to be passed by a unanimous affirmative
votes of all the directors at the meeting.
CHAPTER FIVE
MANAGEMENT ORGANISATION
Article 25
The Company shall adopt the system of General Manager assuming responsibilities.
The Company shall have one (1) General Manager and six (6) Deputy General
Managers, who shall be engaged by the Board of Directors for a term of office
for four (4) years.
Article 26
The General Manager shall be responsible for the daily business operations of
the Company, represent the Company in dealings with other enterprises and
appoint and dismiss personnel in charge of various departments and other
subordinates within the Company.
Article 27
The General Manager shall have the duties as follows:
1. to carry out the Articles of Association of the Company and the resolutions
adopted by the Board of Directors;
2. within the authority granted by the Investor, to deal with other
enterprises in various issues of business and be responsible for any and
all issues of administration and business within the Company;
6
<PAGE>
3. to submit work report to the Investor;
4. to convene and preside over General Manager Business Meeting;
5. to formulate and adopt the main rules and regulations of the Company and
amendments thereto;
6. to decide to establish branch institutions;
7. to examine and decide the sales price of the Company's products on the
domestic and international markets; and
8. to make final administrative decision on issues of rewards and penalty for
staff of the Company.
Article 28
The General Manager and Deputy General Managers shall not concurrently take up
the positions of General Manager or Deputy General Manager in other economic
organisations, and shall not undertake any activities other economic
organisations which are commercially competitive to the Joint Venture Company's
interests.
Article 29
If the General Manager, Deputy General Managers and other senior staff wish to
resign his position, he shall give to the Board the prior written notice.
CHAPTER SIX
FINANCIAL ISSUES
Article 30
The Company shall establish its accounting items within China, keep separate
accounts, submit accounting statements according to relevant regulations and be
subject to the supervision of the relevant financial and taxation departments.
Article 31
The Company shall adopt the calendar year for its accounting year, which shall
commence from 1 January and continue to end on 31 December.
Article 32
The Company shall adopt Renminbi as its book-keeping currency and all accounts,
vouchers and statements shall be written in Chinese.
7
<PAGE>
Article 33
The Company shall open its Renminbi and foreign exchange bank accounts in
relevant banks in China and shall be subject to the regulations of foreign
exchange control in China.
Article 34
The Company shall pay various taxes and fees in accordance with the relevant tax
laws of China. The staff of the Company shall pay individual income tax and
adjustment taxes in accordance with the laws.
Article 35
The Company shall be subject to the audit of relevant departments in its
financial issues, and the annual final financial statements and profit
distribution plan of the Company shall be examined and verified by the account
registered in China.
CHAPTER SEVEN
PROFIT DISTRIBUTION
Article 36
The Company shall allocate from its profit after payment of income tax for the
Reserve Fund, Enterprise Development Fund and Staff Bonus and Welfare Fund.
Article 37
The Company shall distribute profit once each year. The profit distribution plan
and amount of profit distributable shall be made public within three (3) months
after each accounting year.
Article 38
The Company shall not distribute profit of the current accounting year in case
the Company has not yet made up the losses in the preceding accounting year. Any
undistributed profit of the preceding accounting year may be combined into the
profit of the current accounting year for distribution.
CHAPTER EIGHT
STAFF
Article 39
The Company shall employ Chinese and overseas staff according to its
requirement, enter with them into labour contract in accordance with the laws to
specify matters relating to the employment, dismissal, remuneration, welfare,
labour protection, insurance, etc and file such contract with the local labour
administration department.
8
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Article 40
The standard of wage and welfare treatment for staff of the Company shall be
decided by the General Manager in view of the business operation status of the
Company and in accordance with the relevant provisions of the Chinese
government.
CHAPTER NINE
WORKERS UNION
Article 41
The staff of the Company may establish workers union and carry out activities of
the workers union according to the laws as to maintain the legal rights of the
staff, and the Company shall provide the workers union with necessary conditions
for its activities.
Article 42
The Company shall allocate an amount equal to two percent (2%) of the total
amount of the actual wages of the Company's staff to the workers union for its
fund, which shall be used by the workers union of the Company in accordance with
the provisions of the Measures of Management of Workers Union Fund of China.
CHAPTER TEN
TERM, TERMINATION AND LIQUIDATION
Article 43
The Company shall have a term of fifteen (15) years, commencing from the date of
the issue of the business licence of the Company.
Article 44
In case the Company is to, upon expiration, extend its term, the Company shall
submit a written application to the original examination and approval authority
one hundred and eighty (180) days prior to the expiration and shall, upon
approval by such authority, handle the extension formalities with the original
registration authority to eventually effect the extension.
Article 45
In case the Company runs into losses, insolvency, the Company shall terminate
ahead of schedule its business term. Where termination or expiration occurs, the
Company shall carry out liquidation in accordance with the legal procedures,
make announcement to the public and handle the cancellation formalities with the
original registration authority.
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<PAGE>
CHAPTER ELEVEN
RULES AND REGULATIONS
Article 46
The Company shall adopt the following rules and regulations through the General
Manager:
1. business operation regulation;
2. staff rules;
3. wage and salary regulation;
4. staff rewards and penalty regulation;
5. financial affair regulation; and
6. other necessary rules and regulations.
CHAPTER TWELVE
INSURANCE
Article 47
The various insurances of the Company shall be taken with the People's Insurance
Company of China, with issues such as coverage, insurance value, insurance term,
etc to be decided by the Board of the Directors in view of the provisions of the
People's Insurance Company of China.
CHAPTER THIRTEEN
GOVERNING LAW
Article 48
The formulation, validity, interpretation, performance and dispute settlement
shall be governed by the laws of the People's Republic of China.
CHAPTER FOURTEEN
SUPPLEMENTARY PROVISIONS
Article 49
These Articles of Association shall be written in Chinese.
Article 50
Any amendment to these Articles of Association shall be, upon consent of
Asiainfo Holdings Inc., subject to the approval of the original examination and
approval authority.
10
<PAGE>
Article 51
These Articles of Association shall come into effect upon approval by the
relevant examination and approval authority of the Chinese government.
Article 52
These Articles of Association are signed on [ ] in Beijing, China.
Dated: 03/05/1998
ASIAINFO HOLDINGS, INC.
Name: Louis Lau (signature)
11
<PAGE>
EXHIBIT 99.4
BUSINESS LICENCE
OF
ENTERPRISE LEGAL PERSON
OF
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO. LTD.
(copy)
Registration Number: Qi Du Zhe Zong Zi No. 001926
This enterprise, upon examination and verification, is registered as a qualified
legal person to commence business
<PAGE>
No. 0017653
Enterprise Name: (Chinese) [Zhejiang AsiaInfo Dekang Telecommunication
Technology Co. Ltd.]
(English) [blank]
Address: 22nd and 23rd Floors, Section B of Yao Jiang
International Building, No 100, Mo Gan Shan Road,
Hangzhou
Enterprise Type: Wholly Foreign-owned Enterprise
Business Scope: Development and sales of telecommunication computer
software and hardware products; provision of relevant
technical services
Registered Capital: Two million and one hundred thousand US dollars
(US$2,100,000)
Board Chairman: Gong Hongjia
Board Vice Chairman: none
General Manager: Sun Yilang
Deputy General Manager: Shi Zhong
Business Term: from 5 April 1995 to 4 April 2010
Licence Valid Term: from 5 April 1995 to 4 April 2010
Director: Wang Zhongfu
State Administration of Industry and Commerce
of the People's Republic of China
(Official Seal of SAIC of PRC)
Dated: 23 September 1999
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<PAGE>
EXHIBIT 99.5
Labour Contract for Hiring Employees of the AsiaInfo Computer Networks (Beijing)
Co. Ltd.
Party A: AsiaInfo Computer Networks (Beijing) Co. Ltd.
Party B: [Name of Executive]
In accordance with the Labour Law of the People's Republic of China and relevant
regulations of the State, Party A and Party B have, on the basis of the
principle of equality and free will and after consultation, agreed to enter into
this Labour Contract and abide by the provisions stipulated in this Contract.
1. Term of the Labour Contract
This Contract shall be the type of contract with a limited term of 2
years, commencing on [___________] and ending on [___________]. The
probationary period shall be [________].
2. Party B's Post and Work
Party B agrees to engage in work in the [______________] Department and
assume the post of [________________] according to the needs of Party
A. The duties, working tasks, responsibilities and objectives of Party
B's post shall be in conformity with the working standards or the
relevant regulations stipulated by Party A.
3. Labour Protection and Labour Conditions
Party A shall, in accordance with the relevant state regulations on
labour safety and protection, provide Party B with necessary labour
tools and labour protection articles for use.
4. Labour Remuneration and Welfare Treatments
(i). Party B shall, in accordance with Party A's wage distribution system,
be entitled to enjoy the wage remuneration and treatments for his post
(duties). Party A shall, on the 25th day of each month, pay Party B the
wages of that month, the amount of which shall be US$[____________] per
year (before tax). Party B shall pay tax according to law.
(ii). Party A and Party B shall, in accordance with the relevant regulations
of the State, pay social insurance in relation to pension,
unemployment, serious illness, provident funds for accommodation, etc.
(iii). The treatments relating to official public holidays, annual leave,
marriage or funeral leave, maternity leave, etc. shall be provided to
Party B in accordance with the relevant regulations of the State and
the Company.
<PAGE>
(iv). Where Party B becomes injured or crippled as a result of work, Party A
shall actively responsible for providing medical treatment to Party B
until the period of medical treatment ends. Where Party B dies as a
result of work, the funeral fees or funds for supporting the direct
relatives of the deceased shall be paid in accordance with the
regulations stipulated by the State and Party A.
(v). Where Party B suffers sickness or becomes injured during the term of
employment, the wages for sick leave and medical allowances shall be
paid in accordance with the regulations stipulated by the State and
Party A.
(vi). Where Party B is promoted, demoted or transferred to another department
due to working needs or personal ability, the wages of Party B shall be
re-appraised and re-decided for his post and paid in accordance with
the relevant regulations of the Company.
5. Labour Principles
Party A shall formulate various rules and regulations in accordance
with the relevant regulations of the State. Party B shall
conscientiously abide by these rules and regulations and submit himself
to the management of Party A. If Party B violates labour disciplines,
Party A may, in accordance with the rules and regulations of the State
and the Company and in the light of the seriousness the case, impose
disciplinary sanctions and economic punishment on Party B and may even
terminate this Contract.
6. Amendment, Cancellation, Termination and Renewal of Labour Contract and
Compensation
(i). Where there is a change in Party A's production and operating
conditions or Party B's working post, tasks, duties and wages as a
result of a change in the objective conditions on the basis of which
this Contract is executed, Party A and Party B may, through
consultation, agree to amend the relevant contents of this Contract.
(ii). Prior to the expiry of this Contract, where there is a change in
subjective and objective conditions of either Party or both Parties,
Party A and Party B may, through consultation, agree to an early
termination of this Contract.
(iii). In any of the following circumstances, Party A may terminate this
Contract:
a. where it is proved, during the probationary period, that
Party B has failed to meet employment requirements;
b. where Party B has seriously violated labour disciplines or
Party A's rules and regulations;
c. where Party B has been pursued for criminal liabilities
according to law;
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<PAGE>
d. where Party B has committed serious dereliction of his duties,
or has practised graft, causing material losses to the
Company.
(iv). In any of the following circumstances, Party A may terminate this
Contract by giving 30 days' written notice to Party B:
a. where, after undergoing a period of medical treatment, Party B
who has suffered an illness or become injured not as a result
of work is unable to perform the original task or any other
tasks assigned by Party A;
b. where Party B is not capable of performing the given tasks,
even after training and re-assignment of tasks;
c. where Party A and Party B fail to reach an agreement after
consultation regarding the amendment of this Contract in
accordance with paragraph ( i )of Article 6 of this Contract.
(v). If Party A actually needs to reduce its staff during a period of
statutory reorganisation as a result of being on the verge of
bankruptcy or having experienced serious difficulty in production and
operation, it may terminate this Contract by informing all employees of
the situation and reporting the same to the labour administrative
department 30 days in advance.
(vi). Where Party A terminate this Contract in accordance with the provisions
stipulated in the paragraphs (iv) and (v) above, it shall, in
accordance with relevant laws and regulations of the State and the
Beijing Municipality, pay economic compensation and medical allowances.
(vii). In any of the following circumstances, Party A shall not terminate or
cancel this Contract in accordance with paragraphs (iv) and (v) of
Article 6 of this Contract:
a. where Party B suffers an occupational disease or a
work-related injury and has been confirmed by the relevant
labour appraisal committee as being totally or partially
incapable of performing his work after the period of medical
treatment;
b. where a female employee is pregnant, on maternity leave
or within the period for nursing;
c. where Party B is recovering from sickness or a job-related
injury within the stipulated medical period;
d. other circumstances stipulated by the law and administrative
regulations.
(viii). In any of the following circumstances, Party B may, at any time,
terminate this Contract by giving notice to Party A:
a. during the probationary period;
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<PAGE>
b. Party A forces Party B to work by means of violence, threat,
imprisonment or illegal restriction of personal freedom;
c. Party A fails to pay labour remuneration to Party B or to
provide Party B with normal labour conditions in accordance
with this Contract;
d. Party B is admitted to a full-time college at his own expense
after passing an entry examination or shall perform military
service according to law;
e. where other conditions stipulated in state regulations are
satisfied.
(ix). Where Party B terminates this Contract in circumstances other than
those provided in paragraph (viii), it shall notify Party A in writing
30 days in advance.
(x). Where a case regarding the material losses caused by Party B to Party A
has not been completely settled or investigations into other problems
are still pending, Party B shall not terminate this Contract in
accordance with the provisions stipulated in paragraph (ix).
(xi). This Contract shall automatically terminate upon expiry of the term of
the Contract.
(xii). Upon expiry of the term of this Contract, Party A and Party B may,
through consultation, agree to renew this Contract.
7. Economic Compensation and Damages
(i). Where Party B suffers damages as a result of Party A having terminated
this Contract in contravention of the provisions stipulated in this
Contract, Party A shall, in accordance with the relevant regulations of
the State and the local government, be liable to pay compensation to
Party B.
(ii). Where Party A incurs losses as a result of Party B having terminated
this Contract in contravention of relevant regulations or the
provisions stipulated in this Contract, Party B shall pay compensation
to Party A for the following losses:
a. the expenses incurred by Party A for recruiting Party B;
b. training expenses paid by Party A for Party B; where a
separate agreement has been entered into between both parties,
relevant matters shall be handled in accordance with that
agreement;
c. direct economic losses caused to production, operations and
work;
d. economic losses caused to Party A as a result of Party B
having divulged the Company's technical or commercial secrets.
8. Miscellaneous
(i). Other provisions required to be agreed upon by Party A and Party B:
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<PAGE>
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(ii). Matters not covered in this Contract shall be handled in
accordance with relevant state regulations.
(iii). Where an dispute arises between Party A and Party B out of the
performance of this Contract, both Parties shall, within 60 days upon
the occurrence of the dispute, be entitled to apply to the local
dispute arbitration committee for arbitration of the dispute. Where
either Party disagrees with an arbitration award, it may institute
legal proceeding with a people's court.
(iv). This Contract is executed in duplicate, with Party A and Party B each
holding one original. This Contract shall become effective as from the
date of execution.
9. Appendixes
The Confidentiality and Non-competition Agreement, the Job Description,
Profile and Objective Setting shall be appendixes to this Contract.
Party A (official seal):
Legal Representative or Authorised Proxy (official seal):
Date:
Party B (official seal): (signature) ([Name of Executive])
Date:
Certificate Issuing Authority
Officer Issuing Certificate
Date:
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<PAGE>
EXHIBIT 99.6
Confidentiality and Non-competition Agreement of AsiaInfo Computer Networks
(Beijing) Co. Ltd.
Appendix to Labour Contract
AsiaInfo Computer Networks (Beijing) Co. Ltd. (hereinafter referred to as "Party
A"), a wholly-owned enterprises of the United States and [Name of Executive]
(hereinafter referred to as "Party B") enter into this Agreement on matters
relating to the granting of the Company's commercial secrets and the prevention
of the divergence of such secrets and inappropriate competition as follows:
1. Party A and Party B acknowledge that an employee shall, during the term
of his employment, be entitled to obtain the Company's commercial
secrets and confidential information but at the same time be obliged to
keep the same confidential and not to divulge the same to outside
parties. Both Parties deem that commercial secrets shall legally mean
intangible assets and the divulgence of commercial secrets shall be an
illegal act.
2. Commercial secrets referred to in this Agreement shall mean technical
information and operating information which have not come to the
knowledge of the public, are capable of bringing economic benefits to
Party A and practical and have been kept confidential by Party A
through the adoption of security measures.
3. Party B agrees at any time not to divulge or communicate to any person
or organization commercial secrets or confidential information in any
form which may affect Party A's business operations or any matter in
connection therewith (unless Party A has expressly granted approval in
writing).
4. Party B agrees not to provide other enterprises or individuals with any
service with or without compensation which may affect the development
of the Company.
5. In the case of termination of the Labour Contract entered into between
Party A and Party B, Party B warrants that it shall transfer, without
any condition, to Party A all information carriers in relation to Party
A's business which are being handled or controlled by Party B (such as
equipment, laser disks, magnetic disks, magnetic tapes, note books,
documents, memoranda, reports, files, samples, account books, letters,
lists or other records in written or diagrammatic forms, etc.). If
necessary, Party B shall hold a conversation for resignation with the
officers in charge of personnel matters or other designated personnel
and complete signing and seal affixing procedures for resignation and
the hand-over and take-over of his job.
6. Party B undertakes not to disclose to future employers confidential
information as defined in Article 2 of this Agreement which shall be
kept confidential by Party B.
<PAGE>
7. Party B agrees that, within one year upon the termination of the Labour
Contract by Party A, Party B shall not, without the written approval of
Party A, employ any personnel of Party A or introduce Party A's
employees to take a post in Party B's new working unit.
8. Any invention related to the work of Party B' post made by Party B
alone or with other parties during the period when Party B is employed
by Party A shall belong to Party A, unless otherwise authorised and
approved by Party A.
9. Party B agrees to make known to Party A the patent or copyright that
Party B applies for during the term of his employment or within one
year after his resignation.
10. If Party B takes the initiative to terminate the Labour Contract signed
with Party A, then Party B shall not, within 2 years after his
resignation, participate in commercial activities or in services of a
commercial company in direct competition with Party A.
Supplementary Provisions
1. Once signed, this Agreement shall not be amended or terminated unless
otherwise agreed by Party A or this Agreement is in contravention of
the laws and regulations of the State.
2. If either Party A or Party B violates any provisions of this Agreement,
the other party shall have the right to take legal action.
3. This Agreement shall be a supplementary document to the Company's fixed
Labour Contract.
4. This Agreement is executed in duplicate, with Party A and Party B each
holding one original.
Party A: AsiaInfo Computer Networks (Beijing) Co. Ltd.
Signature (official seal) of Legal Representative:
Party B (signature):
([Name of Executive])
Date:
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