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RULE NO. 424(b)(1)
REGISTRATION NO. 333-93199
PROSPECTUS
5,000,000 Shares
[LOGO OF ASIAINFO]
COMMON STOCK
AsiaInfo Holdings, Inc. is offering 5,000,000 shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares.
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We have been approved to list our shares of common stock to be quoted on the
Nasdaq National Market under the symbol "ASIA."
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Investing in our common stock involves risks. See "Risk Factors" beginning on
page 9.
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PRICE $24.00 A SHARE
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts Proceeds to
Public and Commissions AsiaInfo
-------- --------------- -----------
<S> <C> <C> <C>
Per Share.................... $24.00 $1.68 $22.32
Total........................ $120,000,000 $8,400,000 $111,600,000
</TABLE>
AsiaInfo Holdings, Inc. has granted the underwriters the right to purchase up
to an additional 750,000 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 March 7, 2000.
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MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
March 2, 2000
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[Artwork goes on this page]
<PAGE>
TABLE OF CONTENTS
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Page
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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>
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Page
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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........................ 69
Experts.............................. 69
Enforceability of Civil Liabilities.. 70
Additional Filing and Company
Information......................... 71
Index to Financial Statements........ F-1
</TABLE>
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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.
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.
Until March 27, 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.
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"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.
3
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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
professional services and software products in the People's Republic of 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 and Internet content providers in China, including the China
Telecom system, which comprises the Directorate General of Telecommunications,
a state owned enterprise, provincial post and telecommunication administrations
and city and county telecommunications bureaus, and China United
Telecommunications Corporation, or China Unicom, the two largest Chinese
telecommunications and Internet service providers, as well as China Mobile
Communications Corporation, or 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 Internet protocol telephony,
commonly known 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, the physical
network of cables and computers which carries Internet traffic. We are in the
process of designing and building UniNET, China's second-largest national
commercial Internet backbone, for China Unicom and CNCNET, China's third
national commercial Internet backbone for China Netcom Corporation, or China
Netcom. We have also built numerous provincial Internet backbones, including
GuangdongNET, the first and largest provincial commercial Internet backbone in
China.
We develop and sell carrier class, meaning high performance, highly fault
tolerant, software products tailored for the specific needs of the China
market. These products include real time, highly scalable customer management
and billing software and carrier-scale messaging software for Internet service
providers, Internet content providers 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 user base for customer management and billing software
among large Internet service providers in China, having sold software licenses
to our customers for approximately 1.8 million end users as of December 31,
1999. AsiaInfo Mail Center ("AIMC"), the latest version of our messaging
software, was launched in April 1999 and within eight months has been licensed
by our customers for over 9 million of their end users. As of December 31,
1999, we had sold licenses for our wireless telephony customer management and
billing software to our customers for over 7 million end users.
4
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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.
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 expected 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 information technology services in an
increasingly complex network environment;
. real-time, scalable customer management and billing 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
functions.
Our Strategy
Our strategy is to be the leading China-based, world-class provider of
Internet-related, information technology 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
. Focus on high value information technology professional services
. Significantly grow our software business to maximize opportunities in
the Internet software market in China
. Develop broadband and convergent communications solutions
. Leverage our large customer base to generate recurring revenues
. Develop outsourcing solutions
. Attract and retain highly qualified personnel
5
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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:
. Internet infrastructure technology leadership in China
. Combined international and China expertise
. Established customer relationships
. Real time, scalable and adaptable proprietary software
. Total solutions approach
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. While we source hardware for our customers
through our U.S. holding company, AsiaInfo Holdings, Inc., we conduct the bulk
of our business through our two wholly-owned operating subsidiaries, each of
which is a Chinese company. 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.
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THE OFFERING
<TABLE>
<C> <S>
Common stock offered................................ 5,000,000 shares
Common stock to be outstanding after this offering.. 37,484,297 shares
Use of proceeds..................................... We intend to use the
estimated net proceeds of
approximately $109.8
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."
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 December 31, 1999
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 8,891,811 shares
of common stock at a weighted average exercise price of $2.99 per share
outstanding as of December 31, 1999,
. 1,821,300 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
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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
years ended December 31, 1996, 1997, 1998 and 1999 have been derived from our
audited consolidated financial statements. The summary consolidated statement
of operations data for the year ended December 31, 1995 and the summary
consolidated balance sheet data as of the same date 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.
<TABLE>
<CAPTION>
Years Ended December 31,
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1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
(Amounts in thousands of U.S. dollars except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network Solutions...... $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 53,786
Software License....... -- 762 775 2,258 6,494
-------------- -------------- -------------- -------------- --------------
Total revenues......... 1,799 15,543 37,284 44,222 60,280
Gross profit............ 546 6,445 7,728 12,033 18,317
Operating income
(loss)................. (598) 2,186 (713) 681 (4,964)
Net income (loss)....... (578) 1,670 (382) 1,536 (4,946)
Net income (loss) per
share:
Basic.................. $ (0.05) $ 0.12 $ (0.03) $ 0.11 $ (0.34)
Fully diluted(/1/)..... $ (0.05) $ 0.10 $ (0.03) $ 0.05 $ (0.34)
Shares used in
computation:
Basic.................. 12,273,628 13,530,000 13,530,000 13,616,412 14,630,145
Fully diluted(/1/)..... 12,273,628 15,999,133 13,530,000 31,765,534 14,630,145
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of December 31, 1999
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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 $25,404 $135,606
Total current assets.... 3,747 8,325 36,131 42,805 64,772 174,572
Total assets............ 3,787 9,227 37,085 45,359 71,427 181,227
Total liabilities
(excluding minority
interest).............. 4,089 6,429 20,008 26,048 31,639 31,639
Total stockholders'
equity (deficit)....... (567) 1,333 16,179 19,247 39,788 149,588
</TABLE>
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(1) In 1997 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) Consolidated balance sheet data, as adjusted, reflect (a) the sale of
5,000,000 shares of common stock offered by AsiaInfo hereby at an initial
public offering price of $24.00 per share and after deducting the
underwriting discount and estimated offering expenses, and (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.
8
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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,
particularly the allocation of funds, to sustain the growth of 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 reduce the demand for our products
and services and thus have a material adverse effect on our ability to
maintain the current level of revenue and grow 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 is currently reviewing its
telecommunications regulations, particularly as they relate to Internet
content. 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.
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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, or 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 December 31, 1999, entities of the
China Telecom system and China Unicom accounted for approximately 87% 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 revenues, and consequently our profits. See "Business--
Customers."
The long and variable sales cycles for our products and services can cause
our revenues and operating results to vary significantly from period to period
and 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. 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. Other 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, particularly state-owned
enterprises;
. the reduction, delay, interruption or termination of one or more
significant infrastructure projects; and
. our ability to introduce, develop and deliver new software products that
meet customer requirements in a timely manner.
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.
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.
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
10
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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 less favorable payment terms or delays in
hardware deliveries would require us to increase our working capital needs.
Our working capital requirements may also increase significantly in order
to fund more rapid expansion and acquisitions, to develop new or enhanced
services or products, to respond to competitive pressure to compete
successfully for larger projects involving higher levels of hardware purchases
or otherwise if our business grows more rapidly than we currently predict. An
increase in our working capital needs may require that we raise additional
funding following this offering sooner than we presently expect.
We have sustained losses in prior years and may incur slower earnings
growth, earnings declines or net losses in the future.
Although we made a net profit in 1996 and 1998, we have sustained losses in
prior years and in 1999. 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. For example, we intend to more than
double our software research and development budget and significantly increase
software related headcount over the next year. 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 face a competitive labor market in China for skilled personnel and
therefore are highly dependent on the skills and services of our existing key
skilled personnel and our ability to hire additional skilled employees.
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.
Since our business has been evolving, 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
11
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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, particularly our relationships with
our customers, 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.
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 have filed trademark
applications with the United States Trademark Office and 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 although we have not applied for copyright
protection elsewhere (including the United States). Despite these precautions,
the legal regime protecting intellectual property rights in China is weak.
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.
12
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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.
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, in the aggregate, could be
substantial.
Year 2000 issues present technological risks which could expose us to
liabilities and cause disruption to our software or installed systems and hurt
sales of our software products.
Year 2000 problems occur when computer systems and hardware and software
products 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 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 be able to identify all
Year 2000 failures in hardware and software products supplied by third party
vendors or in our proprietary software products because not all failures are
within the scope of these tests.
Any errors or defects relating to Year 2000 date functions 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.
In addition, we use multiple software systems for our internal business
purposes, including accounting, human resources, email, 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.
While we have experienced no Year 2000 failures or errors to date since
Year 2000 failures can be associated with any dates throughout year 2000, we
expect our Year 2000 risks to continue through the end of 2000.
13
<PAGE>
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 and may be restricted from paying 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. 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 to pay dividends.
The fact that our business is conducted in both U.S. Dollars and Renminbi
may subject us to currency exchange rate risk due to fluctuations in the
exchange rate between these two currencies.
Substantially all of our revenues, expenses and liabilities are denominated
in either U.S. dollars or Renminbi. As a result, we are subject to the effects
of exchange rate fluctuations between these currencies. The contracts we enter
into with our customers provide for price adjustments reflecting foreign
exchange fluctuations; however, we cannot guarantee that future contracts will
contain such provisions. As a result of the unitary exchange rate system
introduced in China on January 1, 1994, the official bank exchange rate for
conversion of Renminbi to U.S. dollars experienced a devaluation of
approximately 50%. Since we report our financial results in U.S. dollars, any
future devaluation of the Renminbi against the U.S. dollar may have an adverse
effect upon our reported net income.
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 information technology 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 information technology 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 information technology services market for
Internet infrastructure, this could hurt our profitability and erode our
market share.
In the customer management and billing 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
information technology 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 customer management and billing software market.
14
<PAGE>
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
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 profits and overall financial condition. See "Business--
Competition."
Political, Economic and Regulatory Risks
Political and economic policies of the Chinese government could affect our
industry in general and our competitive position in particular.
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 Ministry of Information Industries, 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
industry in general and our competitive position in particular.
The failure of China to gain entry into the WTO could negatively impact the
Chinese economy and our growth.
Failure by China to join the WTO as expected could slow down China's
economic growth and could result in lower than forecasted spending in the
telecommunications sector in China, which in turn could adversely affect the
demand for our products and services from our large customers.
Uncertainties with respect to the Chinese legal system could adversely
affect us.
Our subsidiaries are wholly foreign owned enterprises, 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 wholly foreign owned enterprises 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.
15
<PAGE>
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 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
There has been no public market for the common stock prior to this offering
and therefore the price may fall below the public offering 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.
The market price of the common stock could fall below the initial public
offering price. 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.
High technology and emerging market shares have historically experienced
extreme volatility and may subject you to losses.
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 the Internet and telecommunications industries;
. variations in our operating results from period to period due to project
timing; and
. announcements of new products or services by us or by our competitors.
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.
Future sales of shares by our company or existing shareholders could cause
the market price of our common stock to fall.
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
38,110,817 shares of common stock, based upon 26,158,664 shares outstanding as
of February 29, 2000 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 and the 5,000,000 Shares sold in
this offering, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants after January 31, 2000. Of
these 38,110,817 shares, the 5,000,000 shares sold in this offering will be
16
<PAGE>
freely tradable. This leaves 33,110,817 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 our securityholders, see "Shares Eligible for Future Sale" and
"Underwriters."
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 81% 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 which could prevent a change of
control of AsiaInfo and prevent you from realizing a premium on your
investment.
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."
17
<PAGE>
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.
18
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $109.8 million from the sale
of shares of common stock offered by us, at an initial public offering price
of $24.00 per share, after deducting underwriting discounts and commissions
and estimated 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 stock. 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 to pay dividends.
19
<PAGE>
CAPITALIZATION
The following table sets forth our cash, short-term debt and total
capitalization as of December 31, 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; and (b) the application of the
net proceeds from the sale of 5,000,000 shares of common stock offered
in this offering at an initial public offering price of $24.00 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, 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 December
31, 1999
----------------------
As
Actual Adjusted(/1/)
------- -------------
(Amounts in thousands
of U.S. dollars)
<S> <C> <C>
Cash and cash equivalents .............................. $25,404 $135,606
======= ========
Short-term debt......................................... $ 9,699 $ 9,699
======= ========
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).......... $ 22 $ --
Series B: 5,000,000 shares authorized at December
31, 1999; $0.01 par value; 2,630,425 shares issued
and outstanding (aggregate liquidation value
$20,000,000)....................................... 26 --
Common stock, 50,000,000 shares authorized $0.01 par
value; shares issued and outstanding December 31,
1999: actual, 25,532,144, as adjusted, 37,484,297.. 255 375
Additional paid-in capital............................ 46,118 155,846
Deferred stock compensation........................... (3,865) (3,865)
Accumulated deficit .................................. (2,765) (2,765)
Accumulated other comprehensive loss.................. (3) (3)
------- --------
Total stockholders' equity........................ 39,788 149,588
------- --------
Total capitalization ................................. $39,788 $149,588
======= ========
</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 December 31,
1999 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) 8,891,811 shares of common
stock underlying options granted under our stock option plans and
outstanding as of December 31, 1999 at a weighted average exercise price
of $2.99 per share, (b) 1,821,300 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.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
$35,485,538, or $1.09 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 December 31, 1999, assuming the conversion of all outstanding shares of
convertible preferred stock into shares of common stock upon the closing of
this offering.
This calculation excludes (a) 8,891,811 shares of common stock underlying
options granted under our stock option plans and outstanding as of December
31, 1999; (b) 1,821,300 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.
After giving effect to the issuance and sale of the 5,000,000 shares of
common stock offered in this offering at an initial public offering price of
$24.00 per share and the application of the estimated net proceeds from this
offering, our pro forma net tangible book value as of December 31, 1999 would
have been $145,285,538, or $3.88 per share of common stock. This represents an
immediate increase in the pro forma net tangible book value of $2.79 per share
to our existing stockholders and an immediate dilution in the pro forma net
tangible book value of $20.12 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $24.00
Pro forma net tangible book value per share as of December
31, 1999.................................................... $1.09
Pro forma increase in net tangible book value per share
attributable to new investors............................... 2.79
-----
Pro forma net tangible book value per share after this
offering..................................................... 3.88
------
Pro forma dilution per share to new investors................. $20.12
======
</TABLE>
The following table summarizes, on a pro forma basis described above as of
December 31, 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..... 32,484,297 86.7% $ 34,740,166 22.5% $ 1.07
New investors............. 5,000,000 13.3% $120,000,000 77.5% $24.00
---------- ----- ------------ -----
Total................... 37,484,297 100.0% $154,740,166 100.0%
========== ===== ============ =====
</TABLE>
As of December 31, 1999, there were outstanding options to purchase
8,891,811 shares of common stock under our stock option plans at a weighted
average exercise price of $2.99 per share. See "Management--Stock Incentive
Plans." If all outstanding options at December 31, 1999 were exercised there
would be additional pro forma dilution to new investors of $0.17 per share
based on the initial offering price per share of $24.00. To the extent that
any options are 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 years ended December 31, 1996, 1997, 1998 and
1999 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 selected consolidated balance sheet data as of the same date
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.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- -------------- -------------- -------------- --------------
(Amounts in thousands of U.S. dollars except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network solutions...... $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 53,786
Software license....... -- 762 775 2,258 6,494
-------------- -------------- -------------- -------------- --------------
Total revenues......... 1,799 15,543 37,284 44,222 60,280
-------------- -------------- -------------- -------------- --------------
Cost of revenues
Network solutions...... 1,253 9,098 29,551 32,188 41,959
Software license....... -- -- 5 1 4
-------------- -------------- -------------- -------------- --------------
Total cost of
revenues.............. 1,253 9,098 29,556 32,189 41,963
-------------- -------------- -------------- -------------- --------------
Gross profit............ 546 6,445 7,728 12,033 18,317
-------------- -------------- -------------- -------------- --------------
Operating expenses
Sales and marketing.... -- 668 835 2,408 8,768
General and
administrative........ 1,144 3,008 6,167 6,463 8,167
Research and
development........... -- 321 394 1,436 2,838
Amortization of
deferred stock
compensation.......... -- 262 1,045 1,045 3,508
-------------- -------------- -------------- -------------- --------------
Total operating
expenses.............. 1,144 4,259 8,441 11,352 23,281
-------------- -------------- -------------- -------------- --------------
Operating Income
(loss)................. (598) 2,186 (713) 681 (4,964)
Other income (expense),
net.................... -- 35 31 477 352
Income tax expense
(benefit).............. 10 69 267 (256) 383
Minority interests in
(income) loss of
consolidated
subsidiaries........... 30 (482) 567 122 84
Equity in loss of
affiliate.............. -- -- -- -- (35)
-------------- -------------- -------------- -------------- --------------
Net income (loss)....... (578) $ 1,670 $ (382) $ 1,536 $ (4,946)
============== ============== ============== ============== ==============
Net income (loss) per
share:
Basic.................. $ (0.05) $ 0.12 $ (0.03) $ 0.11 $ (0.34)
============== ============== ============== ============== ==============
Diluted(/1/)........... $ (0.05) $ 0.10 $ (0.03) $ 0.05 $ (0.34)
============== ============== ============== ============== ==============
Shares used in
computation:
Basic.................. 12,273,628 13,530,000 13,530,000 13,616,412 14,630,145
============== ============== ============== ============== ==============
Diluted(/1/)........... 12,273,628 15,999,133 13,530,000 31,765,534 14,630,145
============== ============== ============== ============== ==============
Pro forma net loss per
share(/2/):
Basic.................. $ (0.25)
==============
Diluted................ $ (0.25)
==============
Shares used in pro forma
computation(/2/):
Basic.................. 19,611,406
==============
Diluted................ 19,611,406
==============
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(Amounts in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C>
Additional Data:
Total revenues net of hardware
costs............................. $ 1,051 $ 6,877 $ 11,684 $ 19,286 $ 25,221
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of December 31, 1999
------------------------------ ------------------------
1995 1996 1997 1998 Actual As Adjusted(/3/)
------ ------ ------- ------- ------- ----------------
(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 $25,404 $135,606
Total current assets.... 3,747 8,325 36,131 42,805 64,772 174,572
Total assets........... 3,787 9,227 37,085 45,359 71,427 181,227
Total liabilities
(excluding minority
interests)............. 4,089 6,429 20,008 26,048 31,639 31,639
Total stockholders'
equity (deficit)....... (567) 1,333 16,179 19,247 39,788 149,588
</TABLE>
- --------
(1) In 1997 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 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, 1999 or the date convertible preferred stock was
issued if the issuance had occurred after January 1, 1999.
(3) Consolidated balance sheet data, as adjusted, reflect (a) the sale of
5,000,000 shares of common stock offered by AsiaInfo hereby at an initial
public offering price of $24.00 per share and after deducting the
underwriting discount and estimated offering expenses and (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.
On April 5, 1999 the Company acquired AI Zhejiang. If the acquisition had
occurred on January 1, 1999 the pro forma statement of operations data for the
year ended December 31, 1999 would have been; total revenues -- $60,485,110,
gross profit -- $18,305,163, operating loss -- $5,577,873 and loss per share,
basic and diluted -- $0.38. This data should be read in conjunction with the
Unaudited Pro Forma Financial Information and the note thereto included on
pages F-37 and F-38.
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. 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 commenced operations in 1993 as an Internet content provider. 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. While we source hardware for our customers through our U.S. parent
company, AsiaInfo Holdings, Inc., we conduct the bulk of our business through
our two wholly-owned operating subsidiaries, each of which is a Chinese
company. 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 customer management and billing software. The acquisition reflects
our strategy to expand the scope and size of our software operations. AI
Zhejiang was one of the earliest entrants in the market for wireless customer
management and billing software. With 7 million licensed users as of December
31, 1999, we believe that we have become a leading provider of wireless
customer management and billing software in China. We acquired AI Zhejiang for
$2 million cash and issuance of 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 year ended December 31, 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%, 98% and 84% of total revenues in 1997, 1998 and 1999,
respectively. The various provincial entities of the China Telecom system are
separate legal entities and generally make purchasing decisions independent of
the Directorate General of Telecommunications, which is headquartered in
Beijing. During the years ended December 31, 1997, 1998 and 1999, certain
provincial entities of the China Telecom system represented more than 10% of
our total revenues. In 1997, two provincial entities accounted for 20% and
12%, respectively, of total revenues. In 1998, three
24
<PAGE>
provincial subsidiaries accounted for 27%, 20% and 13%, respectively, of total
revenues. In 1999, two provincial entities of the China Telecom system
accounted for 29% and 17%, respectively, of total revenues. In addition, China
Unicom accounted for 14% of total revenues in 1999. At December 31, 1999,
approximately 87% of our backlog was attributable to orders placed by various
entities of the China Telecom system and China Unicom.
Revenues
Our total revenues have grown from $15.5 million in 1996 to $44.2 million
in 1998 and $60.3 million in 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 2.1% of total revenues in 1997 to 10.8% of total
revenues in 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 December 31, 1999 was $33.1 million, approximately 79% of which related to
network solutions orders and 21% related to software orders. The total backlog
at December 31, 1998 was $21.4 million, approximately 83% of which related to
network solutions orders and 17% 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 foregoing strategy may result in lower growth rates for
total revenues as against prior periods but will not adversly impact revenues
net of hardware costs. The following table shows our revenue breakdown by
business line on this basis:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Business Line
- -------------
Network solutions net of hardware costs........... 100% 89% 93% 88% 74%
Software license.................................. -- 11% 7% 12% 26%
--- --- --- --- ---
Total revenues net of hardware costs............ 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
We generally charge a fixed price for our network solutions projects.
Revenue is recognized based on the percentage of completion of the project as
measured by the cost recognized for the project. There are three key
milestones in the life of a network solutions project. The first milestone
occurs when the hardware is delivered, which is usually between three and four
months after signing the contract. The majority of revenues associated with a
project are recognized at this milestone, since hardware costs, which account
for the bulk of costs in a
25
<PAGE>
project, are recognized at the time of hardware delivery. The second milestone
is at primary acceptance, which usually occurs around five months after
hardware delivery. Most of the remaining revenues in a contract are recognized
between hardware delivery and primary acceptance, as most of the professional
services are delivered during this period and their costs are recognized as
incurred. 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 revenues for a project during the final
period leading up to the last milestone, which typically occurs around three
months after primary acceptance 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 cost 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. In the case of services,
while there may be some down payment, most of the revenue becomes billable at
the time of primary acceptance. The unpaid amounts for hardware and services
become 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 customer management and billing, and messaging
software products. We recognize substantially all software license revenues
over the installation and customization 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.
26
<PAGE>
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.
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. We have granted a number of options with exercise prices below the
fair market value of the related shares at the time of grant, most of which
were issued prior to 1997. The Company does not, however, intend to issue
options below fair market value in the future. Therefore, our deferred
compensation expenses have been significantly higher historically than we
expect them to be in future years. 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 bad debt provisions for accounts receivable balances based on
management's assessment of the recoverability of revenues on a project-by-
project basis. 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. AI
Technology, one of our subsidiaries, is classified as a "high technology"
company and as such, is currently entitled to preferential treatment under
Chinese tax law. AI Technology operates free of Chinese state corporate income
tax for three years, beginning with the first profitable year, and is entitled
to a 50% tax reduction for the subsequent three years. The tax holiday for AI
Technology expired on December 31, 1998 and the 50% tax reduction expires on
or before December 31, 2001. However, since AI Technology is located in the
Beijing New Technology Industry Development Zone, it benefits from
preferential tax treatment in the form of a further 50% reduction on the
applicable state corporate income tax and an exemption from the 3% local
income tax. In 1999, the effective corporate income tax rate applicable to AI
Technology was 7.5%. Changes in Chinese tax laws may adversely affect our
future operations. 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 $339,000 as of December 31, 1999 which
will expire between 2000 and 2003.
The Company is also subject to US income taxes on its procurement
activities in the U.S. At December 31, 1999, we had tax loss carry forwards of
approximately $1.5 million which will expire in 2018 and 2019.
27
<PAGE>
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 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>
Year Ended
December 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues:
Network solutions...................................... 97.9 % 94.9 % 89.2 %
Software license....................................... 2.1 5.1 10.8
----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0
Cost of revenues........................................ 79.3 72.8 69.6
----- ----- -----
Gross profits........................................... 20.7 27.2 30.4
----- ----- -----
Operating expenses:
Sales and marketing.................................... 2.2 5.5 14.5
Research and development............................... 1.1 3.2 4.7
General and administrative............................. 16.5 14.6 13.6
Deferred stock compensation expense.................... 2.8 2.4 5.8
----- ----- -----
Total operating expenses................................ 22.6 25.7 38.6
----- ----- -----
Operating profit (loss)................................. (1.9) 1.5 (8.2)
Net other income........................................ 0.1 1.1 0.6
Income tax expense (benefit)............................ 0.7 (0.6) 0.6
Minority interest....................................... 1.5 0.3 0.1
Equity in loss of affiliate............................. -- -- (0.1)
----- ----- -----
Net income (loss)....................................... (1.0)% 3.5 % (8.2)%
===== ===== =====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues. Total revenues increased 36.3% to $60.3 million in 1999 from
$44.2 million in 1998. Network solutions accounted for $11.8 million of this
increase, primarily due to a greater number of projects in progress. Software
revenues accounted for the balance of the increase in total revenues. 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 $3.2 million, a large
part of which related to software license revenues.
28
<PAGE>
Cost of revenues. Our cost of revenues increased 30.4% to $42.0 million in
1999 from $32.2 million in 1998, primarily due to the overall expansion of our
business and increased salary costs for our systems integration and design
engineering personnel. The Company periodically reviews its warranty cost
estimates based on historical data and in 1999 costs of revenues were reduced
by $1.2 million as a result of a revision to warranty cost estimates in line
with our historical experience, primarily contracts whose warranty period had
expired in 1999. Gross profit as a percentage of revenues increased from 27.2%
in 1998 to 30.4% in 1999, primarily due to the foregoing revision to warranty
cost estimates.
Operating expenses. Operating expenses increased 105.1% to $23.3 million in
1999 from $11.4 million in 1998, primarily due to the overall expansion of our
business, costs associated with the acquisition of AI Zhejiang and higher
operating expenses resulting from the comprehensive review of human resource
policies discussed above. Of this amount, AI Zhejiang contributed operating
expenses of $1.4 million. Operating expenses as a percentage of revenues
increased from 25.7% to 38.6% primarily due to increased investment in sales
and marketing and research and development personnel to drive the future
growth of the business.
Sales and marketing expenses increased 264.1% to $8.8 million in 1999 from
$2.4 million in 1998 primarily as a result of the implementation of new
marketing activities, the hiring of additional personnel, higher compensation
levels and the effect of the acquisition of AI Zhejiang.
Research and development expenses increased 97.7% to $2.8 million in 1999
from $1.4 million in 1998 primarily due to increased spending associated with
the expansion of our software business, principally increased salary costs of
$614,000 and the effect of the acquisition of AI Zhejiang amounting to
$542,000.
General and administrative expenses increased 26.4% to $8.2 million in 1999
from $6.5 million in 1998 primarily due to an increase in the amortization of
goodwill resulting from the acquisition of AI Zhejiang and an increase in
provisions for bad debts. The amortization of goodwill resulting from the
acquisition of AI Zhejiang was $691,000 in 1999. The Company experienced
collection problems under a contract with the Heilongjiang Provincial
Telecommunications Authority and a provision of approximately $514,000 was
made in 1999 to reduce the receivable to the Company's estimate of the
recoverable amount.
Amortization of deferred stock compensation increased from $1.0 million in
1998 to $3.5 million in 1999 as a result of the recognition of expense in 1999
for options accounted for as variable awards.
Other income and expenses. Other income and expenses, consisting primarily
of net interest income and expense, decreased from income of $478,000 in 1998
to income of $352,000 in 1999 primarily due to lower interest rates on cash
deposits and higher levels of bank debt.
Other. Income taxes increased from a tax benefit of approximately $256,000
in 1998 to a tax expense of approximately $383,000 in 1999 primarily due to an
increase in taxable income generated by our Chinese subsidiaries.
Minority interest. In 1999, minority interest represented the Company's
minority interest in AI Data through August 1999, when AI Data ceased to be a
consolidated subsidiary. AI Data was consolidated as a majority owned
subsidiary for the entire year of 1998.
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 in
1997 to $32.2 million in 1998, 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 a decrease in the share of third party hardware in
total revenues from 69%. to 56%.
29
<PAGE>
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 new marketing activities, 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 as a result of increased
investment to expand our software business, primarily in the form of increased
compensation expenses. 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.
Minority interest. Minority interest in loss of consolidated subsidiaries
decreased from $567,000 in 1997 to $122,000 in 1998, due primarily to the
effect of the Company's acquisition of the remaining 45% in AI CTC in February
1998.
30
<PAGE>
Selected Unaudited Quarterly Combined Results of Operations
The following table sets forth unaudited quarterly statements of operations
data for the four quarters ended December 31, 1998 and 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, December 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(Amounts in thousands of U.S. Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Network solutions..... $5,119 $7,054 $5,150 $24,640 $ 3,900 $17,921 $21,852 $10,113
Software license...... 453 250 1,194 360 1,348 1,625 1,669 1,852
------ ------ ------ ------- ------- ------- ------- -------
Total revenues.......... 5,572 7,304 6,344 25,000 5,248 19,546 23,521 11,965
Cost of revenues........ (3,940) (5,333) (4,437) (18,479) (3,445) (13,869) (16,221) (8,428)
------ ------ ------ ------- ------- ------- ------- -------
Gross profit............ 1,632 1,971 1,907 6,521 1,803 5,677 7,300 3,537
------ ------ ------ ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... (301) (469) (654) (985) (1,095) (1,426) (2,347) (3,900)
General and
administrative....... (996) (1,326) (1,331) (2,811) (1,751) (1,842) (2,794) (1,780)
Research and
development.......... (157) (299) (403) (576) (419) (679) (895) (845)
Deferred stock
compensation
expense.............. (261) (261) (261) (261) (589) (373) (1,848) (698)
------ ------ ------ ------- ------- ------- ------- -------
Total operating
expenses............... (1,715) (2,355) (2,649) (4,633) (3,854) (4,320) (7,884) (7,223)
------ ------ ------ ------- ------- ------- ------- -------
Operating income
(loss)................. (83) (384) (742) 1,888 (2,051) 1,357 (584) (3,686)
Net interest income
(expenses)............. 139 92 57 76 47 (21) 22 162
Other income, net 103 74 49 (113) 183 (9) 149 (181)
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) before
tax.................... 159 (218) (636) 1,851 (1,821) 1,327 (413) (3,705)
Income tax expense
(benefit).............. (141) (295) (163) 343 70 106 121 86
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) before
minority interest...... 300 77 (473) 1,508 (1,891) 1,221 (534) (3,791)
Minority interest....... 32 45 11 35 32 31 21
Equity in loss of
affiliate.............. -- -- -- -- -- -- (9) (26)
------ ------ ------ ------- ------- ------- ------- -------
Net income (loss)....... $ 332 $ 122 $ (462) $ 1,543 $(1,859) $ 1,252 $ (522) $(3,817)
====== ====== ====== ======= ======= ======= ======= =======
</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.
31
<PAGE>
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, the
majority of revenues for a project are recognized at the point of hardware
delivery. Thus, in any given quarter, we may recognize exceptionally large or
exceptionally small amounts of revenue, depending on the timing of hardware
delivery 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."
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 December
31, 1999 was $46.4 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 $5.0 million working capital line of credit with the Bank of
China's New York branch and lines of credit totalling $4.3 million with local
Chinese banks in the People's Republic of China, secured by bank deposits of
$5.0 million. We have borrowed $2.5 million under these lines of credit. As of
December 31, 1999, we had available a total of $6.8 million under these lines.
In addition, as of December 31, 1999 we had borrowings of $7.2 million,
secured by bank deposits of an equal amount, from local banks. 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, to respond to
competitive pressures to compete successfully for larger projects involving
higher levels of hardware purchases or otherwise if our business grows more
rapidly than we currently predict. 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.
Our ability to pay dividends depends in part on dividends we receive from
our operating subsidiaries in China. If we decide to pay dividends, foreign
exchange and other regulations in China may restrict our ability to distribute
retained earnings from our operating subsidiaries in China or convert these
payments from Renminbi into foreign currencies.
Market Risk
We are exposed to interest-rate risk primarily associated with underlying
liabilities. To date, we have not entered into any types of derivatives to
hedge against interest-rate changes, nor do we speculate in foreign currency.
Since 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, we do not have significant
exposure to either U.S. dollar or Renminbi, thus it is not necessary to hedge
our exposures to either currency.
We have historically been exposed to market risk through changing interest
rates. Our principal sources of short term, debt financing has been the lines
of credit and short term loans described above under "Liquidity and Capital
Resources."
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Following the completion of this offering, our primary exposure to
interest-rate risk will relate to the foregoing lines of credit and short-term
loans.
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 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 have
not experienced any Year 2000 failures or errors to date. However, since Year
2000 failures can be associated with any dates through year 2000, we expect
our Year 2000 risks to continue through the end of 2000.
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.
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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.
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 Ministry of
Information Industries' annual report, total government investment in the
sector in 1998 amounted to approximately $18.1 billion, a 33.8% increase from
1997. As a result, the sector has become the fastest developing industry in
terms of China's overall economic development.
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 Ministry of Information
Industries and the DGT.
Prior to 1993, the China Telecom system was under the control of the
predecessor of the Ministry of Information Industries 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 Ministry of Information Industries 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 Internet service providers competed
in the Internet access services market in 1998, according to an IDC report
purchased by Morgan Stanley Dean Witter. We expect service providers to invest
in technology and infrastructure and offer varying,
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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, Netease and China.com
</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.
In a report purchased by Morgan Stanley Dean Witter, 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 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
[CHART]
1997 1998 1999 2000 2001 2002 2003 2004
- ---- ---- ---- ---- ---- ---- ---- ----
1.4 2.4 3.8 7.3 11.7 17.9 25.2 33.1
Source: IDC, November 1999.
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The strong growth in the Internet market has led to heavy investments in
data services infrastructure. Based on Ministry of Information Industries
data, we estimate a total of $675 million was invested by the Chinese
government in data communications infrastructure and related areas in China in
1998, consisting primarily of backbone and access networks, as well as the
software required to operate such networks. We expect an increasingly large
component of total investment in the telecommunications industry will be
Internet related. Furthermore, we believe that the future investments in data
services 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 Internet
services will be allowed to increase at the same rate as other key
telecommunication services. China's eventual entry into the WTO will depend on
a favorable vote by the U.S. Congress, scheduled for this Spring, ratifying
the agreement reached on November 15, 1999, as well as the affirmative vote of
a majority of WTO members. If China's effort in gaining entry into the WTO is
successful, it 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 customer management and billing 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, Internet
service providers and telecommunications carriers must be able to monitor
customer activity and bill customer usage on a real time basis. These mission-
critical needs of Internet service providers and telecommunications carriers
cannot be met by traditional customer
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management and billing 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 customer management and billing
solution that is easily adaptable to a vast number of new products and
services. Moreover, the new customer management and billing 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 customer management and billing 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 functions.
Our Strategy
Our strategy is to be the leading China-based, world-class provider of
Internet-related information technology 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. Based on
forecasted growth as reported by the IDC, as well as communications with our
customers and government agencies, we expect investment in China's
telecommunications industry to continue to grow rapidly, particularly in data
services 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.
Focus on high value information technology professional
services. Currently, we offer our information technology 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.
Significantly 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 Internet service providers. We
plan to invest significant financial and personnel resources to expand our
Internet software business and strengthen our leadership position in the
Internet customer management and billing 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
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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
customer management and billing 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, through these
customers, one of the largest installed software customer bases, as measured
by the number of licensed end users, for leading telecommunications service
providers and Internet content and service providers 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, including outsourced
applications.
Develop outsourcing solutions. Given our expertise in network
implementation and management and applications development and management, we
are well positioned to capitalize on opportunities in the applications hosting
services market, including services such as web hosting and mail hosting
services. We intend to leverage our strong relationship with leading
telecommunications services providers in China, eventually building
partnerships with them to provide outsourcing services to Internet content
providers and other e-commerce enterprises.
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 information technology 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:
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
information technology 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.
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Established customer relationships. We have close relationships with all
leading telecommunications services providers, Internet service providers 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 Internet service providers and other
telecommunication service providers.
We offer total network solutions to our customers by leveraging our core
strengths in information technology 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 requests for
proposals. Over the last four years, we have been awarded contracts for over
80% of the requests for proposals 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 customer management and billing
product for Internet service providers. AIBCCS is a customer management and
billing product for providers of wireless telephony services. AIMC is a
carrier-scale messaging product software.
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
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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 and Internet service providers. Our
Internet infrastructure solutions support a wide array of broadband network
technologies. We have designed and built the first commercial and largest
national Internet backbone, and the largest provincial commercial Internet
backbone, and have been awarded contracts to build the second and third
largest national commercial Internet backbones in China. We have been awarded
a contract to build the wireless data services network for China Mobile in
Tianjin.
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 request for proposal and to improve our chances
in winning the contract. The planning includes defining client business
requirements, developing appropriate information architectures and selecting
preferred technology.
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, configuration and field installation and
testing, 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.
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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 information technology 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 information technology 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 customer management and billing
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
Internet service providers in China.
Our major software products include the following:
Internet customer management and billing software. The latest version of
our Internet customer management and billing 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.
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
Internet service providers, with usage-based fees charged to their
regular monthly telephone bills, and to log on only from certain,
specified phone numbers;
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. a roaming service which allows registered customers from different
Internet service providers to log on to the Internet from each other's
territories, an important feature since most Chinese Internet service
providers 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 for approximately 1.8 million users. Our Internet customer management
and billing software is used by the Directorate General of Telecommunications
and 19 out of 33 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 customer management
and billing 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 customer management and
billing software next year. The new versions will increase scalability to 10
million users, streamline user functions, improve the overall efficiency of
the architecture and enhance fraud management, credit control and reporting
features. We have commenced development of convergent billing software which
supports Internet, wireless and fixed line billing. This software will also
support billing for wireless data services based on Wireless Application
Protocol.
IP Telephony customer management and billing software. Our IP telephony
customer management and billing software, introduced in June 1999,
incorporates core functionality of our Internet customer management and
billing software while catering to the specific needs of IP telephony service
providers with features that include IP telephony gateway which converts
analog signals to digital signals, 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 customer management and
billing software currently used by telephony service providers in China.
Wireless and long-distance telephony customer management and billing
software. Our wireless and long-distance telephony customer management and
billing software, AIBCCS, offers real time, scalable solutions for 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.
With AIBCCS, we pioneered the fraud management software market in China,
which has seen increasing customer demand. We believe AIBCCS is also the only
customer management and billing 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 customer management
and billing solution for this growing market. AIBCCS and its earlier versions
had a total of 7 million installed
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<PAGE>
customer base in China as of December 31, 1999, making us a leading wireless
customer management and billing software provider. 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 Internet service providers 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 was launched in April 1999 and within eight months has
been licensed by our customers for over 9 million of their end users. 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 Wireless Application
Protocol, or WAP, technology. We have recently commenced developing 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 customer management and billing 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 customer management and billing software. Our
Internet and IP telephony customer management and billing software is designed
to allow maximum flexibility, scalability and performance. It has state-of-
the-art, four-tier client/server architecture. This multi-tier architecture,
coupled with the other technologies, gives 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.
. 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 Internet service
providers 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.
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Wireless and long-distance telephony customer management and billing
software. Our wireless and long-distance telephony customer management and
billing 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:
. advanced software technology which allows AIMC to scale both
horizontally by adding more servers and vertically by using higher speed
or multiple central processing units to handle subscriber growth and
larger number of subscribers without compromising system performance and
hardware investment;
. 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
secure access to the data storage subsystem with ultra-high capacity
databases.
Research and Development
We are committed to researching, designing and developing information
technology solutions and software products that meet future needs of our
customers. In the information technology 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 work closely with the research and development
teams of major international technology companies. Cooperation with global
technology leaders improves our access to the most sophisticated technologies,
which enables us to provide the latest and best solutions and products to our
customers.
We have approximately 165 employees engaged in research and development, 15
in network solutions and 150 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 research and development departments in selected regional offices.
Customers
Our customers currently consist primarily of Chinese telecommunication
service providers, Internet service providers, including the various entities
of the China Telecom system, China Unicom, China Mobile, China Netcom and
various other Chinese Internet service providers. 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.
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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. 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. At
December 31, 1999, entities of the China Telecom system and China Unicom
accounted for approximately 87% 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
December 31, 1999, we employed 58 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.
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.
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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 December 31, 1999, we employed 40 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 information technology 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 information technology 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 information technology services market in China,
the competition will intensify.
In the customer management and billing 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 customer management and billing
software market.
Government Regulation
The Chinese government has generally encouraged the development of the
information technology 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
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rules promulgated by the Ministry of Information Industries 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 Ministry of Information Industries 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.
Legal Proceedings
We are not involved in any material legal proceedings.
Employees
As of December 31, 1999 we had a total of 466 employees, with 134 in
engineering, including our professional services organizations, 150 in
software research and development, 98 in sales and marketing and 84 in
administrative roles. Our employees are represented by a labor union and, thus
far, our operations have not been significantly disrupted by labor disputes.
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We devote significant resources to recruiting professionals with both
information technologies systems integration and relevant industry experience.
Most of our senior management and technical employees are western educated
Chinese professionals with substantial expertise in information technologies
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
Q.D. Wang .............. 35 President
Frank Yong.............. 41 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.
Q.D. Wang was appointed as our President in December, 1999. Prior to
joining AsiaInfo, Mr. Wang was the Vice President in charge of the China
Telecom account, Sales and Marketing Director from 1997 to 1999 and Business
Development Director from 1996 to 1997 of Nortel Networks, Beijing. In
addition, from 1995 to 1996 Mr. Wang served as Deputy Managing Director of
AT&T, Central China, based in Wuhan. Mr. Wang attended the Executive MBA
program of the Wharton School of the University of Pennsylvania and holds a
Master of Science degree in Photoelectronics Engineering from Tsinghua
University, Beijing and a Bachelor of Science degree in Electrical Engineering
from Chengdu University of Electronics Engineering, Chengdu.
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.
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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.
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 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 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
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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
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, 1999 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
Q.D. Wang
President........................ 4,349(/1/) -- -- 4,349(/1/)
Frank Yong
Chief Operating Officer.......... 129,217 59,639 11,928 200,784
Ying Han
Executive Vice President and
Chief Financial Officer.......... 148,795 23,210 12,853 184,858
Michael Zhao
Senior Vice President and Chief
Strategy Officer................. 145,000 12,083 24,000 181,083
Larry Huang
Vice President and Chief Technol-
ogy Officer...................... 142,000 11,833 24,000 177,833
</TABLE>
- --------
(1) Represents only salary paid to Mr. Wang for services rendered to the
Company during December 1999.
In 1999, James Ding, our Chief Executive Officer, was granted options to
purchase 400,000 shares of common stock at a weighted average exercise price
of $7.60 per share. These options expire in 2009. Also in 1999, Q.D. Wang, our
President was granted options to purchase 200,000 shares of common stock at a
weighted average exercise price of $7.60 per share. These options expire in
2009. Also in 1999, Ying Han, our Executive Vice President and Chief Financial
Officer was granted options to purchase 225,000 shares of common stock at
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a weighted average exercise price of $5.69 per share. These options expire in
2009. Also in 1999, Frank Yong, our 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. Also in 1999,
Michael Zhao, our Senior Vice President and Chief Strategy Officer, was
granted options to purchase 100,000 shares of common stock at a weighted
average exercise price of $7.60 per share. These options expire in 2009. No
other options were granted to Named Executive Officers in 1999.
The following table provides summary information regarding share option
awards granted to each of the Named Executive Officers during the fiscal year
ended December 31, 1999. We calculated the amounts listed in the following
table under the heading "Potential Realizable Value at Assumed Annual Rates of
Stock Price Appreciation for Option Term" based on the ten-year term of the
option at the time of grant. For purposes of these columns, we assumed stock
price appreciation of 5% and 10% pursuant to rules promulgated by the
Securities and Exchange Commission. These rates of appreciation do not
represent our prediction of our stock price performance.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
Percent of
Total Options Potential Realizable Value
Granted to at Assumed Annual Rates
Number of Employees of Stock Price
Securities during Fiscal Appreciation for Option Value At
Underlying Year Ended Exercise Market Term Grant Date
Options December 31, Price Price Expiration --------------------------- ----------
Name Granted 1999 ($/share) ($/share) Date 5% 10% 0%
- ---- ---------- ------------- --------- --------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Ding.............. 400,000 13.83% 7.60 7.60 10/04/09 $1,911,840 $ 4,844,977 --
Q.D. Wang............... 200,000 6.92% 7.60 7.60 10/18/09 955,920 2,422,489 --
Frank Yong.............. 150,000 5.19% 4.17 4.30 06/01/09 425,137 1,047,464 19,500
70,000 2.42% 7.60 7.60 11/19/09 334,572 847,871
Ying Han................ 125,000 4.32% 4.17 4.30 06/01/09 354,281 872,887 16,250
100,000 3.46% 7.60 7.60 11/19/09 477,960 1,211,244
Michael Zhao............ 100,000 3.46% 7.60 7.60 10/04/09 477,960 1,211,244 --
</TABLE>
Aggregated Option Exercises in Fiscal Year 1999 and Fiscal Year 1999 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, 1999. The numbers in the columns entitled "Value
Realized" and "Value of Unexercised In-the-Money Options at December 31, 1999"
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
Shares Options at In-the-Money Options at
Acquired December 31, 1999 December 31, 1999
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James Ding.............. -- -- 1,050,000 100,000 4,385,500 485,000
Q.D. Wang .............. -- -- -- 200,000 -- --
Frank Yong.............. -- -- 20,000 300,000 92,000 882,500
Ying Han................ -- -- 20,000 305,000 92,000 796,750
Michael Zhao............ 325,000 2,468,375 300,000 100,000 1,020,000 510,000
Larry Huang............. 30,000 153,000 -- 70,000 -- 357,000
</TABLE>
Employment Agreements
We have entered into two-year employment agreements with James Ding, our
Chief Executive Officer, Q.D. Wang, our President, Frank Yong, our Chief
Operating Officer, Ying Han, our Executive Vice President and Chief
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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, $150,000, $129,217,
$148,795, $145,000, and $142,000, respectively. The agreements terminate on
May 26, 2001, November 14, 2000, May 30, 2001, January 4, 2001, February 9,
2000 and December 23, 2001, respectively.
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 were initially authorized for issuance under the 1999
Stock Incentive Plan at the time of its adoption by the Board and an
additional 1,500,000 shares of AsiaInfo's common stock were authorized for
issuance under the 1999 Stock Incentive Plan in November 1999. 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.
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<PAGE>
. 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.
AsiaInfo intends to grant options to acquire 480,00 shares of its common
stock prior to the completion of the offering at an exercise price per share
equal to the initial public offering price.
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.
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<PAGE>
CERTAIN TRANSACTIONS
Stock Option Grants
The following table summarizes as of December 31, 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>
Larry Huang .................. 100,000 5.00 02/01/98
Ying Han ..................... 100,000 6.00 06/01/98
125,000 4.17 06/01/99
100,000 7.60 11/19/99
Frank Yong.................... 100,000 6.00 11/01/98
150,000 4.17 06/01/99
70,000 7.60 11/19/99
Alan Bickell.................. 50,000 3.00 03/23/99
James Ding.................... 400,000 7.60 10/04/99
Edward Tian................... 400,000 7.60 10/04/99
Michael Zhao.................. 100,000 7.60 10/04/99
Q.D. Wang..................... 200,000 7.60 10/18/99
</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
and outstanding on such date.
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 connection with the foregoing private placement, in December 1997 we
issued 9,429,226 stock purchase warrants to the Series A Investors for no
additional consideration. Each warrant represented the right to purchase one
share of our common stock. The stock purchase warrants were exercisable in
whole at any time after December 31, 1999 at an exercise price of $0.005 per
warrant. The warrant agreements provided that, upon
55
<PAGE>
exercise of the warrant and payment of the exercise price, the holder would be
entitled to acquire the number of shares of common stock calculated by
reference to the appropriate earnings before interest, taxes, depreciation and
amortization for the year ending December 31, 1999. The warrants were
protected by anti-dilution provisions which adjusted the exercise price and
the number of shares of common stock issuable upon the occurrence of certain
events. In December 1999, the warrant agreements for the Series A Investors
were amended. The revised warrant agreements provided for exercise of the
warrants prior to the closing of this offering. In December 1999, all the
warrants were exercised into 9,429,226 shares of common stock at no additional
consideration pursuant to amended warrant terms which accelerated the warrant
exercise term.
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. The
sellers in the November 1999 private placement were Xiaohui Chen, James Ding,
Zhijun Hua, Changsheng Li, Jun Liu, Yadong Liu, Jianhui Luu, Wang Peng, Jian
Qi, Simei Qian, Edward Tian, Hao Wang, Luyu Wang, Yupan Wen, Shijie Wu, Ying
Xiong, Guo Xu, Zhiwei Yang, Qing Yu, Quantao Zeng, Dezhong Zhang, Jiangang
Zhang, Yunfei Zhang, Zifang Zhang and Michael Zhao, each of whom is an
employee or former employee of the Company. See "Underwriters."
In January 2000, Louis Lau, our Chairman, sold an aggregate of 190,000
shares of common stock at a price per share of $7.60 to Messrs. Jesse Liu and
Steve Zhang, each an officer of the Company, China.com Corporation and an
affiliate of ChengWei Ventures Ltd. The sale was made in accordance with the
provisions of Regulation S under the Securities Act on the basis that the
transaction occured outside of the United States and each of the purchasers is
not a U.S. person for purposes of such rule.
Each of the foregoing private placement transactions was an arm's length,
negotiated sale to an unrelated party at a price per share which represented
the Company or the sellers' best estimate of fair market value on the
respective dates of such sales.
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
December 31, 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of January 31, 2000 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 January 31, 2000. Unless otherwise indicated, the address
of each stockholder identified below is: c/o AsiaInfo Holdings, Inc., 11
Baishiqiao Road, Haidan District, Beijing 100081, China.
<TABLE>
<CAPTION>
Percentage of
Total Voting
Number of Power
Shares -----------------
Beneficially Before After
Owned Offering Offering
Name of Beneficial Owners ------------ -------- --------
<S> <C> <C> <C>
Chang Sun(/1/)............................... --
Warburg Pincus Ventures, L.P.(/2/)(/3/)...... 4,025,105
Warburg Pincus Ventures
International, L.P.(/2/).................... 4,025,105
11/F St. George's Building
2 Ice House Street Central, Hong Kong
Subtotal....................................... 8,050,210 25% 21%
HTCC Trust(/4/).............................. 2,250,000
Edward Tian(/4/)(/5/)........................ 3,817,708
Subtotal....................................... 6,067,708 19% 16%
China Technology Investment Trust(/6/)....... 2,650,000
James Ding(/6/)(/7/)......................... 2,814,708
Subtotal....................................... 5,464,708 17% 15%
Patrick L. Keen(/8/)......................... --
ChinaVest IV, L.P.(/2/)(/9/)................. 4,127,516
ChinaVest IV-A, L.P.(/2/)(/9/)............... 475,147
ChinaVest IV-B, L.P.(/2/)(/9/)............... 196,779
19/F, 11 Duddell Street Central, Hong Kong
Subtotal....................................... 4,799,442 15% 13%
Fidelity Ventures Limited(/2/)(/10/)......... 518,065
Fidelity International Limited(/2/)(/10/).... 518,066
Fidelity Investors Limited
Partnership(/2/)(/10/)...................... 518,066
16th Floor, Citibank Tower 3 Garden Road
Central, Hong Kong
Subtotal....................................... 1,554,197 5% 4%
</TABLE>
(footnotes on next page)
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Total Voting
Power
Number of -----------------
Shares Before After
Beneficially Offering Offering
Owned -------- --------
Name of Beneficial Owners ------------<S> <C>
Intel Pacific, Inc.(/11/)................. 2,630,425 8% 7%
Louis Lau................................. 1,971,029 6% 5%
Michael Zhao.............................. 861,600 3% 2%
Larry Huang............................... 60,000 0% 0%
Alan D. Bickell(/12/)..................... 130,000 0% 0%
Ying Han.................................. 20,000 0% 0%
Frank Yong................................ 20,000 0% 0%
All directors and executive officers as a
group.................................... 31,799,319 98% 85%
</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) Voting and investment control over the shares of common stock owned by
Warburg Pincus Ventures, L.P. and Warburg Pincus Ventures International,
L.P. is held by Warburg, Pincus & Co., the corporate general partner and
investment manager of both limited partnerships, and not by any single
individual.
(4) 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.
(5) Includes 4,000 shares held by the Stephanie Tian Trust which are
beneficially owned by Edward Tian.
(6) 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 and James Ding has
control over such trust.
(7) Includes 4,000 shares held by the Rene Ding Trust which are beneficially
owned by James Ding.
(8) 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.
(9) Voting and investment control over the shares of common stock owned by
ChinaVest IV, L.P. and ChinaVest IV-A, L.P. are held by their general
partner, ChinaVest Partners IV, a Delaware general partnership, and
voting and investment control over the shares of common stock owned by
ChinaVest IV-B, L.P. is held by its general partner and investment
manager, ChinaVest Management Limited, a Bermuda company, and not by any
single individual.
(10) Voting and investment control over the shares of common stock owned by
Fidelity Ventures Limited, Fidelity International Limited, Fidelity
Investors Limited Partnership is held by their general partner and
investment manager, Fidelity Investors Management LLC, and not by any
single individual.
(11) 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.
(12) Includes 95,000 shares held by the Alan D. Bickell Family Trust which are
beneficially owned by Alan D. Bickell.
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<PAGE>
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 December 31, 1999, there were 25,548,144 shares of common stock
outstanding held of record by 114 stockholders. After the offering, there will
be 37,484,297 shares of common stock outstanding, assuming the automatic
conversion of all outstanding shares of our Series A and Series B Convertible
Preferred Stock, and no exercise of the underwriters' over-allotment option.
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, but will not be affected by
the rights of the holders of our Series A and Series B Preferred Stock, as
such shares will automatically convert into shares of common stock upon the
consummation of this Offering. 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
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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 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 38,110,817 outstanding shares of common
stock. Of these shares, the 5,000,000 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 33,110,817 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, and all 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,
all Restricted Shares will be eligible for sale, subject to applicable holding
periods and certain volume, manner of sale and other limitations under Rule
144.
Following the expiration of such lock-up periods, the shares issued upon
exercise of compensation-related or performance-based 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 up to a given amount of net proceeds within any twelve
month period in reliance upon Rule 144, but without compliance with the
holding period restrictions of 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 10,713,111 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 Clifford Chance 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. Gain recognized by a U.S. Holder generally will be capital gain
and will be short-term capital gain if such U.S. Holder held the Shares for
one year of less or long-term capital gain if such U.S. Holder held the Shares
for more than one year. Short-term capital gain recognized by an individual
U.S. Holder is taxed at the regular income tax rates, while long-term capital
gain is generally subject
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to tax at a maximum rate of 20%. U.S. Holders that are corporations are taxed
on their net capital gains at the regular corporate income tax rates.
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, Deutsche Bank Securities Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation 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............. 1,453,334
Deutsche Bank Securities
Inc...................... 1,453,333
Donaldson, Lufkin &
Jenrette Securities
Corporation.............. 1,453,333
China International
Capital Corporation (Hong
Kong) Limited............ 80,000
Dain Rauscher Wessels..... 80,000
First Union Securities,
Inc...................... 80,000
Edward D. Jones & Co.,
L.P...................... 80,000
Legg Mason Wood Walker,
Incorporated............. 80,000
Brad Peery Inc............ 80,000
SoundView Technology
Group, Inc............... 80,000
Thomas Weisel Partners
LLC...................... 80,000
---------
Total................... 5,000,000
=========
</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 $1.008 a share under the public offering price.
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 750,000
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 $138,000,000, the total underwriters' discounts and commissions would be
$9,660,000 and total proceeds to AsiaInfo would be $128,340,000.
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.
Our common stock has been approved for listing on the NASDAQ National
Market under the symbol "ASIA."
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Each of AsiaInfo and the directors, executive officers and 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;
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; or
. 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 and which to the Company's knowledge, after due inquiry, that
the person to whom such shares are issued, will not sell or otherwise
dispose of these shares in contravention of any lock-up agreement.
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. The shares held by MSDW Equity
Funding will be restricted from sale, transfer, assignment or by hypothecation
for a period of one year from the closing of this offering.
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At our request, the underwriters have reserved for sale up to 8% 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.
Each of the underwriters has agreed that it will not offer, sell or deliver
any of the shares of common stock, or the Shares, offered by this prospectus,
directly or indirectly, or distribute this prospectus or any other offering
material relating to the Shares, in or from any jurisdiction except under
circumstances that will result in compliance with the applicable laws and
regulations thereof.
The Shares have not been and will not be registered under the Securities
and Exchange Law of Japan. Each underwriter has represented and agreed that it
has not offered or sold, and it will not offer or sell, directly or
indirectly, any of the Shares in or to or for the benefit of residents of
Japan or to any persons for reoffering or resale, directly or indirectly, in
Japan or to or for the benefit of any resident of Japan except pursuant to an
exemption from the registration requirements of the Securities and Exchange
Law available thereunder and in compliance with the other relevant laws and
regulations of Japan.
Each underwriter has represented and agreed that (a) it has not offered or
sold and will not offer or sell any Shares to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principle or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 (as
amended) or Part IV of the Financial Services Act 1986, (b) it has complied
and will comply with all applicable provisions of the Financial Services Act
1986 with respect to anything done by it in relation to the Shares in, from or
otherwise involving the United Kingdom and (c) it has only issued or passed on
and will only issue or pass on in the United Kingdom any document received by
it in connection with the issue of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom
such document may otherwise lawfully be issued or passed on.
Each underwriter has represented and agreed that (a) it has not offered or
sold and will not offer to sell in Hong Kong, by means of any document, any
Shares other than to persons whose ordinary business it is to buy or sell
shares or debentures, whether as principal or agent, or in circumstances which
do not constitute an offer to the public within the meaning of the Companies
Ordinance of Hong Kong and (b) unless it is a person permitted to do so under
the securities laws of Hong Kong, it has not issued or had in its possession
for the purpose of issue and will not issue or have in its possession for the
purpose of issue any advertisement, invitation or document relating to the
Shares other than with respect to Shares intended to be disposed of to persons
outside Hong Kong or to be disposed of in Hong Kong only to persons whose
business involves the acquisition, disposal or holding of securities whether
as principal or agent.
For the purposes of the Rules Governing the Listing of Securities on the
Hong Kong Stock Exchange, the Shares are regarded as "selectively marketed
securities," which means that the offer and sale of the Shares is restricted
such that they are marketed to or placed with a number of registered dealers
or financial institutions either with a view to their reselling the Shares as
principals off-market and that the Shares are of such a nature that nearly all
of them will normally be purchased and traded by a limited number of investors
who are particularly knowledgeable in investment matters or placing the Shares
with a limited number of such investors. The underwriters reserve the right to
withdraw, cancel or modify such offer without notice and to reject any order
in whole or in part.
Each underwriter has agreed that it has not and will not offer or sell any
Shares or distribute any document or other material relating to the Shares,
either directly or indirectly, to the public or any member of the public in
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Singapore other than (i) to an institutional investor or other person
specified in Section 106C of the Companies Act, Chapter 50 of Singapore (the
"Singapore Companies Act"); (ii) to a sophisticated investor, and in
accordance with the conditions specified in Section 106D of the Singapore
Companies Act; or (iii) otherwise pursuant to, and in accordance with the
conditions of, any other provision of the Singapore Companies Act. A copy of
this prospectus has been lodged with the Registrar of Companies ad Businesses
in Singapore as an information memorandum for the purposes of Section 106D of
the Singapore Companies Act. The Registrar of Companies and Businesses in
Singapore takes no responsibility as to the contents of this document.
Each underwriter has agreed that it has not offered or sold and will not
offer or sell any Shares and has not distributed and will not distribute any
document or other material in connection with the Shares, either directly or
indirectly in the People's Republic of China in connection with this offering
or at anytime thereafter.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price has been determined by negotiations
between us and the representatives of the underwriters. Among the factors
considered in determining the initial public offering price were 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.
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<PAGE>
LEGAL MATTERS
The validity of the shares and certain other legal matters will be passed
upon for us by Clifford Chance Rogers & Wells LLP. 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. Attorneys in the firm Clifford Chance Rogers & Wells LLP intend
to acquire 10,000 shares of common stock in the offering.
EXPERTS
The consolidated financial statements of AsiaInfo as of December 31, 1998
and 1999 and for each of the years in the three-year period ended December 31,
1999, 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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<PAGE>
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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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ASIAINFO HOLDINGS, INC.
Independent auditors' report.............................................. F-2
Consolidated balance sheets as of December 31, 1998 and 1999.............. F-3
Consolidated statements of operations for the years ended December 31,
1997, 1998 and 1999...................................................... F-4
Consolidated statements of stockholders' equity and comprehensive income
(loss) for the years ended December 31, 1997, 1998 and 1999.............. F-5
Consolidated statements of cash flows for the years ended December 31,
1997, 1998 and 1999...................................................... F-7
Notes to consolidated financial statements................................ F-9
ZHEJIANG ASIAINFO TELECOMMUNCATION TECHNOLOGY CO., LTD.
Independent auditors' report.............................................. F-28
Balance sheets as of December 31, 1997 and 1998........................... F-29
Statements of operations for the years ended December 31, 1997 and 1998... F-30
Statements of owner's equity for the years ended December 31, 1997 and
1998..................................................................... F-31
Statements of cash flows for the years ended December 31, 1997 and 1998... F-32
Notes to financial statements............................................. F-33
PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma financial information basis of presentation........... F-37
Unaudited pro forma statement of operations for the year ended December
31, 1999................................................................. F-38
</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, 1998 and 1999, 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, 1999. 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, 1998 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
Hong Kong
January 24, 2000
F-2
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In US dollars)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 9,749,374 $25,403,884
Restricted cash.................................... 6,000,000 12,189,794
Accounts receivable, trade (net of allowance for
doubtful accounts of $62,685 and $640,269 at
December 31, 1998 and 1999, respectively)......... 23,292,881 21,928,036
Inventories........................................ 566,383 2,908,426
Amount due from a related party.................... 781,686 --
Other receivables.................................. 1,349,034 1,346,884
Deferred income taxes.............................. 16,266 25,117
Deferred offering costs............................ -- 401,607
Prepaid expenses and other current assets.......... 1,049,246 568,825
----------- -----------
Total current assets............................. 42,804,870 64,772,573
Property, plant, and equipment--net.................. 1,745,354 2,183,545
Goodwill, at cost less accumulated amortization...... 421,417 4,302,633
Deferred income taxes................................ 387,238 168,228
----------- -----------
Total Assets..................................... $45,358,879 $71,426,979
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans.............................. $ 5,677,130 $ 9,698,882
Accounts payable................................... 10,117,535 11,867,188
Deferred revenue................................... 3,583,569 495,470
Other payables..................................... 114,718 360,968
Accrued employee benefit........................... 2,615,028 4,810,650
Accrued expenses................................... 1,604,277 1,930,145
Other taxes payable................................ 2,043,194 2,295,030
Income taxes payable............................... 292,468 180,475
----------- -----------
Total current liabilities........................ 26,047,919 31,638,808
----------- -----------
Minority interest.................................... 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
Series B: 5,000,000 shares authorized at December
31, 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: 1998,
14,160,002; 1999, 25,532,144...................... 141,600 255,321
Additional paid-in capital......................... 17,667,474 46,118,424
Deferred stock compensation........................ (783,334) (3,865,373)
Retained earnings (accumulated deficit)............ 2,180,828 (2,764,854)
Accumulated other comprehensive income (loss)...... 18,504 (3,260)
----------- -----------
Total stockholders' equity....................... 19,246,681 39,788,171
----------- -----------
Total Liabilities and Stockholders' Equity....... $45,358,879 $71,426,979
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In US dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Network solutions..................... $36,508,751 $41,964,244 $53,785,805
Software license...................... 774,684 2,258,148 6,494,008
----------- ----------- -----------
Total revenues........................ 37,283,435 44,222,392 60,279,813
----------- ----------- -----------
Cost of revenues:
Network solutions..................... 29,551,059 32,188,695 41,958,770
Software license...................... 4,819 819 3,814
----------- ----------- -----------
Total cost of revenues................ 29,555,878 32,189,514 41,962,584
----------- ----------- -----------
Gross profit........................... 7,727,557 12,032,878 18,317,229
----------- ----------- -----------
Operating expenses:
Sales and marketing................... 835,268 2,408,031 8,768,155
General and administrative............ 6,166,993 6,463,454 8,166,900
Research and development.............. 393,468 1,435,487 2,838,188
Amortization of deferred stock
compensation......................... 1,045,333 1,045,333 3,507,678
----------- ----------- -----------
Total operating expenses.............. 8,441,062 11,352,305 23,280,921
----------- ----------- -----------
(Loss) income from operations.......... (713,505) 680,573 (4,963,692)
----------- ----------- -----------
Other income (expense):
Interest income....................... 173,601 758,533 827,157
Interest expense...................... (184,998) (394,398) (617,867)
Other income, net..................... 43,043 113,532 142,504
----------- ----------- -----------
Total other income, net............... 31,646 477,667 351,794
----------- ----------- -----------
(Loss) income before income taxes and
minority interests.................... (681,859) 1,158,240 (4,611,898)
Income tax expense (benefit)........... 267,000 (255,504) 383,226
----------- ----------- -----------
(Loss) income before minority
interests............................. (948,859) 1,413,744 (4,995,124)
Minority interests in loss of
consolidated subsidiaries............. 566,840 122,066 84,131
Equity in loss of affiliate............ -- -- (34,689)
----------- ----------- -----------
Net (loss) income...................... $ (382,019) $ 1,535,810 $(4,945,682)
=========== =========== ===========
Net (loss) income per share:
Basic................................. $ (0.03) $ 0.11 $ (0.34)
=========== =========== ===========
Diluted............................... $ (0.03) $ 0.05 $ (0.34)
=========== =========== ===========
Shares used in computation:
Basic................................. 13,530,000 13,616,412 14,630,145
=========== =========== ===========
Diluted............................... 13,530,000 31,765,534 14,630,145
=========== =========== ===========
Pro forma net loss per share (note 3):
Basic................................. $ (0.25)
===========
Diluted............................... $ (0.25)
===========
Shares used in pro forma computation
(note 3):
Basic................................. 19,611,406
===========
Diluted............................... 19,611,406
===========
</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, 1997.. -- $ -- 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
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
<CAPTION>
Comprehensive
income (loss)
-------------
<S> <C>
Balance at
January 1, 1997..
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.............
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.............
</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
loss:
Net loss........ -- $ -- -- $ -- $ -- $ -- $(4,945,682) $ -- (4,945,682)
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... -- -- -- -- -- -- -- (21,764) (21,764)
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.......... -- -- 1,485,416 14,854 207,808 -- -- -- 222,662
Warrants
exercised........ -- -- 9,449,226 94,492 (47,146) -- -- -- 47,346
Deferred stock
compensation..... -- -- -- -- 6,589,717 (6,589,717) -- -- --
Amortization of
deferred stock
compensation..... -- -- -- -- -- 3,507,678 -- -- 3,507,678
--------- ------- ---------- -------- ----------- ----------- ----------- ------- -----------
Balance at
December 31,
1999............. 4,791,289 $47,913 25,532,144 $255,321 $46,118,424 $(3,865,373) $(2,764,854) $(3,260) $39,788,171
========= ======= ========== ======== =========== =========== =========== ======= ===========
<CAPTION>
Comprehensive
income (loss)
-------------
<S> <C>
Comprehensive
loss:
Net loss........ $(4,945,682)
Other
comprehensive
income, net of
tax:
Foreign currency
translation
adjustments..... (21,764)
-------------
Comprehensive
loss............ $(4,967,446)
=============
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
December 31,
1999.............
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................... $ (382,019) $ 1,535,810 $(4,945,682)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation............................ 219,386 351,175 620,499
Amortization of goodwill................ -- 46,824 785,050
Amortization of deferred stock
compensation........................... 1,045,333 1,045,333 3,507,678
Deferred income taxes................... 17,000 (365,504) 210,159
Minority interest in loss of
subsidiaries........................... (566,840) (122,066) (84,131)
Equity in loss of affiliate............. -- -- 34,689
Loss on disposal of property, plant, and
equipment.............................. -- -- 48,574
Gain on sale of business................ -- -- (165,932)
Bad debt expense........................ 753,839 -- 839,552
Changes in operating assets and
liabilities:
Restricted cash........................ -- (6,000,000) (6,189,794)
Accounts receivable.................... (7,044,478) (11,848,910) 2,175,416
Inventories............................ 916,486 885,318 (2,353,513)
Amount due from a related party........ -- (781,685) 57,048
Other receivables...................... (320,164) (160,332) 739,791
Deferred offering costs................ -- -- (401,607)
Prepaid expenses and other current
assets................................ (258,973) (92,889) 294,291
Accounts payable....................... 3,993,303 4,056,441 (293,023)
Deferred revenue....................... 2,034,687 (160,861) (3,193,024)
Other payables......................... 22,791 (399,174) (351,725)
Accrued employee benefit............... 711,542 1,334,758 2,231,243
Accrued expenses....................... 783,808 174,451 265,908
Other taxes payable.................... 2,023,974 (1,575,764) 251,145
Income taxes payable................... 119,524 34,969 (111,993)
---------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 4,069,199 (12,042,106) (6,029,381)
---------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant, and
equipment.............................. (270,638) (1,006,980) (1,002,550)
Purchases of the remaining equity
interest of a subsidiary (net of cash
acquired).............................. -- (169,571) --
Proceeds on disposal of property, plant,
and equipment.......................... 42,271 43,708 --
Purchase of a subsidiary................ -- -- (1,297,184)
Prepayment for acquisition of a
subsidiary............................. -- (400,000) --
Proceeds from disposal of AI Data (net
of cash disposed)...................... -- -- 135,626
---------- ----------- -----------
Net cash used in investing activities.... (228,367) (1,532,843) (2,164,108)
---------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
ASIAINFO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In US dollars)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issuance of
convertible preferred stock........... $13,997,632 $ -- $19,850,000
Increase in short-term bank loans...... 2,416,000 9,464,044 16,172,865
Repayment of short-term bank loans..... (964,064) (7,280,114) (12,313,843)
Convertible loan....................... 250,000 -- --
Proceeds on exercise of stock options.. 111,651 875 81,015
Payable to stockholders................ 2,191,790 (2,191,790) --
Warrants exercised..................... -- -- 47,346
Repurchase of minority interest........ -- (712,018) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. 18,003,009 (719,003) 23,837,383
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents: 21,843,841 (14,293,952) 15,643,894
Cash and cash equivalents at beginning
of year................................ 2,220,891 24,065,882 9,749,374
Effect of exchange rate changes on cash
and cash equivalents................... 1,150 (22,556) 10,616
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $24,065,882 $ 9,749,374 $25,403,884
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year:
Interest............................... $ 184,998 $ 369,343 $ 592,954
Income taxes........................... 130,476 75,032 301,012
=========== =========== ===========
Noncash investing and financing
activities:
Deferred stock compensation............ $ -- $ -- $ 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 $2,872,898 and assumed liabilities of
$3,657,914.
In connection with the disposals in 1999 of interests in AI Data for cash
of $350,889 in 1999, the Company disposed of assets with a fair value of
$403,176 and assumed liabilities of $183,531.
See notes to consolidated financial statements.
F-8
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1998 and 1999
(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 December 31, 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. AI Data was consolidated prior to the sale of the
16.5% interest and the remaining interest in AI Data subsequently accounted
for on the equity method up to December 1999 when the Company sold 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 $745,928 which was written off in 1997 as a bad debt. As of December 31,
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,
1998.
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Revenue...................................................... $44,222,392
Net income................................................... 1,413,744
Net income per share:
Basic...................................................... 0.10
Diluted.................................................... 0.04
Shares used in computation:
Basic...................................................... 13,616,412
Diluted.................................................... 31,765,532
</TABLE>
F-9
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(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, determined based on an
independent appraisal conducted subsequent to the acquisition, for their past
services. These shares were fully vested on issue and had no future service
requirements. 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 $4.7 million has been recorded in
goodwill, which is being amortized over 5 years.
The purchase price was allocated in the following manner:
<TABLE>
<S> <C> <C>
Purchase price:
Cash at closing.................................... $2,000,000
Issue of common stock to senior management
($437,500 shares at $4.30 per share)............ 1,881,250
----------
3,881,250
Liabilities assumed:
Short-term bank loan............................. $ 93,918
Accounts payable................................. 2,051,352
Payable to Company............................... 781,686
Deferred revenue................................. 190,734
Other payables and accrued expenses.............. 540,224
---------
3,657,914
Assets purchased:
Cash............................................. 302,724
Accounts receivable.............................. 1,516,970
Advances to suppliers............................ 211,728
Inventories...................................... 12,907
Other receivables and prepaid expenses........... 620,712
Property, plant and equipment.................... 207,857
---------
2,872,898
----------
Total goodwill..................................... $4,666,266
==========
</TABLE>
The following unaudited pro forma information presents the results of
operations of the Company, AI CTC and AI Zhejiang as if the acquisitions had
taken place on January 1, 1998.
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue......................................... $46,867,064 $60,485,110
Net loss........................................ (189,598) (5,561,927)
Net loss per share:
Basic......................................... (0.01) (0.38)
Diluted....................................... (0.01) (0.38)
Shares used in computation:
Basic......................................... 14,053,912 14,739,520
Diluted....................................... 14,053,912 14,739,520
</TABLE>
F-10
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
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;
(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 $34,689 for 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.
F-11
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
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 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 $46,824 at December 31, 1998 and $831,874 at December 31, 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--Software license revenues represent license fees which
allow customers to use the Company's software products in perpetuity up to a
maximum number of users. Software license revenues are derived from contracts
with corporate customers. Revenue from software license fees is recognized
when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable.
Revenue from network solutions contracts, which includes the procurement of
hardware on behalf of the customer, systems design, planning, consulting and
systems integration services is recognized over the contract term based on the
percentage of completion. Estimates of hardware warranty costs are included in
determining project costs and in 1999, costs of revenues were reduced by $1.2
million representing $0.08 per share as the Company's experience in 1999
determined that reduced warranty cost provisions were required. 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 $10,135,662 at December 31, 1998 and
$11,945,082 at December 31, 1999. Billings in excess of revenues recognized on
service contracts are recorded as deferred income until the above revenue
recognition criteria are met. Billings are rendered based on agreed milestones
included in the contracts with customers.
At December 31, 1998 and 1999 the balance of trade account receivables of
$13,157,219 and $9,982,954, respectively, represented amounts billed but not
yet collected. All billed and unbilled amounts are expected to be collected
within 1 year.
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.
F-12
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
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 and amounted to exchange losses of $2,663 in 1997, $691 in 1998
and $46,630 in 1999.
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, 1999 was US$1.00=RMB8.2793. 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."
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".
Deferred offering costs--Deferred offering costs represent expenses
incurred by the Company that are directly attributable the Company's initial
public offering. These costs will be written off against the proceeds from the
offering.
F-13
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
Pro forma 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. Pro forma weighted average
common shares include the effect of the assumed conversion of preferred shares
as of the beginning of the period presented or as of the date of issuance, if
later. Diluted pro forma 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 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
December 31, 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 25,532,144; pro forma 32,484,297 255,321 324,843
Additional paid-in capital........................... 46,118,424 46,096,815
Deferred stock compensation.......................... (3,865,373) (3,865,373)
Retained earnings.................................... (2,764,854) (2,764,854)
Accumulated other comprehensive loss................. (3,260) (3,260)
----------- -----------
Total stockholders' equity........................... $39,788,171 $39,788,171
=========== ===========
</TABLE>
No other balance sheet caption is adjusted.
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.
F-14
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
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>
1998 1999
-------- ----------
<S> <C> <C>
Hardware and parts.................................... $566,383 $2,908,426
======== ==========
</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, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Furniture, fixtures and
electronic equipment..... $1,324,596 $1,993,500
Motor vehicles............ 285,259 308,476
Leasehold improvements.... 391,734 529,389
Accounting software....... 209,018 263,163
---------- ----------
Total................... 2,210,607 3,094,528
Less: Accumulated
depreciation............. 465,253 910,983
---------- ----------
Net book value............ $1,745,354 $2,183,545
========== ==========
</TABLE>
7. SHORT-TERM BANK LOANS
As of December 31, 1999, the Company had total short-term credit facilities
totalling $9.3 million expiring in April and July, 2000, for working capital
purposes. At December 31, 1999 funds available under unused short-term credit
facilities were $6.8 million. At December 31, 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 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 $12.2 million as of December 31, 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 December 31, 1999.
F-15
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
8. OTHER TAXES PAYABLE
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C>
Individual income tax........................... $ 69,757 $ 440,761
Business tax payable............................ 270,417 202,001
Value added taxes payable, net.................. 1,703,020 1,652,268
---------- ----------
$2,043,194 $2,295,030
========== ==========
</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 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.
Value added tax payable on revenues is payable net of value added tax paid on
purchases. The Company is also required to withhold PRC individual income tax
on employees' payroll for remittance to the tax authorities.
9. INCOME TAXES
The components of (loss) income before income taxes and minority interests
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
US................................... $(562,378) $(1,277,546) $(4,040,098)
PRC.................................. (119,481) 2,435,786 (571,800)
--------- ----------- -----------
$(681,859) $ 1,158,240 $(4,611,898)
========= =========== ===========
</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-16
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Current
United States:
Federal...................................... $218,750 $ 96,300 $ --
State........................................ 31,250 13,700 --
Foreign:
PRC.......................................... -- -- 173,068
-------- --------- --------
Total current income taxes................. 250,000 110,000 173,068
-------- --------- --------
Deferred
United States:
Federal...................................... 14,875 33,250 --
State........................................ 2,125 4,750 --
Foreign:
PRC.......................................... -- (403,504) 210,158
-------- --------- --------
Total deferred income taxes................ 17,000 (365,504) 210,158
-------- --------- --------
Total income tax (benefit) expense......... $267,000 $(255,504) $383,226
======== ========= ========
</TABLE>
The components of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards............... $ 336,947 $ 709,334
Depreciation.................................... 66,557 193,345
------------ ------------
Total gross deferred tax assets................... 403,504 902,679
Valuation allowance............................... -- (709,334)
------------ ------------
Total deferred tax assets......................... $ 403,504 $ 193,345
============ ============
</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, 1999,
tax loss carry forwards in the PRC amounted to approximately $339,000, which
will expire between 2000 and 2003, and tax loss carry forwards in the US
amounted to approximately $1.5 million, which will expire in 2018 and 2019. A
valuation allowance of $709,334 for the full amount of the tax losses carried
forward in the US and PRC has been established.
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-17
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(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 did not have any assessable income for 1998. In the absence
of such income tax exemptions, income tax $329,202 in 1997, $150,402 in 1998
and $987 in 1999 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. There was no impact on income per share in 1999. The
50% exemption will expire on December 31, 2001.
Undistributed earnings of the Company's PRC subsidiaries amounted to
approximately $824,000 at December 31, 1999. 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's PRC subsidiaries distributed the
undistributed earnings as of December 31, 1999, the US income tax liability
would be approximately $329,600.
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,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
US federal rate.......................... 35% 35% 35%
State tax rate (net of federal benefit).. 5 5 5
Tax exempt foreign income................ (18) (84) (15)
Expenses not deductible for tax purposes
--Deferred stock compensation expenses.. (61) 22 (33)
-------- -------- --------
(39)% (22)% (8)%
======== ======== ========
</TABLE>
Tax exempt foreign income includes the effect of adjustments made to
conform PRC statutory accounts in U.S. GAAP.
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-18
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(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, 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-19
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(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, 1999, ranks
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 (loss) income per share
The following is a reconciliation of the numerators and denominators of the
basic and diluted net (loss) income per share computations:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income (numerator):
Net (loss) income
Basic and diluted....................... $ (382,019) $ 1,535,810 $(4,945,682)
=========== =========== ===========
Shares (denominator):
Weighted average
Common Stock
Outstanding............................. 14,279,254 14,016,852 15,576,580
Outstanding subject to repurchase....... 749,254 400,440 946,435
----------- ----------- -----------
Basic................................... 13,530,000 13,616,412 14,630,145
Contingent shares....................... -- 400,440 --
Convertible preferred stock............. -- 4,321,728 --
Options................................. -- 3,971,617 --
Warrants................................ -- 9,455,337 --
----------- ----------- -----------
Diluted................................. 13,530,000 31,765,534 14,630,145
=========== =========== ===========
Net (loss) income per share:
Basic................................... $ (0.03) $ 0.11 $ (0.34)
Diluted................................. $ (0.03) $ 0.05 $ (0.34)
</TABLE>
F-20
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
In 1997 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
December 31,
---------------------
1997 1999
---------- ----------
<S> <C> <C>
Convertible preferred stock............................ 4,321,728 6,952,153
Shares of common stock subject to repurchase........... 301,760 --
Outstanding options.................................... 7,448,000 8,891,811
Warrants............................................... 9,489,226 40,000
---------- ----------
21,560,714 15,883,964
========== ==========
</TABLE>
12. COMMITMENTS
Operating Leases-- As of December 31, 1999, the Company was committed under
certain operating leases, requiring annual minimum rentals as follows:
<TABLE>
<S> <C>
2000.......................................................... $ 2,090,650
2001.......................................................... 2,057,777
2002.......................................................... 2,008,615
2003.......................................................... 1,053,051
2004.......................................................... 610,211
Thereafter.................................................... 7,578,700
-----------
$15,399,004
===========
</TABLE>
The leased properties are principally located in the PRC and are used for
administration and research and development. The leases are renewable subject
to negotiation. Rental expense for the three years in the period ended
December 31, 1999 was $772,794, $1,390,811 and $1,538,703, 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-21
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
13. EMPLOYEE RETIREMENT BENEFITS
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% to 23% 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, 1999 was $354,819, $537,593 and $784,413, respectively.
In addition, the Company is required by law to contribute 18% to 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 applicable to China's
foreign investment enterprises, the Company's PRC subsidiaries are required to
make appropriations from net income as determined under PRC GAAP to non-
distributable reserves which include a general reserve, an enterprise
expansion reserve and a staff welfare and bonus reserve. Wholly owned PRC
subsidiaries are not required to make appropriations to the enterprise
expansion reserve but appropriations to the general reserve are required to be
made at not less than 10% of the profit after tax as determined under PRC
GAAP. The staff welfare and bonus reserve is determined by the board of
directors.
The general reserve is used to offset future extraordinary losses. The
subsidiaries may, upon a resolution passed by the stockholders, convert the
general reserve into capital. The staff welfare and bonus reserve is used for
the collective welfare of the employees of the subsidiaries. The enterprise
expansion reserve is used for the expansion of the subsidiaries' operations
and can be converted to capital subject to approval by the relevant
authorities. These reserves represent appropriations of retained earnings
determined according to Chinese law. There were no appropriations to reserves
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, 1999 the amounts were
placed principally with financial institutions in the PRC and the US.
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, which comprises the Directorate General
of Telecommunications, provincial post and telecommunication administrations
and city and county telecommunications bureaus. Although these provincial and
local entities of the China Telecom system are
F-22
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
separate legal entities and generally make their own purchase decisions, such
decisions are nonetheless affected by China Telecom. Sales to various entities
of the China Telecom system amounted to approximately 98%, 98%, and 84% of
total revenues in 1997, 1998 and 1999, respectively. During the years ended
December 31, 1997, 1998 and 1999, certain entities of the China Telecom system
represented more than 10% of total revenues. In 1997, provincial entity A and
provincial entity B accounted for 20% and 12%, respectively, of total
revenues. In 1998, provincial entity C, provincial entity D and provincial
entity E accounted for 27%, 20% and 13%, respectively, of total revenues. In
1999, provincial entity E and provincial entity F accounted for 29% and 17%,
respectively, of total revenues. In 1999, sales to China United
Telecommunications Corporation accounted for 14% of total revenues.
Details of the amounts receivable from the customers with the largest
receivable balances at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Percentage of
accounts receivable
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Five largest receivables balances....................... 67% 61%
</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 12,694,000
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. The options prior to 1998 also contained the right of
repurchase by the Company at fair market value.
F-23
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
Total number of options exercisable and the weighted average exercise price
were 2,342,100, 4,573,400 5,603,111 and $0.44, $0.83 and $2.37 as of December
31, 1997, 1998 and 1999, respectively.
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, 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 $0.41)..... 575,000 3.00
Canceled........................................... (146,000) 1.64
Exercised.......................................... (175,000) 0.005
----------
Outstanding, December 31, 1998....................... 7,702,000 1.39
Granted (weighted average fair value of $2.92) .... 2,892,000 6.07
Cancelled.......................................... (52,300) 2.81
Exercised.......................................... (1,649,889) 0.89
----------
Outstanding, December 31, 1999....................... 8,891,811 $2.99
==========
</TABLE>
The fair value of the common stock underlying the issue of the options
under the Plans is based on valuations by independent appraisers or by
reference to stock sales prices, as appropriate.
Additional information on options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding as of December 31, 1999 as of December 31, 1999
------------------------------------------- -----------------------
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... 968,952 5.75 $0.01 968,952 $0.01
$0.25 to
0.75... 348,490 6.50 0.65 348,490 0.65
$1.00 to
1.50... 2,344,677 7.02 1.10 2,044,677 1.06
$2.00 to
2.75... 1,893,816 7.81 2.57 1,149,816 2.58
$3.00... 752,876 8.70 3.00 91,176 3.00
$4.17... 874,000 9.43 4.17 -- --
$7.60... 1,709,000 9.84 7.60 1,000,000 7.60
--------- ---- ----- --------- -----
Total.. 8,891,811 7.95 $2.99 5,603,111 $2.37
========= ==== ===== ========= =====
</TABLE>
At December 31, 1998 and December 31, 1999, 1,821,000 and 1,821,300
options, respectively, were available for future grant under the Plans.
F-24
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
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 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 1999, such deferred compensation expense aggregated $
nil and $6,091,111, respectively.
In 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 December 31, 1999, such deferred compensation expense
aggregated $498,606.
In late 1999 the Company removed the rights to repurchase shares issuable
under the existing plans.
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, 5.7% in 1997, 4.6% in 1998 and 6.5% in 1999; 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 1997, 1998 and 1999 awards had been amortized to
expense over the vesting period of the awards, pro forma net (loss) income
would have been approximately $(558,093) ($(0.04) per share, basic and
diluted), $1,299,956 ($0.10 and $0.04 per share, basic and diluted),
respectively and $(5,756,676) ($(0.39) per share, basic and diluted) in 1997,
1998 and 1999, respectively.
F-25
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
17.WARRANTS
Convertible preferred stock
In connection with a private placement in December 1997, the Company issued
9,429,226 stock purchase warrants ("Warrants") to its Series A Convertible
Preferred Stock holders ("the Holder"), which were exercisable in whole at any
time after December 31, 1999 at an initial value of $0.005 per Warrant. Each
Warrant represented the right to purchase one share of the Company's common
stock. All the warrants were exercised pursuant to amended warrant terms which
accelerated the warrant exercise term.
Common stock
At December 31, 1998 and 1999, warrants to purchase 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.
In accordance with SFAS No.123 and its related interpretations, the
arrangement was accounted for as a variable award and the Company recognized
compensation expense using an option pricing model of $13,965 in 1997, $81,423
in 1998 and $47,178 in 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 customer management and billing, wireless
customer management and billing and messaging software. These software
products can be sold on a stand alone basis or in connection with a systems
integration
F-26
<PAGE>
ASIAINFO HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997, 1998 and 1999
(In US dollars)
arrangement. AI Zhejiang, which was acquired in 1999, has been presented as a
separate operating segment. There are no differences in accounting treatment
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,
---------------------------------------------------------------
1997 1998 1999
----------- ----------- -------------------------------------
Company
excluding
AI Zhejiang AI Zhejiang Total
<S> <C> <C> <C> <C> <C>
Revenues net of hardware
cost:
Network solutions net of
hardware cost.......... $10,909,554 $17,027,372 $18,157,099 $ 569,556 $18,726,655
Software license........ 774,684 2,258,148 4,302,599 2,191,409 6,494,008
----------- ----------- ----------- ---------- -----------
Consolidated revenues
net of hardware cost... 11,684,238 19,285,520 22,459,698 2,760,965 25,220,663
Consolidated cost of
sales net of hardware
cost................... 3,956,681 7,252,642 5,773,942 1,129,492 6,903,434
----------- ----------- ----------- ---------- -----------
Consolidated gross
profit................. $ 7,727,557 $12,032,878 $16,685,756 $1,631,473 $18,317,229
=========== =========== =========== ========== ===========
Gross profit:
Network Solutions....... $ 6,957,692 $ 9,775,549 $12,386,971 $ (559,936) $11,827,035
Software license........ 769,865 2,257,329 4,298,785 2,191,409 6,490,194
----------- ----------- ----------- ---------- -----------
Consolidated gross
profit................. $ 7,727,557 $12,032,878 $16,685,756 $1,631,473 $18,317,229
=========== =========== =========== ========== ===========
Income (loss) from
operations:
Network Solutions....... $ (556,333) $ 1,019,895 $(3,424,616) $ (742,368) $(4,166,984)
Software license........ (157,172) $ (339,322) (1,743,896) 947,188 (796,708)
----------- ----------- ----------- ---------- -----------
Consolidated income
(loss) from
operations............. $ (713,505) $ 680,573 $(5,168,512) $ 204,820 $(4,963,692)
=========== =========== =========== ========== ===========
</TABLE>
For the years ended December 31, 1997, 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, 1998 and 1999, 99% of the Company's long-lived assets are
located in the People's Republic of China.
F-27
<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-28
<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-29
<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-30
<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$(559,664)
========== ============= ===========
</TABLE>
See notes to financial statements
F-31
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1998 1998
---------- ----------- ----------
Rmb Rmb US$
<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-32
<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-33
<PAGE>
ZHEJIANG ASIAINFO TELECOMMUNICATION TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1997 and 1998
Revenue recognition--Software license revenues represent license fees which
allow customers to use the Company's software products in perpetuity up to a
maximum number of users. Software license revenues are derived from contracts
with corporate customers. Revenue from software license fees is recognized
when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable.
Revenue from systems contracts, which includes the procurement of hardware on
behalf of the customer, systems design, planning, consulting and systems
integration services 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-34
<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-35
<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 from net income as
determined under PRC GAAP to non-distributable reserves which include a
general reserve, an enterprise expansion reserve and a staff welfare and bonus
reserve. Since the Company is wholly foreign owned, it is not required to make
appropriations to the enterprise expansion reserve but appropriations to the
general reserve are required to be made at not less than 10% of the profit
after tax as determined under PRC GAAP. The staff welfare and bonus reserve is
determined by the board of directors.
The general reserve is used to offset future extraordinary losses. The
Company may, upon a resolution passed by the stockholders, convert the general
reserve into capital. The staff welfare and bonus reserve is used for the
collective welfare of the employees. The enterprise expansion reserve is used
for the expansion of the Company's operations and can be converted to capital
subject to approval by the relevant authorities. These reserves represent
appropriations of retained earnings determined according to Chinese law. There
were no appropriations to reserves 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-36
<PAGE>
ASIAINFO HOLDINGS, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
BASIS OF PRESENTATION
The following unaudited pro forma statement of operations of AsiaInfo
Holdings, Inc. (the "Company") for the year ended December 31, 1999 is
presented to show the effects of the 1999 acquisition of Zhejiang AsiaInfo
Telecommunications Technology Co. Ltd. ("AI Zhejiang"), which had been
accounted for as a purchase acquisition, assuming the acquisition had occurred
on January 1, 1999.
The unaudited pro forma financial information does not purport to represent
what the Company's financial position or results of operations would actually
have been had the transactions in fact occurred on the date indicated above,
nor to project the Company's financial position or results of operations for
any future date or period. In the opinion of the Company's management, all
adjustments necessary for a fair presentation have been made. This unaudited
pro forma financial information should be read in conjunction with the
accompanying notes and the consolidated financial statements of the Company
and the related notes included elsewhere herein.
F-37
<PAGE>
ASIAINFO HOLDINGS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Company Al Zhejiang
Historical January 1, Pro Forma
Year ended 1999 to year ended
December 31, April 5, Pro Forma December 31,
1999 1999 Adjustment(/1/) 1999
------------ ----------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Network solutions...... $53,785,805 $ 65,219 $ -- $53,851,024
Software license....... 6,494,008 140,078 -- 6,634,086
----------- --------- --------- -----------
Total revenues......... 60,279,813 205,297 -- 60,485,110
----------- --------- --------- -----------
Cost of revenues:
Network solutions...... 41,958,770 217,363 -- 42,176,133
Software license....... 3,814 -- -- 3,814
----------- --------- --------- -----------
Total cost of
revenues.............. 41,962,584 217,363 -- 42,179,947
----------- --------- --------- -----------
Gross profit............ 18,317,229 (12,066) -- 18,305,163
----------- --------- --------- -----------
Operating expenses:
Sales and marketing.... 8,768,155 103,965 -- 8,872,120
General and
administrative........ 8,166,900 86,266 240,919 8,494,085
Research and
development........... 2,838,188 170,965 -- 3,009,153
Amortization of
deferred stock
compensation.......... 3,507,678 -- -- 3,507,678
----------- --------- --------- -----------
Total operating
expenses.............. 23,280,921 361,196 240,919 23,883,036
----------- --------- --------- -----------
Loss from operations.... (4,963,692) (373,262) (240,919) (5,577,873)
----------- --------- --------- -----------
Other income (expense):
Interest income........ 827,157 643 -- 827,800
Interest expense....... (617,867) -- -- (617,867)
Other income, net...... 142,504 (2,707) -- 139,797
----------- --------- --------- -----------
Total other income,
net................... 351,794 (2,064) -- 349,730
----------- --------- --------- -----------
Loss before income taxes
and minority
interests.............. (4,611,898) (375,326) (240,919) (5,228,143)
Income tax expense ..... 383,226 -- -- 383,226
----------- --------- --------- -----------
Loss before minority
interests.............. (4,995,124) $(375,326) (240,919) (5,611,369)
Minority interests in
loss of consolidated
subsidiary............. 84,131 -- -- 84,131
Equity in loss of
affiliate ............. (34,689) (34,689)
----------- --------- --------- -----------
Net loss................ $(4,945,682) $(375,326) $(240,919) $(5,561,927)
=========== ========= ========= ===========
Net loss per share:
Basic.................. $ (0.34) $ (0.38)
Diluted................ $ (0.34) $ (0.38)
Shares used in
computation:
Basic and diluted ..... 14,630,145 14,739,520
</TABLE>
Notes to Pro forma statement of operations:
(1) To reflect the amortization of goodwill arising on the acquisition of Al
Zhejiang for the period from January 1, 1999 to April 5, 1999.
F-38
<PAGE>
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