<PAGE>
As filed with the Securities and Exchange Commission on May 26, 2000.
Registration No. 333-96137
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
Sohu.com Inc.
(Exact Name of Registrant as Specified in Its Charter)
------------
Delaware 7379 98-0204667
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
7 Jianguomen Nei Avenue
Suite 1519, Tower 2
Bright China Chang An Building
Beijing 100005
People's Republic of China
86-10-6510-2160
(Address and Telephone Number of Registrant's Principal Executive Offices)
------------
CT Corporation System
111 Eighth Avenue
New York, New York 10011
212-590-9200
(Name, Address and Telephone Number of Agent For Service)
Copies to:
Chun Wei, Esq. W. Clayton Johnson, Esq.
Sullivan & Cromwell Cravath, Swaine & Moore
28th Floor Asia Pacific Finance Tower, Suite
Nine Queen's Road Central 2609
Hong Kong 3 Garden Road, Central
852-2826-8688 Hong Kong
852-2509-7201
------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(/1/) Registration Fee
-------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001
per share...................... $86,250,000 $22,770
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 26, 2000
Shares
Sohu.com Inc.
Common Stock
--------
We are offering shares of our common stock in the United States and
Canada through a syndicate of U.S. underwriters, and shares outside the
United States and Canada through a syndicate of international managers. The
offering price and the underwriting discount and commission for the two
offerings are identical.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We have applied to list our common stock on The Nasdaq
Stock Market's National Market under the symbol "SOHU".
The U.S. underwriters and international managers have an option to purchase
on a pro rata basis up to additional shares to cover over-allotments.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions Sohu.com
------ ------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
UBS Warburg
The date of this prospectus is , 2000.
<PAGE>
[Inside front cover --
(1) Top half -- Heading "A Leading Internet Portal in China" followed by a
screen shot of the Sohu.com home page, which is in the Chinese language,
together with English annotations.
(2) Bottom half -- Heading "Offering Context, Content, Community & Commerce"
followed by screen shots of the Sohu online directory, the Sohu News
channel, the Sohu chat room and the Sohu shopping channel.
(3) Background -- The tail of the "Search Fox".]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
Enforceability of Civil
Liabilities........................ 24
Cautionary Notice Regarding Forward-
Looking Statements................. 24
Use of Proceeds..................... 25
Dividend Policy..................... 25
Capitalization...................... 26
Dilution............................ 28
Exchange Rate Information........... 29
Selected Consolidated Financial
Data............................... 30
Corporate Restructuring............. 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 36
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 47
Regulation of the PRC Internet
Industry........................ 62
Management....................... 66
Principal Shareholders........... 76
Related Party Transactions....... 78
Shares Eligible for Future Sale.. 82
Description of Capital Stock..... 84
Taxation......................... 88
Underwriting..................... 91
Notice to Canadian Residents..... 95
Validity of Common Stock......... 96
Experts.......................... 96
Where You Can Find More
Information..................... 96
Index to Financial Statements.... F-1
</TABLE>
------------
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does
not contain all of the information that may be important to you. You should
read the entire prospectus carefully in evaluating an investment in our shares.
Sohu.com Inc.
Our Business
We are a leading Internet portal in China in terms of brand recognition,
page views and registered users. During the seven-day period ended May 20,
2000, we averaged in excess of 12.4 million page views per day. In addition, as
of May 20, 2000, we had over 2.2 million registered e-mail users. Our portal
consists of the following:
. sophisticated Chinese language Web navigational and search capabilities;
. twelve main content channels;
. Web-based communications and community services; and
. a platform for e-commerce services.
We are a pioneer of the Internet industry in China, having introduced the
first Chinese language online directory and search engine. We have exclusively
targeted the PRC Internet market since our inception. All of our products and
services are designed to meet the specific interests and needs of Internet
users in China. As of April 30, 2000, our online directory contained over
250,000 Chinese language Web listings. We offer Internet users a proprietary
Chinese language search and a co-branded English language search. Furthermore,
we have contractual relationships with over 85 Chinese language media and
information providers. Each of our main content channels contains multi-level
sub-channels that cover a comprehensive range of topics, including news,
business, entertainment, sports and career. We also promote user affinity to
Sohu by providing free Chinese language e-mail, online bulletin boards, chat
rooms and instant messaging. We began offering limited e-commerce services on a
trial basis in 1999.
As a leading Internet portal in China, we are well positioned to capitalize
on the emergence of the Web as a new advertising medium and commerce platform
in China. We believe that by providing a well tuned and highly relevant
navigational context and comprehensive range of China-specific content, we
provide advertisers and merchants with targeted access to a large audience with
highly desirable demographic profiles.
Corporate Structure
Under current PRC regulations, foreign companies such as Sohu.com Inc. may
not own or operate telecommunications businesses in China, which may include
the operation of Internet content provision businesses. Our wholly owned PRC
subsidiary, Sohu ITC Information Technology (Beijing) Co., Ltd., or Beijing
ITC, does not have a license to provide Internet content and information
services. As a result, we recently restructured our operations. As part of this
restructuring, our content-related operations were transferred to Beijing Sohu
Online Internet Information Services, Ltd., or Beijing Sohu, a PRC company that
has a license to provide Internet content and information services. Beijing
Sohu is 80% owned by Charles Zhang, our founder, President and Chief Executive
Officer, and 20% owned by He Jinmei, an executive officer of Beijing ITC, both
of whom are PRC nationals. After the restructuring, Beijing ITC continues to
operate our online advertising, e-commerce applications, directory and search
engine and other businesses described in this prospectus, while Beijing Sohu
provides and develops content for use by Beijing ITC on our Web site for a
monthly fee. See "Corporate Restructuring".
1
<PAGE>
Our Market Opportunity
Internet use in China has grown rapidly in recent years and is expected to
significantly outpace growth in worldwide Internet use over the next several
years. According to International Data Corporation, or IDC, between January 1,
1999 and December 31, 1999, the number of PRC Internet users increased from
approximately 2.4 million to 3.8 million. In addition, IDC projects that the
number of Internet users in China will grow to approximately 25.2 million in
2003.
As Internet use becomes more pervasive in China, and as the PRC online
population continues to develop and expand, the opportunities for online
advertising and commerce will also expand.
Zenith Media estimates that advertising expenditures for television,
newspapers, magazines and other traditional media in China totaled over $4.1
billion in 1999. In addition, Forrester Research estimates that the aggregate
online advertising market in China in 1999 was only $8.0 million. As the number
of Internet users increases, we believe that online advertising will capture an
increasing percentage of the overall PRC advertising market. Zenith Media has
estimated that in 2002 China's overall advertising market will be worth $6.1
billion, while Forrester Research has estimated that China's online advertising
market will be worth $100 million in 2002 and $440 million in 2004. Similarly,
the volume of e-commerce transactions in China is expected to increase
significantly as the online population expands. According to IDC, total e-
commerce revenue in China is expected to grow from approximately $43.0 million
in 1999 to approximately $11.7 billion in 2004.
Our Strategy
Our objective is to strengthen our position as a leading Internet portal in
China. In order to accomplish this objective, we plan to:
. maintain and extend our brand recognition;
. increase the number of visitors to our portal and the duration of each
visit;
. increase online advertising revenues and develop an e-commerce business;
and
. acquire complementary assets, technologies and businesses.
Recent Developments
On January 29, 2000, we sold a total of 518,459 shares of our Series D
preferred stock to an affiliate of Pacific Century Cyberworks Limited, an
affiliate of Legend Holdings Limited and Hikari Tsushin, Inc. for an aggregate
of approximately $20.0 million. On February 2, 2000, we sold an additional
259,229 shares of Series D preferred stock to an affiliate of Pacific Century
Cyberworks Limited for approximately $10.0 million. All of the Series D
preferred stock will, under the terms of the preferred stock, be mandatorily
converted into an equal number of shares of common stock upon the consummation
of this offering.
On March 1, 2000, we entered into a one-year non-exclusive agreement with an
affiliate of Nokia Corporation, under which we are Nokia's preferred partner in
China for the co-development of wireless access protocol, or WAP, mobile
Internet services, as well as short message services, or SMS. We are currently
Nokia's only content partner for WAP and SMS services in China, and are
responsible for aggregating content, such as stock quotes, news, e-mail and
advertising, and tailoring it for mobile telephone users. We commenced
providing content for this WAP service on April 27, 2000.
In May 2000, we, together with an affiliate of Nokia Corporation, entered
into six-month cooperation memoranda of understanding , or MOUs, with eight PRC
provincial wireless telecommunications operators. Under the terms of these
MOUs, we will be responsible for identifying and developing content for new WAP
applications and services.
2
<PAGE>
In May 2000, the State Administration of Industry and Commerce, or SAIC,
selected 11 Internet companies in the PRC to participate in a one-year online
advertising trial program. The SAIC is expected to formulate online advertising
regulations based on the information gathered during the trial program. We were
selected as one of the Internet companies that will participate in the trial
program. We also obtained a one-year advertising business permit from SAIC on
May 18, 2000.
Our History
We were incorporated in Delaware in August 1996 as Internet Technologies
China Incorporated, and launched our original Web site, itc.com.cn, in January
1997. During 1997, we developed the Sohu online directory and search engine and
related technology infrastructure, and also focused on recruiting personnel,
raising capital and aggregating content to attract and retain users. In
February 1998, we re-launched our Web site under sohu.com. In September 1999,
we re-named our company Sohu.com Inc. Substantially all of our operations are
conducted through Beijing ITC, our wholly owned PRC subsidiary. In May 2000, as
a result of regulatory developments for the Internet industry in China, we
restructured our operations. See "Corporate Restructuring".
Our principal executive offices are located at 7 Jianguomen Nei Avenue,
Suite 1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China and our telephone number is 86-10-6510-2160. In addition, we
maintain offices in Shanghai and Guangzhou. Our Internet address is
www.sohu.com. The information on our Web site is not a part of this prospectus.
------------
As used in this prospectus, references to "us", "we", "our", "our company",
"Sohu.com" and "Sohu" are to Sohu.com Inc., our subsidiary Beijing ITC, and our
affiliate Beijing Sohu, and these references should be interpreted accordingly.
Except where the context requires otherwise, these references include all of
our subsidiaries. Unless otherwise specified, references to "China" or "PRC"
refer to the People's Republic of China and do not include the Hong Kong
Special Administrative Region, the Macau Special Administrative Region or
Taiwan.
Unless otherwise indicated, all references in this prospectus to the number
of outstanding shares of our common stock:
. give effect to the mandatory conversion of the Series A, B, B-1, C and D
preferred stock into common stock upon the consummation of this
offering;
. give effect to a five-for-one stock split which became effective on
October 15, 1999; and
. do not include the number of shares that we will issue if the U.S.
underwriters and international managers exercise their over-allotment
option.
In addition, the information in this prospectus assumes that the initial
public offering price will be per share, the mid-point of the range
disclosed on the cover of this prospectus. As used in this prospectus, "U.S.
Dollar", "dollar" or "$" means the lawful currency of the United States of
America, and "Renminbi" or "RMB" means the lawful currency of the PRC.
------------
3
<PAGE>
The Offering
This offering consists of the U.S. offering and the international offering,
each of which is described below. A total of . shares will be offered (plus
. shares subject to the U.S. underwriters' and international managers'
overallotment option).
U.S. offering........
An offering in the United States and Canada of .
shares.
International offering.... An offering outside the United States and Canada of
. shares at the same time as the U.S. offering.
Common stock to be
outstanding after this
offering................. shares or shares if the U.S. underwriters
and international managers exercise their over-
allotment option in full. Excluded are stock
options and warrants outstanding of an aggregate of
621,790 shares of our common stock at a weighted
average exercise price of $8.17 per share.
Use of proceeds...........
We intend to use a portion of the net proceeds of
this offering to fund capital expenditures,
consisting primarily of additions to our networking
and computer infrastructure. In addition, we intend
to use a portion of the net proceeds for sales and
marketing activities. The remainder of the net
proceeds will be used for general corporate
purposes. We may also use a portion of the net
proceeds for possible acquisitions or investments
although we do not currently have any agreements or
understandings to make any acquisitions or
investments. See "Use of Proceeds".
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
------------
4
<PAGE>
Summary Consolidated Financial Data
The following summary consolidated financial data have been derived from our
(1) audited consolidated financial statements for the years ended December 31,
1997, 1998 and 1999, (2) our unaudited consolidated financial statements for
the three-months periods ended March 31, 1999 and 2000 and (3) our unaudited
consolidated pro forma balance sheet as of March 31, 2000, all of which are
included elsewhere in this prospectus. The information below should be read in
conjunction with "Selected Consolidated Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations", our
audited consolidated financial statements and the related notes and our
unaudited consolidated financial statements and the related notes, all of which
are included in this prospectus. Our consolidated financial statements are
presented in accordance with the United States generally accepted accounting
principles. Basic and diluted pro forma net loss per share in 1999 is computed
using the weighted average number of shares of common stock outstanding,
including the pro forma effects of the mandatory conversion of the Series A, B,
B-1 and C preferred stock into common stock upon the consummation of this
offering. Basic and diluted pro forma net loss per share for the three months
ended March 31, 2000 is computed using the weighted average number of shares of
common stock outstanding, including the pro forma effects of the mandatory
conversion of the Series A, B, B-1, C and D preferred stock into common stock
upon the consummation of this offering. For a description of the pro forma
financial effects of our restructuring, see "Corporate Restructuring -- Pro
Forma Effects of Corporate Restructuring".
<TABLE>
<CAPTION>
Three Months ended
March 31,
Year ended December 31, (unaudited)
--------------------------------- --------------------
1997 1998 1999 1999 2000
--------- ---------- ---------- --------- ---------
(in thousands, except for per share
and share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 78 $ 472 $ 1,617 $ 233 $ 842
Total costs and
expenses............... (238) (1,082) (5,077) (516) (3,337)
Operating loss.......... (160) (610) (3,460) (283) (2,495)
Net loss................ (160) (615) (3,449) (276) (2,464)
Net loss attributable to
common stockholders.... (160) (859) (4,366) (390) (4,023)
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (0.05) $ (0.24) $ (1.22) $ (0.11) $ (1.11)
Shares used in computing
basic and diluted net
loss per share......... 3,500,000 3,564,000 3,588,000 3,564,000 3,621,000
Basic and diluted pro
forma net loss per
share attributable to
common stockholders.... $ (0.41) $ (0.03) $ (0.26)
Shares used in computing
basic and diluted
pro forma net loss per
share ................. 8,314,000 7,925,000 9,462,000
</TABLE>
5
<PAGE>
The following table is a summary of our consolidated balance sheet as of
March 31, 2000:
. on an actual basis;
. on a pro forma basis to give effect to the mandatory conversion of all
outstanding Series A, B, B-1, C and D preferred stock into common stock
upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the mandatory conversion of
all the preferred stock and the sale of shares of common stock
offered at an assumed initial public offering price of $ per share
after deducting estimated underwriting discounts and commissions and
offering expenses.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------
Pro Pro forma
Actual Forma as adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $33,106 $33,106 $
Working capital.................................. 28,801 28,801
Total assets..................................... 38,111 38,111
Total liabilities................................ 5,322 5,322 5,322
Mandatorily redeemable convertible preferred
stock........................................... 41,721 -- --
Total shareholders' equity (deficit)............. (8,932) 32,789
</TABLE>
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
making an investment decision.
Risks relating to Sohu.com
We have incurred net losses since inception and anticipate that losses will
continue.
We were incorporated in Delaware in August 1996, and launched our original
Web site in January 1997. In February 1998, we re-launched our Web site under
www.Sohu.com. We have incurred significant net losses since inception and had
an accumulated deficit of approximately $9.4 million as of March 31, 2000. We
anticipate that we will continue to incur substantial net losses due to a high
level of planned operating and capital expenditures, including increased sales
and marketing costs, additional personnel hires, and greater levels of product
development. Our net losses will increase in the future and we may never
achieve or sustain profitability.
We have a limited operating history, which may make it difficult for you to
evaluate our business.
We began offering products and services under the www.Sohu.com Web site in
February 1998. Accordingly, we have a limited operating history upon which you
can evaluate our business. In addition, our senior management and employees
have worked together at our company for only a relatively short period of time.
As an early stage company in the new and rapidly evolving PRC Internet market,
we face numerous risks and uncertainties. Some of these risks relate to our
ability to:
. increase our online advertising revenues and successfully build an e-
commerce business, given the early stage of development of the PRC
Internet industry;
. continue to attract a larger audience to our portal by expanding the
type and technical sophistication of the content and services we offer;
and
. maintain our current, and develop new, strategic relationships to
increase our revenue streams as well as product and service offerings;
If we are unsuccessful in addressing these risks, our business, financial
condition and results of operations will be materially and adversely affected.
PRC Internet laws and regulations are unclear and will likely change in the
near future. If we are found to be in violation of current or future PRC laws
or regulations, we could be subject to severe penalties.
We conduct our Internet business solely in the PRC through our wholly owned
subsidiary, Sohu ITC Information Technology (Beijing ) Co., Ltd., or Beijing
ITC. Beijing ITC is a wholly foreign owned enterprise, or a WFOE, under PRC
law. We are a Delaware corporation and a foreign person under PRC law.
Accordingly, our Internet business is 100% foreign-owned. In addition, pursuant
to our recent restructuring, we transferred certain of our assets and
operations to Beijing Sohu Online Internet Information Services, Ltd., or
Beijing Sohu, a PRC company that is 80% owned by our chief executive officer.
We do not have any ownership interest in Beijing Sohu.
The PRC has recently begun to regulate its Internet sector by making
pronouncements or enacting regulations regarding the legality of foreign
investment in the PRC Internet sector, the existence and enforcement of content
restrictions on the Internet and the availability of securities offerings by
companies operating in the PRC Internet sector. In the opinion of TransAsia
lawyers, our PRC counsel, the ownership structures of Sohu, Beijing ITC and
Beijing Sohu, both currently and giving effect to this offering, and the
7
<PAGE>
businesses and operations of Sohu, Beijing ITC and Beijing Sohu as described in
this prospectus comply with all existing PRC laws, rules and regulations, and
no further PRC governmental approvals are required for such ownership
structure, businesses, operations or this offering. There are, however,
substantial uncertainties regarding the interpretation of current PRC Internet
laws and regulations. In addition, there will likely be new PRC Internet laws
and regulations adopted in the near future. Accordingly, we cannot assure you
whether the PRC government may ultimately take a contrary view to the opinion
of our PRC counsel.
Issues, risks and uncertainties relating to PRC government regulation of the
PRC Internet sector include the following:
. A prohibition of foreign investment in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services, may be applied to Internet businesses such
as ours. Some officials of the PRC Ministry of Information, or MII, have
taken the position that foreign investment in the Internet sector is
prohibited.
. The MII has also stated recently that it intends to adopt new laws or
regulations governing foreign investment in the PRC Internet sector in
the near future. If these new laws or regulations are inconsistent with
our restructuring, our business will be severely impaired.
. Under the agreement reached in November 1999 between the PRC and the
United States concerning the United States' support of PRC's entry into
the World Trade Organization, or WTO, foreign investment in PRC Internet
services will be liberalized to allow for 30% foreign ownership in key
telecommunication services, including PRC Internet ventures, for the
first year after China's entry into the WTO, 49% in the second year and
50% thereafter. However, the implementation of this agreement is still
subject to various conditions, including approval by the U.S. Congress
and the PRC National People's Congress, and the agreement also faces
opposition in the United States from various parties, including trade
unions, environmentalists and human rights organizations.
. The MII has also stated recently that the activities of Internet content
providers are also subject to regulation by various PRC government
authorities, depending on the specific activities conducted by the
Internet content provider. Various government authorities have stated
publicly that they are in the process of preparing new laws and
regulations that will govern these activities. The areas of regulation
may include online advertising and online news reporting. In addition,
the new laws and regulations may require various PRC government
approvals for securities offerings by companies engaged in the Internet
sector in the PRC.
The interpretation and application of existing PRC laws and regulations, the
stated positions of the MII and the possible new laws or regulations have
created substantial uncertainties regarding the legality of existing and future
foreign investments in, and the businesses and activities of, PRC Internet
companies, including us.
Accordingly, it is possible that the relevant PRC authorities could, at any
time, assert that any portion or all of our, Beijing ITC's or Beijing Sohu's
existing or future ownership structure and businesses, or this offering,
violates existing or future PRC laws, regulations or policies. It is also
possible that the new laws or regulations governing the PRC Internet sector
that may be adopted in the future will prohibit or restrict foreign investment
in, or other aspects of, any of our, Beijing ITC's or Beijing Sohu's current or
proposed businesses and operations or require governmental approvals for this
offering. In addition, these new laws and regulations may be retroactively
applied to us, Beijing ITC or Beijing Sohu.
If we, Beijing ITC or Beijing Sohu are found to be in violation of any
existing or future PRC laws or regulations, the relevant PRC authorities would
have broad discretion in dealing with such violation, including, without
limitation, the following:
. levying fines;
. confiscating our, Beijing ITC's or Beijing Sohu's income;
8
<PAGE>
. revoking our, Beijing ITC's or Beijing Sohu's business license;
. shutting down our, Beijing ITC's or Beijing Sohu's servers and/or
blocking our Web sites;
. restricting or prohibiting our use of the proceeds of this offering to
finance our business and operations in China;
. requiring us, Beijing ITC or Beijing Sohu to restructure our ownership
structure or operations; and
. requiring us, Beijing ITC or Beijing Sohu to discontinue any portion or
all of our Internet business.
Any of these actions could cause our business, financial condition and
results of operations to suffer and the price of our common stock to decline.
We have attempted to comply with restrictions on foreign investment in the
PRC Internet sector imposed by the PRC government by transferring our
content-related assets and operations to, and entering into agreements with,
Beijing Sohu, a PRC company controlled by our President and Chief Executive
Officer. If the PRC government finds that these agreements do not comply with
the relevant foreign investment restrictions, our business in the PRC will be
adversely affected.
Because the PRC government restricts foreign investment in Internet-related
businesses, we have restructured our Internet operations by having Beijing Sohu
acquire appropriate government licenses to conduct our content-related
operations. In addition, we have transferred our content-related assets and
operations to Beijing Sohu. See "Related Party Transactions". The legal
uncertainties associated with PRC government regulations and our restructuring
may be summarized as follows:
. whether the PRC government may view our restructuring as being in
compliance with their regulations;
. whether the PRC government may impose additional regulatory requirements
with which we or Beijing Sohu may not be in compliance; and
. whether the PRC government will permit Beijing Sohu to acquire future
licenses necessary in order to conduct operations in the PRC.
Although we restructured our operations based upon the advice of the MII, we
cannot be sure that our restructured operations and activities will be viewed
by PRC regulatory authorities as in compliance with applicable PRC laws. Our
business will be adversely affected if our business license is revoked as a
result of non-compliance. In addition, we cannot be sure that we and Beijing
Sohu will be able to obtain all of the licenses we or Beijing Sohu may need in
the future or that future changes in PRC government policies affecting the
provision of information services, including the provision of online services
and Internet access, will not impose additional regulatory requirements on us
or Beijing Sohu or our service providers or otherwise harm our business.
We depend upon contractual arrangements with Beijing Sohu for the success of
our business and these arrangements may not be as effective in providing
operational control as direct ownership of these businesses and may be
difficult to enforce.
Because we conduct our Internet business only in the PRC, and because we are
restricted by the PRC government from owning Internet content operations in the
PRC, we are dependent on Beijing Sohu, in which we have no ownership interest,
to provide such services through contractual agreements between the parties.
This arrangement may not be as effective in providing control over our Internet
content operations as direct ownership of these businesses. For example,
Beijing Sohu could fail to take actions required for our business, such as
entering into content development contracts with potential content suppliers or
failing to maintain the necessary permit for the content servers. If Beijing
Sohu fails to perform its obligations under these agreements, we would
potentially have to rely on legal remedies under PRC law, which we cannot be
sure would be effective or sufficient.
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Beijing Sohu is controlled by Charles Zhang, our chief executive officer. As
a result, our contractual relationships with Beijing Sohu could be viewed as
entrenching his management position or transferring certain value to him,
especially if any conflict arises with him.
Even if we are in compliance with PRC governmental regulations relating to
licensing and foreign investment prohibitions, the PRC government may prevent
us from distributing, and we may be subject to liability for, content that it
believes is inappropriate.
China has enacted regulations governing Internet access and the distribution
of news and other information. In the past, the PRC government has stopped the
distribution of information over the Internet that it believes to violate PRC
law, including content that is obscene, incites violence, endangers national
security, is contrary to the national interest or is defamatory. In addition,
we may not publish certain news items, such as news relating to national
security, without permission from the PRC government. Furthermore, the Ministry
of Public Security has the authority to cause any local Internet service
provider to block any Web site maintained outside the PRC at its sole
discretion. Even if we comply with PRC governmental regulations relating to
licensing and foreign investment prohibitions, if the PRC government were to
take any action to limit or prohibit the distribution of information through
our network or to limit or regulate any current or future content or services
available to users on our network, our business would be harmed.
We are also subject to potential liability for content on our Web sites that
is deemed inappropriate and for any unlawful actions of our subscribers and
other users of our systems under regulations promulgated by the MII.
Furthermore, we are required to delete content that clearly violates the
laws of the PRC and report content that we suspect may violate PRC law. It is
difficult to determine the type of content that may result in liability for us,
and if we are wrong, we may be prevented from operating our Web sites.
We may have to register our encryption software with PRC regulatory
authorities, and if they request that we change our encryption software, our
business operations will be disrupted as we develop or license replacement
software.
Pursuant to the Regulations for the Administration of Commercial Encryption
promulgated at the end of 1999, foreign and domestic PRC companies operating in
the PRC are required to register and disclose to PRC regulatory authorities the
commercial encryption products they use. Because these regulations have just
recently been adopted and because they do not specify what constitutes
encryption products, we are unsure as to whether or how they apply to us and
the encryption software we utilize. We may be required to register, or apply
for permits with the relevant PRC regulatory authorities for, our current or
future encryption software. If PRC regulatory authorities request that we
change our encryption software, we may have to develop or license replacement
software, which could disrupt our business operations. In addition, we may be
subject to potential liability for using software that is subsequently deemed
to be illegal by the relevant PRC regulatory authorities. These potential
liabilities might include, without limitation, fines, product confiscation and
criminal sanctions. We cannot assure you that our business, financial condition
and results of operations will not be materially and adversely affected by the
application of these regulations.
We depend on online advertising for substantially all of our revenues.
We derive substantially all of our revenues from the sale of online
advertising on our Web sites. For 1998, 1999 and the three months ended March
31, 2000, online advertising revenues represented approximately 75%, 93% and
87%, respectively, of our total revenues. In addition, our business plan is
heavily dependent on the anticipated expansion of online advertising in China
and the growth of our revenue is heavily dependent on online advertising.
The online advertising market in China is new and relatively small.
According to Forrester Research, the dollar amount of the online advertising
market in China in 1999 was approximately $8.0 million. According to
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Zenith Media's estimate, the dollar amount of the total advertising market in
China was over $4.1 billion in 1999. Our ability to generate and maintain
significant online advertising revenues in China will depend, among other
things, on:
. the development of a large base of users possessing demographic
characteristics attractive to advertisers;
. downward pressure on online advertising prices;
. the development of independent and reliable means of verifying traffic;
and
. the effectiveness of our advertising delivery, tracking and reporting
systems.
The development of Web software that blocks Internet advertisements before
they appear on a user's screen may hinder the growth of online advertising. The
expansion of ad blocking on the Internet may decrease our revenues because when
an ad is blocked, it is not downloaded from our ad server. As a result, such
advertisements will not be tracked as a delivered advertisement. In addition,
advertisers may choose not to advertise on the Internet or on our portal
because of the use by third parties of Internet advertisement blocking
software. The use of Web software that blocks Internet advertisements may
materially and adversely affect our business, financial condition and results
of operations.
In addition, an element of our strategy is to diversify our revenue stream
by entering into more Web site sponsorship arrangements and by introducing e-
commerce services and generating e-commerce revenue. We cannot assure you that
we will be successful in implementing this strategy.
Accordingly, we cannot assure you that we will be successful in generating
significant future online advertising revenue or in diversifying our revenue
stream, and the failure to do so would have a material adverse effect on our
business, online advertising revenue and profitability.
Our operating results are likely to fluctuate significantly and may differ
from market expectations.
Our annual and quarterly operating results have varied significantly in the
past, and may vary significantly in the future, due to a number of factors,
many of which are beyond our control. As a result, we believe that year-to-year
and quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. It is likely that in some future quarter,
our operating results may be below the expectations of public market analysts
and investors. In this event, the trading price of our common stock may fall.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Quarterly Results of Operations".
We will not be able to attract visitors, advertisers and e-commerce merchants
if we do not maintain and develop the Sohu brand.
Maintaining and further developing the Sohu brand is critical to our ability
to expand our user base and our revenues. We believe that the importance of
brand recognition will increase as the number of Internet users in China grows.
In order to attract and retain Internet users, advertisers and e-commerce
partners, we intend to increase substantially our expenditures for creating and
maintaining brand loyalty. If our revenues do not increase proportionately, our
results of operations and liquidity will suffer.
Our success in promoting and enhancing the Sohu brand, as well as our
ability to remain competitive, will also depend on our success in offering high
quality content, features and functionality. If we fail to promote our brand
successfully or if visitors to our portal or advertisers do not perceive our
content and services to be of high quality, we may not be able to continue
growing our business and attracting visitors, advertisers and e-commerce
partners. This could have a material and adverse effect on our business,
financial condition and results of operations.
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We may need additional capital and we may not be able to obtain it.
Our capital requirements are difficult to plan in our rapidly changing
industry. We currently expect that we will need capital to fund additions to
our portal and computer infrastructure, including any acquisitions of
complementary assets, technologies or businesses we may pursue, as well as the
expansion of our sales and marketing activities. We believe that our current
cash and cash equivalents, cash flow from operations, proceeds from the sale
of Series D preferred stock in January and February 2000 and the proceeds from
this offering will be sufficient to meet our anticipated needs, including
working capital and capital expenditures, for at least the next twelve months.
However, future market or other developments may cause us to require
additional funds.
Our ability to obtain additional financing in the future is subject to a
variety of uncertainties, including:
. investors' perceptions of and appetite for Internet-related securities;
. conditions in the U.S. and other capital markets in which we may seek to
raise financing;
. our future results of operations, financial condition and cash flows;
. the amount of capital that other PRC entities may seek to raise in
foreign capital markets;
. PRC governmental regulation of foreign investment in Internet companies;
. economic, political and other conditions in the PRC; and
. PRC governmental policies relating to foreign currency borrowings.
Our inability to raise additional funds on terms favorable to us, or at
all, may have a material adverse effect on our business, financial condition
and results of operations. For example, we may be required to scale back our
planned expenditures, which could adversely affect our growth prospects. For
more information on our capital and financing requirements, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
If we fail to establish and maintain relationships with content providers, e-
commerce merchants and technology providers, we may not be able to attract
and retain users.
We rely on a number of third party relationships to attract traffic and
provide content in order to make our portal more attractive to users and
advertisers. Third parties providing content to our portal include CNET, Dow
Jones & Company, Inc. and Xinhua News Agency. Most of these arrangements are
short-term and may be terminated at the convenience of the other party. In
addition, much of the third party content provided to our portal is also
available from other sources or may be provided to other Internet companies.
If other Internet companies present the same or similar content in a superior
manner, it would adversely affect our visitor traffic.
Similarly, we have focused, and will continue to focus, on establishing
relationships with leading e-commerce merchants and technology and
infrastructure providers. Our business depends significantly on these
relationships and the licenses that the technology providers have granted to
us. Our competitors may seek to establish the same relationships as we have,
which may adversely affect us. We may not be able to maintain these
relationships or replace them on commercially attractive terms.
We depend on key personnel and our business may be severely disrupted if we
lose the services of our key executives.
Our future success is heavily dependent upon the continued service of our
key executives, particularly Dr. Charles Zhang, who is the founder, President
and Chief Executive Officer of our company and the founder and President of
Beijing Sohu. We rely on his expertise in our business operations and on his
personal relationships with our shareholders, the relevant regulatory
authorities, our customers and suppliers and Beijing Sohu. If one or more of
our key executives were unable or unwilling to continue in their present
positions, we may not be able to easily replace them, our business may be
severely disrupted, financial condition and results
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of operations may be materially and adversely affected. In addition, if any of
these key executives joins a competitor or forms a competing company, we may
lose customers and suppliers and incur additional expenses to recruit and train
personnel. Each of our executive officers has entered into a confidentiality,
non-competition and non-solicitation agreement with us. These officers also
have employment agreements with Beijing ITC, our PRC operating subsidiary,
which contain substantially similar confidentiality and non-competition
undertakings. However, the degree of protection afforded to an employer
pursuant to confidentiality and non-competition undertakings governed by PRC
law may be more limited when compared to the degree of protection afforded
under the laws of other jurisdictions. We do not maintain key-man life
insurance for any of our key executives.
Rapid growth and a rapidly changing operating environment strain our limited
resources.
We have limited operational, administrative and financial resources, which
may be inadequate to sustain the growth we want to achieve. As our audience and
their Internet use increase, as the demands of our audience and the needs of
our customers change and as the volume of online advertising and e-commerce
activities increases, we will need to increase our investment in our network
infrastructure, facilities and other areas of operations. If we are unable to
manage our growth and expansion effectively, the quality of our services could
deteriorate and our business may suffer. Our future success will depend on,
among other things, our ability to:
. adapt our services and maintain and improve the quality of our services;
. continue training, motivating and retaining our existing employees and
attracting and integrating new employees; and
. developing and improving our operational, financial, accounting and
other internal systems and controls.
Our advertising pricing model, which is based on charging a fixed fee to
display advertisements for a specified time period, may not be profitable.
There are currently no industry standard pricing models used to sell
advertising on the Internet. This makes it difficult to project our future
advertising rates and revenues. The models we adopt may prove not to be
profitable. Substantially all of our advertising revenues in 1999 were derived
from charging a fixed fee to display an advertisement over a given time period.
To the extent that minimum guaranteed impression levels are not met, we are
required to provide additional impressions after the contract term and we
accordingly defer the related revenue. The failure of our advertising pricing
model could have a material adverse effect on our business, financial condition
and results of operations.
We may not be able to track the delivery of advertisements through our
portal, which may make us less attractive to potential advertisers.
It is important to advertisers that we accurately measure the demographics
of our user base and the delivery of advertisements through our portal.
Companies may choose not to advertise on our portal or may pay less for
advertising if they do not perceive our ability to track and measure the
demographics of our users or the delivery of advertisements to be reliable. We
depend on third parties to provide us with some of these measurement services.
If they are unable to provide these services in the future, we would need to
perform these services ourselves or obtain these service from other providers.
This could cause us to incur additional costs or cause interruptions or
slowdowns in our business during the time we are replacing these services. We
are currently implementing additional systems designed to collect information
on our users. We cannot assure you, however, that we can implement these
systems successfully.
The loss of one of our significant advertisers would reduce our advertising
revenues as well as materially and adversely affect our financial conditions
and results of operations.
We depend on a small group of advertisers for a significant portion of our
total revenues. For 1999, two of our advertisers, one of which is a
shareholder, each accounted for more than 10% of our total revenues. In
addition, our five largest advertisers accounted for approximately 34% of our
total revenues. In the three
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months ended March 31, 2000, two advertisers each accounted for more than 8% of
our total revenues and our top five advertisers accounted for approximately 34%
of our total revenues. We anticipate that we will continue to rely on a
relatively small number of significant advertisers for a majority of our total
revenues for the foreseeable future. Our business, financial condition and
results of operations would be materially and adversely affected by the loss of
one or more of our significant advertisers or a decrease in the volume of
advertising by any of these advertisers.
During January 2000, we entered into multi-year advertising agreements with
affiliates of Pacific Century Cyberworks, Legend Holdings Limited and Hikari
Tsushin, Inc. We also sold shares of our Series D preferred stock to these
entities or their affiliates in January and February 2000. We expect to derive
significant revenues from these advertising agreements. The loss of any of
these agreements or a decrease in the volume of advertising by any of these
advertisers would have a material adverse effect on our business, financial
condition and results of operations.
Our strategy of acquiring complementary assets, technologies and businesses
may fail and may result in equity or earnings dilution.
As a component of our growth strategy, we have acquired and intend to
actively identify and acquire assets, technologies and businesses that are
complementary to our existing portal business. Our acquisitions could result in
the use of substantial amounts of cash, potentially dilutive issuances of
equity securities, significant amortization expenses related to goodwill and
other intangible assets and exposure to undisclosed or potential liabilities of
acquired companies, each of which could materially and adversely affect our
business, financial condition and results of operations. Moreover the resources
expended in identifying and consummating acquisitions may be significant.
Furthermore, any acquisitions we decide to pursue may be subject to the
approval of the relevant PRC governmental authorities, as well as any
applicable PRC rules and regulations.
We rely on income from dividends and other distributions on equity paid by
our wholly-owned operating subsidiary to fund any cash requirements we may
have.
We are a holding company with no operating assets other than the shares of
Beijing ITC, our wholly- owned subsidiary in the PRC that owns and conducts our
entire Internet business. We rely on dividends and other distributions on
equity paid by Beijing ITC for our cash requirements, including the funds
necessary to service any debt we may incur. If Beijing ITC incurs debt on its
own behalf in the future, the instruments governing the debt may restrict
Beijing ITC's ability to pay dividends or make other distributions to us. In
addition, PRC legal restrictions permit payment of dividends by Beijing ITC
only out of its net income, if any, determined in accordance with PRC
accounting standards and regulations. Under PRC law, Beijing ITC is also
required to set aside a portion of its net income each year to fund certain
reserve funds. These reserves are not distributable as cash dividends. See note
5 to our consolidated financial statements included in this prospectus.
Beijing ITC has been in a loss-making position since its inception and will
continue to make losses in the foreseeable future. Therefore, we have not
received any dividends or other distributions from Beijing ITC in the past and
do not expect any dividends in the foreseeable future.
Until the China Trademark Office issues the actual trademark registration
certificates, we do not have exclusive rights over the mark "Sohu.com".
China's trademark law adopts a "first-to-file" system for obtaining
trademark rights. As a result, the first applicant to file an application for
registration of a mark will preempt all other applicants. Prior use of an
unregistered mark is generally irrelevant except for "well-known" marks. We
have registered the domain name "Sohu.com" with Network Solutions and the
domain name "Sohu.com.cn" with China Internet Network Information Center, a
domain name registration service in China, and have full legal rights over
these domain names. We have also filed trademark applications for the mark
"Sohu.com" in Chinese and English with the China Trademark Office. However,
until actual registration certificates are issued by the China Trademark
Office, we do not have exclusive rights over the mark "Sohu.com".
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We have applied for registration of the "Sohu.com" mark in the United
States. We have also applied for registration of the "Sohu.com" mark in Hong
Kong and Taiwan, and plan to apply for registration in Malaysia and Singapore.
Completion of all of these applications are subject to prior rights in the
relevant jurisdictions. Any rejection of such applications may adversely affect
our legal rights over the mark "Sohu.com" in those countries and regions.
Unauthorized use of our intellectual property by third parties, and the
expenses incurred in protecting our intellectual property rights, may
adversely affect our business.
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may adversely affect our business and
reputation. We rely on trademark and copyright law, trade secret protection and
confidentiality agreements with our employees, customers, business partners and
others to protect our intellectual property rights. Despite our precautions, it
may be possible for third parties to obtain and use our intellectual property
without authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries is uncertain
and still evolving. In particular, the laws of the PRC and certain other
countries are uncertain or do not protect intellectual property rights to the
same extent as do the laws of the United States. Moreover, 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. Future litigation could result in substantial costs and
diversion of our resources, and could have a material adverse effect on our
business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may
force us to incur substantial legal expenses and, if determined adversely
against us, materially disrupt our business.
We cannot be certain that our products and services do not or will not
infringe valid patents, copyrights or other intellectual property rights held
by third parties. We have in the past been, and may in the future be, subject
to legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. In particular, if we
are found to have violated the intellectual property rights of others, we may
be enjoined from using such intellectual property, and we may incur licensing
fees or be forced to develop alternatives. We may incur substantial expenses in
defending against these third party infringement claims, regardless of their
merit. Successful infringement claims against us may result in substantial
monetary liability or may materially disrupt the conduct of our business.
We may be subject to, and may expend significant resources in defending
against, claims based on the content and services we provide over our portal.
As our services may be used to download and distribute information to
others, there is a risk that claims may be made against us for defamation,
negligence, copyright or trademark infringement or other claims based on the
nature and content of such information. Furthermore, we could be subject to
claims for the online activities of our visitors and incur significant costs in
their defense. In the past, claims based on the nature and content of
information that was posted online by visitors have been made in the United
States against companies that provide online services. We do not carry any
liability insurance against such risks.
We could be exposed to liability for the selection of listings that may be
accessible through our portal or through content and materials that our
visitors may post in classifieds, message boards, chat rooms or other
interactive services. If any information provided through our services contains
errors, third parties may make claims against us for losses incurred in
reliance on the information. We also offer Web-based e-mail services, which
expose us to potential liabilities or claims resulting from:
. unsolicited e-mail;
. lost or misdirected messages;
. illegal or fraudulent use of e-mail; or
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. interruptions or delays in e-mail service.
Investigating and defending these claims may be expensive, even if they do
not result in liability.
Risks relating to our markets
We rely on online advertising sales for a significant portion of our future
revenues, but the Internet has not been proven as a widely accepted medium
for advertising.
We expect to derive most of our revenue for the foreseeable future from
Internet advertising, and to a lesser extent, from e-commerce. If the Internet
is not accepted as a medium for advertising, our ability to generate revenues
will be adversely affected.
The acceptance of the Internet as a medium for advertising depends on the
development of a measurement standard. No standards have been widely accepted
for the measurement of the effectiveness of Internet advertising. Industry-wide
standards may not develop sufficiently to support the Internet as an effective
advertising medium. If these standards do not develop, advertisers may choose
not to advertise on the Internet in general or through our portals or search
engines. This would have a material adverse effect on our business, financial
condition and results of operations.
Many of our current and potential advertising and e-commerce customers have
only limited experience using the Internet for advertising or commerce
purposes, and may not be willing to fully embrace the products and services
we offer, which would adversely affect our future revenues and business
expansion.
The online advertising and e-commerce markets are new and rapidly evolving,
particularly in China. As a result, many of our current and potential
advertising and e-commerce customers have limited experience using the Internet
for advertising or commerce purposes and historically have not devoted a
significant portion of their advertising and sales budgets to Internet-based
advertising and e-commerce. Moreover, customers that have invested substantial
resources in other methods of conducting business may be reluctant to adopt a
new strategy that may limit or compete with their existing efforts. In
addition, companies may choose not to advertise or sell their products on our
portal if they do not perceive our online advertising and e-commerce platform
to be effective or our audience demographics to be desirable. The failure to
successfully address these risks or execute our business strategy would
significantly reduce our profitability and materially and adversely affect our
financial condition and results of operations.
We face intense competition which could reduce our market share and adversely
affect our financial performance.
The PRC Internet market is characterized by an increasing number of entrants
because, among other reasons, the barriers to entry are relatively low. The
market for Internet services and products, particularly Internet search and
retrieval services and Internet advertising, is intensely competitive. In
addition, the Internet industry is relatively new and constantly evolving and,
as a result, our competitors may better position themselves to compete in this
market as it matures.
There are many companies that provide or may provide Web sites and online
destinations targeted at Internet users in China. Some of our major competitors
in China are major United States Internet companies, such as Yahoo! Inc. In
addition, we may face competition from existing or new domestic PRC Internet
companies that are either affiliated with large corporations such as American
Online and Softbank Corporation, or controlled or sponsored by PRC government
entities. These competitors may have certain advantages over us, including:
. substantially greater financial and technical resources;
. more extensive and well developed marketing and sales networks;
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. better access to original content;
. greater global brand recognition among consumers; and
. larger customer bases.
With these advantages, our competitors may be better able to:
. develop, market and sell their products and services;
. adapt more quickly to new and changing technologies; and
. more easily obtain new customers.
We can provide no assurance that we will be able to compete successfully
against our current or future competitors.
The telecommunications infrastructure in China, which is not as well
developed as in the United States, may limit our growth.
The telecommunications infrastructure in China is not well developed. In
particular, we depend on the Chinese government and state-owned enterprises to
establish and maintain a reliable Internet and telecommunications
infrastructure to reach a broader base of Internet users in China. We cannot
assure you that the Internet infrastructure in China will support the demands
associated with continued growth. If the necessary infrastructure standards or
protocols or complementary products, services or facilities are not developed
on a timely basis or at all by the Chinese government and state-owned
enterprises, our business, financial condition and results of operations could
be materially and adversely affected.
We depend on ChinaNet, China Telecom and the Beijing Telecom Administration
for telecommunications services, and any interruption in these services may
result in severe disruptions to our business.
Although private Internet service providers exist in China, almost all
access to the Internet is maintained through ChinaNet, currently owned by China
Telecom, under the administrative control and regulatory supervision of China's
Ministry of Information Industry. In addition, local networks connect to the
Internet through a government-owned international gateway. This international
gateway is the only channel through which a domestic Chinese user can connect
to the international Internet network. We rely on this infrastructure and China
Telecom to provide data communications capacity primarily through local
telecommunications lines. Although the government has announced aggressive
plans to develop the national information infrastructure, we cannot assure you
that this infrastructure will be developed or that the Internet infrastructure
in China will be able to support the continued growth of Internet usage. In
addition, we will have no access to alternative networks and services, on a
timely basis if at all, in the event of any infrastructure disruption or
failure.
We cannot assure you that we will be able to lease additional bandwidth from
the Beijing Telecom Administration on acceptable terms or on a timely basis or
at all. In addition, we will have no means of getting access to alternative
networks and services, on a timely basis or at all, in the event of any
disruption or failure of the network.
If we are unseccessful in addressing these risks, our business may be
severely disrupted.
High cost of Internet access may limit the growth of the Internet in China
and impede our growth.
Access to the Internet in China remains relatively expensive, and may make
it less likely for users to access and transact business over the Internet.
Unfavorable rate developments could further decrease our visitor traffic and
our ability to derive revenues from transactions over the Internet. This could
have a material adverse effect on our business, financial condition and results
of operations.
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The acceptance of the Internet as a commerce platform in China depends on the
resolution of problems relating to fulfillment and electronic payment.
Our future growth of revenues depends in part on the anticipated expansion
of e-commerce activities in China. As China currently does not have a reliable
nationwide product distribution network, the fulfillment of goods purchased
over the Internet will continue to be a factor constraining the growth of e-
commerce. An additional barrier to the development of e-commerce in China is
the lack of reliable payment systems. In particular, the use of credit cards or
other viable means of electronic payment in sales transactions is not as well
developed in China as in some other countries, such as the United States.
Various government entities and businesses are working to resolve these
fulfillment and payment problems, but these problems are expected to continue
to hinder the acceptance and growth of the Internet as a commerce platform in
China, which could in turn adversely affect our business, financial condition
and results of operations.
Risks Related to the Internet and Our Technology Infrastructure
To the extent we are unable to scale our systems accordingly to meet the
rapidly increasing PRC Internet population, we will be unable to expand our
user base and increase our attractiveness to advertisers and merchants.
China is one of the world's fastest growing Internet markets. According to
International Data Corporation, the number of Internet users in China was 3.8
million in 1999 and is projected to grow to approximately 25.2 million in 2003.
As Web page volume and traffic increase, we cannot assure you that we will be
able to scale our systems proportionately. To the extent we do not successfully
address our capacity constraints, our operations may be severely disrupted, and
we may not be able to expand our user base and increase our attractiveness to
advertisers and merchants.
Unexpected network interruptions caused by system failures may result in
reduced visitor traffic, reduced revenue and harm to our reputation.
Our portal operations are dependent upon Web browsers, Internet service
providers, content providers and other Web site operators in China, which have
experienced significant system failures and system outages in the past. Our
users have in the past experienced difficulties due to system failures
unrelated to our systems and services. Any system failure or inadequacy that
causes interruptions in the availability of our services, or increases the
response time of our services, as a result of increased traffic or otherwise,
could reduce our user satisfaction, future traffic and our attractiveness to
users and advertisers.
Our operations are vulnerable to natural disasters and other events, as we
only have limited backup systems and do not maintain any backup servers
outside of China.
We have limited backup systems and have experienced system failures and
electrical outages from time to time in the past, which have disrupted our
operations. All of our servers and routers are currently hosted in a single
location within the premises of Beijing Telecom Administration. We do not
maintain any back up servers outside Beijing. We do not have a disaster
recovery plan in the event of damage from fire, floods, typhoons, earthquakes,
power loss, telecommunications failures, break-ins and similar events. If any
of the foregoing occur, we may experience a complete system shut-down. We do
not carry any business interruption insurance. To improve the performance and
to prevent disruption of our services, we may have to make substantial
investments to deploy additional servers or one or more copies of our Web sites
to mirror our online resources. Although we carry property insurance with low
coverage limits, our coverage may not be adequate to compensate us for all
losses, particularly with respect to loss of business and reputation, that may
occur.
Concerns about security of e-commerce transactions and confidentiality of
information on the Internet may increase our costs, reduce the use of our
portal and impede our growth.
A significant barrier to e-commerce and confidential communications over the
Internet has been the need for security. Internet usage could decline if any
well-publicized compromise of security occurred. We may incur
18
<PAGE>
significant costs to protect against the threat of security breaches or to
alleviate problems caused by these breaches. If unauthorized persons are able
to penetrate our network security, they could misappropriate proprietary
information or cause interruptions in our services. As a result, we may be
required to expend capital and resources to protect against or to alleviate
these problems. Security breaches could have a material adverse effect on our
business, financial condition and results of operations.
Our network operations may be vulnerable to hacking, viruses and other
disruptions, which may make our products and services less attractive and
reliable.
Internet usage could decline if any well publicized compromise of security
occurs. "Hacking" involves efforts to gain unauthorized access to information
or systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our service. We
may be required to expend capital and other resources to protect our Web site
against hackers. We cannot assure you that any measures we may take will be
effective. Security breaches could have a material adverse effect on our
business. In addition, the inadvertent transmission of computer viruses could
expose us to a material risk of loss or litigation and possible liability, as
well as materially damage our reputation and decrease our user traffic.
Political, Economic and Regulatory Risks
Regulation and censorship of information distribution in China may adversely
affect our business.
China has enacted regulations governing Internet access and the distribution
of news and other information. Furthermore, the Propaganda Department of the
Chinese Communist Party has been given the responsibility to censor news
published in China to ensure, supervise and control proper political ideology.
In addition, the Ministry of Information Industry has published implementing
regulations that subject online information providers to potential liability
for content included on their portals and the actions of subscribers and others
using their systems, including liability for violation of PRC laws prohibiting
the distribution of content deemed to be socially destabilizing. Because many
PRC laws, regulations and legal requirements with regard to the Internet are
relatively new and untested, their interpretation and enforcement may involve
significant uncertainty. In addition, the PRC legal system is a civil law
system in which decided legal cases have limited binding force as legal
precedents. As a result, in many cases it is difficult to determine the type of
content that may result in liability for a Web site operator.
Periodically, the Ministry of Public Security has stopped the distribution
over the Internet of information which it believes to be socially
destabilizing. The Ministry of Public Security has the authority to cause any
local Internet service provider to block any Web site maintained outside China
at its sole discretion. If the PRC government were to take any action to limit
or eliminate the distribution of information through our portal or to limit or
regulate any current or future applications available to users of our portal,
such action could have a material adverse effect on our business, financial
condition and results of operations.
The State Secrecy Bureau, which is directly responsible for the protection
of state secrets of all PRC government and Chinese Communist Party
organizations, is authorized to block any Web site it deems to be leaking state
secrets or failing to meet the relevant regulations relating to the protection
of state secrets in the distribution of online information. Under the
applicable regulations, we may be held liable for any content transmitted on
our portal. Furthermore, where the transmitted content clearly violates the
laws of the PRC, we will be required to delete it. Moreover, where the
transmitted content is considered suspicious, we are required to report such
content. We must also undergo computer security inspections, and if we fail to
implement the relevant safeguards against security breaches, we may be shut
down. In addition, under recently adopted regulations, Internet companies which
provide bulletin board systems, chat rooms or similar services, such as our
company, must apply for the approval of the State Secrecy Bureau. As the
implementing rules of these new regulations have not been issued, however, we
do not know how or when we will be expected to comply. We cannot assure you
that our business, financial condition and results of operations will not be
materially and adversely affected by the application of these regulations.
19
<PAGE>
Political and economic policies of the PRC government could affect our
business.
All of our business, assets and operations are located in China and all of
our revenues are derived from our operations in China. Accordingly, our
business, financial condition and results of operations are affected to a
significant degree by economic, political and legal developments in China.
Changes in political, economic and social conditions in China, adjustments in
PRC government policies or changes in laws and regulations could adversely
affect our business, financial condition and results of operations.
The economy of China differs from the economies of most countries belonging
to the Organization for Economic Cooperation and Development in a number of
respects, including:
. structure;
. level of government involvement;
. level of development;
. level of capital reinvestment;
. growth rate;
. control of foreign exchange; and
. methods of allocating resources.
Since 1949, China has been primarily a planned economy subject to a system
of macroeconomic management. Although the Chinese government still owns a
significant portion of the productive assets in China, economic reform policies
since the late 1970s have emphasized decentralization, autonomous enterprises
and the utilization of market mechanisms. Although we believe that economic
reform and the macroeconomic measures adopted by the Chinese government have
had a positive effect on economic development in China, we cannot predict what
effects these measures may have on our business or results of operations.
The PRC legal system embodies uncertainties which could limit the legal
protections available to us and you.
The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In 1979, the PRC government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 20 years has
significantly enhanced the protections afforded to various forms of foreign
investment in mainland China. Our PRC operating subsidiary, Beijing ITC, is a
wholly- foreign owned enterprise, or WFOE, which is an enterprise incorporated
in mainland China and wholly-owned by foreign investors. Beijing ITC is subject
to laws and regulations applicable to foreign investment in mainland China in
general and laws and regulations applicable to WFOEs in particular. However,
these laws, regulations and legal requirements are relatively recent, and their
interpretation and enforcement involve uncertainties. These uncertainties could
limit the legal protections available to us and other foreign investors,
including you. In addition, we cannot predict the effect of future developments
in the PRC legal system, particularly with regard to the Internet, including
the promulgation of new laws, changes to existing laws or the interpretation or
enforcement thereof, or the preemption of local regulations by national laws.
Restrictions on currency exchange may limit our ability to utilize our
revenues effectively.
Substantially all of our revenues and operating expenses are denominated in
Renminbi. The Renminbi is currently freely convertible under the "current
account", which includes dividends, trade and service-related foreign exchange
transactions, but not under the "capital account", which includes foreign
direct investment.
Currently, Beijing ITC may purchase foreign exchange for settlement of
"current account transactions", including payment of dividends, without the
approval of the State Administration for Foreign Exchange, or SAFE. Beijing ITC
may also retain foreign exchange in its current account (subject to a ceiling
approved by
20
<PAGE>
the SAFE) to satisfy foreign exchange liabilities or to pay dividends. However,
we cannot assure you that the relevant PRC governmental authorities will not
limit or eliminate our ability to purchase and retain foreign currencies in the
future.
Since a significant amount of our future revenues will be in the form of
Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenue generated in Renminbi to fund our business
activities outside China, if any, or expenditures denominated in foreign
currencies.
Foreign exchange transactions under the capital account are still subject to
limitations and require approvals from the SAFE. This could affect Beijing
ITC's ability to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
We may suffer currency exchange losses if the Renminbi depreciates relative
to the U.S. Dollar.
Our reporting currency is the U.S. Dollar. However, substantially all of our
assets and revenues are denominated in Renminbi. Our assets and revenues as
expressed in our U.S. Dollar financial statements will decline in value if the
Renminbi depreciates relative to the U.S. Dollar. Any such depreciation could
adversely affect the market price of our common stock. Very limited hedging
transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may
decide to enter into hedging transactions in the future, the availability and
effectiveness of these hedges may be limited and we may not be able to
successfully hedge our exposure at all. In addition, our currency exchange
losses may be magnified by PRC exchange control regulations that restrict our
ability to convert Renminbi into U.S. Dollars.
Risks Related to this Offering
An active trading market for our shares may not develop and the trading price
for our shares may fluctuate significantly.
Prior to this offering, there has been no public market for our shares. If
an active public market for our shares does not develop after this offering,
the market price and liquidity of our shares may be adversely affected. We have
applied to list our common stock on The Nasdaq Stock Market's National Market.
We can provide no assurances that a liquid public market for our shares will
develop.
The initial public offering price for our shares has been determined by
negotiation between us and the U.S. underwriters and international managers
based upon several factors and we can provide no assurance that the price at
which the shares are traded after this offering will not decline below the
initial offering price.
In addition, The Nasdaq Stock Market's National Market has from time to time
experienced significant price and volume fluctuations that have affected the
market prices for the securities of technology companies, particularly Internet
companies. As a result, investors in our shares may experience a decrease in
the value of their shares regardless of our operating performance or prospects.
In the past, following periods of volatility in the market price of a company's
securities, shareholders have often instituted securities class action
litigation against that company. If we were involved in a class action suit, it
could divert the attention of senior management, and, if adversely determined,
have a material adverse effect on our business, financial condition and results
of operations.
The sale or availability for sale of substantial amounts of our common stock
could adversely affect its market price.
Sales of substantial amounts of our common stock in the public market after
the completion of this offering, or the perception that these sales could
occur, could adversely affect the market price of our common stock and could
materially impair our future ability to raise capital through offerings of our
common stock. There will be shares of common stock outstanding immediately
after this offering, or shares if
21
<PAGE>
the U.S. underwriters and international managers exercise their over-allotment
option in full. In addition, as of April 30, 2000, there were outstanding
options and warrants to purchase 621,790 shares, including options and warrants
to purchase 237,289 shares that are immediately exercisable. All of the shares
sold in this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless held by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. The 10,861,872 shares of
common stock outstanding prior to this offering (assuming the conversion of all
outstanding convertible preferred stock into common stock and the exercise of
all outstanding options and warrants to acquire common stock) are "restricted
securities" as defined in Rule 144 and may not be sold in the absence of
registration other than in accordance with Rule 144 or Rule 701 under the
Securities Act or another exemption from registration.
In connection with this offering, we, our executive officers and directors
and all of our preferred shareholders have agreed not to sell any shares of
common stock for 180 days after the date of this prospectus without the U.S.
underwriters' consent. However, the U.S. underwriters may release these shares
from these restrictions at any time. We cannot predict what effect, if any,
market sales of shares held by our significant shareholders or any other
shareholder or the availability of these shares for future sale will have on
the market price of our common stock. See "Shares Eligible for Future Sale" for
a more detailed description of the restrictions on selling shares of our common
stock after this offering.
A number of our shareholders are parties to an agreement with us that
provides these shareholders with the right to require us to register the sale
of shares owned by them. These rights cover more than 50% of our issued and
outstanding common stock prior to this offering (assuming the conversion of all
outstanding shares of preferred stock into common stock and the exercise of all
outstanding options and warrants to acquire common stock) and will also cover
any additional shares obtained by these shareholders from time to time.
Registration of these shares of our common stock would permit the sale of these
shares without regard to the restrictions of Rule 144. Under the terms of this
agreement, we do not have any obligation to register for sale with the
Securities and Exchange Commission any shares of common stock held by these
shareholders if, within the six month period preceding the date of the request
for registration, we have already effected a registration under the Securities
Act pursuant to a request by these shareholders or in which these shareholders
had an opportunity to participate. For a further discussion of these
registration rights, see "Description of Capital Stock -- Registration Rights."
We are controlled by a small group of our existing shareholders, whose
interests may differ from other shareholders.
Our three largest shareholders currently beneficially own approximately 67%
of our outstanding shares (assuming the conversion of all outstanding shares of
preferred stock into common stock and the exercise of all outstanding options
and warrants to acquire common stock), and following this offering will
beneficially own approximately % of the outstanding shares, or % if the
U.S. underwriters and international managers exercise their over-allotment
option in full. Accordingly, they will have significant influence in
determining the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets, election of directors and other
significant corporate actions. They will also have the power to prevent or
cause a change in control. In addition, without the consent of these
shareholders, we could be prevented from entering into transactions that could
be beneficial to us. The interests of these shareholders may differ from the
interests of the other shareholders.
Holders of approximately % of the outstanding shares of our common stock
immediately following this offering (assuming the conversion of all outstanding
shares of preferred stock into common stock and the exercise of all outstanding
options and warrants to acquire common stock) are parties to an agreement under
which they have agreed to vote together in favor of their nominees to our board
of directors. As a result of their voting power, they will have the ability to
cause their nominees to be elected. See "Related Party Transactions" and
"Principal Shareholders" for more information regarding the share ownership of
our officers, directors and significant shareholders.
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<PAGE>
Because the initial public offering price is substantially higher than the
pro forma net tangible book value per share, you will incur immediate and
substantial dilution.
If you purchase common stock in this offering, you will pay more for your
shares than the amount paid by existing shareholders for their shares. As a
result, you will experience immediate and substantial dilution of approximately
$ per share (assuming the conversion of all outstanding convertible
preferred stock into common stock and no exercise of outstanding options or
warrants to acquire common stock), representing the difference between our pro
forma net tangible book value per share as of March 31, 2000, after giving
effect to this offering and the assumed initial public offering price per share
of $ per share. In addition, you may experience further dilution to the
extent that shares of our common stock are issued upon the exercise of stock
options or warrants. Substantially all of the shares issuable upon the exercise
of currently outstanding stock options or warrants will be issued at a purchase
price less than the public offering price per share in this offering. See
"Dilution" for a more complete description of how the value of your investment
in our common stock will be diluted upon the completion of this offering.
Anti-takeover provisions of the Delaware General Corporation Law and our
certificate of incorporation could delay or deter a change in control.
Amendments we intend to make to our certificate of incorporation and our
bylaws, as well as various provisions of the Delaware General Corporation Law,
may make it more difficult to effect a change in control of our company. The
existence of these provisions may adversely affect the price of our common
stock, discourage third parties from making a bid for our company or reduce any
premiums paid to our shareholders for their common stock. For example, we
intend to amend our certificate of incorporation to authorize our board of
directors to issue "blank check" preferred stock and to attach special rights
and preferences to this preferred stock. The issuance of this preferred stock
may make it more difficult for a third party to acquire control of us. We also
intend to amend our certificate of incorporation to provide for the division of
the board of directors into two classes as nearly equal in size as possible
with staggered two-year terms. This classification of the board of directors
could have the effect of making it more difficult for a third party to acquire
our company, or of discouraging a third party from acquiring control of our
company. See "Description of Capital Stock -- Preferred Stock," and
"Description of Capital Stock -- Anti-Takeover Effects of Delaware Law and our
Fifth Amended and Restated Certificate of Incorporation and Bylaws" for a more
complete description of our capital stock, our certificate of incorporation and
the effects of the Delaware General Corporation Law that could hinder a third
party's attempts to acquire control of us.
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<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES
We are a company organized under the laws of Delaware, but substantially all
of our assets are located in the PRC. We have appointed CT Corporation System,
111 Eighth Avenue, New York, New York 10011, as our agent to receive service of
process with respect to any action brought against us in the United States
District Court for the Southern District of New York under the securities laws
of the United States or of any State of the United States, or any action
brought against us in the Supreme Court of the State of New York in the County
of New York under the securities laws of the State of New York. However, it may
be difficult for investors to enforce outside the United States judgments
against us obtained in the United States in any such actions, including actions
predicated upon the civil liability provisions of the federal securities laws
of the United States or of the securities laws of any State of the United
States. In addition, certain of our directors and officers and certain of the
experts named herein are resident outside the United States (principally in the
PRC) and all or a substantial portion of the assets of such persons are or may
be located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon such
persons, or to enforce against them or us judgments obtained in United States
courts, including judgments predicated upon the civil liability provisions of
the federal securities laws of the United States or of the securities laws of
any State of the United States. We have been advised by our PRC counsel,
TransAsia Lawyers, that in their opinion, there is doubt as to the
enforceability in the PRC, in original actions or in actions for enforcement of
judgments of United States courts, of civil liabilities predicated solely upon
the federal securities laws of the United States or the securities laws of any
State of the United States.
------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. All statements other than statements of historical fact in this
prospectus are forward-looking statements. These forward-looking statements are
subject to various risks and uncertainties. Generally, these forward-looking
statements can be identified by the use of forward-looking terminology such as
"may", "will", "expect", "anticipate", "estimate", "plan" or other similar
words. These statements discuss future expectations, identify strategies,
contain our projections of future results of operations or financial condition
or state other "forward-looking" information. Known and unknown risks,
uncertainties and other factors could cause the actual results to differ
materially from those contained in any forward-looking statement.
Although we believe that our expectations expressed in these forward-looking
statements are reasonable, we cannot assure you that our expectations will turn
out to be correct. Our actual results could be materially different from and
worse than our expectations. We have no obligation to update publicly or revise
any forward-looking statements. Important risks and factors that could cause
our actual results to be materially different from our expectations are
generally set forth in the "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections and elsewhere in this prospectus.
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<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $ million, or approximately $ million if the U.S.
underwriters' and international managers' over-allotment option is exercised in
full, after deducting the estimated underwriting discount and offering expenses
payable by us. These estimates are based on an assumed initial public offering
price of $ per share.
We intend to use approximately $17.0 million of the net proceeds to fund
capital expenditures, with additions to our networking and computer
infrastructure accounting for approximately $15.5 million. In addition, we
intend to use approximately $36.0 million for sales and marketing activities.
The remainder of the net proceeds will be used for general corporate purposes,
including working capital and expansion of our work force. We may also use a
portion of the net proceeds for possible acquisitions of or investments in
businesses, products and technologies that are complementary to our business,
although we do not currently have any agreements or understandings to make any
acquisitions or investments.
The foregoing represents our present intentions with respect to the
allocation of the net proceeds of this offering based upon our present plans
and business conditions. The occurrence of unforeseen events or changed
business conditions could result in the application of the proceeds of this
offering in a manner other than as described in this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance our business and
to fund growth and, therefore, do not expect to pay any cash dividends for the
foreseeable future. Any future determination to pay dividends will be made at
the discretion of our board of directors and will be based upon our earnings,
cash flow, financial condition and capital requirements and any other
conditions our board of directors deems relevant. In addition, the payment of
dividends may be limited by financing agreements that we may enter into in the
future.
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<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of March 31, 2000:
(1) on an actual basis;
(2) on a pro forma basis to reflect:
. the conversion of 1,125,000 shares of Series A preferred stock for
1,125,000 shares of common stock at a conversion price of $0.200 per
share of common stock;
. the conversion of 1,738,910 shares of Series B preferred stock for
2,898,183 shares of common stock at a conversion price of $0.621 per
share of common stock;
. the conversion of 338,295 shares of Series B-1 preferred stock for
338,295 shares of common stock at a conversion price of $1.035 per
share of common stock;
. the conversion of 1,479,507 shares of Series C preferred stock for
1,479,507 shares of common stock at a conversion price of $4.702 per
share of common stock; and
. the conversion of 777,688 shares of Series D preferred stock for
777,688 shares of common stock at a conversion price of $38.576 per
share of common stock;
(3) on a pro forma as adjusted basis to reflected the mandatory conversion
of all the preferred stock and the sale of shares of common stock
offered in this offering at an assumed initial public offering price of
$ per share (the midpoint of the range of estimated initial public
offering price set forth on the cover page of this prospectus), after
the deduction of underwriting discounts and estimated expenses payable
by us in this offering.
In connection with this offering, all of our outstanding shares of preferred
stock will mandatorily convert into shares of common stock if and when the
aggregate proceeds from this offering are not less than $20,000,000 and with a
price to the public of at least $38.576 per share.
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<PAGE>
You should read this table together with "Selected Consolidated Financial
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements, including the notes
thereto, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------
Pro forma
as
Actual Pro forma adjusted
------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $33,106 $33,106 $
======= ======= ======
Short-term debt.................................... $ 2,899 $ 2,899 $2,899
======= ======= ======
Long-term debt..................................... $ -- $ -- $ --
------- ------- ------
Mandatorily redeemable preferred stock:
Series B and B-1 mandatorily redeemable
convertible preferred stock, par value $0.001:
2,077,205 shares authorized, 2,077,205 shares
issued and outstanding, actual (no shares issued
and outstanding, as adjusted)(1)................ $ 2,947 $ -- $ --
Series C mandatorily redeemable convertible
preferred stock, par value $0.001: 1,479,507
shares authorized, 1,479,507 shares issued and
outstanding, actual (no shares issued and
outstanding, as adjusted)(2).................... 7,721 -- --
Series D mandatorily redeemable convertible
preferred stock, par value $0.001: 777,688
shares authorized, 777,688 shares outstanding,
actual (no shares issued and outstanding, as
adjusted)(3).................................... 31,053 -- --
------- ------- ------
Total mandatorily redeemable preferred stock... $41,721 $ -- $ --
------- ------- ------
Shareholders' equity (deficit):
Series A convertible preferred stock, par value
$0.001: 1,125,000 shares authorized, 1,125,000
shares issued and outstanding, actual (no shares
issued and outstanding, as adjusted)............ $ 1 $ -- $ --
Common stock, par value $0.001: 11,500,000 shares
authorized, 3,621,410 shares issued and
outstanding, actual ( shares issued and
outstanding, as adjusted)(4).................... 4 10
Additional paid-in capital......................... 1,567 43,283
Deferred compensation and other.................... (1,067) (1,067) (1,067)
Accumulated deficit................................ (9,437) (9,437) (9,437)
------- ------- ------
Total shareholders' equity (deficit)............. (8,932) 32,789
------- ------- ------
Total capitalization............................ $35,688 $35,688 $
======= ======= ======
</TABLE>
- ---------------------
(1) Recorded at its issuance costs plus amortization of the increase in the
value of the Series B and B-1 preferred stock since issuance. The recorded
value of the preferred stock is being adjusted upwards to its estimated
redemption amount through periodic charges to retained earnings. These
charges, which are reflected in our statement of operations as accretion on
mandatory convertible preferred stock, totaled $244 and $467 for the years
ended December 31, 1998 and 1999, respectively, and $114 and $116 for the
three months ended March 31, 1999 and 2000, respectively.
(2) Recorded at its issuance costs plus amortization of the increase in the
value of the Series C preferred stock since issuance. The recorded value of
the preferred stock is being adjusted upwards to its estimated redemption
amount through periodic charges to retained earnings. These charges, which
are reflected in our statement of operations as accretion on mandatory
convertible preferred stock, totaled $0 and $450 for the years ended
December 31, 1998 and 1999, respectively, and $0 and $345 for the three
months ended March 31, 1999 and 2000, respectively.
(3) Recorded at its issuance costs plus amortization of the increase in the
value of the Series D preferred stock since issuance. The recorded value of
the preferred stock is being adjusted upwards to its estimated redemption
amount through periodic charges to retained earnings. These charges, which
are reflected in our statement of operations as accretion on mandatory
convertible preferred stock, totaled $0 and $0 for the years ended December
31, 1998 and 1999, respectively, and $1,098 for the three months ended
March 31, 2000.
(4) Excludes 412,043 shares reserved for issuance pursuant to options we may
issue in the future pursuant to our stock option plans and stock options
and warrants outstanding of an aggregate of 621,790 shares of our common
stock as of March 31, 2000 at a weighted average exercise price of $7.67
per share.
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<PAGE>
DILUTION
As of March 31, 2000, our pro forma net tangible book value was $ . , or
$ . per share. Pro forma net tangible book value per share represents the
amount of our total consolidated tangible assets, minus the amount of our total
consolidated liabilities, divided by the total number of shares of our common
stock outstanding on that date, as adjusted to give pro forma effect as of that
date to the conversion of all our outstanding preferred stock into common
stock. See "Capitalization". Assuming we had sold the shares of common
stock offered in this offering at an initial public offering price of $ per
share, after giving effect to the sale of the shares offered in this offering
and after deducting underwriting discounts and commissions and other estimated
expenses of this offering, our pro forma net tangible book value at March 31,
2000 would have increased to $ , or $ per share. This represents an
immediate increase of $ in net tangible book value per share to existing
shareholders and an immediate dilution of $ in net tangible book value per
share to new investors purchasing the shares at the initial public offering
price. Dilution is determined by subtracting pro forma net tangible book value
per share after this offering from the amount of cash paid by a new investor
for one share. The following table illustrates such per share dilution. The
assumed initial public offering price per share set forth below of $ is
based on the mid-point of the estimated price range per share set forth on the
cover page of this prospectus.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share at March 31, 2000...... $
Increase in pro forma net tangible book value per share
attributable to new investors..................................... $
----
Pro forma net tangible book value per share after giving effect to
this offering....................................................... $
Dilution in pro forma net tangible book value per share to new
investors........................................................... $
====
</TABLE>
The following table summarizes the number of shares purchased from us as of
March 31, 2000, the total consideration paid to us and the average price per
share paid by existing investors and by new investors purchasing shares in this
offering at an assumed initial public offering price of $ per share and
without giving effect to underwriting discounts and commissions and other
estimated expenses of this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors......... 10,240,083 % $39,350,000 % $3.84
New investors..............
---------- ------ ----------- ------
Total.................... 100.00% $ 100.00% $
========== ====== =========== ======
</TABLE>
The foregoing discussion and table assumes no exercise of any outstanding
stock options or warrants. As of March 31, 2000, there were stock options and
warrants outstanding to purchase an aggregate of 621,790 shares of our common
stock at a weighted average exercise price of $7.67 per share. If all these
options and warrants had been exercised on March 31, 2000, before giving effect
to this offering, our pro forma net tangible book value would have been
approximately $ . , or $ . per share. After giving effect to this offering,
our pro forma net tangible book value on March 31, 2000 would have been
approximately $ , or $ per share, the increase in net tangible book value
attributable to new investors would have been $ per share and the dilution
in net tangible book value to new investors would have been $ per share. In
addition, the dilution will be $ per share if the U.S. underwriters and
international managers fully exercise their over-allotment options.
28
<PAGE>
EXCHANGE RATE INFORMATION
The following table sets forth information concerning the noon buying rates
in New York City for cable transfers in Renminbi and U.S. Dollars, as certified
for customs purposes by the Federal Reserve Bank in New York, for the periods
indicated:
<TABLE>
<CAPTION>
Noon Buying Rate
-----------------------------------
Period Period End Average(1) High Low
------ ---------- ---------- ------ ------
(RMB per $1.00)
<S> <C> <C> <C> <C>
1994........................................ 8.6442 8.6306 8.8270 8.4545
1995........................................ 8.3374 8.3713 8.5000 8.2916
1996........................................ 8.3284 8.3394 8.5000 8.3002
1997........................................ 8.3100 8.3194 8.3290 8.2911
1998........................................ 8.2789 8.3009 8.3180 8.2774
1999........................................ 8.2795 8.2784 8.2800 8.2770
2000 (through May 25, 2000)................. 8.2773 8.2787 8.2799 8.2768
</TABLE>
- ---------------------
(1) Determined by averaging the rates on the last business day of each month
during the respective period.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, our financial statements and the
notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The selected statement of operations data presented below for the
years ended December 31, 1997, 1998 and 1999, and the selected balance sheet
data as of December 31, 1998 and 1999, are derived from our financial
statements that have been audited by PricewaterhouseCoopers, independent public
accountants, and are included elsewhere in this prospectus. The statement of
operations data presented below for the period from August 2, 1996 (inception)
to December 31, 1996, and the selected balance sheet data as of December 31,
1996, are derived from our audited financial statements not included in this
prospectus. The selected statement of operations data for the three-months
periods ended March 31, 1999 and 2000, and the selected balance sheet data as
of March 31, 2000, are derived from our unaudited financial statements included
elsewhere in this prospectus. These unaudited financial statements have been
prepared on the same basis as our audited financial statements and, in our
opinion, include all material adjustments, consisting only of normal recurring
adjustments, necessary to state fairly this unaudited financial information.
Our consolidated financial statements are prepared and presented in
accordance with United States generally accepted accounting principles. Basic
and diluted pro forma net loss per share in 1999 is computed using the weighted
average number of common shares outstanding, including the pro forma effects of
the mandatory conversion of the Series A, B, B-1, C preferred stock into common
stock upon the consummation of this offering. Basic and diluted pro forma net
loss per share for the three months ended March 31, 1999 and 2000 is computed
using the weighted average number of shares of common stock outstanding,
including the pro forma effects of the mandatory conversion of the Series A, B,
B-1, C and D preferred stock into common stock upon the consummation of this
offering.
30
<PAGE>
<TABLE>
<CAPTION>
Period from
August 2, 1996 Three months ended
(inception) to Year ended December 31, March 31,
December 31, ---------------------------------- ---------------------------
1996 1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ---------- ----------
(in thousands, except for per share and share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 78 $ 472 $ 1,617 $ 233 $ 842
Costs and expenses:
Cost of revenues....... -- 19 215 1,576 172 811
Product development.... -- 50 208 427 55 348
Sales and marketing.... -- 94 351 1,758 126 1,533
General and
administrative........ 18 75 308 1,270 163 516
Stock-based
compensation(1)....... 12 -- -- 46 -- 129
---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses........... 30 238 1,082 5,077 516 3,337
---------- ---------- ---------- ---------- ---------- ----------
Operating loss......... (30) (160) (610) (3,460) (283) (2,495)
Interest income........ 1 -- 23 25 7 31
Interest expense --
related party......... -- -- (28) (14) -- --
---------- ---------- ---------- ---------- ---------- ----------
Net loss................ (29) (160) (615) (3,449) (276) (2,464)
Accretion on mandatorily
redeemable convertible
preferred stock........ -- -- (244) (917) (114) (1,559)
---------- ---------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (29) $ (160) $ (859) $ (4,366) $ (390) $ (4,023)
========== ========== ========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (0.01) $ (0.05) $ (0.24) $ (1.22) $ (0.11) $ (1.11)
Shares used in computing
basic and diluted net
loss per share......... 3,500,000 3,500,000 3,564,000 3,588,000 3,564,000 3,621,000
Basic and diluted pro
forma net loss per
share.................. $ (0.41) $ (0.03) $ (0.26)
Shares used in computing
basic and diluted pro
forma net loss per
share.................. 8,314,000 7,925,000 9,462,000
Cost of revenues..... $ -- -- -- $ 13 $ -- $ 6
Product development.. -- -- -- 11 -- 3
Sales and marketing.. -- -- -- 14 -- 11
General and
administrative...... 12 -- -- 8 -- 109
---------- ---------- ---------- ---------- ---------- ----------
$ 12 $ -- $ -- $ 46 $ -- $ 129
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------------
(1) Stock-based compensation:
31
<PAGE>
The following table is a summary of our consolidated balance sheet as of
December 31, 1996, 1997, 1998 and 1999 and as of March 31, 2000:
. on an actual basis;
. on a pro forma basis to give effect to the mandatory conversion of all
outstanding Series A, B, B-1, C and D preferred stock into common stock
upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the mandatory conversion of
all the preferred stock and the sale of . shares of common stock
offered at an assumed initial public offering price of $ . per share
after deducting estimated underwriting discounts and commissions and
offering expenses.
<TABLE>
<CAPTION>
As of December 31, As of March 31, 2000
------------------------- ------------------------------
Pro forma
1996 1997 1998 1999 Actual Pro forma as adjusted
---- ---- ------ ------- ------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $87 $111 $1,232 $ 3,924 $33,106 $33,106 $
Working capital......... 194 22 1,303 2,577 28,801 28,801
Total assets............ 217 179 1,778 7,076 38,111 38,111
Total liabilities....... 18 115 204 1,911 5,322 5,322 5,322
Mandatorily redeemable
convertible preferred
stock.................. -- -- 2,362 10,207 41,721 -- --
Total shareholders'
equity (deficit)....... 199 64 (788) (5,042) (8,932) 32,789
</TABLE>
32
<PAGE>
CORPORATE RESTRUCTURING
Overview
Under current PRC regulations, foreign companies such as Sohu.com Inc. may
not own or operate telecommunications businesses in China, which may include
the operation of Internet content provision businesses. Our wholly owned PRC
subsidiary, Beijing ITC, does not have a license to provide internet content or
information services. As a result, we recently restructured our operations in
China. As part of this restructuring, we and Beijing ITC entered into a series
of agreements with Beijing Sohu and Beijing Sohu's two shareholders. Beijing
Sohu is a PRC company that is 80% owned by Dr. Charles Zhang, our founder,
President and Chief Executive Officer, and 20% owned by Ms. Jinmei He, an
executive officer of Beijing ITC, both of whom are PRC nationals.
Under our restructuring and agreements with Beijing Sohu and its two
shareholders:
. Beijing ITC is responsible for all technical matters relating to our
www.sohu.com platform, conducts our online advertising, e-commerce
applications, directory and search engine and other businesses as
described in this prospectus and continues to receive the revenues from
these activities.
. Our content-related operations, including the development, collection,
classification, supervision and dissemination of content for our Web
site, were transferred to Beijing Sohu, which has a license to provide
Internet information services.
. Beijing ITC will transfer its ten content related servers, related
equipment and up to 25 content editors and supervisors to Beijing Sohu.
. Beijing Sohu provides and develops content for use by Beijing ITC on our
Web site for a monthly fee subject to periodic adjustment as agreed by
the parties.
. Beijing ITC provides relevant consulting and technical services to
Beijing Sohu and grants to Beijing Sohu, and will assist Beijing Sohu in
obtaining from our company, the necessary domain name, trade name,
trademark and copyright licenses to support Beijing Sohu's operations.
. Beijing ITC or a third party designated by Beijing ITC will have the
right, at any time, subject to PRC law (including any restrictions on
foreign investment), to purchase the entire ownership interest in
Beijing Sohu of the two Beijing Sohu shareholders.
. We plan to extend a loan for $176,000 to Dr. Charles Zhang and a loan
for $43,000 to Ms. Jinmei He, solely for the purpose of helping them
fund their additional equity investments in Beijing Sohu as a result of
our restructuring. Dr. Zhang and Ms. He have pledged all of their shares
in Beijing Sohu to us as security for the loans.
For more information on these agreements, see "Related Party Transactions".
In the opinion of our PRC counsel, the ownership structures of Sohu.com
Inc., Beijing ITC and Beijing Sohu, both currently and after giving effect to
this offering, and the businesses and operations of Sohu, Beijing ITC and
Beijing Sohu as described in this prospectus, comply with all existing laws,
rules and regulations of the PRC, and no consent, approval or license other
than those already obtained is required under any of the existing laws, rules
and regulations of the PRC for such ownership structures, businesses and
operations or this offering. See "Risk Factors -- PRC Internet laws and
regulations are unclear and will likely change in the near future. If we are
found to be in violation of current or future PRC laws and regulations, we
could be subject to severe penalties" and "PRC Regulatory Matters".
33
<PAGE>
The following chart illustrates our corporate structure after the corporate
restructuring.
(1) Beijing ITC is responsible for the consulting and technical matters
relating to the www.sohu.com platform, conducts online advertising, e-
commerce applications, directory and search engine and other businesses
as described in this prospectus and receives the revenue from these
activities.
(2) Beijing Sohu is responsible for our content-related operations,
including the development, collection, classification, supervision and
dissemination of content for the Web site, and has a license to provide
Internet information services.
Pro Forma Effect of Corporate Restructuring
As a result of the corporate restructuring described above, our financial
statements have been affected as follows:
. Reduce the balance of cash and record a corresponding loan receivable in
the amount of $219,000 for funds lent to the shareholders of Beijing
Sohu; and
. Reduce the balance of fixed assets by $89,000 and record a corresponding
receivable with respect to the net book value of the computer equipment
transferred to Beijing Sohu.
In addition, subsequent to the corporate restructuring, certain content-related
operations previously conducted by Beijing ITC will be conducted by Beijing
Sohu. For the three months ended March 31, 2000, the monthly cost of conducting
these operations was approximately $97,000. If Beijing Sohu had conducted these
operations during the three months ended March 31, 2000, the estimated monthly
cost would have been cost of approximately $102,000. The incremental monthly
cost represents additional tax and overhead costs associated with conducting
these operations in a separate PRC legal entity. As Beijing ITC uses the
content developed by Beijing Sohu, and as we expect to fund Beijing Sohu's
ongoing operations through adjustments to the monthly fee payable under the
cooperation agreement, Beijing ITC will record an expense approximately equal
to the entire amount of Beijing Sohu's costs on a monthly basis plus business
tax charges.
34
<PAGE>
The following tables, which are unaudited, show the pro forma effect of our
restructuring as if it had occurred on January 1, 1999 for statement of
operations purposes and as of March 31, 2000 for balance sheet purposes.
<TABLE>
<CAPTION>
Three Months Ended March 31,
Year Ended December 31, 1999 2000
---------------------------------- ----------------------------------
Pro forma Pro forma
Actual adjustments Pro forma Actual adjustments Pro forma
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except for per share and share data)
Statement of Operation
Data:
Revenues................ $ 1,617 $-- $ 1,617 $ 842 $-- $ 842
Costs and expenses...... (5,077) (30)(/1/) (5,107) (3,337) (9)(/1/) (3,346)
Operating loss.......... (3,460) (30) (3,490) (2,495) (9) (2,504)
Net loss................ (3,449) (30) (3,479) (2,464) (9) (2,473)
Net loss attributable to
common stockholders.... (4,366) (30) (4,396) (4,023) (9) (4,032)
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (1.22) $ (1.23) $ (1.11) $ (1.11)
Shares used in computing
basic and diluted net
loss per share......... 3,588,000 3,588,000 3,588,000 3,621,000
</TABLE>
- ---------------------
(1) Reflects pro forma increases in costs and expenses for the year ended
December 31, 1999 and the three month period ended March 31, 2000. The
adjustments include: (i) a decrease in our expenses representing the
expenses of the content management and development operations formerly
incurred by Beijing ITC that were transferred to Beijing Sohu and (ii) an
increase in our expenses representing the monthly fee that Beijing ITC pays
to Beijing Sohu under the cooperation agreement. The monthly fee is higher
than Beijing Sohu's expenses because the fee is designed to reimburse
Beijing Sohu for the expenses plus incremental 5% business taxes.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------
Pro forma Pro
Actual adjustments forma
------- ----------- -------
<S> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.................... $33,106 $(219)(/1/) $32,887
Working capital.............................. 28,801 (178)(/2/) 28,614
Fixed assets................................. 2,227 (41)(/3/) 2,186
Total assets................................. 38,111 38,111
Total liabilities............................ 5,322 5,322
Mandatorily redeemable convertible preferred
stock....................................... 41,721 41,721
Total shareholders' equity (deficit)......... (8,932) (8,932)
</TABLE>
- ---------------------
(1) Reflects a pro forma decrease in cash and cash equivalents of $219 as of
March 31, 2000 due to the extension of loans totaling RMB1.8 million to
Charles Zhang and He Jin Mei, the shareholders of Beijing Sohu, to fund
their additional investment in Beijing Sohu. The ten year loans will be
reflected on our balance sheet as long term receivables, which are
reflected in pro forma total assets.
(2) Reflects a pro forma decrease in working capital of $178 as of March 31,
2000 due to the loans described above of $219 and an increase in receivable
of $41 from the sale of the fixed asset to Beijing Sohu.
(3) Reflects a pro forma decrease in fixed assets of $41 as of March 31, 2000,
representing the book value of the servers of Beijing ITC that will be
transferred to Beijing Sohu under the restructuring. These amounts exclude
certain servers acquired by Beijing ITC after March 31, 2000 at a cost of
approximately $48 that will also be transferred to Beijing Sohu under the
restructuring.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes to those statements and other financial
information appearing elsewhere in this prospectus.
Overview
Sohu is a leading Internet portal in China in terms of brand recognition,
page views and registered users. We were incorporated in August 1996 as
Internet Technologies China Incorporated, and for the period from our inception
through December 1996, we focused our activities on the development of our Web
site while incurring minimal operating expenses. We launched our original Web
site, www.itc.com.cn, in January 1997. During 1997, we developed the Sohu
online directory and search engine and related technology infrastructure, and
also focused on recruiting personnel, raising capital and aggregating content
to attract and retain users. In February 1998, we re-launched our Web site
under www.sohu.com.cn, and during 1998, we also:
. launched our online directory and search engine;
. began offering content channels, including news and sports;
. improved and upgraded our services;
. expanded our production staff; and
. increased our marketing activities in order to build the Sohu brand.
In 1999, we re-named our company Sohu.com Inc., and continued the
development of our Web site, as well as our business, sales and marketing
activities. In particular, we:
. experienced substantial growth in registered users and page views;
. upgraded our search engine capabilities and launched our e-mail
services;
. significantly increased our production, marketing and sales staff;
. expanded our branded content channels, featuring news, sports, business
and finance and other topics of interest to Internet users in China; and
. began providing e-commerce services on a trial basis.
Substantially all of our operations are conducted through Sohu ITC
Information Technology (Beijing) Co., Ltd., or Beijing ITC, our wholly owned
PRC subsidiary, which was incorporated in 1997. Under current PRC regulations,
foreign companies such as Sohu.com Inc. may not own or operate
telecommunications businesses in China, which may include the operation of
Internet content provision businesses. As a result, we recently restructured
our operations in the PRC. As part of this restructuring, our content-related
operations were transferred to Beijing Sohu Online Internet Service, Ltd., or
Beijing Sohu, a PRC company that is 80% owned by Charles Zhang, our founder,
President and Chief Executive Officer, and 20% owned by He Jinmei, an executive
officer of Beijing ITC. Beijing Sohu is not a subsidiary of our company, and
its assets, liabilities and results of operations will not be included in our
consolidated financial statements. For a description of the pro forma effects
of the restructuring on our consolidated financial statements for the year
ended December 31, 1999 and the three months ended March 31, 2000, see
"Corporate Restructuring -- Pro Forma Effect of Corporate Restructuring".
Revenues
We have derived substantially all of our revenues from the sale of
advertisements on our portal. Advertising revenues are derived principally
from:
. advertising arrangements under which we receive fixed fees for banners
placed on our Web sites for specified periods of time and with a
guaranteed number of impressions;
36
<PAGE>
. sponsorship arrangements which allow advertisers to sponsor an area on
our Web site in exchange for a fixed payment; such arrangements may also
guarantee a number of impressions over a specified period of time; and
. design, coordination and production of advertising campaigns to be
placed on our portal.
Rates for banner advertising depend on:
. term of the contract;
. whether the impressions are for general audiences or targeted audiences;
. where the banner advertisements are placed within our portal; and
. the number of guaranteed impressions or other performance obligations.
Sponsorship arrangements generally have higher advertising rates than banner
advertising, because sponsorship arrangements typically provide advertisers
with the right to specify the content to be included, and may also provide the
exclusive right to advertise in a specific, designated location on our Web site
for a specified period of time. Sponsorship arrangements also may have longer
terms and other performance obligations. These performance obligations relate
to the design, integration and co-ordination of content and links in the
content channels on our Web site.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant obligations remain at
the end of the period and collection of the resulting receivable is probable.
To the extent minimum guaranteed impression levels or other performance
obligations are not met, we defer recognition of the corresponding revenues
until guaranteed levels are achieved or the remaining performance obligations
are met.
Under some of our content arrangements, we have agreed to pay royalties to
content providers based on a percentage of the advertising revenues derived
from advertisements placed on our channels. Under some of the other content
arrangements, we pay fixed fees for content provided over a specified period of
time, generally ranging from three to 24 months. Where content agreements
provide for royalties, those royalty rates generally range from 15% to 50% of
the related revenues. In 1999, 6.6% of our revenues were subject to such
royalty agreements with content providers, with royalties in the amount of
$27,000 being paid to content providers. In the first quarter of 2000,
approximately 4% of our revenues were subject to such royalty arrangements,
with $7,000 in royalties being paid to content providers. We have recorded the
entire amount of revenues subject to royalty arrangements in our consolidated
revenues and the royalties due to our content providers in our cost of
revenues.
To date, we have not recorded any revenues from barter transactions.
In 1999, the duration of our advertising contracts ranged from 2 days to 365
days, with an average duration of 45 days, compared to an average duration of
107 days in 1998. In the first quarter of 2000, the duration ranged from 2 days
to 268 days, with an average of 56 days. In addition, in 1999, we charged an
average price of $18 per 1,000 guaranteed impressions, compared to an average
price of $13 in 1998. The average price in the first quarter of 2000 was $20
per 1,000 guaranteed impressions. We believe that our online advertising rates
are currently set at general market levels.
To date, we have not recorded any e-commerce revenues, but have engaged in
pilot trials of e-commerce activities.
Costs and Expenses
Our cost of revenues is made up of Internet access and bandwidth leasing
charges, royalty payments, content fees, Web site maintenance costs,
amortization of purchased technology, depreciation of computer equipment and
other production costs.
37
<PAGE>
Product development expenses include compensation and related expenses for
personnel engaged in the enhancement of our Web site and online directory,
amortization of software licenses and other third party technology expenses and
compensation and related costs of employees in the business development
department. Costs incurred in the enhancement of our Web site and the
classification and organization of listings within our portal and enhancements
to existing products are charged to product development expense as incurred.
Material software development costs incurred during the application development
stage, including the costs related to the development of our Web site, are
capitalized as other assets and are amortized over three years.
Sales and marketing expenses primarily consist of advertising and promotion
on television, online and in print; promotional materials and sponsorship of
special events; and compensation, benefits and sales commissions to our direct
sales force. Our sales and marketing costs are expected to increase in the
future as we enhance our selling and marketing efforts. In particular, the
largest component of our sales and marketing expenses is marketing costs for
new user acquisition, which is closely tied to our user growth.
General and administrative expenses primarily consist of compensation and
benefits for general management, finance and administrative personnel costs,
professional fees, depreciation of office equipment and other office expenses.
We intend to expand our Guangzhou and Shanghai offices to conduct sales and
marketing, and to assist Beijing Sohu in developing content partner
relationships. This may result in our hiring of additional staff and purchasing
of additional office equipment and computer and networking equipment, all of
which will increase our general and administrative expenses.
In 1999, we recorded deferred stock-based compensation of approximately
$67,000. In general, deferred stock-based compensation is recognized based on
the difference, if any, between the estimated fair value of our common stock
and the amount an employee must pay to acquire the stock, as determined on the
date the option is granted. The difference is initially recorded as a reduction
of shareholders' equity and then amortized and charged to expense on an
accelerated basis over the vesting period of the applicable options, which is
typically four years or less. Of the total stock-based compensation amount,
$46,000 was amortized and charged to expense in 1999.
In January 2000, we granted options for the purchase of 127,000 shares of
common stock to certain of our employees and a director at an exercise price of
$15.00. In connection with these option grants, we recorded deferred stock
compensation of approximately $1.2 million which will be amortized and charged
to expense on an accelerated basis over the vesting period of the applicable
options. The options granted generally vest over periods ranging from one to
four years beginning with the first quarter subsequent to the date of grant of
the options. Compensation expense associated with this grant and recognized
during the three months ended March 31, 2000 totaled $120,000.
Based on options issued and outstanding as of April 30, 2000, we currently
expect to amortize and charge to expense the following amounts of stock-based
compensation:
. 2000 - $625,000;
. 2001 - $335,000;
. 2002 - $164,000;
. 2003 - $ 71,000; and
. 2004 - $ 4,000.
At March 31, 2000, we had incurred approximately $981,000 of transaction
expenses relating to this offering, which are being deferred and included as
other assets. Upon the consummation of this offering, these costs will be
offset against the proceeds of this offering in additional paid-in-capital.
Accretion of Mandatorily Redeemable Convertible Preferred Stock
After March 5, 2003, holders of our Series B and B-1 preferred stock may
request that our company redeem all of their shares at a price of $2.069 per
share plus any declared but unpaid dividends. After
38
<PAGE>
September 9, 2004, holders of our Series C preferred stock may request that our
company redeem all of their shares at a price of $9.404 per share plus any
declared but unpaid dividends. Accordingly, the Series B, B-1 and C preferred
stock are being accreted to their estimated redemption value through periodic
charges to retained earnings. After January 25, 2005, holders of our Series D
preferred stock may request that our company redeem all of their shares at a
price of $77.152 per share plus any declared but unpaid dividends. Accordingly,
the Series D preferred stock are being accreted to its estimated redemption
value through periodic charges to retained earnings. For 1999, charges with
respect to the Series B and B-1 preferred stock totaled $467,000, while charges
with respect to the Series C preferred stock totaled $450,000. For the three
months ended March 31, 2000, charges with respect to the Series B and B-1
preferred stock totaled $116,000 and charges with respect to the Series C
preferred stock totaled $345,000, while charges with respect to the Series D
preferred stock totaled $1,098,000. These charges are also reflected in our
statement of operations as accretion on mandatory convertible preferred stock.
Since all of the outstanding shares of preferred stock will be mandatorily
converted into shares of common stock upon the consummation of this offering,
we do not expect to incur additional accretion of mandatorily redeemable
convertible preferred stock after the consummation of this offering.
Limited Operating History
We have incurred significant net losses and negative cash flows from
operations since our inception. At March 31, 2000, we had an accumulated
deficit of $9.4 million. These losses have been funded primarily through the
issuance of preferred stock. We have not achieved profitability, and expect to
continue to incur net losses in 2000 and subsequent fiscal periods. We intend
to invest heavily in marketing and brand development, content enhancements and
technology and infrastructure development, which would result in substantial
net losses and negative cash flows for the foreseeable future. Moreover, the
amount of these losses is expected to increase from current levels. Even if we
do achieve profitability, we may be unable to sustain or increase profitability
in the future.
We have a limited operating history for you to use as a basis for evaluating
our business. You must consider the risks and difficulties frequently
encountered by early stage companies like us in new and rapidly evolving
markets, including the Internet advertising market in the PRC.
Dependence on a Limited Number of Advertisers
In the first quarter of 2000, two of our advertisers, Nokia Corporation and
Alibaba.com, each accounted for over 8% of our revenues, and our five largest
advertisers accounted for more than 34% of our revenues and 40% of our accounts
receivable. In 1999, two of our advertisers, Intel Corporation, which is one of
our shareholders, and Nokia Corporation, each accounted for more than 10% of
our revenues, and our five largest advertisers accounted for approximately 34%
of our revenues and 43% of our accounts receivable. In 1998, two advertisers
each accounted for greater than 10% of our revenues, and our five largest
advertisers accounted for 71% of our revenues and 93% of our accounts
receivable. In 1997, two advertisers each accounted for greater than 10% of our
revenues, and our five largest advertisers accounted for 65% of our revenues
and 91% of our accounts receivable.
During January 2000, we entered into multi-year advertising agreements with
an affiliate of Pacific Century Cyberworks Limited, an affiliate of Legend
Holdings Limited and Hikari Tsushin, Inc. We expect to derive a significant
portion of our revenues over the next three years from these agreements. The
loss of any of these agreements or any of our significant advertisers, or a
decrease in the volume of advertising by any of the advertisers, would have a
material adverse effect on our business, financial condition and results of
operations. See "Risk Factors -- The loss of one of our top advertisers would
reduce our advertising revenues and materially and adversely affect our
business".
39
<PAGE>
Results of Operations
Comparison of the Three-Month Periods ended March 31, 2000 and March 31, 1999
Revenues
Our revenues increased to $842,000 for the three months ended March 31, 2000
compared to $233,000 for the same period in 1999. This increase was primarily
due to a significant increase in advertising revenue, which was in turn a
result of a significant increase in our marketing and sales promotional
activities during this period. Approximately 79% of our revenues in the three
months ended March 31, 2000 was attributable to new customer sales, and
approximately 21% was attributable to sales to customers existing in the three
months ended March 31, 1999. We did not record any e-commerce revenues during
these periods.
Cost and Expenses
Cost of Revenues. Our cost of revenues increased to $811,000 for the three
months ended March 31, 2000 compared to $172,000 for the same period in 1999.
This increase was principally the result of an increase of $410,000 in
bandwidth leasing charges due to our leasing of additional bandwidth from the
Beijing Telecom Administration and an increase of $139,000 in personnel costs
due to a significant expansion of the services provided on our Web site.
Bandwidth leasing charges and personnel costs constituted approximately 52% and
30%, respectively, of our cost of revenues during this period.
Product Development Expenses. Our product development expenses increased to
$348,000 for the three months ended March 31, 2000 compared to $55,000 for the
same period in 1999. This increase was mainly a result of an increase of
$130,000 in compensation and related expenses for personnel engaged in the
enhancement of our Web site and the establishment of our business development
department in the latter part of 1999. Personnel costs constituted
approximately 49% of our product development expenses during this period.
Sales and Marketing Expenses. Our sales and marketing expenses increased to
$1,533,000 for the three months ended March 31, 2000 compared to $126,000 for
the same period in 1999. This increase was primarily due to an increase in
costs of $652,000 in our cost of advertising activities and an increase of
$488,000 for special promotional events, such as our two-year anniversary
concert in February 2000. Advertising expenses constituted approximately 42% of
our sales and marketing expenses during this period.
General and Administrative Expenses. Our general and administrative expenses
increased to $516,000 for the three months ended March 31, 2000 compared to
$163,000 for the same period in 1999. This increase was principally a result of
an increase of $148,000 in personnel costs due to the hiring of additional
administrative personnel and an increase of $53,000 in professional fees.
Personnel costs and professional fees constituted approximately 36% and 18%,
respectively, of our general and administrative expenses during this period.
Stock-Based Compensation Expenses. Our stock-based compensation expenses
were $129,000 for the three months ended March 31, 2000. This amount represents
the amortization during this period of our deferred stock-based compensation
relating to stock options granted in 1999 and 2000. We did not incur stock-
based compensation expenses during the same period in 1999.
Operating Loss
As a result of the foregoing, we had an operating loss of $2,495,000 for the
three months ended March 31, 2000 compared to an operating loss of $283,000 for
the same period in 1999.
Interest Income
Interest income increased to $31,000 for the three months ended March 31,
2000 compared to $7,000 for the same period in 1999. This increase was
primarily due to increased cash balances held at bank accounts or invested in
short-term instruments or certificates of deposit.
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Net Loss, Accretion on Mandatorily Redeemable Convertible Preferred Stock,
Income Tax and Net Loss Attributable to Common Stockholders
As a result of the foregoing, our net loss increased to $2,464,000 for the
three months ended March 31, 2000 compared to $276,000 for the same period in
1999. Accretion on mandatorily redeemable convertible preferred stock was
$1,559,000 for the three months ended March 31, 2000 compared to $114,000 for
the same period in 1999. As we have incurred losses since inception, no
provision for income taxes has been made. Net loss attributable to common
stockholders was $4,023,000 for the three months ended March 31, 2000 compared
to $390,000 for the same period in 1999.
Comparison of the Years 1999 and 1998
Revenues
Our revenues increased to $1,617,000 in 1999 compared to $472,000 in 1998.
This was primarily due to an increase in the number of advertising contracts
and in the average dollar amount of the contracts. We did not record any e-
commerce revenues during these periods. Approximately 66% of our revenues in
1999 was attributable to new customer sales and approximately 34% was
attributable to sales to customers existing in the prior year. Approximately
78% of our revenues in 1998 was attributable to new customer sales and
approximately 22% were attributable to sales to existing customers.
Costs and Expenses
Cost of Revenues. Our cost of revenues increased to $1,576,000 in 1999
compared to $215,000 in 1998. This was principally a result of a significant
increase of $481,000 due to the hiring of additional personnel and related
personnel costs, as well as an increase of $515,000 in Internet access and
bandwidth leasing charges due to our leasing of additional bandwidth from the
Beijing Telecom Administration. This increase was also due to an increase of
$100,000 in hardware and software amortization costs and an increase of $55,000
in royalty and fixed fee payments to content providers. Most of these costs are
fixed costs. Personnel costs, Internet bandwidth and leasing charges, hardware
and software amortization costs and payments to content providers constituted
approximately 38%, 33%, 7% and 1%, respectively, of our cost of revenues in
1999.
Product Development Expenses. Our product development expenses increased to
$427,000 in 1999 compared to $208,000 in 1998. This increase was largely a
result of an increase of $124,000 due to the increase in the number of
personnel and related personnel costs, as well as the costs incurred during the
preliminary project stage of new product development projects, such as the
development of our branded content channels and the upgrading of our Chinese
key word search software and e-mail service. In addition, we established a
business development department in 1999. Personnel costs constituted
approximately 61% of our product development expenses in 1999.
Sales and Marketing Expenses. Our sales and marketing expenses increased to
$1,758,000 in 1999 compared to $351,000 in 1998. This increase was primarily
due to an increase of $1,043,000 related to the launch of our new advertising
campaign, including print, radio and billboard advertising, as well as an
increase of $199,000 in personnel costs associated with the expansion of our
sales and marketing staff to 30 persons in 1999 from 15 persons in 1998. Prior
to 1999, we did not incur any advertising costs. Advertising expenses
constituted approximately 59% of our sales and marketing expenses in 1999.
General and Administrative Expenses. Our general and administrative expenses
increased to $1,270,000 in 1999 compared to $308,000 in 1998. This increase was
mainly caused by an increase of $176,000 related to the hiring of additional
administrative personnel, increased professional service fees of $425,000 and
costs associated with the opening of our Guangzhou office. In addition, we
recognized $60,000 in expenses associated with services provided by affiliates
of one of our shareholders in 1999. Personnel costs and professional service
fees constituted approximately 20% and 41% of our general and administrative
expenses in 1999.
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<PAGE>
Stock-Based Compensation Expenses. Our stock-based compensation expenses
were $46,000 in 1999. This amount represents the amortization during this
period of our deferred stock-based compensation relating to stock options
granted in 1999. We did not incur stock-based compensation expenses in 1998.
Operating Loss
As a result of the foregoing, we had an operating loss of $3,460,000 in
1999 compared to $610,000 in 1998.
Interest Income
Interest income increased to $25,000 in 1999 compared to $23,000 in 1998.
This increase was primarily due to increased cash balances held at bank
accounts or invested in short-term instruments or certificates of deposit.
Net Loss, Accretion on Mandatorily Redeemable Convertible Preferred Stock,
Income Tax and Net Loss Attributable to Common Stockholders
As a result of the foregoing, our net loss increased to $3,449,000 in 1999
compared to $615,000 in 1998. Accretion on mandatorily redeemable convertible
preferred stock was $917,000 in 1999 compared to $244,000 in 1998. As we have
incurred losses since inception, no provision for income taxes has been made.
Net loss attributable to common stockholders was $4,366,000 in 1999 compared
to $859,000 in 1998.
Comparison of the Years 1998 and 1997
Revenues
Our revenues increased to $472,000 in 1998 compared to $78,000 in 1997.
This increase was primarily due to an increase in the number of advertising
contracts and in the average size of the contracts, including a sponsorship
arrangement with Intel for a fixed fee of $150,000. Approximately 78% of our
revenues in 1998 were attributable to new customer sales and approximately 22%
were attributable to sales to customers existing in the prior year.
Substantially all of our revenues in 1997 were attributable to new customer
sales.
Costs and Expenses
Cost of Revenues. Our cost of revenues increased to $215,000 in 1998
compared to $19,000 in 1997. This increase was primarily due to the launching
of our online directory and search engine and
improvements to our infrastructure, which resulted in significantly higher
expenditures related to Internet access and bandwidth leasing, personnel and
other production costs. Personnel costs increased by $99,000 and constituted
approximately 52% of our cost of revenues in 1998.
Product Development Expenses. Our product development expenses increased to
$208,000 in 1998 compared to $50,000 in 1997. This increase was largely due to
an increase of $109,000 in personnel costs related to the increase of our
product development team from six persons in 1997 to 23 persons in 1998.
During 1998, we also launched our online directory and search engine and
continued to make enhancements to our Web site. Personnel costs constituted
approximately 66% of our product development expenses in 1998.
Sales and Marketing Expenses. Our sales and marketing expenses increased to
$351,000 in 1998 compared to $94,000 in 1997. This increase was primarily due
to an increase of $137,000 resulting from higher sales and marketing personnel
costs and related expenses. These costs and expenses constituted approximately
80% of our sales and marketing expenses in 1998.
General and Administrative Expenses. Our general and administrative
expenses increased to $308,000 in 1998 compared to $75,000 in 1997. This
increase was mainly a result of an increase in personnel costs of $54,000 due
to the hiring of additional personnel, increased professional service fees of
$77,000 and costs associated with the opening of our Shanghai office.
Personnel costs and professional service fees constituted approximately 26%
and 31% of our general and administrative expenses in 1998.
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Stock-Based Compensation Expenses. We did not have any stock-based
compensation expenses in 1998 and 1997.
Operating Loss
As a result of the foregoing, we had an operating loss of $610,000 in 1998
compared to $160,000 in 1997.
Interest Income
We had interest income of $23,000 in 1998, mainly as a result of cash
balances held in interest bearing accounts or invested in short-term
instruments or certificates of deposit. We did not have any interest income in
1997, as all of our cash balances were held in non-interest bearing accounts.
Net Loss, Accretion on Mandatorily Redeemable Convertible Preferred Stock,
Income Tax and Net Loss Attributable to Common Stockholders.
As a result of the foregoing, our net loss increased to $615,000 in 1998
compared to $160,000 in 1997. Accretion on mandatorily redeemable convertible
preferred stock was $244,000 in 1998. No mandatorily redeemable convertible
preferred stock was issued in 1997. As we have incurred losses since
inception, no provision for income taxes has been made. Net loss attributable
to common stockholders was $859,000 in 1998 compared to $160,000 in 1997.
Quarterly Results of Operations
The following table sets forth, for the periods presented, our unaudited
quarterly results of operations for the eight fiscal quarters ended March 31,
2000. The data have been derived from our unaudited consolidated financial
statements, and in our management's opinion, they have been prepared on
substantially the same basis as the annual financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair statement of the financial results for the periods presented. This
information should be read in conjunction with the annual financial statements
included elsewhere in this prospectus. The operating results in any quarter
are not necessarily indicative of the results that may be expected for any
future period.
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------
June 30, September December March 31, June 30, September December March 31,
1998 30, 1998 31, 1998 1999 1999 30, 1999 31, 1999 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 75 $ 62 $ 309 $ 233 $ 434 $ 401 $ 549 $ 842
Costs and expenses:
Cost of revenues(1).... 25 41 129 172 272 494 638 811
Product
development(1)........ 39 58 82 55 84 116 172 348
Sales and
marketing(1).......... 45 85 185 126 163 465 1,004 1,533
General and
administrative(1)..... 48 96 125 163 250 377 480 516
Stock-based
compensation.......... -- -- -- -- 36 6 4 129
----- ----- ----- ----- ----- ------- ------- -------
Total costs and
expenses............ 157 280 521 516 805 1,458 2,298 3,337
----- ----- ----- ----- ----- ------- ------- -------
Operating loss.......... (82) (218) (212) (283) (371) (1,057) (1,749) (2,495)
Interest income......... 2 6 15 7 5 6 7 31
Interest expense --
related party.......... (3) -- -- -- -- (14) -- --
----- ----- ----- ----- ----- ------- ------- -------
Net loss................ (83) (212) (197) (276) (366) (1,065) (1,742) (2,464)
Accretion on mandatorily
redeemable preferred
stock.................. (32) (87) (114) (114) (114) (118) (571) (1,559)
----- ----- ----- ----- ----- ------- ------- -------
Net loss attributable to
common stockholders.... $(115) $(299) $(311) $(390) $(480) $(1,183) $(2,313) $(4,023)
===== ===== ===== ===== ===== ======= ======= =======
</TABLE>
- --------------------
(1) Excluding stock-based compensation. See our consolidated financial
statements.
43
<PAGE>
Liquidity and Capital Resources
To date, we have primarily financed our operations through the sale of our
preferred stock, a one-time extension of an interim loan from one of our
shareholders, which was converted into shares of our Series C preferred stock
as part of our Series C preferred stock financing in October of 1999, and a
short-term bank in March 2000. As of March 31, 2000, we had approximately
$33,106,000 in cash and cash equivalents.
Net cash used in operating activities was $2,351,000 for the three months
ended March 31, 2000 compared to $341,000 for the same period in 1999. Net cash
used in operating activities was $1,720,000 in 1999 compared to $678,000 in
1998. To date, we have experienced significant negative cash flows from
operating activities. Costs associated with increases in personnel and
increased sales and marketing initiatives contributed to our negative cash flow
position.
Net cash used in investing activities was $1,325,000 for the three months
ended March 31, 2000 compared to $66,000 for the same period in 1999. Net cash
used in investing activities was $2,521,000 in 1999 compared to $227,000 in
1998. Net cash used in investing activities during these periods primarily
resulted from the purchase of fixed assets and computer software from third
party vendors.
Net cash provided by financing activities was $32,858,000 for the three
months ended March 31, 2000 compared to $0 for the same period in 1999. Net
cash provided by financing activities was $6,933,000 in 1999 compared to
$2,026,000 in 1998. Net cash provided by financing activities for the three
months ended March 31, 2000 primarily consisted of the issuance of our Series D
preferred stock for $30.0 million and a short-term bank loan for $2,899,000
which has been subsequently repaid. Net cash provided by financing activities
during 1999 primarily consisted of the interim loan of $1.5 million from one of
our shareholders and the issuance of our Series C preferred stock for
$5.4 million.
Net cash used in operating activities was $678,000 in 1998 compared to
$46,000 in 1997. Significant uses of cash in operations that contributed to our
negative cash flow position in 1998 include costs associated with our marketing
initiatives, technology development and increased staffing in our content
aggregation and business operations.
Net cash used in investing activities was $227,000 in 1998 compared to
$30,000 in 1997. Net cash used in investing activities during these periods
related to the purchase of fixed assets.
Net cash provided by financing activities was $2,026,000 in 1998 compared to
$100,000 in 1997. The 1997 amounts represented loans and investments from our
founders. In 1998, net cash provided by financing activities primarily
consisted of proceeds from the sale of Series B preferred stock.
Our principal commitments consist of obligations outstanding under lease
contracts for our office space in Beijing. We made capital expenditures of
approximately $0.9 million in 1999, and expect to make capital expenditures
totaling approximately $4.0 million for 2000 and $13.0 million for 2001. The
capital expenditures in 1999 principally consisted of purchases of, or
investments in, our network infrastructure. We expect our capital expenditures
in 2000 and 2001 to primarily consist of purchases of additional servers,
computer software and workstations. In addition, we expect that our capital
expenditures will increase significantly in the future as we make technological
improvements to our network infrastructure and enter into strategic joint
ventures or acquisitions. We also intend to upgrade our financial and
accounting systems and infrastructure. In addition to capital expenditures, we
have substantial future cash needs for our planned substantial future increases
in expenses, including sales, marketing, promotional and work force expenses
and bandwidth leasing charges.
Our net accounts receivable balance increased significantly from $401,000 at
December 31, 1999 to $776,000 at March 31, 2000. The number of days sales
outstanding in accounts receivable also increased from an average of 55 days
during 1999 to 77 days during the first quarter of 2000. These increases were
primarily due to the fact that our resources devoted to accounts receivable
collection did not catch up with our revenue
44
<PAGE>
growth. During March and April 2000, we have: (1) increased staff dedicated to
billing and collections; (2) tied our sales staff's commissions to accounts
receivable collections; and (3) in some cases, required prepayments for our
advertising contracts.
We believe that our current cash and cash equivalents, cash flow from
operations and the proceeds from this offering will be sufficient to meet our
anticipated cash needs, including for working capital and capital expenditures,
for at least the next twelve months. We may, however, require additional cash
resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If these
sources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or to obtain a credit facility. The sale
of additional equity or convertible debt securities could result in additional
dilution to our shareholders. The incurrence of indebtedness would result in
increased fixed obligations and could result in operating and financial
covenants that would restrict our operations. We cannot assure you that
financing will be available in amounts or on terms acceptable to us, if at all.
Holding Company Structure
We are a holding company with no operations other than our ownership of
Beijing ITC, our wholly-owned subsidiary in the PRC that, together with Beijing
Sohu, owns and conducts our entire Internet business. As a result, we rely on
dividends and other distributions paid by Beijing ITC, including the funds
necessary to service any debt we may incur. If Beijing ITC incurs debt on its
own behalf in the future, the instruments governing the debt may restrict
Beijing ITC's ability to pay dividends or make other distributions to us. In
addition, PRC legal restrictions permit payment of dividends to us by Beijing
ITC only out of U.S. Beijing ITC's net income, if any, determined in accordance
with PRC accounting standards and regulations. Under PRC law Beijing ITC is
also required to set aside a portion of its net income, if any, each year to
fund certain reserve funds. These reserves are not distributable as cash
dividends. See note 5 to our consolidated financial statements included in this
prospectus.
Taxation
Sohu is subject to income taxes in the United States while our PRC operating
subsidiary, Beijing ITC, is subject to income tax in the PRC.
Beijing ITC is subject to the Income Tax Law of the People's Republic of
China concerning Foreign Investment Enterprises and Foreign Enterprises and
various local tax laws. Under these tax laws, Beijing ITC is subject to income
tax at a statutory rate of 33% (30% state income taxes plus 3% local income
taxes) on PRC taxable income. Although Beijing ITC's income is generally not
taxable in the United States, dividends distributed from Beijing ITC to our
company are subject to income tax in the United States. Under the applicable
PRC tax laws, these dividends are exempt from withholding tax in China. Subject
to certain limitations, the income taxes paid by Beijing ITC on its earnings
are creditable against Sohu's tax liabilities in the United States.
Sohu and Beijing ITC have not paid any income taxes because we have incurred
losses since inception. As of December 31, 1999, we had a net operating loss
for U.S. federal income tax purposes of $689,000 and a net operating loss for
PRC income tax purposes of $2,915,000 available to offset future U.S. federal
and PRC income tax liabilities, respectively. The net operating loss for U.S.
federal income tax purposes will expire from 2012 to 2020, while the net
operating loss for PRC income tax purposes will expire from 2002 to 2004. We
have provided a full valuation allowance against deferred tax assets relating
to these net operating losses due to the uncertainty surrounding their
realization.
China contribution plan and profit appropriation
Beijing ITC participates in a government-mandated, multi-employer defined
contribution plan, through which employees receive retirement, medical and
other welfare benefits. PRC labor regulations stipulate that
45
<PAGE>
Beijing ITC must pay a monthly contribution to the local labor bureau. The
monthly contribution rate is based on the monthly basic compensation amount of
qualified employees. Beijing ITC has no further commitments beyond its monthly
contribution, and the relevant local labor bureau is responsible for meeting
all retirement benefit obligations.
Under applicable PRC laws, Beijing ITC is required to make appropriations
from after-tax profit to non-distributable reserve funds which are determined
by its board of directors. These reserve funds must include a general reserve,
an enterprise expansion fund and a staff bonus and welfare fund. Ten percent of
after-tax profit (as determined under PRC GAAP) must be put in the general
reserve fund per annum, while the other fund appropriations are at Sohu's
discretion. Since Beijing ITC is in a loss position, no appropriations have
been made.
Foreign Currency Exchange Losses
While our reporting currency is the U.S. dollar, to date virtually all of
our revenues and costs are denominated in Renminbi and a significant portion of
our assets and liabilities are denominated in Renminbi. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be impacted by fluctuations in the exchange rate between U.S. Dollars and
Renminbi. If the Renminbi depreciates against the U.S. Dollar, the value of our
Renminbi revenues and assets as expressed in our U.S. Dollar financial
statements will decline. We do not hold any derivative or other financial
instruments that expose us to substantial market risk. See "Risk Factors -- We
may suffer currency exchange losses if the Renminbi depreciates relative to the
U.S. Dollar". See note 3 to our consolidated financial statements included in
this prospectus.
The Renminbi is currently freely convertible under the "current account",
which includes dividends, trade and service-related foreign exchange
transactions, but not under the "capital account", which includes foreign
direct investment. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk. While we
may decide to enter into hedging transactions in the future, the effectiveness
of these hedges may be limited and we may not be able to successfully hedge our
exposure at all. Accordingly, we may incur economic losses in the future due to
foreign exchange rate fluctuations which may have a negative impact on our
financial condition and results of operations.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.133,
which is effective, as amended, for all quarters in fiscal years beginning
after June 15, 2000, establishes accounting and reporting standards for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. As we do not currently engage
in derivative or hedging activities, we do not expect the adoption of this
standard to have a significant impact on our consolidated financial statements.
46
<PAGE>
BUSINESS
Overview
We are a leading Internet portal in China in terms of brand recognition,
page views and registered users. During the seven-day period ended May 20,
2000, we averaged in excess of 12.4 million page views per day. Our mission is
to make Sohu an indispensable part of the daily life of every person in China.
Our portal consists of sophisticated Chinese language Web navigational and
search capabilities, 12 main content channels, Web-based communications and
community services and a platform for e-commerce services. As of May 20, 2000
our online directory contained over 250,000 Chinese language Web listings, each
reviewed and classified by our editorial staff. In addition, we have
contractural content relationships with over 85 Chinese language media and
information providers. Each of our interest-specific main channels contains
multi-level sub-channels that cover a comprehensive range of topics, including
news, business, entertainment, sports and career. We also promote user affinity
to Sohu by providing free Chinese language e-mail, online bulletin boards, chat
rooms and instant messaging. All of our products and services are designed to
meet the specific interests and needs of Internet users in China.
We are a pioneer of the Internet industry in China, having introduced the
first Chinese language online directory and search engine. We have exclusively
targeted the Internet market in China since our inception. Our Web site is
tailored to the particular thinking and viewing habits of Internet users in
China. According to a survey conducted in December 1999 by Hui Cong Research,
one of the largest information technology market research firms in the PRC,
Sohu was the most favored Chinese language Web site among PRC Internet users.
In addition, according to studies commissioned by our company and conducted by
The Gallup Organization in February and April 2000 in three of the largest
cities in the PRC (Beijing, Shanghai and Guangzhou), Sohu had the highest
overall level of unaided Web site awareness among Internet users.
As a leading Internet portal in China, we are well positioned to capitalize
on the emergence of the Web as a new advertising medium and commerce platform
in China. We believe that by providing a well tuned and highly relevant
navigational context and comprehensive range of China-specific content, we
provide advertisers and merchants with targeted access to an audience with
highly desirable demographic profiles. To expand our user and revenue base, we
began offering free Web-based e-mail in July 1999 and, as of May 20, 2000, we
had over 2.2 million registered e-mail users. We offer a universal registration
system, whereby a user that has registered for our e-mail service is
automatically registered for our chat, bulletin board, instant messaging and
other services. We have attracted several strategic investors, including Dow
Jones & Company, Inc., Intel Corporation, an affiliate of Pacific Century
Cyberworks Limited, an affiliate of Legend Holdings Limited and Hikari Tsushin,
Inc.
Industry Background
The Internet has developed into a significant global mass medium that allows
millions of people worldwide to find information, interact with others and
conduct business electronically. International Data Corporation, or IDC,
estimates that the number of Internet users worldwide will grow from
approximately 196.1 million at the end of 1999 to approximately 502.4 million
by the end of 2003. The rapidly growing number of users and the ability of
corporations to effectively target them has led to online advertising and
e-commerce opportunities. According to Forrester Research, the dollar value of
Internet advertising worldwide is expected to increase from approximately $3.3
billion in 1999 to approximately $24.1 billion in 2003. In addition, IDC is
also projecting an increase in e-commerce transactions on the Internet from
$111.4 billion in 1999 to approximately $1,317 billion in 2003.
The Growth of the Internet in China
Internet use in China has grown rapidly in recent years and is expected to
significantly outpace growth in worldwide Internet use over the next several
years. According to IDC, between January 1, 1999 and
47
<PAGE>
December 31, 1999, the number of PRC Internet users increased from
approximately 2.4 million to approximately 3.8 million. In addition, IDC
projects the number of Internet users in China will grow to approximately 25.2
million in 2003.
Increased competition among telecommunications providers and increased
infrastructure spending have accelerated network infrastructure improvements.
Together with significant decreases in charges for telephone installation and
usage and Internet access, these factors have contributed, and are expected to
continue to contribute, to the growth of Internet use in China. Furthermore,
personal computer penetration in urban centers in China has increased rapidly,
and we expect this penetration rate to continue to increase as prices of
personal computers decline. In addition, the potential for Internet access
through alternative devices, such as television set-top boxes and wireless
telephones, as well as the development of broadband Internet access services,
may further accelerate the growth of the number of Internet users in China.
According to the PRC National Bureau of Statistics, as of December 31, 1998,
there were approximately 330 million households, of which 90% owned
televisions, and, per the Ministry of Information Industry, approximately 40
million cellular telephone users in China.
As Internet use becomes more pervasive in China, and as the PRC online
population continues to develop and expand, the opportunities for online
advertising and commerce will also expand. Although China's per capita GDP is
relatively low, there is a large and growing segment of the population that is
well educated and relatively affluent and has demonstrated a willingness to
embrace new technologies. For example, according to statistics published by the
PRC National Bureau of Statistics and estimates prepared by the MII, the number
of cellular subscribers in China grew from approximately 1.6 million
subscribers in 1994 to approximately 40 million subscribers in 1999.
Zenith Media estimates that advertising expenditures for television,
newspapers, magazines, TV, radio and other traditional media in China totaled
over $4.1 billion in 1999. In addition, Forrester Research estimates that the
aggregate online advertising market in China in 1999 was only $8.0 million. As
the number of Internet users increases, we believe that online advertising will
capture an increasing percentage of the overall PRC advertising market. Zenith
Media has estimated that in 2002 China's overall advertising market will total
$6.1 billion, while Forrester Research has estimated that China's online
advertising market will total $100.0 million in 2002 and $440.0 million in
2004. Similarly, the volume of e-commerce transactions in China is expected to
increase significantly as the online population expands. According to IDC,
total e-commerce revenue in China is expected to grow from approximately $43.0
million in 1999 to approximately $11.7 billion in 2004.
The projected amounts set forth above have been derived from or copied from
market research reports. You should note that there can be no assurance any of
these projected amounts will be achieved.
Unique Challenges and Demands of China's Internet Market
We believe that China's Internet market faces the following unique
challenges and demands:
. Demand for Chinese directories and local content tailored for Internet
users in China. PRC Internet users demand content and services that are
distinct from those offered in the overseas Chinese language Internet
markets, such as Hong Kong, Taiwan and the North American Chinese
communities. China uses a simplified version of the Chinese characters
while the overseas Chinese-speaking population typically uses the
traditional characters. The distinct cultural and historical background
of China's Internet users also translates into viewing and thinking
habits that are distinct from those in other markets. This requires not
only that online directories and content contain different information,
but that such information be uniquely structured to best reflect such
viewing and thinking habits in order to provide users with the most
user-friendly online experience.
. Chinese language is not key word search-friendly. Key word searches in
Chinese are more complicated than searches in English and require
specially designed software. In particular, sentences
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in Chinese are made up of phrases, equivalent to words in English, that
consist of one to several characters. Unlike in English where words in a
sentence are separated by spaces, Chinese phrases with varying numbers
of characters are not separated out in a sentence. Therefore, Chinese
text must be indexed to separate out the phrases before they can be
subjected to key word/phrase searches. In addition, a Chinese phrase
generally has more synonyms or closely associated phrases than the
equivalent English word, which makes it crucial to develop a
comprehensive database of synonyms and closely associated phrases for an
effective Chinese key word search function. The fact that each character
in Chinese requires twice the number of bytes needed for a letter in
English may also create additional software complications.
. Limited Bandwidth Resources. The telecommunications infrastructure in
China remains underdeveloped. In particular, bandwidth remains
relatively expensive and scarce, posing significant challenges to Web
sites that encounter heavy and fluctuating traffic. In addition, the
services provided by network backbone operators and server hosting
facilities are still relatively poor. Moreover, most users in China
currently access the Web through low-speed dial-up modems. As a result,
Internet companies offering content and services in China must design
their operations within the confines of these technological constraints
and execute their business strategies accordingly.
. Underdeveloped product distribution networks and payment systems hinder
the growth of e-commerce. The most important factor affecting the
development of e-commerce in China is the availability of efficient
product distribution channels that provide timely and satisfactory
fulfillment of purchase orders. As China currently does not have a
reliable nationwide product distribution network, the fulfillment of
goods purchased over the Internet will continue to be a factor
constraining the growth of e-commerce. Furthermore, an additional
barrier to the development of e-commerce is the lack of reliable payment
systems. In particular, the use of credit cards or another viable means
of electronic payment in sales transactions in China is not as well
developed as some other countries, such as the United States.
. The business and regulatory environment in China is often uncertain and
difficult to understand and navigate. The business and regulatory
environment in China remains poorly understood by most businesses
outside China. China has only recently transformed itself from a
predominantly socialist economy to a market-oriented economy, and many
industries are still monopolized by state-owned companies. Business
relationships are often defined by past practices and mutual
understandings as opposed to precise contractual provisions. As a
result, foreign companies, including overseas Chinese companies, often
find China's business environment frustrating. In addition, the
regulatory environment for the Internet in China and for businesses in
general remains uncertain in many respects. Without extensive knowledge
about China, businesses often fail to effectively interact with
regulators and such failure may result in fatal delays in their strategy
execution. The distinctiveness of the PRC Internet market from the other
overseas Chinese markets also limits the advantages a regional Internet
business may gain by leveraging across the mainland China and overseas
Chinese markets, especially since the mainland China market is expected
to be far larger than other overseas Chinese markets within several
years.
The Sohu.com Solution
We have developed our portal to address the unique challenges and needs of
China's Internet market. We believe that our success to date is attributable to
the following factors, and we believe that these factors will continue to be
our competitive strengths:
Exclusive Focus on Mainland China
We focus exclusively on the Internet market in China. Our products and
services are tailored to the specific interests, needs and viewing habits of
our PRC Internet users. We have based our operations in China since our
inception, and substantially all of our employees are based in the PRC. Our
local presence allows us
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to better understand the needs of advertisers and business partners that
operate in China, and to build and maintain strong relationships with them. For
example, we have established contractual content relationships with over 85
Chinese language media and information providers. Moreover, as a result of our
local presence, we are able to maintain a regular dialogue with the relevant
PRC regulatory authorities, and consequently we believe we are better attuned
to operating an Internet business within the existing PRC business and
regulatory environment.
First Mover Advantage and Brand Leadership
We are a pioneer of the Internet industry in China, having introduced the
first Chinese language online directory and search engine. According to a
survey conducted in December 1999 by Hui Cong Research, one of the largest
information technology market research firms in the PRC, Sohu was the most
favored Chinese language Web site among PRC Internet users. In addition,
according to studies commissioned by our company and conducted by The Gallup
Organization in February and April 2000 in three of the largest cities in the
PRC (Beijing, Shanghai and Guangzhou), Sohu.com had the highest overall level
of unaided Web site awareness among Internet users. A significant part of our
branding strategy revolves around the creation of public awareness of Sohu when
we introduce new concepts and standards to PRC Internet users. In so doing, we
believe we have become synonymous with the evolution and development of the PRC
Internet industry. Our brand recognition has enabled us to attract a growing
user audience and leading companies as advertisers and e-commerce partners.
Proprietary Web Navigational and Search Capabilities
Our Sohu online directory, the centerpiece of our portal, was carefully
designed and has been continuously refined to reflect the unique cultural
characteristics and thinking and viewing habits of PRC Internet users. As of
April 30, 2000, our online directory contained over 250,000 Chinese language
Web listings, each reviewed and classified by our editorial staff. We currently
receive approximately 1,000 requests every day from other Web sites for
inclusion in our directory. Most Web site listings in our directory are
classified in multiple subcategories, and each site sits at the end point of,
on average, three different paths in our directory. As a result, our directory
is highly complex, proprietary and China-specific, and we believe it would be
very difficult for our competitors to duplicate our directory. In addition, our
customized Web search software is designed to meet the unique challenges posed
by the Chinese language and its pictographic characters. In particular, our
large database of Chinese synonyms and closely associated phrases enables users
to execute key word searches effectively both for Web site listings and within
our content channels.
Highly Attractive Platform for Advertising and Commerce
We believe that Sohu is a highly attractive platform for advertisers and
merchants because we have a leading Internet brand in China and provide access
to a user group with a highly desirable demographic profile. We have developed
a client service group dedicated to enhancing our relationship with advertisers
and maximizing the effectiveness of their advertising campaigns. We also
provide advertisers with detailed and timely data regarding the number of
advertisements displayed and the number of users who clicked through for
additional information. Moreover, we intend to take advantage of our high
visitor traffic by developing a user-friendly e-commerce platform that will
allow merchants with the necessary fulfillment capabilities to easily transact
business on our Web site. We also plan to facilitate transactional activity by
handling order tracking as well as product database management. In addition, we
are working with a number of commercial banks in China on the development of
reliable electronic payment systems.
Technical Expertise in Dealing with Bandwidth Limitations
Bandwidth limitations resulting from the underdeveloped telecommunications
infrastructure and server hosting environment in China may adversely affect the
ability of a Web site to accommodate and process heavy
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Web traffic reliably and quickly. As a result of our experience in China, we
believe we have substantial technical expertise and are an industry leader in
designing our operations within the confines of these technological
constraints. We constantly seek to conserve our bandwidth resources by
adjusting and fine-tuning our network and traffic routing configurations to
minimize passing traffic between our servers. In addition, all of our sites are
designed to maximize download speed, and our content aggregation is tailored
for a limited bandwidth environment.
Our Strategy
Our objective is to strengthen our position as a leading Internet portal in
China. In order to accomplish this objective, we plan to:
Maintain and Extend Our Brand Recognition
We intend to continue building our brand and strengthening our brand
leadership in China through:
. focusing our marketing efforts on increasing user registration;
. promoting services and features that target the youth market;
. building new marketing and distribution relationships;
. leveraging the media attention and publicity afforded to Sohu in our
capacity as a pioneer of the PRC Internet industry; and
. sponsoring television shows, newspaper columns, events and concerts.
Increase the Number of Visitors to Our Portal and the Duration of Each Visit
In addition to our marketing efforts, we intend to increase the number of
visitors to our portal, as well as the duration of each visit to our portal
(commonly referred to as the "stickiness" of our Web site), through continuing
efforts to improve our content, online directory and search engine, including
the following measures:
. leverage our brand leadership in China to build new content, advertising
and e-commerce relationships and add new product offerings;
. continue to add new utility features and communication tools to extend
the function/solution aspects of our content channels with the goal of
making our portal an indispensable source of solutions and information
for our users; and
. enhance our community offerings and increase interactivity among users;
. enable our users to personalize and customize the comprehensive range of
products, services and utility features we offer;
. continue to integrate our channels and sub-channels to better reflect
the thinking and viewing habits of Chinese online users and create
maximum ease of use and simplicity;
. continue our focus on increasing the download speed of our sites and
maintaining the high quality and uniform appearance of our sites.
Increase Online Advertising Revenues and Develop an E-Commerce Business
We plan to increase our online advertising revenue streams by increasing the
number of advertisers and, as the user base grows, increasing our net
advertising rates. We also intend to increase the number of Web site
sponsorship arrangements with leading advertisers in China, which are of longer
term and higher value than typical banner advertising sales arrangements. We
plan to achieve this mainly by expanding our sales force
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targeting large corporations and Internet companies, as well as continuing to
improve the quality of our client services group. Furthermore, we plan to
increase user registration and enhance our advertising measurement capabilities
in order to gain a better understanding of our user demographics and improve
our ability to target advertisement delivery.
We also plan to leverage our brand recognition and heavy traffic volume to
generate revenues from e-commerce activities. In particular, we intend to
become an aggregator of online merchants by providing online space on our
portal to third party merchants. Companies that have sold products on a trial
basis on our Web site include Motorola (pagers) and Compaq (personal
computers). In addition to providing merchants with access to our users, we
plan to provide order tracking, product database management and payment
facilities. Presently, we have no intention to handle direct-to-customer
product fulfillment. We intend to charge online merchants fees and, in some
cases, commissions for e-commerce transactions conducted through our portal.
Currently, three merchants are online on our portal.
Acquire Complementary Assets, Technologies and Businesses
We intend to actively identify and acquire assets, technologies and
businesses that are complementary to our existing portal business. We expect to
target our acquisition efforts to businesses that can help us:
. expand our user and revenue base;
. widen geographic coverage within China;
. enhance our content and service offerings;
. advance our technology; and
. strengthen our technical talent pool.
The Sohu.com Portal
The following is a brief description of the products and services we offer
under the main categories of home page and navigational context, aggregated
content, communication tools and e-commerce services. We intend to continue to
add new products and services to our portal, to better integrate our products
and services and to expand the function/solution aspects of our content
channels. In 1999, a majority of our revenues were derived from online
advertising on our home page and our Business and Finance, Technology and
Learning channels.
Home Page and Navigational Context Aggregated Content
Online Directory Main Channels:
Search Engine News
Business and Finance
Communication Tools
Dow Jones
Free E-Mail Sports
Information Technology
Chat Rooms
Instant Messaging Women
Message Boards Entertainment
Online Polling
Music
Learning
E-Commerce Services Career
Real Estate
Shopping Channel
Games
Auction Channel
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Home Page and Navigational Context
Our portal is organized around the Sohu.com home page and the central
feature of our home page is our online directory. A screen shot of our home
page is included on the inside front cover of this prospectus.
Online Directory. Our online directory was designed and has been
continuously refined to reflect the unique cultural characteristics and
thinking and viewing habits of PRC Internet users. We are the first site in
China to introduce manual Web classification, and Chinese Web site
classification remains one of our key strengths. On average we add
approximately 400 new listings (less deletions of inactive Web links) to our
directory per day. As of April 30, 2000, our directory contained over 250,000
Chinese language Web listings under the following 18 principal categories:
Arts Literature Science/Technology
Business/Finance Living/Service Social Sciences
Computer/Internet Medicine/Health Society/Culture
Country/Region News/Media Sports/Exercise
Education Politics/Law Travel/Transportation
Entertainment/Leisure Reference
Personal Homepage
Our Web sites are further organized under these principal categories within
approximately 550 hierarchical subcategories and, as appropriate, individual
Web items are referenced under multiple subcategories. Each site sits at the
end point of, on average, three different paths in our directory. In addition,
each site has been reviewed and classified by our editorial staff, and our
basic Web site listings are in most cases supplemented by a brief descriptive
commentary. As a result, our directory is highly complex, proprietary and
China-specific, and we believe it offers comprehensiveness and relevance that
would be very difficult for our competitors to duplicate.
Search Engine. Users can browse our directory listings through a Chinese
keyword search request that scans the contents of the entire directory or
within any category or subcategory. Our search software enables us to build and
continuously fine-tune a large database of Chinese synonyms and closely
associated phrases, which is essential for the accurate and efficient execution
of Chinese key word searches. We believe our large database is also difficult
for our competitors to duplicate.
We also offer a function called "Global Web Search". The Global Web Search
uses our proprietary association database to browse the World Wide Web and
collect and organize Chinese language Web content.
In addition, users can access the co-branded Snap/Sohu search to surf the
Web in English.
Aggregated Content
We aggregate content on a variety of topics, organized around the above-
mentioned 12 main channels. Each main channel contains numerous sub-channels
and features news, commentaries and various utilities and solutions relating to
a specific topic. As of April 30, 2000, we had over 85 content suppliers, which
enable us to provide a wide range of content offerings. Our content suppliers
are leading Chinese language media and information providers in a variety of
fields with coverage over all major cities in China. The arrangements we have
with our content suppliers are typically short-term and not exclusive and often
provide for revenue sharing as compensation to our content suppliers.
All of our channels, including co-branded third party content on our portal,
are defined by the following features that together constitute the distinct
Sohu "look and feel": the Sohu.com logo, our "search fox" mascot that displays
different postures in different channels, the navigation bar, the color
combination, the size and type of the Chinese characters, the large spacing
used in our directories and the reporting style. The first row of the
navigation bar remains the same in each channel, listing the 12 main channels
as set forth below, but the links in the second row of the navigation bar are
selected to reflect users' interests in that specific channel.
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Main Content Channels:
News Delivers a comprehensive selection of local, national
and international news from newspapers, magazines and
other information providers throughout China. Full
text search is available on each page.
Business and Features business and financial news provided by
Finance leading financial information services in China, as
well as content translated and updated by the Dow
Jones team in Beijing. This channel also features a
co-branded Dow Jones Business Center that is popular
among Chinese professionals. Users can retrieve real-
time stock quotes, exchange rates and annual reports,
research reports and other information on selected
companies on this channel.
Dow Jones Delivers business, financial and other information
provided by Dow Jones & Company, Inc. This channel
primarily focuses on international business and
financials news.
Sports Provides the latest in national and international
sports headlines, results, commentaries and analyses.
Users can also compete in contests over national
soccer tournament rankings and participate on our
sports bulletin board.
Information Features information technology news, product reviews
Technology and software downloads. This channel also provides
Web navigation handbooks for Internet novices, as
well as Webmonkey China (translated daily from
HotWired), which offers Web design tutorials for
sophisticated Web users.
Women Covers a broad range of lifestyle-related topics that
are of particular interest to Chinese women. This
channel includes content from fashion publications,
such as the Chinese editions of Cosmopolitan and
Trends magazines, as well as publications covering
beauty, society, travel and other areas.
Contains extensive coverage of the entertainment
Entertainment arenas that are of interest to Chinese users,
including dining, movies, television programs, plays
and operas and best-selling and classic books.
Music Covers music stars, events, record releases and other
news and reports relating to the music industry, as
well as music rankings in China, Taiwan, Hong Kong
and the United States. This channel also offers music
downloads, interviews and contests.
Learning Provides educational resources and information. This
channel is unique among Chinese language portals, and
introduces the Internet and Sohu.com to many
children. Intel financially sponsored the
establishment of this channel, and we developed this
channel with top providers of electronic publishing
education programs in China.
Career Provides job listings and resume databases, as well
as career advice and career-related news and reports.
Real Estate Offers a directory of apartment and other residential
housing listings, and publishes advice on general
real estate matters.
Games
Features news and reviews related to games and a
game-related bulletin board. It also offers free,
downloadable and frequently updated games.
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Communication and Community Tools
We offer a variety of communication and community tools for our Chinese
online users which are important in promoting user affinity to our portal:
Free E-Mail
We began offering free Web-based e-mail services in
July 1999, and as of May 20, 2000, we had over 2.2
million registered e-mail users. We recently upgraded
our e-mail technology.
Chat Room Our Java-based chat services enable participants to
interact in real-time group discussions or create
their own private one-on-one chat rooms. We currently
have chat rooms covering 12 broad interest areas such
as sports, romance, finance and current events. Twice
a week, we host live celebrity chats that offer our
users the chance to discuss a variety of topics with
well-known personalities. For example, in the past,
we have hosted major events on these forums that drew
tens of thousands of participants, such as the July
1999 question and answer session on the PRC national
college entrance examinations.
Instant Messaging Our instant messaging service enables our users to
detect whether their friends and other users with
similar interests are online, as well as send
messages in Chinese directly to them. Our users can
subscribe for specific interest groups and
communicate with people who share similar interests.
Message Boards Users can post and exchange information on message
boards covering 16 main topics ranging from education
and immigration to fashion and sports. On average,
50,000 messages are posted online each day.
Online Polling From time to time our channels place short, focused
pollings covering a variety of topics that are of
interest to our users and advertisers.
E-Commerce Services
We have introduced e-commerce activities on our portal and have conducted
limited e-commerce transactions on a trial basis. We have established an e-
commerce platform, and are in the early stages of actively marketing our e-
commerce services to potential customers. We plan to leverage our brand and
position as a leading PRC Internet portal and utilize our heavy visitor traffic
to develop our e-commerce business. Under our e-commerce business model,
merchants and manufacturers will provide, handle and distribute merchandise,
while banks and technology companies will manage the operational aspects of e-
commerce transactions, such as payment collection and settlement. We will also
work closely with our technology suppliers to further develop and refine our e-
commerce software platform.
Shopping Channel We currently have three merchants on our portal, one
of which is the largest television shopping network
in Beijing. This television shopping network offers
its products on our e-commerce platform, and handles
all matters relating to product fulfillment. All
transactions are settled either through debit cards
or by cash on delivery.
Auction Channel We have built a business-to-consumer online auction
platform, and we conducted online auctions on our Web
site in September 1999 and December 1999. We intend
to further develop our online auction platform and
may enter into strategic alliances with other online
auction houses.
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Online Advertising Sales
Advertising Programs
Our typical advertising contract involves an advertiser or advertising
agency paying us a fixed fee for displaying an advertisement for a specified
period of time with a guaranteed number of impressions. As our advertising
revenues are recognized ratably over the term of the contract (subject to
meeting the guaranteed impression levels), any increase in our page views over
the life of an advertising contract would not increase our revenues. Our
advertising contracts typically have terms ranging from three to 24 months.
Advertising on our portal currently consists of banner-style advertisements and
buttons from which viewers can hyperlink directly to the advertiser's own Web
site. In addition, we also offer advertisers text links and sponsorships of
subchannels, message boards and chat rooms. Our standard charge in terms of
cost per thousand impressions, commonly referred to as CPMs, for banner
advertisements varies depending on the terms of the contract and the
advertisement's location within our portal.
Discounts from standard rates are typically provided for higher volume,
longer-term advertising contracts, and may be provided for promotional
purposes. We have also, from time to time, performed Chinese language Web site
design services for our advertising customers (although design services are not
a material part of our revenues). In addition, we offer promotional advertising
programs, such as contests and sampling, in order to build brand awareness,
generate leads and drive traffic to an advertiser's site. In the near future,
we plan to increasingly develop Web site sponsorship arrangements with leading
advertisers in China. We expect these arrangements to be of longer term and
higher value than typical banner advertising arrangements.
Advertising Customers
During 1999, 117 companies advertised on our portal, up from 90 advertisers
during 1998 and 40 advertisers during 1997. During 1999, our principal
advertising customers included:
. Intel;
. Legend;
. Motorola;
. Nokia; and
. NBCi/Snap.
We have derived substantially all of our revenues to date from the sale of
online advertising. In 1999, two of our advertisers, Intel and Nokia, each
accounted for over 10% of total revenues. During the same period, our five
largest advertisers accounted for approximately 34% of total revenues. In the
first quarter of 2000, two of our advertisers, Nokia Corporation and
Alibaba.com, each accounted for over 8% of our revenues, and our five largest
advertisers accounted for more than 34% of our revenues and 40% of our accounts
receivable.
In May 2000, the State Administration of Industry and Commerce, or SAIC,
selected 11 Internet companies in China to participate in a one-year online
advertising trial program. The SAIC is expected to formulate online advertising
regulations based on the information gathered during the trial program. We were
selected as one of the Internet companies that will participate in the trial
program. We obtained a one-year advertising business permit from the SAIC on
May 18, 2000.
In January 2000, the Company also entered into long-term advertising
contracts with its Series D Preferred shareholders. Under the contracts, the
Series D shareholders have committed to purchase certain services from the
Company, including banner advertising, sponsorship of website channels,
directory services and use of the Company's e-commerce platform, over the terms
of the contracts, which range from 2 1/2 to 3 years. The contract price will be
paid in quarterly payments over the life of the agreements. The detailed
description of specific services to be provided under these agreements will be
decided over the term of the contracts, with the individual fees for services
consistent with rates charged to the Company's most preferred customers.
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Strategic Relationships
Intel Corporation. Intel Corporation, one of our shareholders, provided
funding of $150,000 toward the creation of our Learning channel. Intel has
also selected us as a primary Internet link in its Pentium III promotion
program in China. As part of the promotion, portions of our Learning and
Shopping channels were Pentium III enabled.
Dow Jones & Company, Inc. Dow Jones & Company, one of our shareholders, is
an important, non-exclusive content provider to our Business and Finance
channel. The Dow Jones team in Beijing translates and updates the latest
business and finance information 40 times a day. Dow Jones also operates
the Dow Jones Business Center within our Business and Finance channel,
which provides categorized and comprehensive business information, and has
been especially popular among Chinese professionals. In addition, Dow Jones
provides us with real-time information on international financial markets.
Furthermore, Dow Jones has the right to sell a portion of our banner
advertising inventories on our Business and Finance channel inside and
outside China. Dow Jones also has the non-exclusive right to sell
advertising for the directories, the keyword search and other channels to
customers who require advertising space beyond the Business and Finance
channel. Dow Jones shares in a percentage of the revenues derived from our
Business and Finance channel. This arrangement has a one-year term which
commenced in December 1999.
NBCi/Snap. We operate an exclusive, co-branded Snap/Sohu search engine for
all English language searches requested by our users. Under this
arrangement, Snap provides us with a customized version of its standard
search and aggregation service free of charge. This arrangement had an
initial term of one year commencing in December 1998, which was
subsequently extended for an additional six months. In addition, Snap paid
us a one-time payment of $50,000 in exchange for advertising on our Web
site.
Pacific Century Cyberworks Limited. We have entered into a non-exclusive
advertising contract at market rates with an affiliate of Pacific Century
Cyberworks Limited. This agreement has a two and a half-year term
commencing July 2000. An affiliate of Pacific Century Cyberworks is one of
our shareholders. Pacific Century Cyberworks is a Hong Kong Stock Exchange
listed company that is primarily involved in Internet technology-related
businesses. Pacific Century Cyberworks recently entered into an agreement
to acquire all of the outstanding shares of common stock of Cable &
Wireless HKT, the leading fixed line and wireless telecommunication
provider in Hong Kong.
Legend Holdings Limited. We have entered into a non-exclusive advertising
contract at market rates with an affiliate of Legend Holdings Limited. This
agreement has a three-year term commencing in January 2000. Legend Holdings
is one of the largest manufacturers of personal computers and other
computer hardware in the PRC. Legend is listed on the Hong Kong Stock
Exchange. An affiliate of Legend Holdings is one of our shareholders.
Hikari Tsushin, Inc. Hikari Tsushin, one of our shareholders, is one of the
leading retail distributors of cellular telephones and paging devices in
Japan. We have entered into a non-exclusive advertising contract at market
rates with Hikari Tsushin. This agreement has a three-year term commencing
in January 2000.
Nokia Corporation. We have entered into a non-exclusive agreement with
Nokia, under which we are Nokia's preferred partner in China for the co-
development of wireless access protocol, or WAP, mobile Internet services,
as well as Nokia's short message service, or SMS. We are currently Nokia's
only content partner for WAP and SMS services in China, and are responsible
for aggregating content and services, such as stock quotes, news, e-mail
and advertising, and tailoring it for mobile telephone users. We commenced
providing content for this WAP service on April 27, 2000. Service and
advertisement revenues derived from WAP-based and SMS-based services will
be shared between our company and Nokia based on a ratio to be agreed upon
at the end of the initial trial phase. This agreement has a one-year term
commencing March 2000.
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Sales and Marketing
Sales Organization
We mainly rely on direct sales by our internal sales force for the placement
of our online advertisement inventory, and plan to expand sales through
agencies outside of China and in regions of China not covered by our direct
sales force. Our sales organization is dedicated to maintaining close
relationships with top advertisers and large multinational corporations
operating in China. As of March 31, 2000, our direct sales organization
consisted of 28 sales staff located in Beijing, Shanghai and Guangzhou. These
offices cover sales in the northern, eastern and southern regions of China,
respectively. We intend to expand and develop our sales organization in our key
markets in China. The compensation package for our sales staff typically
consists of a base salary plus sales commissions.
Marketing and Brand Awareness
The focus of our marketing strategy is to generate brand awareness for
Sohu.com. Since our inception through March 31, 2000, we spent approximately
$3.7 million in sales and marketing expenses, an amount we believe to be much
smaller than that spent by some of our competitors. However, primarily as a
result of the media attention afforded to Sohu in our capacity as a pioneer of
the PRC Internet industry, we have been able to generate substantial public
awareness of Sohu. As of March 31, 2000, our marketing department consisted of
22 persons located in Beijing, Shanghai and Guangzhou.
Competition
There are many companies that distribute online content and services
targeting Chinese users. We compete with distributors of content and services
over the Internet, including Web directories, search engines, content sites,
Internet service providers and sites maintained by government and educational
institutions. These sites compete with us for visitor traffic, advertising
dollars, e-commerce transactions and potential partners. The Internet market in
China is new and rapidly evolving. Competition is intense and is expected to
increase significantly in the future because there are no substantial barriers
to entry in our market.
We have many competitors in the PRC Internet portal market, including
China.com, Netease, Sina.com and Yahoo!China. In addition, a number of existing
or new PRC Internet portals, including those controlled or sponsored by PRC
government entities, may have competitive advantages over us in terms of:
. global brand recognition;
. financial and technical resources; and
. better access to original content.
However, we believe we have competitive advantages over our competitors
because of:
. our brand name, which is one of the most recognized among PRC Internet
companies;
. our exclusive focus on China;
. our ability to offer products and services that are tailored to the
specific interests, needs and viewing habits of PRC Internet users; and
. the experience and quality of our management team.
We compete with other portals in China for advertising and e-commerce
revenues primarily on the following basis:
. brand recognition;
. volume of traffic and users;
. quality of web site and content;
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. strategic relationships;
. quality of online advertising and e-commerce services;
. effectiveness of sales and marketing efforts; and
. price.
Our existing competitors may in the future achieve greater market acceptance
and gain additional market share. It is also possible that new competitors may
emerge and acquire significant market share. In particular our online directory
also faces competition from software and other Internet products and services
incorporating search and retrieval capabilities. In addition, operators of
leading Web sites or Internet service providers, including large corporations
such as Microsoft/MSN, Yahoo!, Lycos and America Online, currently offer, and
could expand, their online products and services targeting China. We believe
the rapid increase in China's online population will draw more attention from
these multinational players to the PRC Internet market. We also compete with
traditional forms of media, like newspapers, magazines, radio and television
for advertisers and advertising revenue. Please refer to "Risk Factors" for a
more detailed discussion of the risks we face from our competitors.
Intellectual Property and Proprietary Rights
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection, non-competition and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our intellectual property rights. Despite our precautions, it may be
possible for third parties to obtain and use our intellectual property without
authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries is
uncertain and still evolving. The laws of the PRC and certain other countries
do not protect intellectual property to the same extent as do the laws of the
United States.
We have registered the domain name "www.Sohu.com" with Network Solutions and
the domain name "www.Sohu.com.cn" with China Internet Network Information
Center, a domain name registration service in China, and have full legal rights
over these domain names. We have also filed trademark applications for the mark
"Sohu.com" with the China Trademark Office. China's trademark law, however,
adopts a system whereby the first applicant to receive a registration
certificate for a mark will preempt all other applicants. Prior use of an
unregistered mark is generally irrelevant except for "well-known" marks. As a
result, until actual registration certificates are issued by the China
Trademark Office, we do not have any legal rights over the mark "Sohu.com".
We have filed a service mark application for the "Sohu.com" service mark
with the U.S. Patent and Trademark Office. We are in the process of publishing
the "Sohu.com" service mark and expect to complete the registration process in
the near future. We have also filed service mark applications in Hong Kong and
Taiwan, and are in the process of applying for registration in Malaysia and
Singapore. Policing unauthorized use of our marks, however, is difficult and
expensive. In addition, it is possible that our competitors will adopt product
or service names similar to ours, thereby impeding our ability to distinguish
our brand and possibly leading to customer confusion.
Many parties are actively developing chat, homepage, search and related Web
technologies. We expect these parties to continue to take steps to protect
these technologies, including seeking patent protection. There may be patents
issued or pending that are held by others and that cover significant parts of
our technology, business methods or services. For example, we are aware that a
number of patents have been issued in the areas of e-commerce, Web-based
information indexing and retrieval and online direct marketing. Disputes over
rights to these technologies are likely to arise in the future. We cannot be
certain that our products do not or will not infringe valid patents, copyrights
or other intellectual property rights held by third parties. We may be subject
to legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business.
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<PAGE>
We also intend to continue licensing technology from third parties,
including technology relating to the following:
<TABLE>
<CAPTION>
Licensor Function Duration
- -------- -------- --------
<S> <C> <C>
Netgravity Ad serving software One-time technology purchase with perpetual license; annual
maintenance fee.
Lodesoft Instant messaging software One-time technology purchase with perpetual license; additional
payments after reaching 50 million registered users.
OMRON Search engine software One-time technology purchase with perpetual license.
Microsoft Commercial Internet system One-time technology purchase with perpetual license for 5,000
active users; additional payments for additional active users.
</TABLE>
The market is evolving and we may need to license additional technologies to
remain competitive. We may not be able to license these technologies on
commercially reasonable terms or at all. In addition, we may fail to
successfully integrate any licensed technology into our services. Our inability
to obtain any of these licenses could delay product and service development
until alternative technologies can be identified, licensed and integrated.
Technology Infrastructure
We maintain all of our servers at the premises of the Beijing Telecom
Administration, or BTA, pursuant to one-year server hosting agreements and we
do not maintain any backup servers outside Beijing. The BTA is the
administrator of the central hub of the ChinaNet backbone, and is currently the
only provider of interconnection services to the ChinaNet backbone in Beijing.
Our servers are hosted by the BTA in the same building where ChinaNet is
administered. We have leased two 100 Mbps circuits that connect directly to the
ChinaNet backbone, and we expect to require additional circuits as our Web site
traffic continues to grow. Internet access rates in China, when compared to
rates in the United States and other more developed countries, remain
relatively expensive.
We have developed a close working relationship with the BTA. Our operations
depend on the ability of the BTA to protect their systems against damage from
fire, power loss, telecommunications, failure, break-ins, or other events. The
BTA provides us with support services 24 hours per day, 7 days per week. The
BTA also provides connectivity for our servers through multiple high-speed
connections. All facilities are protected by multiple power supplies.
For reliability, availability, and serviceability, we have created an
environment in which each server can function separately. Key components of our
server architecture are served by multiple redundant machines. We also employ
in-house and third-party monitoring software. Reporting and tracking systems
generate daily traffic, demographic, and advertising reports.
Our portal must accommodate a high volume of traffic and deliver frequently
updated information. Components or features of our portal have in the past
suffered outages or experienced slower response time because of equipment or
software down time. These events did not have a material adverse effect on our
business, but we cannot assure you that such events will not have a material
adverse effect in the future.
Employees
As of April 30, 2000, we had 236 full-time employees, of whom 28 worked in
sales, 96 in product and content, 22 in marketing, 53 in technology and
business development, and 37 in finance and administration. From time to time,
we employ independent contractors to support our research and development,
marketing, sales and editorial departments. None of our personnel are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
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All of our management and key executives, and substantially all of our other
employees, have entered into confidentiality, non-competition and non-
solicitation agreements with us. In addition, all of our management and key
executives, and substantially all of our department managers and group leaders,
have entered into employment agreements with Beijing ITC, our PRC operating
subsidiary, which contain substantially similar confidentiality and non-
competition undertakings. However, the degree of protection afforded to an
employer pursuant to confidentiality and non-competition undertakings governed
by PRC law may be more limited when compared to the degree of protection
afforded under the laws of other jurisdictions. A significant number of our
employees hold incentive stock options in Sohu, which provide financial
opportunities to them that vest on average over a period of two to four years.
Facilities
Our principal executive offices are located in approximately 26,295 square
feet of office space in Beijing, China under leases that expires on December
31, 2001 and December 31, 2002. We also lease sales and marketing office space
in Shanghai and Guangzhou.
Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against us or Beijing ITC. From time to time we become subject to
legal proceedings and claims in the ordinary course of our business. Such legal
proceedings or claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
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REGULATION OF THE PRC INTERNET INDUSTRY
The following description of PRC laws and regulations is based upon the
opinion of TransAsia Lawyers, our PRC counsel. For a description of certain
legal risks relating to our ownership structure and businesses, see "Risk
Factors".
Overview
Certain areas related to the Internet, such as telecommunications,
international connections for computer information networks, information
security and censorship, as well as foreign investment in those areas, are
covered in detail by a number of existing laws and regulations. The PRC
Internet industry is regulated by various governmental authorities, such as the
Ministry of Information Industry, or MII (formerly the Ministry of Post and
Telecommunications, or MPT), the State Administration of Industry and Commerce,
or SAIC, and the Ministry of Public Security.
The PRC has recently announced its policies, and is in the process of
enacting regulations, regarding the legality of foreign investment in the PRC
Internet industry, the existence and enforcement of content restrictions on the
Internet e-commerce activities and online news dissemination, as well as
domestic approval procedures for Internet companies in the PRC wishing to offer
securities in China or abroad. In November 1999, China and the United States
reached an agreement concerning China's entry into the World Trade
Organization, or WTO. The provisions of this agreement will likely be reflected
in new PRC legislation, and will likely affect the interpretation of existing
regulations relating to the PRC Internet sector. However, we cannot predict the
timing or the effect of future developments in the regulatory framework for the
PRC Internet sector.
Under current PRC regulations, foreign companies such as Sohu.com Inc.
cannot own or operate value-added telecommunications businesses in the PRC. It
is not clear whether the operation of Internet content provision services is
considered value-added telecommunications services. The China-U.S. WTO
agreement has since confirmed that the value-added telecommunications sector
may include online information or content provision services. As a result, we
recently restructured our operations. As part of this restructuring, Beijing
ITC entered into a series of agreements with Beijing Sohu and Beijing Sohu's
two shareholders. Beijing Sohu is a PRC company that is 80% owned by Dr.
Charles Zhang, our founder, President and Chief Executive Officer, and 20%
owned by Ms. Jinmei Hei, an executive officer of Beijing ITC. Under the
restructuring, Beijing Sohu will be structured as an Internet information
service provider and has obtained a license to provide Internet content and
information services.
In the opinion of our PRC counsel, the ownership structures of Sohu, Beijing
ITC and Beijing Sohu, both currently and after giving effect to this offering,
and the businesses and operations of Sohu, Beijing ITC and Beijing Sohu as
described in this prospectus, comply with all existing laws, rules and
regulations of the PRC. In addition, no consent, approval or license other than
those already obtained is required under any of the existing laws, rules and
regulations of the PRC for such ownership structures, businesses and operations
or this offering. The restructuring of our business in the PRC was conducted
pursuant to the advice of MII officials.
Foreign Investment in the Telecommunications Sector
In the opinion of TransAsia Lawyers, there are currently no laws, rules or
regulations prohibiting foreign investment in the PRC Internet sector, but
there are regulations promulgated by the MII relating to foreign investment in
the telecommunications sector in China, including:
. Provisional Administrative Measures Regarding the Examination and
Approval of Deregulated Telecommunications Operations (1993);
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. Provisional Regulations for the Administration of the Deregulated
Telecommunications Operations Market (1995); and
. Definitions of Various Deregulated Telecommunications Operations (1995).
These regulations prohibit a foreign person or entity, including any foreign
investment enterprise established in the PRC, such as Beijing ITC, from
investing in, or operating or participating in the operation of, any business
that provides "value-added telecommunications services". These services are
defined under PRC legislation to include, among other services, "computer
information services" and "electronic mail box services". These regulations
were promulgated and the definitions were adopted, however, prior to the
emergence of the Internet in China and prior to the signing of the WTO accord
between China and the United States. In the opinion of TransAsia Lawyers, our
business activities in China following our restructuring do not fall within the
definition of "computer information services" or "electronic mail box
services", each as defined under the Definitions of Various Deregulated
Telecommunications Operations (1995), because:
. the term "computer information services" is intended to refer to China's
public telecom database network, where fees are levied on database
users; and
. the term "electronic mail box" refers to a service launched by China
Telecom at the beginning of 1992 on the ChinaPAC platform, which is a
completely different data transmission network than the Internet.
International Connections for Computer Information Networks
The State Council and the MII have promulgated regulations governing
international connections for PRC computer networks, including:
. Provisional Regulations of the People's Republic of China for the
Administration of International Connections to Computer Information
Networks (1997) and their Implementing Measures (1998);
. Measures for the Administration of International Connections to China's
Public Computer Interconnected Networks (1996); and
. Reply Concerning the Verification and Issuance of Operating Permits for
Business Relating to International Connections for Computer Information
Networks and for Public Multimedia Telecommunications Business (1998).
Under these regulations, any entity seeking access to international
connections for computer information networks in China, such as Beijing ITC and
Beijing Sohu, must comply with the following requirements:
. be a PRC legal person;
. have the appropriate equipment, facilities and technical and
administrative personnel;
. have implemented and registered a system of information security and
censorship; and
. effect all international connections with an authorized Internet service
provider in China.
In the opinion of TransAsia Lawyers, both Beijing ITC and Beijing Sohu are
in proper compliance with all of these requirements.
Information Security and Censorship
The principal PRC regulations concerning information security and censorship
are:
. The Law of the People's Republic of China on the Preservation of State
Secrets (1988) and its implementing rules (1990);
. The Law of the People's Republic of China on State Security (1993) and
its implementing rules (1994);
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. Rules of the People's Republic of China for Protecting the Security of
Computer Information Systems (1994);
. Notice Concerning Work Relating to the Filing of Computer Information
Systems with International Connections (1996);
. Administrative Measures for Protecting the Security of Computer
Information Network with International Connections (1997); and
. Regulations for the Protection of State Secrets for Computer Information
Systems on the Internet (2000).
The aforementioned regulations specifically prohibit the use of Internet
infrastructure which results in a breach of public security or the provision of
socially destabilizing content or transmits state secrets.
. ""A breach of public security" includes breach of national security or
disclosure of state secrets; infringement on state, social or collective
interests or the legal rights and interests of citizens; or illegal or
criminal activities.
. ""Socially destabilizing content" includes any action that incites
defiance or violation of Chinese laws and regulations; incites
subversion of state power and the overturning of the socialist system;
fabricates or distorts the truth, spreads rumors or disrupts social
order; or spreads feudal superstition, involves obscenities,
pornography, gambling, violence, murder, horrific acts or instigates
criminal acts.
. ""State secrets" are defined as "matters that affect the security and
interest of the state". The term covers such broad areas as national
defense, diplomatic affairs, policy decisions on state affairs, national
economic and social development, political parties and "other state
secrets that the State Secrets Bureau has determined should be
safeguarded".
According to these regulations, it is mandatory for Internet companies in
China to complete security filing procedures with the local public security
bureau and for them to update regularly with the local public security bureau
regarding information security and censorship systems for their Web sites. In
the opinion of TransAsia Lawyers, Beijing Sohu has, as required by PRC law and
as agreed under the restructuring agreements, established an internal security
committee and adopted security maintenance measures, employed a full-time
bulletin board system supervisor and exchanged information with the local
public security bureau with regard to sensitive or censored information and Web
sites on a regular basis, and therefore is in full compliance with the above
regulations.
In addition, the State Secrets Bureau has recently issued regulations
authorizing the blocking of access to any site it deems to be leaking state
secrets or failing to meet the relevant regulations regarding the protection of
state secrets in the distribution of online information. Specifically, Internet
companies in China with bulletin board systems, chat rooms or similar services,
such as our company, must apply for the approval of the State Secrets Bureau.
As implementing rules for the regulations have not been issued, however,
details concerning how Web sites should comply with the regulations remain to
be clarified.
Encryption Software
In October 1999, the State Encryption Administration Commission promulgated
the Regulations for the Administration of Commercial Encryption, which was
followed in November 1999 by the Notice of the General Office of the State
Encryption Administration Commission. Both of these regulations address the use
in China of software with encryption functions. According to these regulations,
encryption products purchased for use must be reported. Violation of the
encryption regulations may result in the issuance of a warning, levying of a
penalty, confiscation of the encryption products and even criminal liabilities.
Since there are currently no publicly issued official interpretations of, or
detailed implementing rules for, these regulations, it is unclear how PRC
Internet companies should comply with these regulations.
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Web-Based Services
In the opinion of TransAsia Lawyers, there are no existing PRC laws, rules
or regulations that address the development and provision of Web-based
services, such as online directories, search engines, free e-mail boxes, e-
commerce and online advertising, except for two product-specific regulations
governing the online sale of audio-visual products and books that forbid
foreign-invested companies from conducting such businesses in China. In
addition, there are no existing PRC laws, rules or regulations that regulate
bulletin board systems, chat rooms and instant messenger functions. However,
the information that is exchanged among users using such functions is itself
subject to the various legislation mentioned above governing information
security and censorship, with which we are in compliance. The Beijing
Administration of Industry and Commerce recently issued a regulation requiring
all companies engaging in online business activities to complete filing and
registration procedures. Beijing ITC has done so and is therefore in compliance
with the regulation.
In the opinion of TransAsia Lawyers, online advertising is neither regulated
nor prohibited by any existing PRC laws, rules or regulations, including the
Advertising Law of the People's Republic of China (1994). The SAIC, the
government authority responsible for the area, is currently considering
adopting new regulations governing online advertising. We cannot predict the
timing and effects of such new regulations. On May 18, 2000, the SAIC issued to
Beijing ITC a one-year advertising business permit, which enables us to conduct
online advertising business.
There are no existing PRC laws, rules or regulations that specifically
define or regulate Internet content providers. According to the Measures for
the Administration of China Public Multimedia Telecommunications, "information
sources providers" are required to report to the MII for verification and to
execute an interconnections agreement and an understanding letter for
information security with China Telecom or other "node service providers". In
the opinion of TransAsia Lawyers, after the restructuring, Beijing ITC is not
an "information source provider" as defined under the above regulation and
merely operates a technical platform on which content provided by information
source providers is displayed.
Accordingly, in the opinion of TransAsia Lawyers, the current and proposed
web-based services provided by us, including our online directories, search
engine, email, e-commerce and online advertising services, comply with the
existing PRC laws, rules and regulations.
Business License and Approval for Foreign Investment
Beijing ITC is structured as a technology-oriented company engaged in the
development of Internet technologies and related software, as well as online
advertising businesses and e-commerce activities. Under current PRC law, the
legal establishment of such a technology company must be approved by the
relevant local Commission for Foreign Economic Relations and Trade, and may
commence operations only upon the issuance of a business license by the SAIC.
In the opinion of TransAsia Lawyers, Beijing ITC has satisfied all of the
aforementioned requirements.
Beijing Sohu is structured as an Internet information services company
engaged in online information services and content development. Despite the
absence of relevant legislation, the establishment of Beijing Sohu with these
business activities was approved by the MII. In the opinion of TransAsia
Lawyers, Beijing Sohu has satisfied all relevant regulations and MII
requirements.
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MANAGEMENT
Directors and Executive Officers of Sohu.com
The following table sets forth information regarding the directors and
executive officers of Sohu.com:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Directors and Executive Officers
Charles Zhang......................... 36 Chairman of the Board of Directors,
President
and Chief Executive Officer
Edward Roberts........................ 64 Director
James McGregor........................ 46 Director
George Chang.......................... 47 Director
Mary Ma............................... 48 Director
Thomas Gurnee......................... 49 Chief Financial Officer and
Senior Vice President, Finance
Alan Li............................... 51 Chief Operating Officer
Victor Koo............................ 34 Senior Vice President,
Corporate Business Development
Edwin Chan............................ 55 Senior Vice President, Marketing and Sales
Gary Zhao............................. 37 Vice President, Finance
Xin Ye................................ 36 Vice President, Technology
</TABLE>
Dr. Charles Zhang is the founder of Sohu and has been Chairman of the Board,
President and Chief Executive Officer since August 1996. Prior to founding
Sohu, Dr. Zhang worked for Internet Securities Inc. (ISI) and helped establish
its China operations. Prior to joining ISI, he worked as Massachusetts
Institute of Technology's liaison officer with China. Dr. Zhang has a Ph.D
degree in experimental physics from Massachusetts Institute of Technology and a
Bachelor of Science degree from Qinghua University in Beijing. Dr. Zhang is a
native of the People's Republic of China.
Dr. Edward Roberts has been a director of Sohu since September 1996. He is
the David Sarnoff Professor of Management of Technology at Massachusetts
Institute of Technology's Alfred P. Sloan School of Management. He has chaired
the Sloan School Management of Technology program since 1967. Dr. Roberts has
been a co-founder and director of numerous emerging technology companies and
venture capital funds, including Zero Stage and First Stage Capital Equity
Funds, Medical Information Technology, Advanced Magnetics, NETSilicon,
Pegasystems and Selfcare. He has authored over 140 articles and eleven books,
the most recent being Entrepreneurs in High Technology (Oxford University
Press, 1991), winner of the Association of American Publishers' award as
Outstanding Book of 1991 in Business and Management. Dr. Roberts received four
degrees from M.I.T., including a Ph.D degree in 1962.
James McGregor has been a director of Sohu since August 1998. He is Vice
President, China, of Dow Jones & Company, Inc. and the chief business
representative for Dow Jones in China. From July 1990 to the end of 1993, Mr.
McGregor was The Wall Street Journal's bureau chief in China. Mr. McGregor
served as chairman of the American Chamber of Commerce in Beijing in 1996 and
as president of the Foreign Correspondents Club in Beijing in 1991. Mr.
McGregor received a journalism degree from University of Minnesota.
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George Chang has been a director of Sohu since January 2000. He is a
director of various companies within the Morningside group, a private global
investment house, including Morningside Asia Advisory Limited. Morningside Asia
Advisory Limited is an affiliate of Maxtech Enterprises Limited, one of our
shareholders. Prior to joining Morningside in 1991, Mr. Chang held senior
financial positions with various trading companies in Hong Kong, and was chief
financial officer of a major multinational trading and sourcing operation. Mr.
Chang has worked with Arthur Andersen in Hong Kong and in Toronto, Canada. He
holds both Bachelor of Business Administration and Master of Business
Administration degrees from the University of Wisconsin, and is a member of the
American Institute of Certified Public Accountants, the Canadian Institute of
Chartered Accountants and the Hong Kong Society of Accountants.
Mary Ma has been a director of Sohu since March 2000. She is the Executive
Director and Senior Vice President of Legend Holdings Limited, a public company
with shares listed on the Hong Kong Stock Exchange and an affiliate of one of
our shareholders. She is responsible for the management of the overall
operations, strategic planning and business development of Legend Holdings. She
has over 22 years' experience in the strategic developments of international
alliances. Ms. Ma graduated from Capital Normal University in 1976 with a
Bachelor of Arts degree, and also studied English literature through a
scholarship program at King's College in Britain.
Thomas Gurnee has been the Chief Financial Officer and Senior Vice
President, Finance, of Sohu since January 2000. Prior to joining Sohu, Mr.
Gurnee held a number of senior positions with Chartered Semiconductor
Manufacturing Ltd, one of the world's leading independent semiconductor
foundries, including Vice President for Business Development, President (North
America), Chief Operating Officer (Singapore) and Chief Financial Officer
(Singapore). Prior to joining Chartered Semiconductor Manufacturing, Mr. Gurnee
spent thirteen years at Schlumberger Ltd, an oil field services and measurement
systems company, as finance director of various divisions in France, Singapore
and the United States. Mr. Gurnee obtained a Bachelor of Arts degree from
Stanford University and a Master of Business Administration degree from
University of Santa Clara.
Alan Li has been the Chief Operating Officer of Sohu since March 2000. Prior
to joining Sohu, Mr. Li held a number of senior positions with Oracle China,
including Executive Director responsible for strategic and new venture
development and Managing Director. Prior to joining Oracle China, Mr. Li spent
fourteen years with Digital Equipment Corporation, and was the General Manager
of Huadi Computer Co. Ltd., a joint venture between Digital and China Aerospace
Corporation. Prior to joining Digital, he spent eight years with IBM in Hong
Kong. Mr. Li holds a Bachelor of Science degree from Hong Kong University and a
Masters of Business Administration degree from The Chinese University of Hong
Kong, and has completed all course work for the Doctorate of Business
Administration degree from Nova University.
Victor Koo has been Senior Vice President, Corporate Business Development of
Sohu since January 2000. He also served as Senior Vice President, Operations
and Chief Financial Officer of Sohu between March and December of 1999. Prior
to joining Sohu, Mr. Koo held numerous senior positions in Richina Group, a
China based venture capital firm, since 1994, including as Vice President and
Director of Business Development. Prior to his employment with Richina Group,
Mr. Koo was with Bain & Company in San Francisco and Procter & Gamble
International in Hong Kong. Mr. Koo received a Masters of Business
Administration degree from Stanford University where he won a fellowship from
the Center for East Asian Studies. He was a Regent's Scholar at the University
of California at Berkeley, where he received a Bachelor of Science degree.
Edwin Chan has been Senior Vice President, Marketing and Sales of Sohu since
September 1999. Prior to joining Sohu, Mr. Chan founded his own advertising
agency and, after its merger with another agency, served as a partner of the
combined agency. Prior to that, Mr. Chan served for nearly ten years as
managing director at multinational advertising agencies J. Walter Thompson and
BBDO. Mr. Chan received a Bachelor of Arts degree from Hong Kong University.
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Gary Zhao has been Vice President, Finance, of Sohu since January 2000.
Prior to joining Sohu, he held senior positions with Motorola Corporation, GE
Capital Corporation, A.T. Kearney, Lehman Brothers and General Motors. Mr. Zhao
holds a Bachelor of Science degree from Tsinghua University, a Master of
Science degree from University of Minnesota and a Master of Business
Administration degree from the University of Pennsylvania's Wharton School of
Business.
Xin Ye has been Vice President, Technology, of Sohu since May 2000. Prior to
joining Sohu, he held senior positions with a number of Silicon Valley
technology firms, including Marimba, Innovix Technologies, Inc., Renaissance
Software, Tibco and Watkins-Johnson Co. Mr. Ye holds a Bachelor of Science
degree in Computer Engineering from Tsinghua University and a Master of Science
degree in Computer Science from Marquette University.
Audit and Compensation Committees
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, including the selection of our independent auditors, the scope of
annual audits, fees to be paid to our independent auditors and the performance
of our independent auditors. The audit committee currently consists of James
McGregor, George Chang and Mary Ma.
The compensation committee reviews and recommends to the board of directors
the salaries, benefits and stock option grants of all employees, consultants,
directors and other individuals compensated by us. The compensation committee
also administers our stock option and other employee benefits plans. The
compensation committee currently consists of Edward Roberts.
Classified Board of Directors
Our board of directors is divided into two classes of directors serving
staggered two-year terms. Upon the expiration of the term of a class of
directors, the directors in that class will be elected for two-year terms at
the annual meeting of shareholders in the year in which their term expires.
With respect to each class, a director's term will be subject to the election
and qualification of their successors, or their earlier death, resignation or
removal. These provisions, when coupled with the provision of our fifth amended
and restated certificate of incorporation authorizing the board of directors to
fill vacant directorships or increase the size of the board of directors, may
deter a shareholder from removing incumbent directors and simultaneously
gaining control of the board of directors by filling vacancies created by such
removal with its own nominees.
Our board of directors has resolved that Mr. George Chang and Ms. Mary Ma
will serve as Class I Directors whose terms expire at the 2001 annual meeting
of shareholders, and Dr. Charles Zhang, Dr. Edward Roberts and Mr. James
McGregor will serve as Class II Directors whose terms expire at the 2002 annual
meeting of shareholders.
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Directors, Executive Officers and Key Employees of Beijing ITC
The following table sets forth information regarding the directors,
executive officers and key employees of Beijing ITC:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Executive Officers
Charles Zhang......................... 36 Chairman of the Board of Directors,
President and Chief Executive Officer
Thomas Gurnee......................... 49 Chief Financial Officer and
Senior Vice President, Finance
Alan Li............................... 51 Chief Operating Officer
Victor Koo............................ 34 Senior Vice President, Corporate Business
Development
Edwin Chan............................ 55 Senior Vice President, Marketing and Sales
Gary Zhao............................. 37 Vice President, Finance
Xin Ye................................ 36 Vice President, Technology
Key Employees
Min Yang.............................. 32 Financial Controller
Jinmei He............................. 28 Marketing Director
Peter Song............................ 33 Technology Director
Michael Ma............................ 33 Regional Sales Director
Elaine Feng........................... 28 Business Development Director
Jianjun Wang.......................... 30 Manager of Classification Group
Maggie Wu............................. 26 Content Development Director
Tony Cheung........................... 29 Regional Sales Manager
</TABLE>
Min Yang joined Beijing ITC in 1998 and has been the Financial Controller
since May 1999. He was previously finance and administration manager at Zeneca
SinoPharm in Beijing. Prior to that, he worked at De Nora Electrochemical
Industrial Corporation. Mr. Yang received a Bachelor of Arts degree from
Northeast University of Finance and Economics.
Jinmei He joined Beijing ITC in September 1997 and has been the Marketing
Director since November 1999. She was previously with Internet Securities
Inc.'s Beijing representative office. She received a Bachelor of Arts degree
from Southwest Jiatong University.
Peter Song has been Beijing ITC's Technology Director since April 1998. He
was previously with SINOPEC, a PRC state-owned oil company, and has held
several programming and technical positions. Mr. Song received a Bachelor of
Science degree from Tianjin University.
Michael Ma joined Beijing ITC in January 2000 and is the Regional Sales
Director. Prior to joining Beijing ITC, he held a number of marketing positions
with Gillette (China) Ltd. Mr. Ma received a Bachelor of Business
Administration degree from Zhongshan University School of Management and a
Certificate in Business Administration from the University of California at
Berkeley.
Elaine Feng joined Beijing ITC in May 1998 as the Sales Manager and has been
the Business Development Director since November 1999. She was previously a
business development manager at Star TV. Prior to that, Ms. Feng worked for
Richina Media.
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<PAGE>
Jianjun Wang has been the Manager of Beijing ITC Classification Group since
August 1999. He is also a part-time lecturer at Beijing Teachers' University.
Dr. Wang received his doctorate degree from Beijing Teachers' University.
Maggie Wu joined Beijing ITC in 1997 and held positions in marketing and
sales prior to becoming Content Development Director in 2000. She received a
Bachelor of Arts degree from International Trade Shanghai Financial and
Economic University.
Tony Cheung joined Beijing ITC in September 1999 and is the Regional
Advertising Sales Manager. He was previously advertising manager and senior
manager, China region at CAAC Inflight Magazine. He received a Bachelor of
Business Administration degree from the University of Oregon and a Master of
Business Administration Degree from Sheffield Hallam University.
Executive Officers
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
Director Compensation
Directors do not currently receive any cash compensation for serving on the
board of directors of Sohu or Beijing ITC, although they are reimbursed for
reasonable travel expenses incurred in connection with attending board of
directors and committee meetings.
In January 2000, Edward Roberts received options to purchase 4,000 shares of
common stock pursuant to our stock incentive plan. These options have an
exercise price of $15.00 and vest on a quarterly basis, with options to
purchase 1,000 shares vesting at the end of each quarter of the year beginning
with the vesting commencement date.
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Executive Compensation
The following table sets forth the compensation earned for all services
rendered to us in all capacities during 1999 by our executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation(1) Compensation Awards
-------------------------------------
Fiscal Securities
Name and Principal Position Year Salary Bonus Underlying Options(#)
- --------------------------- ------ -------- ----------------------------
<S> <C> <C> <C> <C>
Charles Zhang.................... 1999 $ 50,000 $ -- 50,000
Chairman of the Board,
President and Chief Executive
Officer
Thomas Gurnee(2)................. 1999 $ -- $ -- 70,000
Chief Financial Officer and
Senior Vice President, Finance
Alan Li(3)....................... 1999 $ -- $ -- --
Chief Operating Officer
Victor Koo(4).................... 1999 $ 75,000 $ -- 80,349
Senior Vice President,
Corporate Business Development
Edwin Chan(5).................... 1999 $ 58,334 $ -- 30,000
Senior Vice President,
Marketing and Sales
Gary Zhao(6)..................... 1999 $ -- $ -- --
Vice President, Finance
Xin Ye(7)........................ 1999 $ -- $ -- --
Vice President, Technology
</TABLE>
- ---------------------
(1) The column for "Other Annual Compensation" has been omitted because there
is no compensation required to be reported in that column. The aggregate
amount of perquisites and other personal benefits provided to each officer
listed above is less than 10% of the total annual salary and bonus of that
officer.
(2) Mr. Gurnee joined Sohu in January 2000. His employment agreement provides
for an annual salary in 2000 of $170,000.
(3) Mr. Li joined Sohu in March 2000. His employment agreement provides for an
annual salary in 2000 of $170,000, and he was granted options to purchase
70,000 shares of common stock in March 2000.
(4) Mr. Koo joined Sohu in April 1999. His employment agreement provides for an
annual salary in 2000 of $120,000.
(5) Mr. Chan joined Sohu in September 1999. His employment agreement provides
for an annual salary in 2000 of $200,000.
(6) Mr. Zhao joined Sohu in January 2000. His employment agreement provides for
an annual salary in 2000 of $120,000, and he was granted options to
purchase 30,000 shares of common stock in January 2000.
(7) Mr. Ye joined Sohu in May 2000. His employment agreement provides for an
annual salary in 2000 of $120,000.
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<PAGE>
Option Grants In Fiscal Year 1999
The following table sets forth information regarding stock options granted
to our executive officers listed on the Summary Compensation Table for 1999. We
have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term(1)
----------------------------------------------------------- -----------------------
Number of
Securities Percent of Total
Underlying Options Granted
Options to Employees in Exercise Price
Name Granted Fiscal Year 1999 per Share Expiration Date 5% 10%
- ---- ---------- ---------------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles Zhang........... 50,000(2) 14% $ 4.70 Sept. 21, 2009 $ 42,464 $ 206,874
Thomas Gurnee........... 70,000(3) 19% $10.00 Dec. 5, 2009 $ 65,320 $ 518,644
Alan Li(4).............. -- -- -- -- -- --
Victor Koo.............. 80,349(5) 22% $ 4.70 Nov. 1, 2009 $ 145,327 $ 455,192
Edwin Chan.............. 30,000(6) 8% $10.00 Dec. 5, 2009 $ 27,994 $ 222,276
Gary Zhao(7)............ -- -- -- -- -- --
Xin Ye(8)............... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) The potential realizable value is based on the term of the option at the
time of its grant, which is ten years for the stock options granted to the
executive officers in the table. The assumed 5% and 10% annual rates of
appreciation over the term of the options are set forth in accordance with
rules and regulations adopted by the Securities and Exchange Commission and
do not represent our estimates of stock price appreciation. The potential
realizable value is calculated by assuming that the fair market value of
the underlying common stock on the date of grant, as determined by our
board of directors based on a combination of an independent valuation and
the pricing of other equity transactions with third parties, appreciates at
the indicated rate, compounded annually, for the entire term of the option
and that the option is exercised and the stock sold on the last day of its
term at this appreciated stock price. No valuation method can accurately
predict future stock prices or option values because there are too many
unknown factors. No gain to the optionee is possible unless the stock price
increases over the option term. Such a gain in stock price would benefit
all stockholders.
(2) Options granted vest ratably on a quarterly basis over one year commencing
from September 21, 1999.
(3) Options granted vest over a three year period commencing January 1, 2000,
with one-third of the options vesting at the end of the first year and the
remaining options vesting ratably on a quarterly basis over the remaining
term of the options.
(4) Mr. Li joined our company in March 2000.
(5) Options granted vest ratably over three years on a quarterly basis
commencing from May 1, 1999.
(6) Options granted vest over a four year period commencing September 15, 1999,
with one-quarter of the options resting at the end of the first year and
the remaining options vesting ratably on a quarterly basis over the
remaining term of the options.
(7) Mr. Zhao joined our company in January 2000.
(8) Mr. Ye joined our company in May 2000.
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<PAGE>
Aggregate Option Exercises in Fiscal Year 1999 And Fiscal Year-End Option
Values
The following table sets forth information concerning the exercise of stock
options during the fiscal year ended December 31, 1999 by our officers listed
on the Summary Compensation Table and the fiscal year-end value of unexercised
in-the-money options held by such officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value Of Unexercised
Unexercised Options at In-the-money Options at
December 31, 1999 December 31, 1999(1)
----------------------------------- -------------------------
Shares Acquired
Name on Exercise Value Realized(2) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Zhang........... -- -- 12,500 37,500 $12,500 $37,500
Thomas Gurnee........... -- -- -- 70,000 -- $70,000
Alan Li(3).............. -- -- -- -- -- --
Victor Koo.............. -- -- 13,392 66,957 $13,392 $66,957
Edwin Chan.............. -- -- -- 30,000 -- $30,000
Gary Zhao(4)............ -- -- -- -- -- --
Xin Ye(5)............... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) There was no public market for the common stock on December 31, 1999. The
value of unexercised in-the-money options at December 31, 1999 has been
calculated based on the mid-point of the price for the initial public
offering of our common stock, less the applicable exercise price per share
multiplied by the number of underlying shares.
(2) None of our executive officers exercised any stock options during 1999.
(3) Mr. Li joined our company in March 2000.
(4) Mr. Zhao joined our company in January 2000.
(5) Mr. Ye joined our company in May 2000.
In January 2000, our board of directors granted options for the purchase of
127,000 shares of common stock to certain of our employees and a director at an
exercise price of $15.00 per share. The options granted generally vest over
periods ranging from one to four years beginning with the first quarter
subsequent to the date of grant of the options.
Employment Arrangements
Each of Charles Zhang, Thomas Gurnee, Alan Li, Victor Koo, Edwin Chan and
Gary Zhao has entered into a confidentiality, non-competition and non-
solicitation agreement with us. Such agreements prohibit each of them from
competing with us or soliciting our employees, customers, suppliers or partners
in competition with us during his employment with us and for a period of one
year after the termination of his employment for any reason. Under such
agreement, each executive officer has also agreed to use any confidential
information belonging to us or held by us in confidence solely for our benefit
and not to disclose such confidential information during and after his
employment with us.
In addition, all of our executive officers have entered into employment
agreements with Beijing ITC, our PRC operating subsidiary, which contain
substantially similar confidentiality and non-competition undertakings.
However, the degree of protection afforded to an employer pursuant to
confidentiality and non-competition undertakings governed by PRC law may be
more limited in certain respects when compared to the degree of protection
afforded under the laws of other jurisdictions.
Stock Incentive Plan
We have adopted a stock incentive plan as of January 25, 2000 to assist us
in attracting and retaining highly competent people to serve as employees,
directors and advisors who will contribute to our success and the success of
the members of our network. We also seek to motivate those people to achieve
long-term
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<PAGE>
objectives which will benefit our shareholders. The following groups of people
are eligible to receive options under the stock incentive plan:
. employees;
. directors;
. advisors and consultants.
Our stock incentive plan also provides these groups of people with
opportunities to make direct purchases of our common stock.
Our board of directors administers the stock incentive plan and has wide
discretion to award options. Subject to the provisions of the stock incentive
plan, our board of directors determines who will be granted options, the type
and timing of options to be granted, vesting schedules and other terms and
conditions of options, including the exercise price. A significant number of
our employees are granted options. The number of options awarded to a person is
based on the person's potential ability to contribute to our company's success.
the person's position with our company and sometimes length of service.
Our board of directors may award "incentive" options or "non-qualified"
options. We have granted both incentive and non-qualified options under the
stock option plan. If the holder of an incentive option exercises the option
and holds the shares of common stock he receives for the holding periods
required by the Internal Revenue Code, the exercise of the incentive does not
result in taxable income to the holder. We are therefore not entitled to a
corresponding tax deduction. The incentive options we granted under the stock
incentive plan are designed to meet the requirements of the Internal Revenue
Code, including a requirement that the exercise price is at least 100% of the
fair market value of our common stock on the date we grant the option and that
the option has a term no longer than ten years. However, no person who owns,
directly or indirectly, more than 10% of the total combined voting power of all
classes of our shares may receive incentive options unless the exercise price
is at least 110% of the fair market value of our common stock on the grant date
and the term is no longer than five years. Options granted under the stock
incentive plan are not transferable by the optionee, other than by will or by
the laws of descent and distribution.
By contrast, if the holder of a non-qualified option exercises the option,
the holder will be required to recognize taxable income on the date of
exercise. The taxable income is equal to the difference between the fair market
value of the shares acquired by exercising the option and the exercise price of
the option. We are then entitled to a corresponding tax deduction.
At April 30, 2000, options to purchase 522,647 shares of common stock were
outstanding under the stock incentive plan and 412,043 shares remained
available for future option grants. The weighted average exercise price for
these outstanding options is $8.17 per share. Most of these outstanding options
become exercisable on a schedule at least as rapid as the following:
. with respect to 25% of the shares subject to the option, on the first
anniversary of the date of grant; and
. with respect to the remaining 75% of the shares subject to the option in
twelve equal quarterly installment beginning one calendar quarter after
the date of such anniversary.
These options terminate upon the earliest to occur of the following: 90 days
after termination of an optionee's employment, 180 days after an optionee's
employment is terminated for any other reason, including retirement, disability
or death, and ten years after the grant date. Notwithstanding the foregoing,
upon a change of control (for example, a merger or similar transaction or the
removal of a majority of the members of our current board of directors) of our
company, all unvested portions of options then outstanding will vest in full on
that date.
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<PAGE>
Our board of directors may amend, alter, suspend, or terminate the stock
incentive plan at any time, provided, however, that the board must first seek
the approval of shareholders, if required by law or regulation, and that of
each affected optionee if such amendment, alteration, suspension or termination
would adversely affect his or her rights under any option granted prior to that
date.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table, sets forth information with respect to the beneficial
ownership, within the meaning of Section 13(d)(3) of the Securities Exchange
Act 1934, as amended, of our common stock, as of April 30, 2000 and as adjusted
to reflect the sale of the shares of common stock offered in this offering for:
. each person who we know owns beneficially more than 5% of our common
stock;
. each of our directors;
. each of our executive officers; and
. all of our executive officers and directors as a group.
The following information gives effect to the conversion of all outstanding
shares of our preferred stock into common stock upon the consummation of this
offering.
<TABLE>
<CAPTION>
Shares of Shares of
Common Stock Common Stock
Beneficially Owned Beneficially Owned
Before this Offering After this Offering Number of Number of
-------------------- ----------------------- exercisable excluded
Name of Beneficial Owner Number Percentage Number Percentage options/warrants(1) options/warrants(2)
- ------------------------ --------- ---------- --------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Charles Zhang(3)(14).... 3,444,423 33.6% % 12,500 37,500
Maxtech Enterprises
Limited(4)(14)......... 2,528,036 24.5 81,798 --
Intel
Corporation(5)(14)..... 1,288,750 12.6 -- --
Edward Roberts(6)(14)... 519,595 5.1 2,000 2,000
James McGregor(7)....... -- -- -- --
George Chang(8)......... -- -- -- --
Thomas Gurnee(9)........ * * -- 70,000
Alan Li (10)............ * * -- 70,000
Victor Koo(11).......... * * 20,087 60,262
Edwin Chan(12).......... * * -- 30,000
Gary Zhao(13)........... * * -- 30,000
All directors and
executive officers as a
group
(6 persons)............ 4,033,257 39.4% 32,587 271,762
</TABLE>
- ---------------------
* Indicates less than one percent of the common stock
(1) Shows shares of our common stock issuable upon exercise of options that are
currently exercisable or are exercisable within 60 days of the date of this
prospectus. These shares are included in the total number of shares
beneficially owned.
(2) Shows shares of our common stock issuable upon exercise of options that
will not be exercisable within 60 days of the date of this prospectus.
These shares are not included in the total number of shares beneficially
owned.
(3) Dr. Zhang's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
519, Tower 2, Bright Chiina Chang An Building, Beijing 100005, People's
Republic of China.
(4) A British Virgin Islands corporation that is wholly-owned by Morningside
Technologies Inc., a Cayman Islands corporation, which is in turn wholly-
owned by Morningside CyberVentures Holdings Limited, a British Virgin
Islands corporation, which is in turn wholly-owned by The NTX-II Trust, an
Isle of Man Trust. The trustee of the trust is Verrall Limited, an Isle of
Man corporation. Verrall Limited controls indirectly, through The NTX-II
Trust, a 100% ownership interest in Maxtech Enterprises Limited, and has
sole power to vote and dispose of the shares of Sohu held by Maxtech
Enterprises Limited. The address of Maxtech Enterprises Limited is Suite
835A, Europort, Gilbraltar. The address of Verrall Limited is c/o
Dickinson, Cruickshank & Co., 33/37, Athol Street, Douglas IM1 1LB, Isle of
Man.
(5) Intel Corporation's address is 2200 Mission College Boulevard, Santa Clara,
CA 95052, U.S.A.
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<PAGE>
(6) Dr. Roberts' address is c/o M.I.T. Sloan School of Management, 50 Memorial
Drive, E52-535, Cambridge, MA 02142-1347, U.S.A.
(7) Mr. McGregor's address is c/o Dow Jones China, Unit 1101, Tower A, Beijing
Ke Lun Building, 12A Guanghua Lu, Chaoyang District, Beijing 100020,
People's Republic of China.
(8) Mr. Chang's address is c/o Morningside Asia Advisory Limited, Room 1503,
Hang Lung Centre, 2-20 Paterson Street, Causeway Bay, Hong Kong.
(9) Mr. Gurnee's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(10) Mr. Li's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(11) Mr. Koo's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(12) Mr. Chan's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(13) Mr. Zhao's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
1519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(14) These shareholders and certain other shareholders are parties to a voting
agreement. Under the agreement (i) Dow Jones and Intel may each nominate
one director to our board of directors; (ii) Harrison Enterprises and
Maxtech Enterprises may jointly nominate one director to our board of
directors; (iii) all parties to the agreement will vote the voting
securities owned by them in favor of the nominees specified above; and
(iv) none of parties will vote to remove any director nominated in
accordance with the stockholders' voting agreement, other than for cause,
without the consent of the party or parties entitled to nominate the
director. For each of Dow Jones and Intel, its nomination rights will
terminate when it no longer holds at least 50% of the preferred stock it
had purchased or at least 50% of the common stock into which any such
preferred stock has been converted. For Harrison Enterprises and Maxtech
Enterprises, their joint nomination rights will terminate when, between
them, they no longer hold at least 50% of the preferred stock they had
purchased or at least 50% of the common stock into which any such
preferred stock has been converted. The nomination rights for all parties
will terminate in their entirety when none of (x) Harrison Enterprises and
Maxtech Enterprises collectively, (y) Dow Jones or (z) Intel holds at
least 50% of the preferred stock originally purchased or at least 50% of
the common stock into which any such preferred stock has been converted.
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<PAGE>
RELATED PARTY TRANSACTIONS
We have entered into an agreement whereby we provide Internet advertising
and promotional services to a subsidiary of Intel Corporation, one of our
shareholders. The total amount of revenue recorded under this agreement was $0,
$175,000 and $178,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. During 1999, affiliates of Maxtech Enterprises Limited, one of
our shareholders, provided certain professional and managerial services to us.
The estimated fair value of these services was approximately $60,000 for the
year ended December 31, 1999. In connection with these services, Maxtech
received a warrant from us in October 1999 giving it the right to purchase
81,798 shares of our common stock at a price of $6.1126 per share. This warrant
is exercisable during the two year period from the date of its issuance.
Sohu, Dr. Charles Zhang and holders of our Series A, B, B-1 and C preferred
stock are parties to the second amended and restated stockholders' voting
agreement. This agreement provides that, among other things:
. Dow Jones and Intel may each nominate one director to our board of
directors;
. Harrison Enterprises and Maxtech Enterprises may jointly nominate one
director to our board of directors;
. all of the parties will vote the voting securities owned by them in
favor of the nominees specified above; and
. none of the parties will vote to remove any director nominated in
accordance with the stockholders' voting agreement, other than for
cause, without the consent of the party entitled to nominate the
director.
The parties to the stockholders' voting agreement, with the exception of Dr.
Charles Zhang, together with Hikari Tsushin, Inc., Internet Creations Limited,
a subsidiary of Pacific Century Cyberworks Limited, and Legend New-Tech
Investment Limited, a subsidiary of Legend Holdings Limited, have entered into
the third amended and restated investor rights agreement. This agreement
provide that, among other things:
. parties holding more than 20% of our outstanding common stock (excluding
shares of common stock acquired by our founding shareholders pursuant to
the exercise of stock options or warrants or the conversion of preferred
stock) have the right to require the filing of a registration statement
with the Securities and Exchange Commission during any period, and no
more than two over any period, to register for sale shares of our common
stock owned by them;
. parties proposing to sell common stock at an aggregate price to the
public of $500,000 or more have the right to require the filing of a
Form S-3 registration statement with the Securities and Exchange
Commission during any period to register for sale the shares of common
stock owned by them; and
. all parties have rights to participate in registration statements filed
by Sohu for the sale of our common stock in an underwritten offering for
its own account or for the account of other shareholders;
. however, we are not obligated to file a registration statement with the
SEC if, within the six month period preceding the date of the request
for registration, we have already effected a registration statement in
accordance with the terms of the agreement.
The existence and exercise of these registration rights may make it more
difficult for us to arrange future financing and may have an adverse effect on
the market price of our common stock. See "Description of Capital Stock --
Registration Rights".
During 1999, Kummell Investments Limited, an affiliate of Maxtech
Enterprises, extended a one-time $1,500,000 loan to us. This loan was
subsequently converted into 319,013 shares of our Series C preferred stock as
part of our Series C preferred stock financing.
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<PAGE>
On May , 2000, we and our wholly owned PRC subsidiary, Beijing ITC,
entered into a series of agreements with Beijing Sohu and Beijing Sohu's two
shareholders. Beijing Sohu is a PRC company that is 80% owned by Dr. Charles
Zhang, our founder, President and Chief Executive Officer, and 20% owned by Ms.
Jinmei He, an executive officer of Beijing ITC.
Cooperation Agreement
Under this agreement, Beijing Sohu agreed to provide to Beijing ITC, for a
monthly service fee of RMB Internet information services including the
following:
. providing, collecting, classifying, editing, supervising and
disseminating content for use by Beijing ITC on the www.sohu.com Web
site;
. collecting and supervising the original content that Beijing ITC may use
to develop the digitalized content to be released in online and wireless
access protocol, or WAP, versions;
. upon consultation with Beijing ITC, developing and entering into new
content supplier relationships;
. providing online space for use by Beijing ITC in conducting its online
advertising and commerce activities on the www.sohu.com Web site;
. providing Beijing ITC with other internet information services
reasonably requested by Beijing ITC.
The monthly service fee is subject to periodic adjustment as agreed by the
parties. The parties intend that the fee will be an amount necessary to
reimburse Beijing Sohu for all its costs and expenses incurred in conducting
its content operations under the cooperation agreement.
Moreover, in order to allow Beijing Sohu to provide the services described
above, Beijing ITC has granted to Beijing Sohu and will assist Beijing Sohu in
obtaining from our company, the following licenses by agreements to be
separately signed for a fixed monthly fee:
. domain name licenses for the non-exclusive use of the www.sohu.com and
www.sohu.com.cn domain names;
. trade name and trademark license for the non-exclusive use of the
English and Chinese language versions of the "Sohu" name and trademark;
and
. copyright license for the non-exclusive use of our overall Web site
design and the digitalized content developed and owned by Beijing ITC to
be released in online and WAP versions.
All of the licenses granted above are granted only for Beijing Sohu's
services to be provided to Beijing ITC pursuant to this agreement in China.
Beijing Sohu is responsible for obtaining and maintaining the necessary
operating permits, including an information services permit, an online news
dissemination permit, if required, and computer network security registrations
and complying with PRC law regarding the distribution of content on our
website.
In order to support Beijing Sohu's operations and services, Beijing ITC has
agreed that it will provide exclusive technical services to Beijing Sohu in the
following areas:
. portal Web site technology;
. Web site server application software;
. solutions for system operations; and
. training for technical personnel and provision for technical consulting.
In addition, Beijing Sohu agreed to rely exclusively on Beijing ITC's
technical support and services and will enter into a separate agreement for the
specifics of these services.
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<PAGE>
The cooperation agreement has a term of 20 years, and may be terminated by
either party upon (i) a breach of the agreement that is not remedied within ten
days after notice of the breach has been provided by the non-breaching party to
the breaching party, or (ii) a force majeure event that continues for 30 days
or more and makes it impossible for one or both parties to continue performing
under the agreement.
Beijing Sohu also has agreed that without Beijing ITC's written consent,
Beijing Sohu may not transfer, mortgage or sub-license to any third party or
use for the benefit of any third party any of its rights under this agreement
and may not use the rights granted under this agreement in any way detrimental
to the commercial reputation of Beijing ITC.
Each party's obligations under this agreement can be excused from
performance upon a force majeure event, which is defined to include
unforeseeable and unavoidable events, including hacker attacks.
This agreement is governed by PRC law and disputes arising under this
agreement will be subject to arbitration proceedings in China.
Assets and Business Restructuring Agreement
Under this agreement, Beijing ITC agreed to, among other things, do the
following:
. transfer all ten of its content-related servers and related equipment to
Beijing Sohu for an amount equal to the net book value of the servers
and the equipment as audited by our accountants, which we estimate to be
approximately RMB$740,000 and is payable six months after the transfer
date;
. assign up to 25 of its content editors and supervisors to Beijing Sohu.
In return, Beijing Sohu agreed to, among other things, the following:
. use the content-related servers and related equipment solely for the
purpose of providing information services to our www.sohu.com Web site
in China; and
. be responsible for the compensation, welfare and employment of the
content editors and supervisors assigned to Beijing Sohu.
The assets and business restructuring agreement has a term of 20 years, and
may be terminated by either party upon (1) a breach of the agreement that is
not remedied within ten days after notice of the breach has been provided by
the non-breaching party to the breaching party or (2) a force majeure event
that continues for 30 days or more and makes it impossible for one or both
parties to continue performing under the agreement.
Each party's obligations under this agreement can be excused from
performance upon a force majeure event, which is defined to include
unforeseeable and unavoidable events, including hacker attacks.
This agreement is governed by PRC law and disputes arising under with this
agreement will be subject to arbitration proceedings in China.
Option Agreement
Beijing ITC entered into an exclusive twenty year option agreement with the
shareholders of Beijing Sohu, Dr. Charles Zhang and Ms. Jinmei He. Under this
agreement, Beijing ITC or a third party designated by Beijing ITC will have the
right, at any time, subject to the laws of the PRC, including any applicable
restrictions on foreign investment, to purchase from Dr. Zhang and Ms. He at an
aggregate price of RMB$2,000,000, their entire ownership interest in Beijing
Sohu. The option may be exercised in whole or in part on one or more occasions.
This agreement expires upon the earlier of twenty years after its execution and
the date on which the entire ownership interest of Beijing Sohu is acquired by
Beijing ITC.
This agreement is governed by PRC law and disputes arising under this
agreement will be subject to arbitration proceedings in China.
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Loan Agreements
We plan to enter into a loan agreement for $176,000 with Dr. Charles Zhang
and a loan agreement for $43,000 with Ms. Jinmei He. The sole purpose of these
loans is to help them fund their additional equity investments in Beijing Sohu
as a result of our corporate restructuring. The loans will not bear any
interest, will have a term of ten years and will be repayable in full at
maturity. In the event Beijing ITC or its designee purchases shares of Beijing
Sohu pursuant to the option agreement described above, the net proceeds to Dr.
Zhang and Ms. He from the sale of shares will be applied towards partial
repayment of the loans. Dr. Zhang and Ms. He have pledged all of their shares
in Beijing Sohu to us as security for the loans.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock. We
cannot predict the effect, if any, that sales of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Future sales of substantial amounts of our stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of our stock.
Upon completion of this offering, we expect to have shares of common
stock outstanding or shares if the U.S. underwriters and international
managers fully exercise their over-allotment option to purchase additional
shares. Of these shares, all of the shares sold in this offering will be freely
tradeable without restriction under the Securities Act, except for any such
shares which may be acquired by one of our affiliates. Rule 144 defines an
affiliate of a company as a person that, directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, our company. All shares of common stock outstanding prior to this
offering are "restricted securities", as such term is defined under Rule 144,
because they were issued in private transactions not involving a public
offering. These shares may not be sold in the absence of registration other
than in accordance with Rule 144 or Rule 701 under the Securities Act or
another exemption form registration. This prospectus may not be used in
connection with any resale of shares of common stock acquired in this offering
by our affiliates.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers, directors and preferred shareholders have agreed that they
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
Rule 144
In general, under Rule 144 if a period of at least one year has elapsed
since the later of the date the restricted shares were acquired from Sohu and
the date they were acquired from an affiliate, then the holder of such
restricted shares, including an affiliate, is entitled to sell a number of
shares within any three-month period that does not exceed the greater of:
. one percent of the then outstanding shares; and
. the average weekly reported volume of trading of such shares on Nasdaq
during the four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission.
The holder may only sell such shares through unsolicited brokers'
transactions. Sales under Rule 144 are also subject to certain requirements
pertaining to:
. the manner of such sales;
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. notices of such sales; and
. the availability of current public information concerning Sohu.
Rule 144(k)
Under Rule 144 (k), a holder of restricted shares may sell shares
immediately without regard to the volume limitations and other restrictions
described above if:
. a period of at least two years has passed between the later of (1) the
date restricted securities were acquired from Sohu and (2) the date they
were acquired from an affiliate, as applicable;
. the holder is not an affiliate at the time of the sale; and
. the holder has not been an affiliate for at least three months prior to
the sale.
Rule 144 does not require the same person to have held the securities for
the applicable periods. The foregoing summary of Rule 144 is not intended to be
a complete description.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our directors, officers, employees, consultants or advisors who
purchased shares of common stock from us in connection with a compensatory
share plan or other written agreement may be eligible to resell such shares 90
days after the closing of this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding period, contained
in Rule 144. Beginning 90 days after the date of this prospectus, shares
acquired upon exercise of options issued under our stock option plan will be
outstanding and eligible for sale in reliance upon Rule 701. Additional shares
may be available if options are exercised in the 180-day period following the
date of this prospectus.
Registration Rights
After completion of this offering, the holders of approximately shares
of common stock, or their transferees, will be entitled to exercise rights to
cause us to register those shares for resale under the Securities Act. These
holders have these registration rights under the provisions of a registration
rights agreement that was entered into in connection with the private placement
of our Series B, Series B-1, Series C and Series D preferred stock. These
rights cover the shares of common stock into which the preferred stock will be
converted upon completion of this offering, as well as any shares obtained by
these shareholders from time to time after this offering. Registration of these
shares of our common stock would permit the sale of these shares without regard
to the restrictions of Rule 144. For a further description of these
registration rights, see the "Certain Relationships" section of this
prospectus.
Stock Incentive Plan
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 900,000 shares of common stock reserved for
issuance under our stock incentive plan. This registration statement is
expected to be filed as soon as practicable after the closing of this offering.
Through April 30, 2000, options to purchase 522,647 shares had cumulatively
been issued and are outstanding. All of these shares will be eligible for sale
in the public market from time to time, subject to vesting provisions, Rule 144
volume and other limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lockup agreements.
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DESCRIPTION OF CAPITAL STOCK
General
Our fifth amended and restated certificate of incorporation and our amended
and restated bylaws, which will become effective upon the closing of this
offering, authorize the issuance of up to 29,000,000 shares of common stock,
par value $0.001 per share, and 1,000,000 shares of preferred stock, par value
$0.001 per share, the rights and preferences of which may be established from
time to time by our board of directors. The following summarizes the terms and
provisions of our capital stock upon the closing of this offering. The summary
is not complete, and you should read the forms of our fifth amended and
restated certificate of incorporation and bylaws, which will be filed as
exhibits to the registration statement of which this prospectus is a part. As
of April 30, 2000, 3,621,410 shares of common stock were issued and
outstanding, 5,459,400 shares of convertible preferred stock (Series A, B, B-1,
C and D) convertible into 6,618,673 shares of common stock were issued and
outstanding and options and warrants to purchase 621,790 shares of common stock
were issued and outstanding.
Common Stock
Under our fifth amended and restated certificate of incorporation, holders
of our common stock are entitled to one vote for each share held of record on
all matters submitted to a vote of the shareholders, including the election of
directors. They do not have cumulative voting rights, so that holders of a
plurality of the shares of common stock present at a meeting at which a quorum
is present will be able to elect all of our directors eligible for election in
a given year. The holders of a majority of the voting power of the issued and
outstanding common stock will constitute a quorum. Subject to preferences that
may be applicable to any then outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of
our liquidation, dissolution or winding up, the holders of common stock will be
entitled to share ratably in the net assets legally available for distribution
to shareholders after payment of all of our liabilities and liquidation
preference of any preferred stock then outstanding. Holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. The
rights, preferences and privileges of holders of common stock are subject to
the rights of the holders of shares of any series of preferred stock that we
may designate and issue in the future. After the closing of this offering,
there will be no shares of preferred stock outstanding.
Preferred Stock
Our board of directors will be authorized to issue preferred stock in one or
more series and to establish the number of shares to be included in each series
and to fix the designations, powers, preferences and rights of the shares of
each series and any qualifications, limitations or restrictions of each series.
Because the board of directors will have the power to establish the preferences
and rights of the shares of any series of preferred stock, it may afford the
holders of any series of preferred stock preferences, powers and rights,
including voting rights, senior to the rights of the holders of common stock.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company.
Registration Rights
A number of our shareholders are parties to the third amended and restated
investor rights agreement. Under the terms of the agreement, parties holding
more than 20% of our outstanding common stock (excluding shares of common stock
acquired by our founding shareholders pursuant to the exercise of stock options
or warrants or the conversion of preferred stock) has the right to require the
filing of a registration statement with the SEC to register for sale shares of
common stock owned by them. We are also obligated to register any of the shares
of common stock issuable upon conversion of the preferred stock held by other
parties to the agreement if they request to be included in the registration.
These parties, in the aggregate, have two demand
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registration rights. Furthermore, if we become eligible to file registration
statements on Form S-3, parties proposing to sell common stock at an aggregate
price to the public of US$500,000 or more have the right to require us to file
a registration statement on Form S-3 under the Securities Act to register for
sale shares of common stock owned by them. We are also obligated to register
the shares of common stock issuable upon conversion of the preferred stock held
by parties to the agreement if they request to be included in the registration,
although we will not be required to effect any Form S-3 registration more than
once in any 180 day period. However, we are not obligated to file a
registration statement with the SEC if, within the six month period preceding
the date of the request for registration, we have already effected a
registration statement in accordance with the terms of the agreement. Holders
of preferred stock which are parties to the agreement will be entitled to
require us to register the common stock owned by them or issuable upon the
conversion of their preferred stock when we register common stock for our own
account or the account of other shareholders. This type of registration right
is commonly known as a "piggyback" registration right.
The foregoing registration rights are subject to certain conditions and
limitations, including:
. the right of the U.S. underwriters in any underwritten offering to limit
the number of shares of common stock held by shareholders with
registration rights to be included in any demand, Form S-3 or piggyback
registration; and
. our right to delay for up to 90 days the filing or effectiveness of a
registration statement pursuant to a demand for registration if the
board of directors determines that the registration would not be in our
best interest at that time.
We are generally required to bear all of the expenses of all registrations,
except underwriting discounts and commissions. Registration of any of the
shares of common stock held by shareholders with registration rights would
result in those shares becoming freely tradable without restriction under the
Securities Act immediately after effectiveness of the registration. We have
agreed to indemnify the holders of registration rights in connection with
demand, Form S-3 and piggyback registration under the terms of the third
amended and restated investor rights agreement.
Anti-Takeover Effects of Delaware Law and Our Fifth Amended and Restated
Certificate of Incorporation and Bylaws
Section 203 of the Delaware General Corporation Law
We must comply with the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of three years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who, together with affiliates and associates, owns,
or, in some cases, within three years prior, did own, 15% or more of the
corporation's voting stock. Under Section 203, a business combination between
our company and an interested shareholder is prohibited unless it satisfies one
of the following three conditions:
. our board of directors must have previously approved either the business
combination or the transaction that resulted in the shareholder becoming
an interested shareholder;
. upon consummation of the transaction that resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding, for purposes of determining the number of shares
outstanding, shares owned by (1) persons who are directors and also
officers and (2) employee stock plans, in some instances; or
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. the business combination is approved by our board of directors and
authorized at an annual or special meeting of the shareholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested shareholder.
Provisions of our fifth amended and restated certificate of incorporation
and amended and restated bylaws, which are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
to be in its best interest, including those attempts that might result in a
premium over the market price for the shares of common stock held by our
shareholders.
Classified Board of Directors
Our certificate of incorporation provides that the number of directors shall
be determined in accordance with the bylaws. Upon the completion of this
offering, our board of directors will be divided into two classes of directors
serving staggered two-year terms. As a result, approximately one-half of the
board of directors will be elected each year. With respect to each class, a
director's term will be subject to the election and qualification of their
successors, or their earlier death, resignation or removal. In addition, our
board of directors may be removed only for cause. These provisions, when
coupled with the provision of our fifth amended and restated certificate of
incorporation authorizing the board of directors to fill vacant directorships
or increase the size of the board of directors, may deter a shareholder from
removing incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by such removal with its own
nominees.
Stockholder Action; Special Meetings of Shareholders
Our fifth amended and restated certificate of incorporation eliminates the
ability of shareholders to act by written consent. It further provides that
special meetings of our shareholders may be called only by the chairman of the
board, president or a majority of the board of directors. These provisions may
render it more difficult for shareholders to take action opposed by the board
of directors.
Advance Notice Requirements for shareholder Proposals and Director Nominations
Our amended and restated bylaws provide that stockholders seeking to bring
business before an annual meeting of shareholders, or to nominate candidates
for election as directors at an annual meeting of shareholders, must provide
timely notice in writing. To be timely, a shareholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 60 days nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting of shareholders; provided, that in the
event that the annual meeting is called for a date that is not within 30 days
before or after such anniversary date, notice by the shareholder in order to be
timely must be received not later than the close of business on the tenth day
following the date on which notice of the date of the annual meeting was mailed
to shareholders or made public, whichever first occurs. In the case of a
special meeting of shareholders called for the purpose of electing directors,
notice by the shareholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice of the
date of the special meeting was mailed or public disclosure of the date of the
special meting was made, whichever first occurs. Our amended and restated
bylaws also specify certain requirements as to the form and content of a
shareholder's notice. These provisions may preclude shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
Supermajority approvals
Our amended and restated by laws provide that the provisions of our
certificate of incorporation referred to above will not be able to be altered
without approval by our stockholders holding not less than 80% of the voting
power of the outstanding shares.
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Authorized But Unissued Shares
The authorized but unissued shares of preferred stock are available for
future issuance without shareholder approval. The existence of authorized but
unissued shares of preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
Indemnification, and Limitation of Liability for Directors and Officers
Our fifth amended and restated certificate of incorporation provides that we
will indemnify our directors and officers to the fullest extent permitted by
the laws of the State of Delaware. Our charter also provides that a director of
our company shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Law as the same exists or may hereafter
be amended.
The indemnification rights conferred by our certificate of incorporation are
not exclusive of any other right to which a person seeking indemnification may
otherwise be entitled. We will also provide liability insurance for our
directors and officers for certain losses arising from claims or charges made
against them, while acting in their capacities as directors or officers.
Transfer Agent and Registrar
Our transfer agent is The Bank of New York.
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TAXATION
Certain United States Tax Consequences to Non-U.S. Holders of Common Stock
This section summarizes certain United States federal income and estate tax
consequences of the ownership and disposition of common stock by a non-U.S.
holder. You are a non-U.S. holder if you are, for United States federal income
tax purposes:
. a nonresident alien individual,
. a foreign corporation,
. a foreign partnership, or
. an estate or trust that in either case is not subject to United States
federal income tax on a net income basis on income or gain from common
stock.
This section does not consider the specific facts and circumstances that may
be relevant to a particular non-U.S. holder and does not address the treatment
of a non-U.S. holder under the laws of any state, local or foreign taxing
jurisdiction. This section is based on the tax laws of the United States,
including the Internal Revenue Code of 1986, as amended, existing and proposed
regulations, and administrative and judicial interpretations, all as currently
in effect. These laws are subject to change, possibly on a retroactive basis.
You should consult a tax advisor regarding the United States federal tax
consequences of acquiring, holding and disposing of common stock in your
particular circumstances, as well as any tax consequences that may arise
under the laws of any state, local or foreign taxing jurisdiction.
Dividends
Generally, a percentage of any dividend paid by a United States corporation
that received at least 80% of its gross income from one or more active foreign
businesses for the three tax years before the tax year in which the dividend is
paid (or, if the corporation has no gross income for such three-year period, in
the tax year in which the dividend is paid) is not subject to withholding of
United States federal income tax. The applicable percentage is determined by
dividing the corporation's foreign gross income for the testing period by the
corporation's total gross income for that period. Any remaining portion of the
dividend would be subject to withholding tax as described below. We believe
that we are likely to satisfy the 80% foreign business requirement, but this
conclusion is a factual determination made annually and no assurances can be
made that we will do so.
Except for that portion of any dividend not subject to withholding as
described above and except as described below, if you are a non-U.S. holder of
common stock, dividends paid to you are subject to withholding of United States
federal income tax at a 30% rate or at a lower rate if you are eligible for the
benefits of an income tax treaty that provides for a lower rate. Under
currently effective United States Treasury regulations, for purposes of
determining if dividends are subject to the 30% withholding tax, dividends paid
to an address in a foreign country are presumed to be paid to a resident of
that country, unless the person making the payment has knowledge to the
contrary. Under current interpretations of United States Treasury regulations,
this presumption also applies for purposes of determining whether a lower
withholding rate applies under an income tax treaty.
Under United States Treasury regulations that will generally apply to
dividends paid after December 31, 2000, you must satisfy certain certification
requirements in order to claim the benefit of a lower treaty rate.
Additionally, if you are a partner in a foreign partnership that holds the
common stock, you, in addition to the foreign partnership, must satisfy the
certification requirements and the partnership must provide certain information
as well. The Internal Revenue Service will apply a look-through rule in the
case of tiered partnerships.
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If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may obtain a refund of any amounts withheld in excess
of that rate by filing a refund claim with the United States Internal Revenue
Service.
If the dividends are "effectively connected" with your conduct of a trade or
business within the United States, and, if required by a tax treaty, the
dividends are attributable to a permanent establishment, or in the case of an
individual a "fixed base", that you maintain in the United States, then the
dividends generally are not subject to withholding tax, provided you file the
appropriate Internal Revenue Service form with the payor. Instead, "effectively
connected" dividends are taxed at rates applicable to United States citizens,
resident aliens and domestic United States corporations.
If you are a corporate non-U.S. holder, "effectively connected" dividends
that you receive may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on gain that you recognize on a disposition of common
stock unless:
. the gain is "effectively connected" with your conduct of a trade or
business in the United States, and the gain is attributable to a
permanent establishment, or in the case of an individual a "fixed base",
that you maintain in the United States, if that is required by an
applicable income tax treaty as a condition for subjecting you to United
States taxation on a net income basis,
. you are an individual, you hold the common stock as a capital asset, you
are present in the United States for 183 or more days in the taxable
year of the sale and certain other conditions are satisfied, or
. we are or have been a "United States real property holding corporation"
for federal income tax purposes and you held, directly or indirectly, at
any time during the five-year period ending on the date of disposition,
more than 5% of the common stock and you are not eligible for any treaty
exemption.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or at a lower rate if you are
eligible for the benefits of an income tax treaty that provides for a lower
rate.
We have not been, are not and do not anticipate becoming a United States
real property holding corporation for United States federal income tax
purposes.
Federal Estate Taxes
Common stock held by an individual who is a non-U.S. holder at the time of
death will be included in the holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Under currently applicable law, if you are a non-U.S. holder, dividends paid
to you at an address outside the United States will not be subject to United
States information reporting requirements or backup withholding tax. Beginning
with respect to payments made after December 31, 2000, a non-U.S. holder will
be entitled to such exemption only if the non-U.S. holder provides a Form W-8
(or satisfies certain documentary evidence requirements for establishing that
it is a non-U.S. holder) or otherwise establishes an exemption.
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If you sell your common stock outside of the United States through a non-
U.S. office of a non-U.S. broker, and the sales proceeds are paid to you
outside the United States, then United States backup withholding and
information reporting requirements generally will not apply to that payment.
However, United States information reporting, but not backup withholding, will
apply to a payment of sales proceeds, even if that payment is made outside the
United States, if you sell your common stock through a non-U.S. office of a
broker that:
. is a United States person,
. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,
. is a "controlled foreign corporation" as to the United States, or with
respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
-- one or more of its partners are U.S. persons, as defined in United
States Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interests in the partnership, or
-- at any time during its tax year, the foreign partnership is engaged
in a United States trade or business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of common stock to or
through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you certify,
under penalties of perjury, that you are a non-U.S. person or you otherwise
establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund
claim with the United States Internal Revenue Service.
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UNDERWRITING
Under the terms and subject to the conditions contained in a U.S. and
international underwriting agreement dated , 2000, we have agreed to sell
to the underwriters named below, for whom Credit Suisse First Boston
Corporation is acting as representative for the U.S. underwriters and Credit
Suisse First Boston (Hong Kong) Limited is acting as representative for the
international underwriters, the following respective number of shares of common
stock:
<TABLE>
<CAPTION>
Number
U.S. Underwriters of Shares
----------------- ---------
<S> <C>
Credit Suisse First Boston Corporation...............................
Donaldson, Lufkin & Jenrette Securities Corporation..................
UBS AG, acting through its financial services group UBS Warburg......
----
Subtotal...........................................................
----
</TABLE>
<TABLE>
<CAPTION>
Number
International Managers of Shares
---------------------- ---------
<S> <C>
Credit Suisse First Boston (Hong Kong) Limited.......................
DLJ International Securities.........................................
UBS AG, acting through its financial services group UBS Warburg......
----
Subtotal...........................................................
----
Total............................................................
====
</TABLE>
The U.S. offering and the international offering are each conditioned upon
the closing of the other.
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments by the non-defaulting underwriters may be increased or
this offering of common stock may be terminated.
We have granted the underwriters a 30-day option to purchase on a pro rata
basis up to . additional shares of common stock from us at the initial public
offering price, less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions
paid by us............. $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
We will reimburse certain expenses of the underwriters incurred in
connection with this offering.
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The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of our common stock being offered.
Pursuant to an agreement between the U.S. underwriters and international
managers, each U.S. underwriter has agreed that, as a part of its distribution
of the common stock and subject to permitted exceptions, it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of common
stock or distribute any prospectus relating to the common stock to any person
outside the United States or Canada or to any other dealer who does not so
agree. Each international manager has agreed that, as part of its distribution
of the common stock and subject to permitted exceptions, it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of common
stock or distribute any prospectus relating to the common stock in the United
States or Canada or to any other dealer who does not so agree. The foregoing
limitations do not apply to stabilization transactions or to transactions
between the U.S. underwriters and international managers. As used herein,
"United States" means the United States of America (including the States and
the District of Columbia), its territories, possessions and other areas subject
to its jurisdiction; "Canada" means Canada, its provinces, territories,
possessions and other areas subject to its jurisdiction; and an offer or sale
shall be in the United States or Canada if its is made to (i) any individual
resident in the United States or Canada or (ii) any corporation, partnership,
pension, profit-sharing or other trust or entity (including any such entity
acting as an investment adviser with discretionary authority) whose office most
directly involved with the purchase is located in the United States or Canada.
Each of the international managers severally represents and agrees that:
In the United Kingdom:
. it has not offered or sold, and prior to the date six months after the
date of issue of the common stock will not offer or sell, any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal 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 Regulation 1995;
. 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 common stock in, from or otherwise involving the United
Kingdom;
. it has only issued or passed on and will only issue 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 common stock to a person who
is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person
to whom such document may otherwise lawfully be issued or passed on;
In Japan:
. it has not offered or sold and will not offer or sell, directly or
indirectly, in Japan or to or for the account of any resident of Japan
any shares of common stock, except (1) under an exemption from the
registration requirements of the securities and Exchange Law of Japan
and (2) in compliance with any other applicable requirements of Japanese
law;
. it will send to any dealer who purchases from it any shares of common
stock a notice stating in substance that, by purchasing such shares, the
dealer represents and agrees that it has not offered or sold, and will
not offer or sell, any shares of common stock, directly or indirectly,
in Japan or to or for the account of any resident thereof except
pursuant to any exemption from the registration requirements of the
Securities and Exchange Law of Japan, and that the dealer will send to
any other dealer to whom it sells any shares of common stock a notice
containing substantially the same statement as is contained in this
sentence;
92
<PAGE>
In Hong Kong:
. it has not offered or sold and will not offer or sell any shares of
common stock in Hong Kong by means of any document, other than to
persons whose ordinary business it is to buy or sell shares or
debentures, whether as principal or agent, except in circumstances which
do not constitute an offer to the public within the meaning of the
Companies Ordinance (Chapter 32) of Hong Kong;
. it has not issued and will not issue any initiation or advertisement
relating to the common stock in Hong Kong, except if permitted to do so
by the securities law of Hong Kong, other than with respect to shares of
common stock 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 shares whether as principal or
agent; and
In Singapore:
. it has not and will not offer or sell any shares of common stock or
distribute any document or other material relating to the common stock,
either directly or indirectly, to the public or any member of the public
in Singapore other than (1) to an institutional investor or other person
specified in Section 106C of the Companies Act, Chapter 50 of Singapore,
(2) to a sophisticated investor, and in accordance with the conditions,
specified in Section 106D of the Companies Act Chapter 50 of Singapore
or (3) otherwise pursuant to, and in accordance with the conditions of,
any other provision of the Companies Act Chapter 50 of Singapore.
A copy of this prospectus has been lodged with the Registrar of Companies
and Businesses in Singapore as an information memorandum for the purposes of
Section 106D of the Companies Act Chapter 50 of Singapore. The Registrar of
Companies and Businesses in Singapore takes no responsibility as to the
contents of this document.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers, directors and preferred shareholders have agreed that they
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any
of the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock to be sold in this offering, to
strategic partners, consultants and friends and family of our officers. The
number of shares available for sale to the general public in this offering will
be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
The underwriters have agreed to reimburse certain of our expenses incurred
in connection with this offering.
93
<PAGE>
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "SOHU".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the representatives and does not reflect the market price for
our common stock following this offering. Among the principal factors
considered in determining the initial public offering price will be:
. the information in this prospectus and otherwise available to the
representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. our past and present operations;
. our past and present earnings and current financial position;
. the ability of our management;
. our prospects for future revenues and earnings;
. the present state of our development;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
. the general condition of the securities markets at the time of this
offering.
We can offer no assurance that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to this offering or that an active trading market for the
common stock will develop and continue after this offering.
The representatives on behalf of the underwriters may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing transaction or a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at anytime.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations.
94
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the securities in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of securities are effected. Accordingly, any resale of the securities in
Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to
be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the securities.
Representations of Purchasers
Each purchaser of securities in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom such purchase
confirmation is received that (1) such purchaser is entitled under applicable
provincial securities laws to purchase such securities without the benefit of a
prospectus qualified under such securities laws, (2) where required by law,
that such purchaser is purchasing as principal and not as agent, and (3) such
purchaser has reviewed the text above under "Resale Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of securities to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
securities acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of securities acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of securities should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the
securities in their particular circumstances and with respect to the
eligibility of the securities for investment by the purchaser under relevant
Canadian legislation.
95
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the common stock will be passed upon for Sohu.com Inc. by
Sullivan & Cromwell, Hong Kong and New York, New York. Certain legal matters
under U.S. federal and New York law will be passed upon for the underwriters by
Cravath, Swaine & Moore, Hong Kong and New York, New York. Certain legal
matters as to PRC law will be passed upon for Sohu.com Inc. by TransAsia
Lawyers, Beijing and for the underwriters by Commerce & Finance Law Offices,
Beijing.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers, independent accountants, given on the authority of said
firm as experts in auditing and accounting. We have included in this prospectus
descriptions concerning PRC laws and regulations and our regulatory compliance
in reliance upon the opinion of TransAsia Lawyers and their authority as
experts in PRC legal matters.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
our common stock offered in this offering. This prospectus does not contain all
of the information in the Registration Statement and the exhibits. We have
omitted certain portions pursuant to the rules and regulations of the
Securities and Exchange Commission.
As a result of this offering, we will become subject to the periodic
reporting and other informational requirements of the Securities Exchange Act
of 1934, as amended. In accordance with these requirements, we will file
reports and other information with the Securities and Exchange Commission.
For further information with respect to us and the shares being offered in
this offering, please refer to the Registration Statement, including the
exhibits filed therewith. You can inspect and copy the Registration Statement
and the exhibits as well as other reports and information at the public
reference facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; and
at the regional offices of the Securities and Exchange Commission at Seven
World Trade Center, 13th Floor, New York, New York 10048; and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
obtain copies of these materials from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Further information on the operation of the Public
Reference Room in Washington, D.C. can be obtained by calling the Securities
and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission also maintains a Web site that
contains reports, proxy statements and other information about issuers, such as
Sohu.com Inc., who file electronically with the Securities and Exchange
Commission. The address of that site is http://www.sec.gov.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to give any information or make any representation
about us or this offering that is different from, or in addition to, that
contained in this prospectus or in any of the materials that we have
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. If you are in a jurisdiction where
offers to sell, or solicitations of offers to buy, the securities offered by
this document are unlawful, or if you are a person to whom it is unlawful to
direct these types of activities, then the offer presented in this document
does not extend to you. The information contained in this document speaks only
as of the date of this document unless the information specifically indicates
that another date applies.
96
<PAGE>
SOHU.COM INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and March
31, 2000 (unaudited); and Pro forma March 31, 2000 (unaudited).......... F-3
Consolidated Statements of Operations for each of the three years ended
December 31, 1997, 1998 and 1999 and for each of the three month periods
ended March 31, 1999 (unaudited) and 2000 (unaudited)................... F-4
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1998 and 1999 and for each of the three month periods
ended March 31, 1999 (unaudited) and 2000 (unaudited)................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
three years ended December 31, 1997, 1998 and 1999 and for the three
month period ended March 31, 2000 (unaudited)........................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Sohu.com Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of shareholders'
equity (deficit) expressed in U.S. dollars present fairly, in all material
respects, the financial position of Sohu.com Inc. (the "Company") and its
subsidiary at December 31, 1998 and 1999, and the results of their operations
and their 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. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Beijing, People's Republic of China
February 2, 2000
F-2
<PAGE>
SOHU.COM INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of US dollars, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, March 31, March 31,
1998 1999 2000 2000
------------ ------------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $1,232 $3,924 $33,106 $33,106
Accounts receivable, net..... 68 401 776 776
Accounts receivable-related
parties..................... 158 37 -- --
Prepaid and other current
assets...................... 49 126 241 241
------ ------ ------- -------
Total current assets....... 1,507 4,488 34,123 34,123
Fixed assets, net.............. 236 999 2,227 2,227
Other assets, net.............. 35 1,589 1,761 1,761
------ ------ ------- -------
$1,778 $7,076 $38,111 $38,111
====== ====== ======= =======
LIABILITIES AND SHAREHOLDERS
EQUITY (DEFICIT)
Current liabilities:
Short-term loan.............. $ -- $ -- $ 2,899 $ 2,899
Accounts payable............. 72 500 1,039 1,039
Accrued liabilities.......... 132 1,411 1,384 1,384
------ ------ ------- -------
Total current liabilities.. 204 1,911 5,322 5,322
Commitments and contingencies
(Note 11)
Series B Mandatorily Redeemable
Convertible Preferred Stock:
$0.001 par value per share
(2,077,205 shares authorized;
2,074,790, 2,077,205 and
2,077,205 shares issued and
outstanding at December 31,
1998 and 1999 and March 31,
2000 (unaudited), no shares
issued and outstanding on a
Pro Forma basis at March 31,
2000 (unaudited))............. 2,362 2,831 2,947 --
Series C Mandatorily Redeemable
Convertible Preferred Stock:
$0.001 par value per share
(1,479,507 shares authorized,
issued and outstanding at
December 31, 1999 and March
31, 2000 (unaudited), no
shares issued and outstanding
on a Pro Forma basis at March
31, 2000 (unaudited))......... 7,376 7,721 --
Series D Mandatorily Redeemable
Convertible Preferred Stock:
$0.001 par value per share
(777,688 shares authorized,
issued and outstanding at
March 31, 2000 (unaudited), no
shares issued and outstanding
on a Pro Forma basis at March
31, 2000 (unaudited)) ........ -- -- 31,053
------ ------ ------- -------
Total Mandatorily
Redeemable Convertible
Preferred Stock........... 2,362 10,207 41,721 --
Shareholders' equity (deficit):
Series A Preferred Stock:
$0.001 par value per share
(1,125,000 shares
authorized, issued and
outstanding at December 31,
1998 and 1999 and March 31,
2000 (unaudited), no shares
issued and outstanding on a
Pro Forma basis at March 31,
2000 (unaudited))........... 1 1 1 --
Common Stock: $0.001 par
value per share (11,500,000
shares authorized;
3,563,595, 3,621,410 and
3,621,410 shares issued and
outstanding at December 31,
1998 and 1999 and March 31,
2000 (unaudited); and
9,462,395 shares issued and
outstanding on a Pro Forma
basis at March 31, 2000
(unaudited)................. 4 4 4 10
Additional paid-in capital..... 255 389 1,567 43,283
Deferred compensation and
other......................... -- (22) (1,067) (1,067)
Accumulated deficit............ (1,048) (5,414) (9,437) (9,437)
------ ------ ------- -------
Total shareholders' equity
(deficit)................. (788) (5,042) (8,932) 32,789
------ ------ ------- -------
$1,778 $7,076 $38,111 $38,111
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SOHU.COM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands of US dollars, except share data)
<TABLE>
<CAPTION>
Year ended Three months Ended
-------------------------------------- -------------------
December 31, December 31, December 31, March 31, March 31,
1997 1998 1999 1999 2000
------------ ------------ ------------ --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues (including
related party amounts
of $0, $175, $178, $20
(unaudited) and $36
(unaudited))........... $ 78 $ 472 $ 1,617 $ 233 $ 842
Costs and expenses:
Cost of revenues....... 19 215 1,576 172 811
Product development.... 50 208 427 55 348
Sales and marketing.... 94 351 1,758 126 1,533
General and
administrative
(including related
party amounts of $60
in 1999).............. 75 308 1,270 163 516
Stock-based
compensation*......... -- -- 46 -- 129
------ ------ ------- ------ -------
Total costs and
expenses............ 238 1,082 5,077 516 3,337
------ ------ ------- ------ -------
Operating loss......... (160) (610) (3,460) (283) (2,495)
Interest income........ -- 23 25 7 31
Interest expense-
related party......... -- (28) (14) -- --
------ ------ ------- ------ -------
Net loss................ (160) (615) (3,449) (276) (2,464)
Accretion on Series B, C
and D mandatorily
redeemable convertible
preferred stock........ -- (244) (917) (114) (1,559)
------ ------ ------- ------ -------
Net loss attributable to
common stockholders.... $ (160) $ (859) $(4,366) $ (390) $(4,023)
====== ====== ======= ====== =======
Basic and diluted net
loss per share
attributable to common
stockholders........... $(0.05) $(0.24) $ (1.22) $(0.11) $ (1.11)
====== ====== ======= ====== =======
Shares used in computing
basic and diluted net
loss per share......... 3,500 3,564 3,588 3,564 3,621
====== ====== ======= ====== =======
Basic and diluted pro
forma net loss per
share (unaudited)...... $ (0.41) $(0.03) $ (0.26)
======= ====== =======
Shares used in computing
basic and diluted pro
forma net loss per
share (unaudited)...... 8,314 7,925 9,462
======= ====== =======
Cost of revenues..... $ -- $ -- $ 13 $ -- $ 6
Product development.. -- -- 11 -- 3
Sales and marketing.. -- -- 14 -- 11
General and
administrative...... -- -- 8 -- 109
------ ------ ------- ------ -------
$ -- $ -- $ 46 $ -- $ 129
====== ====== ======= ====== =======
</TABLE>
*Stock-based compensation:
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SOHU.COM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of US dollars, except share data)
<TABLE>
<CAPTION>
Year ended Three months ended,
--------------------------------------- -------------------
December 31, December 31, December 31, March 31, March 31,
1997 1998 1999 1999 2000
------------ ------------- ------------ --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(160) $ (615) $(3,449) $(276) $(2,464)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Loss on disposal of
fixed assets........ -- -- 6 -- --
Depreciation and
amortization........ 3 23 277 23 163
Services rendered by
shareholder......... -- -- 60 -- --
Stock-based
compensation
expense............. -- -- 46 -- 129
Amortization of
discount on
convertible
promissory notes.... -- 25 -- -- --
Changes in assets and
liabilities:
Accounts receivable... (13) (55) (333) (245) (374)
Accounts receivable--
related parties...... -- (158) 121 8 36
Prepaids and other
current assets....... 56 (35) (77) (30) (116)
Other assets.......... (9) (26) (78) (76) (237)
Accounts payable...... 23 49 428 (46) 539
Accrued liabilities... (1) 114 1,279 301 (27)
----- ------ ------- ----- -------
Net cash used in
operating
activities......... (101) (678) (1,720) (341) (2,351)
Cash flows from
investing activities:
Acquisition of fixed
assets............... (30) (227) (942) (66) (1,325)
Acquisition of other
assets............... -- -- (1,580) -- --
Disposal of fixed
assets............... -- -- 1 -- --
----- ------ ------- ----- -------
Net cash used in
investing
activities......... (30) (227) (2,521) (66) (1,325)
Cash flows from
financing activities:
Issuance/(repayment)
of Convertible
Promissory Notes--
related party........ 100 (100) 1,500 -- --
Issuance of Series A
Preferred Stock...... 55 -- -- -- --
Issuance of Series B
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- 2,118 -- -- --
Issuance of Series C
Mandatorily
Redeemable
Convertible Preferred
Stock ............... -- -- 5,426 -- --
Issuance of Series D
Mandatorily
Redeemable
Convertible Preferred
Stock................ -- -- -- -- 29,959
Issuance of Common
Stock................ -- 8 7 -- --
Short-term loan....... -- -- -- -- 2,899
----- ------ ------- ----- -------
Net cash provided by
financing
activities........... 155 2,026 6,933 -- 32,858
Net
increase/(decrease)
in cash and cash
equivalents........ 24 1,121 2,692 (407) 29,182
Cash and cash
equivalents at
beginning of period... 87 111 1,232 1,233 3,924
----- ------ ------- ----- -------
Cash and cash
equivalents at end of
period................ $ 111 $1,232 $ 3,924 $ 826 $33,106
===== ====== ======= ===== =======
Non-cash financing
activity:
Conversion of
convertible
promissory note and
accrued interest into
Series C Mandatorily
Redeemable
Convertible Preferred
Stock................ $ -- $ -- $ 1,514 $ -- $ --
===== ====== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SOHU.COM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands of US dollars, except share data)
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Total
---------------- ---------------- Additional Deferred Shareholders'
Shares Shares Paid-in- Compensation Accumulated Equity
Issued Amount Issued Amount Capital and Other Deficit (Deficit)
--------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 850,000 $ 1 3,500,000 $ 4 $ 167 $ -- $ (29) $ 143
Issuance of Series A
Preferred Stock....... 275,000 -- -- -- 55 -- -- 55
Issuance of warrants... -- -- -- -- 25 -- -- 25
Net loss............... -- -- -- -- -- -- (160) (160)
--------- --- --------- --- ------ ------- ------- -------
Balance, December 31,
1997................... 1,125,000 1 3,500,000 4 247 -- (189) 63
Issuance of common
stock................. -- -- 63,595 -- 8 -- -- 8
Accretion of Series B
Mandatorily Redeemable
Convertible Preferred
Stock................. -- -- -- -- -- -- (244) (244)
Net loss............... -- -- -- -- -- -- (615) (615)
--------- --- --------- --- ------ ------- ------- -------
Balance, December 31,
1998................... 1,125,000 1 3,563,595 4 255 -- (1,048) (788)
Issuance of common
stock................. -- -- 57,815 -- 7 -- -- 7
Accretion of Series B
and C Mandatorily
Redeemable Convertible
Preferred Stocks...... -- -- -- -- -- -- (917) (917)
Issuance of
compensatory stock
options............... -- -- -- -- 67 (67) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 46 -- 46
Services rendered by
shareholder........... -- -- -- -- 60 -- -- 60
Foreign currency
translation
adjustment............ (1) -- (1)
Net loss............... -- -- -- -- -- -- (3,449) (3,449)
--------- --- --------- --- ------ ------- ------- -------
Balance, December 31,
1999................... 1,125,000 $ 1 3,621,410 $ 4 $ 389 $ (22) $(5,414) $(5,042)
Issuance of common
stock (unaudited).....
Accretion of Series B,
C and D Mandatorily
Redeemable Convertible
Preferred Stock
(unaudited)........... -- -- -- -- -- -- (1,559) (1,559)
Issuance of
compensatory stock
options (unaudited)... -- -- -- -- 1,178 (1,178) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- -- 129 -- 129
Foreign currency
translation adjustment
(unaudited)........... -- -- -- -- -- 4 -- 4
Net loss (unaudited)... -- -- -- -- -- -- (2,464) (2,464)
--------- --- --------- --- ------ ------- ------- -------
Balance, March 31, 2000
(unaudited)............ 1,125,000 $ 1 3,621,410 $ 4 $1,567 $(1,067) $(9,437) $(8,932)
========= === ========= === ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of US dollars, except number of shares and per share
data)
1. Organisation and Nature of Operations
Sohu.com Inc. (the "Company") was incorporated in Delaware, USA in August
1996 under the name of Internet Technologies China, Inc. The Company changed
its name to Sohu.com Inc. in September 1999. The Company does not have any
substantive operations of its own and substantially all of its primary business
operations are conducted through its wholly-owned subsidiary, Sohu ITC
Information Technology (Beijing) Co., Ltd., which was incorporated in the
People's Republic of China during 1997. The Company offers internet-based
advertising and content through its internet portal site, Sohu.com. The Company
conducts its business within one industry segment and markets its products and
services to clients primarily in the People's Republic of China.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America.
2. Summary of Significant Accounting Policies
(a) Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary incorporated in the People's Republic of China.
All intercompany balances and transactions have been eliminated.
(b) 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(c) Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are composed primarily of investments in money market accounts
stated at cost, which approximates fair value.
(d) Fixed assets and depreciation
Fixed assets, comprising computer hardware and office furniture and
equipment, are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three to five years.
(e) Other assets, net
Other assets includes rental deposits, as well as computer software
purchased from unrelated third parties which is being amortized over its
estimated useful life of three years. Also included in other assets are direct
costs related to the development of the Company's website which have been
capitalized and are being amortized over their estimated useful life of three
years.
At December 31, 1999 and March 31, 2000, the Company had incurred
approximately $780 and $981 (unaudited), respectively, of transaction expenses
relating to the Company's proposed initial public offering
F-7
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
which are being deferred and included as other assets. Upon the successful
closing of the Company's proposed initial public offering, these costs will be
offset against the proceeds of the offering in Additional Paid-In-Capital.
(f) Impairment of long-lived assets
The Company reviews long-lived assets based upon expected gross cash flows
and will reserve for impairment whenever events or changes in circumstances
indicate the carrying amount of the assets may not be fully recoverable. Based
on its most recent analysis, the Company believes that there was no impairment
of its fixed assets and intangible assets as at March 31, 2000 (unaudited).
(g) Product development
Cost incurred in the enhancement of the Company's website and the
classification and organization of listings within internet properties and
enhancements to existing products are charged to product development expense as
incurred. Material software development costs incurred during the application
development stage, including the costs related to the development of the
Company's website, are capitalized as other assets once technological
feasibility has been established. Website development costs are amortized over
three years.
(h) Foreign currency translation
Foreign currency transactions are translated at the applicable rates of
exchange in effect at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at
the applicable rates of exchange in effect at that date. Foreign currency
transaction gains and losses were not material for any period presented.
The Company's functional and reporting currency is the U.S. dollar. The
functional currency of the Company's subsidiary in China is the Renminbi
("RMB"). Sales and purchase and other expense transactions are generally
denominated in RMB. Accordingly, assets and liabilities of the China subsidiary
are translated at the current exchange rate in effect at the balance sheet
date, and revenues and expenses are translated at the average exchange rates in
effect during the reporting period. Gains and losses resulting from foreign
currency translation, if material, are recorded in a separate component of
shareholders' equity. Foreign currency translation adjustments of $0.1, $0.2
and $0.9 in 1997, 1998 and 1999, respectively, are included in Deferred
Compensation and Other in the consolidated statement of shareholders equity
(deficit) for the periods presented.
(i) Advertising expense
Advertising expenses are charged to the income statement when incurred.
Included in sales and marketing expenses are advertising costs of $597, $0
(unaudited) and $652 (unaudited) for the year ended December 31, 1999 and three
months ended March 31, 1999 and 2000, respectively. Prior to 1999, the Company
incurred no advertising costs.
(j) Revenue recognition
The Company's revenues are derived principally from the sale of banner
advertisements pursuant to short-term contracts. Revenues on banner advertising
contracts are recognized ratably over the period in which the advertisement is
displayed. Company obligations typically also include guarantees of a minimum
number of impressions or times that an advertisement appears in pages viewed by
users. To the extent that minimum
F-8
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
guaranteed impressions are not met within the contractual time period, the
Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. The Company also earns revenue from
sponsorship contracts whereby the Company provides services relating to the
design, integration and co-ordination of content and links in channels on the
Company's website. These development fees are recognized as revenue once the
related services have been performed and the channel and related links have
been placed on the Company's website. Revenues and costs related to banner
development services are recognized upon completion of the contract due to the
short time period between when the contract is started and the service is
completed.
For all Company services, revenue is only recognized provided that no
significant Company obligations remain at the end of the period and the
collection of the resulting receivable is probable.
Revenue from on-line commercial transactions will be recognized on a net
commission basis following both successful on-line verification of customer
payment and the shipment of products. To date, the Company has not recorded any
revenues pursuant to such transactions.
To date, the Company has not recorded any material revenues from barter
transactions. Revenue from barter transactions will be recognized during the
period in which the advertisements are displayed on the Company's website,
Barter transactions are recorded at the lower of the fair value of the goods or
services received or the fair value of the advertisement given.
(k) Cost of revenues
Royalties paid to content providers are expensed as incurred and included as
cost of revenues. Contracts with content providers generally range from 3 to 24
months in duration and may be terminated by either party upon notice. In
addition to arrangements whereby a fixed fee is paid for content over a
specified period of time, certain contracts require payments to content
providers based on a stated percentage of the related advertising revenues
generated. Such payments are expensed as incurred and included as cost of
revenues.
(l) Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with APB No. 25, "Accounting for Stock Issued to Employees", ("APB
No. 25") and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", ("SFAS No. 123"). In general,
compensation cost under APB No. 25 is recognized based on the difference, if
any, between the estimated fair value of the Company's common stock and the
amount an employee must pay to acquire the stock, as determined on the date the
option is granted. Total compensation cost as determined at the date of option
grant is recorded in Shareholders' Equity as Additional Paid-in-Capital with an
offsetting entry to Deferred Compensation. Deferred Compensation is amortized
on an accelerated basis and charged to expense in accordance with FASB
Interpretation No.28 (FIN 28) over the vesting period of the underlying
options, generally ranging from two to four years.
(m) Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of income taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available evidence, are not
expected to be realised. As the Company has incurred losses since inception, no
provision for income taxes has been made.
F-9
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
(n) Net loss per share
The basic net loss per share is computed by dividing the net income or loss
available to common shareholders for the period by the weighted average number
of common shares outstanding during the period. Diluted net income or loss per
share is computed by dividing the net income or loss for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of incremental common
shares issuable upon the exercise of stock options and warrants and the
conversion of preferred stock, are included in diluted net income or loss per
share to the extent such shares are dilutive. The diluted net loss per share is
the same as the basic net loss per share for all periods presented as all
common equivalent shares have the effect of reducing the net loss per share and
thus have not been included.
(o) Interim results (unaudited)
The accompanying balance sheet as of March 31, 2000, the statement of
operations and of cash flows for the three months ended March 31, 1999 and 2000
and the statement of stockholders' equity (deficit) for the three months ended
March 31, 2000 are unaudited. In the opinion of management, such unaudited
financial statements have been prepared on the same basis as the audited
financial statements referred to above and include all adjustments, consisting
only of normal recurring adjustments necessary for a fair statement of the
results of the interim period. The data disclosed in the notes to the financial
statements as of such dates and for such periods are unaudited.
(p) Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 and the
three months ended March 31, 2000 are computed using the weighted average
number of common shares outstanding, including the pro forma effect, on an as-
if-converted basis, of the automatic conversion of Series B, C and D
Mandatorily Redeemable Convertible Preferred Stock and Series A Preferred Stock
into shares of common stock effective upon the closing of an initial public
offering by the Company if and when the aggregate proceeds from the Offering
are not less than $20,000 and with a price to the public of at least $38.576
per share. Pro forma diluted net loss per share is computed using the pro forma
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalent shares, composed of shares of common stock
issuable upon the exercise of stock options and warrants, are not included in
pro forma diluted net loss per share as this would reduce the net loss per
share.
(q) Comprehensive income
Comprehensive income is defined as the change in equity of a company during
a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to
owners. For the Company, the difference between comprehensive loss and net loss
is attributable to foreign currency translation adjustments of $0.1, $0.2, and
$0.9 for 1997, 1998 and 1999, respectively. Accordingly, comprehensive loss did
not differ materially from net loss for the periods presented.
(r) Stock split
On October 15, 1999, the Company's Board of Directors approved a five-for-
one stock split of the issued and outstanding common stock, which was effected
on October 15, 1999. All shares and per share amounts have been retroactively
adjusted to reflect this stock split.
F-10
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
(s) Proposed initial public offering of common stock and pro forma balance
sheet (unaudited)
In conjunction with an initial public offering of the Company's common
stock, (the "Offering"), all of the outstanding shares of Series B, C and D
Mandatorily Redeemable Convertible Preferred Stock and Series A Preferred Stock
will automatically convert into shares of common stock if and when the
aggregate proceeds from the Offering are not less than $20,000 and with a price
to the public of at least $38.576 per share. The pro forma effect of this
conversion of preferred stock has been reflected in the accompanying unaudited
Pro Forma Consolidated Balance Sheet at March 31, 2000.
3. Risks and Uncertainties
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. As of March 31, 2000, substantially all of the Company's
cash and cash equivalents were held in two financial institutions; one
institution is a federally insured financial institution located in the United
States and the second institution is located in the People's Republic of China.
At various times, the Company maintains cash balances in excess of United
States federally insured limits or in institutions in the People's Republic of
China. Accounts receivable are typically unsecured, denominated in Chinese RMB,
and are derived from revenues earned from customers primarily located in the
People's Republic of China. The Company performs ongoing credit evaluations of
its customers and, if necessary, maintains reserves for potential credit
losses. Historically, such losses have been within management's expectations.
The Company's client base is limited. Revenues from its five largest
customers represented 65%, 71%, 34%, 13% (unaudited) and 34% (unaudited) of
total revenues for the three years ended December 31, 1997, 1998 and 1999 and
the three months ended March 31, 1999 and 2000, respectively. These same five
customers represent 93%, 43% and 40% (unaudited) of accounts receivable as of
December 31, 1998 and 1999 and March 31, 2000, respectively.
The Company's sales and purchase and expense transactions are generally
denominated in RMB and a significant portion of the Company's assets and
liabilities are denominated in RMB. The RMB is not freely convertible into
foreign currencies. In China, foreign exchange transactions are required by law
to be transacted only by authorized financial institutions at exchange rates
set by the Bank of China. Remittances in currencies other than RMB by the
Company's subsidiary in China must be processed through the Bank of China or
other PRC foreign exchange regulatory bodies and require certain supporting
documentation in order to effect the remittance.
The Company faces certain macro-economic and regulatory risks and
uncertainties relating to the Company's China operations (see note 11).
F-11
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
4. Balance Sheet Components
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net
Accounts receivable................ $ 68 $ 427 $ 836
Less: Allowance for doubtful
accounts.......................... -- (26) (60)
---- ------ ------
$ 68 $ 401 $ 776
==== ====== ======
Fixed Assets
Computer equipment................. $215 $1,029 $2,125
Office furniture and equipment..... 48 170 399
---- ------ ------
263 1,199 2,524
Accumulated depreciation........... (27) (200) (297)
---- ------ ------
$236 $ 999 $2,227
==== ====== ======
Other Assets
Deferred offering costs............ $-- $ 780 $ 981
Purchased computer software........ -- 669 725
Website development costs.......... -- 131 131
Rental deposits and other.......... 35 113 61
---- ------ ------
35 1,693 1,898
Accumulated amortization........... -- (104) (137)
---- ------ ------
$ 35 $1,589 $1,761
==== ====== ======
Accrued liabilities
Compensation and benefits.......... $ 85 $ 581 $ 758
Professional services.............. 25 657 367
Others............................. 22 173 259
---- ------ ------
$132 $1,411 $1,384
==== ====== ======
</TABLE>
5. China contribution plan and profit appropriation
The Company's subsidiary in China participates in a government-mandated
multi-employer defined contribution plan pursuant to which certain retirement,
medical and other welfare benefits are provided to employees. Chinese labor
regulations require the Company's subsidiary to pay to the local labor bureau a
monthly contribution at a stated contribution rate based on the monthly basic
compensation of qualified employees. The relevant local labor bureau is
responsible for meeting all retirement benefit obligations; the Company has no
further commitments beyond its monthly contribution.
Pursuant to the laws applicable to China's Foreign Investment Enterprises,
the Company's subsidiary in China must make appropriations from after-tax
profit to non-distributable reserve funds as determined by the Board of
Directors. These reserve funds include a (i) general reserve, (ii) enterprise
expansion fund and (iii) staff bonus and welfare fund. The general reserve fund
requires annual appropriations of 10% of after-tax profit (as determined under
PRC GAAP); the other fund appropriations are at the Company's discretion. Since
the Company's PRC subsidiary is in a loss position, no appropriations have been
made to the general reserve fund. During 1997, 1998 and 1999, the Company
contributed a total of $14, $103, and $470, respectively, to these funds.
F-12
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
6. Borrowings
During 1999, the Company borrowed $1,500 through the issuance of a
convertible promissory note to a preferred shareholder. The note bore interest
at an annual rate of 4.79%; during 1999, the Company recognized interest
expense of $14. The entire principal amount of the note plus accrued interest
was converted automatically into Series C Preferred Stock upon the issuance of
Series C Preferred Stock in October, 1999 (see Note 8).
During 1997, the Company issued promissory notes to preferred shareholders
totalling $100. These notes were subject to an annual interest rate of 10%. On
March 21, 1998, the Company repaid the principal of $100 and related interest
of $3. Warrants to purchase 46,255 shares of common stock at an exercise price
of $0.20 per share were issued and vested in connection with the Company's
issuance of these promissory notes. The amount of the proceeds attributable to
the relative value of the warrants in the amount of $25 was recorded as a
discount related to the promissory notes and is reflected as an adjustment to
interest expense over the term of the notes. As of March 31, 2000 (unaudited),
warrants to purchase 28,910 shares of Common Stock had been exercised and
warrants to purchase 17,345 shares of Common Stock remained outstanding.
In March 2000, the Company entered into a $2,899 (unaudited) short-term loan
agreement with a PRC financial institution. The loan is denominated in Renminbi
and bears annual interest at 6.138%. This loan was fully repaid in April 2000.
7. Series B Mandatorily Redeemable Convertible Preferred Stock
At December 31, 1999, there were 2,077,205 shares of Series B and Series B-1
Mandatorily Redeemable Convertible Preferred Stock ("Series B Preferred Stock")
authorized, issued and outstanding. The following table sets forth the activity
related to the Series B Preferred Stock (amounts in thousands of US dollars,
except share data):
<TABLE>
<CAPTION>
Series B Series B-1 Total
---------------- -------------- ----------------
Shares Amount Shares Amount Shares Amount
--------- ------ ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998... -- $ -- -- $-- -- $ --
Issuance of preferred shares
for cash, net of issue
costs....................... 1,736,495 1,773 338,295 345 2,074,790 2,118
Accretion to estimated
redemption value............ -- 204 -- 40 -- 244
--------- ------ ------- ---- --------- ------
Balance at December 31,
1998........................ 1,736,495 1,977 338,295 385 2,074,790 2,362
Exercise of warrants......... 2,415 2 -- -- 2,415 2
Accretion to estimated
redemption value............ -- 391 -- 76 -- 467
--------- ------ ------- ---- --------- ------
Balance at December 31,
1999........................ 1,738,910 $2,370 338,295 $461 2,077,205 $2,831
========= ====== ======= ==== ========= ======
Accretion to estimated
redemption value
(unaudited)................. -- 97 -- 19 -- 116
--------- ------ ------- ---- --------- ------
Balance at March 31, 2000
(unaudited)................. 1,738,910 $2,467 338,295 $480 2,077,205 $2,947
========= ====== ======= ==== ========= ======
</TABLE>
Following amendment of the Company's Articles of Incorporation, the holders
of Series B Preferred Stock have various rights and preferences as follows:
Voting
Each holder of Series B Preferred Stock has voting rights equal to the
number of shares of common stock then issuable upon its conversion into common
stock. Each holder of Series B Preferred Stock will generally vote together
with the common stock shareholders.
F-13
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
Dividends
No dividends, whether in cash, in property or in shares of the common stock
of the Company shall be declared on outstanding common shares unless the Board
of Directors has declared a dividend for Series B Preferred Stock. Where
dividends on Series B Preferred Stock are declared, dividends will be allocated
to Series B Preferred shares based on the equivalent number of common shares
into which such Series B Preferred Stock could be converted. The Board through
December 31, 1999 has declared no dividends on Series B Preferred Stock.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series B Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of Series A Preferred Stock, an amount
equal to $1.0346 per share of Series B Preferred Stock, plus declared but
unpaid dividends. After the liquidation preference of the holders of the Series
B Preferred Stock has been satisfied, the holders of the Series A Preferred
Stock shall be entitled to receive an amount equal to $.20 per share, plus
declared but unpaid dividends. After setting apart or paying in full the
preferential amounts due to the holders of Series B Preferred Stock and Series
A Preferred Stock as noted above, the holders of the Series B Preferred Stock
shall be entitled to receive an amount equal to $0.5173 per share, plus
declared but unpaid dividends. Should the Company's legally available assets be
insufficient to satisfy the liquidation preferences, the entire amount of
assets will be distributed ratably to the holders of Series B Preferred Stock.
Conversion
Each share of Series B-1 Preferred Stock is convertible, at the option of
the holder commencing from the date of issuance, into common shares on a share
for share basis. Each share of Series B Preferred Stock was originally
convertible, at the option of the Holder commencing from the date of issuance,
to common shares on a share for share basis. Further adjustments to both of
these ratios will be made where there are accrued and unpaid dividends on
preferred stock or where common stock is issued at less than $0.20 per share.
Certain events which occurred in 1998 resulted in a change to the conversion
ratio for Series B Preferred Stock such that each share of Series B Preferred
Stock became convertible using a basis of one share of Series B Preferred Stock
for 1.667 shares of common stock. This change in the conversion ratio did not
represent a beneficial conversion feature at the date of issuance of the Series
B Preferred Stock in 1998. The Series B Preferred Stock will be converted
automatically into Common Stock, at the then applicable conversion rate, upon
the closing of an underwritten public offering of shares of Common Stock of the
Company at a public offering price of at least $38.576 per share and gross
proceeds to the Company in excess of $20,000.
Redemption
After March 5, 2003, holders of Series B Preferred Stock may request that
the Company redeem all the outstanding shares at a price of $2.069 per share
plus any declared but unpaid dividends. Accordingly, the Series B Preferred
Stock is being accreted to its estimated redemption value through charges to
retained earnings; such charges totalled $244, $467, $114 (unaudited), and $116
(unaudited) for the years ended December 31, 1998 and 1999 and three months
ended March 31, 1999 and 2000, respectively.
Warrants
In connection with the issuance of the Company's Series B Convertible
Preferred Stock financing in 1998, the Company granted an option to purchase
2,415 shares of the Company's Series B Convertible Preferred Stock at an
exercise price of $1.035 per share. This option was exercised in 1999.
F-14
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
8. Series C Mandatorily Redeemable Convertible Preferred Stock
In October 1999, the Company entered into a Series C Preferred Stock
Purchase agreement, whereby the Company authorized 1,848,885 shares of the
Company's Series C Mandatory Redeemable Convertible Preferred Stock ("Series C
Preferred Stock") at an issue price of $4.702 per share. At December 31, 1999,
there were 1,479,507 shares issued and outstanding. Following amendment of the
Company's Articles of Incorporation, the holders of Series C Preferred Stock
have various rights and preferences as follows:
Voting
Each holder of Series C Preferred Stock has voting rights equal to the
number of shares of common stock then issuable upon its conversion into common
stock. Each holder of Series C Preferred Stock will generally vote together
with the common stock shareholders.
Dividends
No dividends, whether in cash, in property or in shares of the common stock
of the Company shall be declared on outstanding common shares unless the Board
of Directors has declared a dividend for Series C Preferred Stock. Where
dividends on Series C Preferred Stock are declared, dividends will be allocated
to Series C Preferred shares based on the equivalent number of common shares
into which such Series C Preferred Stock could be converted. The Board through
December 31, 1999 has declared no dividends on Series C Preferred Stock.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of the Common stock, an amount equal
to $4.702 per share, plus declared but unpaid dividends.
Conversion
Each share of Series C Preferred Stock is convertible, at the option of the
holder commencing from the date of issuance, into common shares on a share for
share basis. Adjustments to this ratio will be made where there are accrued and
unpaid dividends on preferred stock or common stock. The Series C Preferred
Stock will be converted automatically into Common Stock, at the then applicable
conversion rate, upon the closing of an underwritten public offering of shares
of Common Stock of the Company at a public offering price of at least $38.576
per share and gross proceeds to the Company in excess of $20,000.
Redemption
After September 9, 2004, holders of Series C Preferred Stock may request
that the Company redeem all the outstanding shares at a price of $9.404 per
share plus any declared but unpaid dividends. Accordingly, the Series C
Preferred Stock is being accreted to its estimated redemption value through
charges to from retained earnings; such charges totalled $450 and $345
(unaudited) for the year ended December 31, 1999 and three months ended March
31, 2000. The redemption rights of the Series C Preferred Stock are subordinate
to the Series B Preferred Stock.
F-15
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
9. Series D Mandatorily Redeemable Convertible Preferred Stock (unaudited)
In January and February 2000, the Company entered into a Series D Preferred
Stock Purchase agreement, whereby the Company authorized 777,688 shares of the
Company's Series D Mandatory Redeemable Convertible Preferred Stock ("Series D
Preferred Stock") at an issue price of $38.576 per share. At March 31, 2000,
there were 777,688 shares issued and outstanding. Following amendment of the
Company's Articles of Incorporation, the holders of Series D Preferred Stock
have various rights and preferences as follows:
Voting
Each holder of Series D Preferred Stock has voting rights equal to the
number of shares of common stock then issuable upon its conversion into common
stock. Each holder of Series D Preferred Stock will generally vote together
with the common stock shareholders.
Dividends
No dividends, whether in cash, in property or in shares of the common stock
of the Company shall be declared on outstanding common shares unless the Board
of Directors has declared a dividend for Series D Preferred Stock. Where
dividends on Series D Preferred Stock are declared, dividends will be allocated
to Series C Preferred shares based on the equivalent number of common shares
into which such Series D Preferred Stock could be converted. The Board through
March 31, 2000 has declared no dividends on Series C Preferred Stock.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets of the Company to the holders of the Common stock, an amount equal
to $38.576 per share, plus declared but unpaid dividends.
Conversion
Each share of Series D Preferred Stock is convertible, at the option of the
holder commencing from the date of issuance, into common shares on a share for
share basis. Adjustments to this ratio will be made where there are accrued and
unpaid dividends on preferred stock or common stock. The Series D Preferred
Stock will be converted automatically into Common Stock, at the then applicable
conversion rate, upon the closing of an underwritten public offering of shares
of Common Stock of the Company at a public offering price of at least $38.576
per share and gross proceeds to the Company in excess of $20,000.
Redemption
After January 25, 2005, holders of Series D Preferred Stock may request that
the Company redeem all the outstanding shares at a price of $77.152 per share
plus any declared but unpaid dividends. Accordingly, the Series D Preferred
Stock is being accreted to its estimated redemption value through charges to
retained earnings; such charges totalled $1,098 for the three months ended
March 31, 2000. The redemption rights of the Series D Preferred Stock are
subordinate to the Series B Preferred Stock.
F-16
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
Advertising contracts
In January 2000, the Company also entered into long-term advertising
contracts with its Series D Preferred shareholders. Under the contracts, the
Series D shareholders have committed to purchase certain services from the
Company, including banner advertising, sponsorship of website channels,
directory services and use of the Company's e-commerce platform, over the terms
of the contracts, which range from 2 1/2 to 3 years. The contract price will be
paid in quarterly payments over the life of the agreements. The detailed
description of specific services to be provided under these agreements will be
decided over the term of the contracts, with the individual fees for services
consistent with rates charged to the Company's most preferred customers. During
the three months ended March 31, 2000, no cash was received and no revenues
were recognized pursuant to these long-term advertising contracts.
10. Series A Preferred Stock
At December 31, 1999, there were 1,125,000 shares of Series A Preferred
Stock ("Preferred A") issued and outstanding at an issue price of $0.20 per
share. Following amendment of the Company's Articles of Incorporation, the
holders of Preferred A shares have various rights and preferences as follows:
Voting
Each holder of Series A Preferred Stock has voting rights equal to the
number of shares of common stock then issuable upon its conversion into common
stock. Each holder of Series A Preferred Stock will generally vote together
with the common stock shareholders.
Dividends
No dividends, whether in cash, in property or in shares of the capital stock
of the Company shall be declared for Preferred A unless the Board of Directors
has declared a dividend on outstanding common shares. Where dividends on
Preferred A are declared, dividends will be allocated to Preferred A based on
the equivalent number of common shares into which such preferred shares could
be converted. The Board through December 31, 1999 has declared no dividends on
Preferred A.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A Preferred Stock shall
be entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Company to the holders of the Common Stock
or to the holders of the Series B, B-1 and C Preferred Stock after the
satisfaction of the liquidation preference indicated in Note 7 above, an amount
equal to $0.20 per share, plus declared but unpaid dividends.
Conversion
Each share of Series A Preferred Stock is convertible at the holder's option
into common shares on a share for share basis. Adjustments to this ratio will
be made where there are accrued and unpaid dividends on preferred stock or
where common stock has been issued at less than $0.20 per share. The Series A
Preferred Stock will be converted automatically into Common Stock, at the then
applicable conversion rate, upon the closing of an underwritten, public
offering of shares of Common Stock of the Company at a public offering price of
at least $38.576 per share and gross proceeds for the Company in excess of
$20,000.
F-17
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
11. Commitments and Contingencies
As of December 31, 1999 and March 31, 2000, the Company had future minimum
rental lease payments under non-cancellable operating leases as follows:
<TABLE>
<CAPTION>
December March 31,
31, 2000 2000
-------- -----------
<S> <C> <C>
(unaudited)
2000................... $ 597 $ 448
2001................... 506 506
------ -----------
$1,103 $ 954
====== ===========
</TABLE>
The Company recognized $56, $157, $205, $36 (unaudited) and $149 (unaudited)
of rent expense for the years ended December 31, 1997, 1998 and 1999 and three
months ended March 31, 1999 and 2000, respectively.
The Chinese market in which the Company operates poses certain macro-
economic and regulatory risks and uncertainties. These uncertainties extend to
the ability of the Company to operate an internet business and to conduct on-
line advertising in the People's Republic of China. Though the People's
Republic of China has, since 1978, implemented wide range market-oriented
economic reforms, continued reforms and progress towards a full market-oriented
economy are uncertain. In addition, the telecommunication, information, and
media industries remain highly regulated. Restrictions are currently in place
or are unclear regarding in what specific segments of these industries foreign
owned entities, like the Company, may operate. The Company's legal structure
and scope of operations in China could be subjected to restrictions which could
result in severe limits to the Company's ability to conduct business in the
People's Republic of China and this could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
12. Related Party Transactions
The Company has entered into an agreement whereby the Company provides
internet advertising and promotional services to a preferred shareholder. The
total amount of revenue recorded under agreements with this preferred
shareholder was $0, $175, $178, $20 (unaudited) and $36 (unaudited) for the
three years ended December 31, 1997, 1998, 1999 and the three months ended
March 31, 1999 and 2000, respectively. As of December 31, 1998 and 1999 and
March 31, 2000, $158, $37, $0 (unaudited), respectively, were included in
Accounts receivable--related parties related to this arrangement.
During 1999, in connection with a warrant issued by the Company to purchase
81,798 shares of common stock at an exercise price of $6.1126 per share, one of
the Company's preferred shareholders arranged for certain of its affiliates to
provide certain professional and managerial services to the Company. The
estimated fair value of such expenses, amounting to approximately $60 for the
year ended December 31, 1999, has been credited to additional paid-in capital.
As of December 31, 1999 and March 31, 2000 (unaudited) this warrant remains
outstanding.
Pursuant to a one-year agreement that commenced in December 1999, the
Company has provided a link from its website to a related party's website. In
addition, the related party provides internet content on an updated daily basis
to the Company's website. The link allows for certain news and other
informational content to be made available to users of the Company's internet
portal site, with revenues generated from advertising placed in conjunction
with the service to be allocated between both parties on a contractually agreed
basis. For the year ended December 31, 1999 and the three months ended March
31, 2000, the Company has recognized expense of $16, $0 and $4 (unaudited),
respectively, as a result of this collaborative arrangement.
F-18
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
13. Income Taxes
The Company is subject to taxes in both the United States and the People's
Republic of China. The Company's subsidiary in China is governed by the Income
Tax Law of the People's Republic of China concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax laws (the "PRC
Income Tax Law"). Pursuant to the PRC Income Tax Law, wholly-owned foreign
enterprises are subject to income tax at a statutory rate of 33% (30% State
income tax plus 3% local income tax) on PRC taxable income. The Company is in a
loss position in both the U.S. and China. No provision or benefit for income
taxes have been provided in any periods. The following is a reconciliation
between the U.S. federal statutory rate and the Company's effective tax rate:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate: (34)% (34)% (34)%
Foreign tax difference from U.S. rate................. 1 1 1
Permanent book-tax differences........................ -- 10 8
Valuation allowance for deferred tax assets........... 33 23 25
--- --- ---
0 % 0 % 0 %
=== === ===
</TABLE>
Significant components of the Company"s deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards.......................... $ 59 $ 1,196
Other book-tax basis differences........................... 12 25
----- -------
Total deferred tax assets.................................. 71 1,221
----- -------
Valuation allowance........................................ (71) (1,190)
----- -------
-- 31
----- -------
Deferred tax liabilities:
Capitalized expenses....................................... -- (31)
----- -------
$ -- $ --
===== =======
</TABLE>
The Company has provided a full valuation allowance against deferred tax
assets due to the uncertainty surrounding their realization.
As of December 31, 1999, the Company had federal net operating loss ("NOL")
and Chinese NOL of approximately $689 and $2,915, respectively, available to
offset future federal and Chinese income tax liabilities, respectively. The
U.S. NOL will expire from 2012 to 2020 and the Chinese NOL will expire from
2002 to 2004.
14. Financial Instruments
The carrying amount of the Company's cash and cash equivalents approximates
their fair value due to the short maturity of those instruments. The carrying
value of receivables and payables approximated their market values based on
their short-term maturities. The fair value of related party receivables and
payables is not readily determinable due to the related party nature of the
accounts.
F-19
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
15. Stock Options
The Company has adopted a share option plan, which provides for the issuance
of up to 900,000 shares of common stock. The share option plan allows for the
grant of incentive share options qualified within the meaning of Section 422 of
the U.S. Internal Revenue Code of 1986 and non-qualified share options, which
do not so qualify.
The Company has reserved 900,000 shares of Common Stock for issuance under
the Company's Stock Option Plan and at December 31, 1999 and March 31, 2000,
539,043 and 412,043 (unaudited) options, respectively, were available for grant
under the plan.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------------- ---------------------
1997 1998 1999 2000
--------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Options Exercise Options Exercise Options Exercise Options Exercise
Outstanding Price ($) Outstanding Price ($) Outstanding Price ($) Outstanding Price ($)
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(unaudited)
Outstanding at beginning
of Period.............. 127,190 $0.10 127,190 $0.10 80,940 $0.10 395,647 $5.97
Granted................ -- -- -- -- 366,299 6.46 127,000 15.00
Exercised.............. -- -- (46,250) 0.10 (46,250) 0.10 -- --
Cancelled.............. -- -- -- -- (5,342) 1.00 -- --
------- ----- ------- ----- ------- ----- ------- -----
Outstanding at period
end.................... 127,190 $0.10 80,940 $0.10 395,647 $5.97 522,647 $8.17
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
December 31, 1999 December 31, 1999
--------------------------------------------- ----------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Number Contractual Life Exercise Price Number Exercise Price
Prices Outstanding (years) ($) outstanding ($)
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10 34,690 6.68 $ 0.10 34,690 $ 0.10
$1.00 62,158 9.45 $ 1.00 28,935 $ 1.00
$4.70 130,349 9.39 $ 4.70 13,392 $ 4.70
$10.00 168,450 9.95 $10.00 -- $10.00
<CAPTION>
Options Outstanding at Options Exercisable at
March 31, 2000 March 31, 2000
--------------------------------------------- ----------------------------
(unaudited) (unaudited)
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Number Contractual Life Exercise Price Number Exercise Price
Prices Outstanding (years) ($) outstanding ($)
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
(unaudited)
$0.10 34,690 6.44 $ 0.10 34,690 $ 0.10
$1.00 62,158 9.21 $ 1.00 31,643 $ 1.00
$4.70 130,349 9.14 $ 4.70 53,485 $ 4.70
$10.00 168,450 9.70 $10.00 11,986 $10.00
$15.00 127,000 9.82 $15.00 6,342 $15.00
</TABLE>
F-20
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
Stock-based compensation. In connection with certain stock option grants
during the year ended December 31, 1999 and the three months ended March 31,
1999 and 2000, the Company recognized deferred stock compensation totalling
$67, $0 (unaudited) and $1,178 (unaudited), respectively, which is being
amortized over the vesting periods of the related options, which generally
range from two to four years. Compensation expense recognized during the year
ended December 31, 1999 and the three months ended March 31, 1999 and 2000
totaled $46, $0 (unaudited) and $129 (unaudited), respectively.
Minimum value disclosures. The Company calculated the minimum value of stock
option grants on the date of grant using the Black-Scholes pricing method with
the following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Risk-free interest rate..................................... 4.96%-5.37%
Expected life (years)....................................... 1-4
Expected dividend yield..................................... --
Volatility.................................................. --
Weighted average grant date fair value of options granted
during the period.......................................... $0.23-$0.79
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the stock option
awards as prescribed by SFAS No. 123, the Company's net loss per share would
have resulted in the pro forma amounts disclosed below:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Net loss attributable to common shareholders:
As reported................................................. $(4,366)
Pro forma................................................... $(4,388)
Net loss per share, basic and diluted:
As reported................................................. $ (1.22)
Pro forma................................................... $ (1.22)
</TABLE>
The effects of applying SFAS No. 123 methodology in this pro forma
disclosure may not be indicative of future amounts. Additional stock option
awards in future years are expected.
F-21
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
16. Net Loss Per Share
Net loss per share. The following table sets forth the computation of basic
and diluted net loss per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Year Ended December Ended March
31, 31,
----------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
(unaudited)
Numerator:
Net loss........................... $ (160) $ (615) $(3,449) $ (276) $(2,464)
Accretion of Series B and C
Mandatorily Redeemable Preferred
Stocks to redemption value........ -- (244) (917) (114) (1,559)
------ ------ ------- ------ -------
Net loss attributable to common
shareholders...................... $ (160) $ (859) $(4,366) $ (390) $(4,023)
====== ====== ======= ====== =======
Denominator:
Shares used in computing basic and
diluted net loss per share (in
thousands)........................ 3,500 3,564 3,588 3,564 3,621
====== ====== ======= ====== =======
Basic and diluted net loss per share
attributable to common
shareholders........................ $(0.05) $(0.24) $ (1.22) $(0.11) $ (1.11)
====== ====== ======= ====== =======
Antidilutive securities including
options, warrants, and preferred
shares not included in net loss per
shares calculation (in thousands)... 1,239 3,005 4,931 4,433 6,210
====== ====== ======= ====== =======
</TABLE>
F-22
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
Pro forma net loss per share (unaudited) Pro forma basic and diluted net
loss per share is computed using the weighted average number of shares of
common stock outstanding, including the pro forma effects, on an as-if-
converted basis, of the automatic conversion of Series B, C and D Mandatorily
Redeemable Preferred Stocks and Series A Preferred Stock into shares of common
stock effective upon the closing of an initial public offering by the Company
if and when the aggregate proceeds from the Offering are not less than $20,000
and with a price to the public of at least $38.576 per share. Common stock
equivalent shares, composed of shares of common stock issuable upon the
exercise of stock options and warrants, are not included in pro forma diluted
net loss per share as this would reduce the net loss per share. The following
table sets forth the computation of pro forma basic and diluted net loss per
share for the year ended December 31, 1999 and three months ended March 31,
2000 (unaudited):
<TABLE>
<CAPTION>
Pro Forma
Three Month
Ended
Pro Forma ---------------
Year ended March March
December 31, 31, 31,
1999 1999 2000
------------ ------ -------
<S> <C> <C> <C>
Numerator:
Net loss....................................... $(3,449) $(276) $(2,464)
======= ====== =======
Denominator:
Shares used in computing basic and diluted net
loss per share................................ 3,588 3,564 3,621
Adjustment to reflect assumed conversion of all
preferred stock to common stock from date of
issuance...................................... 4,726 4361 5,841
------- ------ -------
Shares used in computing pro forma basic and
diluted net loss per share.................... 8,314 7,925 9,462
------- ------ -------
Basic and diluted pro forma net loss per share... $(0.41) $(0.03) $(0.26)
======= ====== =======
Antidilutive securities including options and
warrants not included in pro forma net loss per
share calculation............................... 205 72 369
======= ====== =======
</TABLE>
17. Subsequent Events
During May 2000, the Company entered into certain agreements with Beijing
Sohu Online Internet Information Services, Ltd. ("Beijing Sohu"), a PRC company
that is owned by a major shareholder of the Company and an employee of the
Company. Pursuant to the agreements with Beijing Sohu and the shareholders of
Beijing Sohu, certain operations related to the Company's online content were
transferred to Beijing Sohu in order to allow Beijing Sohu to develop and
provide content to the Company for a monthly service fee, which will be subject
to periodic adjustment as agreed between the parties.
As part of these agreements, the Company will sell certain computer
equipment to Beijing Sohu for an amount equal to the net book value of the
equipment, which is estimated to be approximately RMB 740 and is payable six
months after the transfer date. The Company also extended loans in the amount
of $219 to the shareholders of Beijing Sohu in order to finance their equity
investment in Beijing Sohu. The loans are secured by their shares of Beijing
Sohu, bears no interest and are due in full at the end of ten years.
The Company's PRC subsidiary has also entered into an option agreement
giving it the right, at any time, subject to PRC law, to purchase the entire
ownership in Beijing Sohu of the two Beijing Sohu shareholders for RMB 2,000.
F-23
<PAGE>
[Inside back cover --
(1) Heading "Sohu -- The Search Fox, Opening up China to the Internet" followed
by four footprints of a fox. Beside each footprint is one of four elements
of the Sohu.com solution -- "Mainland China Focus", "Pure Portal Play",
"Dominant Brand Presence" and "Proven Organic Growth".
(2) Background -- The tail of the "Search Fox".]
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses, other than the
underwriting discounts and commission, payable by the Registrant in connection
with the offering described in the Registration Statement (all amounts are
estimated except the SEC registration fee):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 22,770
National Association of Securities Dealers, Inc. filing fee........ 9,125
NASDAQ listing fee................................................. *
Printing costs..................................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Transfer agent's fees and expenses................................. *
Miscellaneous...................................................... *
--------
Total Expenses................................................... $ *
========
</TABLE>
- --------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DCGL") makes
provision for the indemnification of officers and directors of corporations in
terms sufficiently broad to indemnify the officers and directors of the
Registrant under certain circumstances from liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
As permitted by the DGCL, the Registrant's Certificate of Incorporation (the
"Charter") provides that, to the fullest extent permitted by the DGCL, no
director shall be liable to the registrant or to its stockholders for monetary
damages for breach of his fiduciary duty as a director. Delaware law does not
permit the elimination of liability (i) for any breach of the director's duty
of loyalty to the registrant or its stockholders, (ii) for acts or missions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases or (iv) for any transaction from which the director
derives an improper personal benefit. The effect of this provision in the
Charter is to eliminate the rights of the Registrant and its stockholders
(through stockholders' derivatives suits on behalf of the Registrant) to
recover monetary damages against a director for breach of fiduciary duty as a
director thereof (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv), inclusive, above. These provisions will not alter the liability of
directors under the federal securities laws.
The Registrant's Bylaws (the "Bylaws") provide that the Registrant may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Registrant) by reason of the fact that he is or was a
director, officer, employee or agent of the Registrant or is or was serving at
the request of the Registrant as a director, officer, employee or agent of any
other corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Registrant, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe such
person's conduct was unlawful.
II-1
<PAGE>
The Bylaws also provide that the Registrant may indemnify any person who was
or is a party of is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Registrant to procure
judgment in its favor by reason of the fact that such person acted in any of
the capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
to the Registrant unless and only to the extend that the Court of Chancery of
the State of Delaware or the court in which such action or suit was brought
shall determine that despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
be indemnified for such expenses which the Court of Chancery of the State of
Delaware or the court in which such action was brought shall deem proper.
The Bylaws also provide that to the extent a director or officer of the
Registrant has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue,
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith; that indemnification provided for in the Bylaws shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the Registrant may purchase and maintain insurance on behalf of a
director or officer of the registrant against any liability asserted against
him or incurred by him in any such capacity or arising out of his status as
such whether or not the Registrant would have the power to indemnify him
against such liabilities under such Bylaws.
Item 15. Recent Sales of Unregistered Securities
The Registrant has not issued or sold securities within the past three years
pursuant to offerings that were not registered under the Securities Act of
1933, as amended, except as follows (all share numbers give effect to a five-
for-one stock split which became effective October 15, 1999):
(a) On August 3, 1996, the Registrant sold 3,500,000 shares of its
common stock to Charles Zhang for an aggregate of $8,207.98.
(b) On October 11, 1996, the Registrant sold 375,000 shares of its
Series A convertible preferred stock to Edward Roberts for an aggregate of
$75,000.
(c) On October 11, 1996, the Registrant sold 375,000 shares of its
Series A convertible preferred stock to Brant Binder for an aggregate of
$75,000.
(d) On November 20, 1996, the Registrant sold 100,000 shares of its
Series A convertible preferred stock to Nicholas Negroponte for an
aggregate of $20,000.
(e) On February 2, 1997, the Registrant sold 250,000 shares of its
Series A convertible preferred stock to Nicholas Negroponte for an
aggregate of $50,000.
(f) On April 16, 1997, the Registrant sold 20,000 shares of its Series A
convertible preferred stock to Nicholas Negroponte for an aggregate of
$5,000.
(g) On March 10, 1998, the Registrant sold 96,655 shares of its Series B
convertible preferred stock to Kummell Investments Limited for an aggregate
of $100,000. These shares were subsequently transferred to Maxtech
Enterprises Limited.
(h) On March 10, 1998, the Registrant sold 773,250 shares of its Series
B convertible preferred stock to Intel Corporation for an aggregate of
$400,000.
(i) On March 10, 1998, the Registrant sold 96,655 shares of its Series B
convertible preferred stock to Harrison Enterprises, Inc. for an aggregate
of $100,000.
(j) On March 10, 1998, the Registrant sold 190,000 shares of its Series
B convertible preferred stock to PTV-China, Inc. for an aggregate of
$50,000.
II-2
<PAGE>
(k) On March 10, 1998, the Registrant sold 579,935 shares of its Series
B convertible preferred stock to Kummell Investments Limited for an
aggregate of $600,000. These shares were subsequently transferred to
Maxtech Enterprises Limited.
(l) On March 23, 1998, the Registrant sold 63,595 shares of its common
stock to Edward Roberts for an aggregate of $8,094.
(m) On August 18, 1998, the Registrant sold 338,295 shares of its Series
B-1 convertible preferred stock to Dow Jones & Company for an aggregate of
$350,000.
(n) On February 11, 1999, the Registrant sold 11,565 shares of its
common stock to Brant Binder for an aggregate of $2,313.
(o) On August 5, 1999, the Registrant sold 23,125 shares of its common
stock to Edward Roberts for an aggregate of $2,313.
(p) On September , 1999, the Registrant sold 2,415 shares of its common
stock to Theodore Mason for an aggregate of $2,498.56.
(q) On September 6, 1999, the Registrant sold 23,125 shares of its
common stock to Edward Roberts for an aggregate of $2,313.
(r) On October 18, 1999, the Registrant sold 1,318,588 shares of its
Series C convertible preferred stock to Kummell Investments Limited for an
aggregate of $6,200,000. These shares were subsequently transferred to
Maxtech Enterprises Limited.
(s) On October 18, 1999, the Registrant sold 31,902 shares of its Series
C convertible preferred stock to The Roberts Family Trust, for which Edward
Roberts is the trustee, for an aggregate of $150,000.
(t) On October 18, 1999, the Registrant sold 31,902 shares of its Series
C convertible preferred stock to Brant Binder for an aggregate of $150,000.
(u) On October 18, 1999, the Registrant sold 31,902 shares of its Series
C convertible preferred stock to Nicholas Negroponte for an aggregate of
$150,000.
(v) On October 18, 1999, the Registrant sold 65,213 shares of its Series
C convertible preferred stock to PTV-China, Inc. for an aggregate of
$306,632.
(w) On January 29, 2000, the Registrant sold 129,615 shares of its
Series D convertible preferred stock to Hikari Tsushin, Inc. for an
aggregate of $5,000,000.
(x) On January 29, 2000, the Registrant sold 129,615 shares of its
Series D convertible preferred stock to Legend New-Tech Investment Limited
for an aggregate of $5,000,000.
(y) On January 29, 2000, the Registrant sold 259,229 shares of its
Series D convertible preferred stock to Internet Creations Limited for an
aggregate of $10,000,000.
(z) On February 2, 2000, the Registrant sold 259,229 shares of its
Series D convertible preferred shares to Internet Creations Limited for an
aggregate of $10,000,000.
The transactions set forth above were undertaken in reliance upon the
exemptions from the registration requirements of the Securities Act afforded by
(i) Section 4(2) thereof and/or Regulation D promulgated thereunder, as sales
not involving a public offering, and/or (ii) Regulation S promulgated
thereunder, as sales by an issuer in offshore transactions to non-U.S. persons
(as defined in Regulation S). The purchasers of the securities described above
acquired them for their own account not with a view to any distribution thereof
to the public. The certificates evidencing the securities bear legends stating
that the shares may not be offered, sold or transferred other than pursuant to
an effective registration statement under the Securities Act or an exemption
from such registration requirements.
Upon the closing of the Registrant's offering of common stock pursuant to
this Registration Statement, all of the Registrant's outstanding shares of
preferred stock will be converted into common stock.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.**
3.1 Fourth Amended and Restated Certificate of Incorporation of Sohu.com
Inc., as filed with the Delaware Secretary of State on February 1,
2000.
3.2 Bylaws of Sohu.com Inc.
3.3 Form of Fifth Amended and Restated Certificate of Incorporation of
Sohu.com Inc., to be effective upon the closing of the offering.
3.4 Amended and Restated Bylaws of Sohu.com Inc., to be effective upon
the closing of the offering.
4.1 Form of Specimen Certificate for the common stock.**
5.1 Opinion of Sullivan & Cromwell, United States counsel to the
Registrant, as to the validity of the common stock.**
10.1 2000 Stock Incentive Plan.
10.2 Form of Stock Option Agreement.
10.3 Form of Non-Competition, Confidential Information and Work Product
Agreement with the Registrant's Executive Officers.*
10.4 English Translation of Form of Employment Agreement for Employees of
Beijing ITC. (refile)
10.5 Series B Preferred Stock Purchase Agreement.
10.6 Series B-1 Preferred Stock Purchase Agreement.
10.7 Series C Preferred Stock Purchase Agreement.
10.8 Series D Preferred Stock Purchase Agreement.*
10.9 Second Amended and Restated Stockholders' Voting Agreement.
10.10 Third Amended and Restated Investor Rights Agreement.*
10.11 Technical Services Agreement between Hikari Tsushin, Inc. and Sohu
ITC Information Technology (Beijing) Co. Ltd.+*
10.12 Technical Services Agreement between Legend (Beijing) Limited and
Sohu ITC Information Technology (Beijing) Co. Ltd. +*
10.13 Technical Services Agreement between PCCW International Marketing
Limited and Sohu ITC Information Technology (Beijing) Co. Ltd.+*
10.15 Cooperation Agreement between Sohu ITC Information Technology
(Beijing) Co. Ltd. and Beijing Sohu Online Internet Services, Ltd.**
10.14 Assets and Business Restructuring Agreement between Sohu ITC
Information Technology (Beijing) Co. Ltd. and Beijing Sohu Online
Internet Services, Ltd.**
10.16 Option Agreement between Sohu ITC Information Technology (Beijing)
Co. Ltd. and Beijing Sohu Online Internet Services, Ltd.**
10.17 Loan Agreement between Sohu.com Inc. and Charles Zhang.**
10.18 Loan Agreement between Sohu.com Inc. and Jinmei He.**
11.1 Statement Regarding Computation of Per Share Earnings.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Sullivan & Cromwell.
23.2 Consent of TransAsia Lawyers.
23.3 Consent of PricewaterhouseCoopers.
24.1 Powers of attorney are set forth under "Signatures" in this Part II
of the Registration Statement.*
24.2 Additional powers of attorney.
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by amendment
+ Contains portions for which confidential treatment has been requested.
II-4
<PAGE>
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the U.S.
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the U.S. underwriters to permit prompt delivery to each purchaser.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by a registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Beijing, China,
on May 26, 2000.
Sohu.com Inc.
/s/ Thomas Gurnee
By: _________________________________
Name: Thomas Gurnee
Title: Senior Vice President,
Finance and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons on
May 26, 2000, in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ Charles Zhang Chairman of the Board, President
___________________________________________ and Chief Executive Officer
Charles Zhang
* Director
___________________________________________
Edward Roberts
* Director
___________________________________________
James McGregor
* Director
___________________________________________
George Chang
* Director
___________________________________________
Mary Ma
/s/ Thomas Gurnee Chief Financial Officer
___________________________________________
Thomas Gurnee
* Controller
___________________________________________
</TABLE> Min Yang
/s/ Thomas Gurnee
*By: ___________________________
Thomas Gurnee
Attorney-in-Fact
II-6
<PAGE>
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.**
3.1 Fourth Amended and Restated Certificate of Incorporation of Sohu.com
Inc., as filed with the Delaware Secretary of State on February 1,
2000.
3.2 Bylaws of Sohu.com Inc.
3.3 Form of Fifth Amended and Restated Certificate of Incorporation of
Sohu.com Inc., to be effective upon the closing of the offering.
3.4 Amended and Restated Bylaws of Sohu.com Inc., to be effective upon
the closing of the offering.
4.1 Form of Specimen Certificate for the common stock.**
5.1 Opinion of Sullivan & Cromwell, United States counsel to the
Registrant, as to the validity of the common stock.**
10.1 2000 Stock Incentive Plan.
10.2 Form of Stock Option Agreement.
10.3 Form of Non-Competition, Confidential Information and Work Product
Agreement with the Registrant's Executive Officers.*
10.4 English Translation of Form of Employment Agreement for Employees of
Beijing ITC. (refile)
10.5 Series B Preferred Stock Purchase Agreement.
10.6 Series B-1 Preferred Stock Purchase Agreement.
10.7 Series C Preferred Stock Purchase Agreement.
10.8 Series D Preferred Stock Purchase Agreement.*
10.9 Second Amended and Restated Stockholders' Voting Agreement.
10.10 Third Amended and Restated Investor Rights Agreement.*
10.11 Technical Services Agreement between Hikari Tsushin, Inc. and Sohu
ITC Information Technology (Beijing) Co. Ltd.+*
10.12 Technical Services Agreement between Legend (Beijing) Limited and
Sohu ITC Information Technology (Beijing) Co. Ltd. +*
10.13 Technical Services Agreement between PCCW International Marketing
Limited and Sohu ITC Information Technology (Beijing) Co. Ltd.+*
10.15 Cooperation Agreement between Sohu ITC Information Technology
(Beijing) Co. Ltd. and Beijing Sohu Online Internet Services, Ltd.**
10.14 Assets and Business Restructuring Agreement between Sohu ITC
Information Technology (Beijing) Co. Ltd. and Beijing Sohu Online
Internet Services, Ltd.**
10.16 Option Agreement between Sohu ITC Information Technology (Beijing)
Co. Ltd. and Beijing Sohu Online Internet Services, Ltd.**
10.17 Loan Agreement between Sohu.com Inc. and Charles Zhang.**
10.18 Loan Agreement between Sohu.com Inc. and Jinmei He.**
11.1 Statement Regarding Computation of Per Share Earnings.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Sullivan & Cromwell.
23.2 Consent of TransAsia Lawyers.
23.3 Consent of PricewaterhouseCoopers.
24.1 Powers of attorney are set forth under "Signatures" in this Part II
of the Registration Statement.*
24.2 Additional powers of attorney.
27.1 Financial Data Schedule.*
</TABLE>
- --------
* Previously filed.
** To be filed by amendment
+ Contains portions for which confidential treatment has been requested.
<PAGE>
Exhibit 3.1
FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SOHU.COM INC.
Sohu.com Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
A. The name of the Corporation is Sohu.com Inc. The date of the filing of
its original Certificate of Incorporation (the "Original Certificate of
Incorporation") with the Secretary of State of the State of Delaware was August
2, 1996, under the name of Internet Technologies China Incorporated. The
Original Certificate of Incorporation was amended and restated on March 10,
1998, subsequently amended and restated on August 7, 1998, amended on September
28, 1999, and amended and restated on October 15, 1999 (the "Third Amended and
Restated Certificate of Incorporation").
B. This Fourth Amended and Restated Certificate of Incorporation (the
"Certificate"), which amends, restates and integrates the provisions of the
Third Amended and Restated Certificate of Incorporation, as amended to date, was
duly adopted by the Board of Directors of the Corporation in accordance with the
provisions of Sections 141(f), 242 and 245 of the General Corporation Law of the
State of Delaware, as amended from time to time (the "DGCL"), and was duly
adopted by the written consent of the stockholders of the Corporation in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
DGCL.
C. The text of the Third Amended and Restated Certificate of
Incorporation, as amended to date, is hereby amended and restated in its
entirety to provide as herein set forth in full.
ARTICLE I
The name of this corporation (the "Corporation") is Sohu.com Inc..
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
-1-
<PAGE>
ARTICLE IV
A. Number of Shares and Classes of Stock. The Corporation is authorized
-------------------------------------
to issue two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of stock which the Corporation
shall have authority to issue is Seventeen Million One Hundred Thousand
(17,100,000) shares, consisting of Eleven Million Five Hundred Thousand
(11,500,000) shares of Common Stock, $0.001 par value per share, and Five
Million Six Hundred Thousand (5,600,000) shares of Preferred Stock, $0.001 par
value per share.
B. Rights, Preferences, Privileges and Restrictions of Preferred Stock.
-------------------------------------------------------------------
The rights, preferences, privileges and restrictions of the Preferred Stock are
as set forth below in this Article IV.B. The Series A Convertible Preferred
Stock shall consist of One Million One Hundred Twenty-Five Thousand (1,125,000)
shares (the "Series A Preferred"), the Series B Convertible Preferred Stock
shall consist of One Million Seven Hundred Thirty-Eight Thousand Nine Hundred
Ten (1,738,910) shares (the "Series B Preferred"), the Series B-1 Convertible
Preferred Stock shall consist of Three Hundred Thirty-Eight Thousand Two Hundred
Ninety-Five (338,295) shares (the "Series B-1 Preferred"), the Series C
Convertible Preferred Stock shall consist of One Million Four Hundred Seventy-
Nine Thousand Five Hundred Seven (1,479,507) shares (the "Series C Preferred")
and the Series D Convertible Preferred Stock shall consist of Seven Hundred
Seventy-Seven Thousand Six Hundred Eighty-Eight (777,688) shares (the "Series D
Preferred").
1. Dividends.
(a) No dividends, whether in cash, in property or in shares of the
capital stock of the Corporation, shall be declared or set aside for any class
or series of shares of capital stock of the Corporation unless and until the
Board of Directors of the Corporation (the "Board") shall have declared and the
Corporation shall have paid in full a dividend in like amount and kind on the
then outstanding shares of Series B Preferred, Series B-1 Preferred, Series C
Preferred and Series D Preferred (determined based upon the number of shares of
Common Stock (including fractions of a share) into which each share of Series B
Preferred, Series B-1 Preferred, Series C Preferred or Series D Preferred held
by each holder thereof could be converted pursuant to the provisions hereof).
(b) No dividends, whether in cash, in property or in shares of the
capital stock of the Corporation, shall be declared or set aside for any shares
of Series A Preferred unless the Board shall declare a dividend on the then
outstanding shares of Common Stock, in which event the holders of Series A
Preferred shall be entitled to the amount of dividends per share of Series A
Preferred as would be declared payable on the largest number of shares of Common
Stock (including fractions of a share) into which each share of Series A
Preferred held by each holder hereof could be converted pursuant to the
provisions hereof, such number determined as of the record date for the
determination of holders of Common Stock and Series A Preferred entitled to
receive such dividend.
-2-
<PAGE>
2. Liquidation Preference. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, distributions
to the stockholders of the Corporation shall be made in the following manner:
(a) The holders of the Series B Preferred and the holders of the
Series B-1 Preferred shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the Corporation to the
holders of the Common Stock or any other series of Preferred Stock by reason of
their ownership of such stock, (i) an amount equal to $1.0346 (subject to
appropriate adjustment for stock splits, stock dividends, combinations or other
similar recapitalizations affecting such shares occurring after the filing of
this Fourth Amended and Restated Certificate of Incorporation) for each share of
Series B Preferred or Series B-1 Preferred then held by them and (ii), an amount
equal to all declared but unpaid dividends on the Series B Preferred or Series
B-1 Preferred, as the case may be. If upon the occurrence of a liquidation,
dissolution or winding up of the Corporation the assets and funds thus
distributed among the holders of the Series B Preferred and Series B-1 Preferred
shall be insufficient to permit the payment to such holders of the full
preferential amount, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series B Preferred and the holders of the Series B-1 Preferred in proportion to
the preferential amount each such holder is otherwise entitled to receive in
accordance with the preceding sentence.
(b) After setting apart or paying in full the preferential amounts due
pursuant to Subsection 2(a) above, the holders of the Series A Preferred shall
be entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Corporation to the holders of the Common
Stock or to the holders of the Series B Preferred and Series B-1 Preferred under
Subsection 2(c) by reason of their ownership of such stock, an amount equal to
$0.20 (subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalizations affecting such shares occurring
after the filing of this Fourth Amended and Restated Certificate of
Incorporation) for each share of Series A Preferred then held by them and, in
addition, an amount equal to all declared but unpaid dividends on the Series A
Preferred. If upon the occurrence of a liquidation, dissolution or winding up
of the Corporation the assets and funds thus distributed among the holders of
the Series A Preferred shall be insufficient to permit the payment to such
holders of the full preferential amount, then the entire assets and funds of the
Corporation legally available for distribution (after the payments required
under Subsection 2(a) have been made) shall be distributed ratably among the
holders of the Series A Preferred in proportion to the preferential amount each
such holder is otherwise entitled to receive.
(c) After setting apart or paying in full the preferential amounts due
pursuant to Subsections 2(a) and 2(b) above, the holders of the Series B
Preferred and the holders of the Series B-1 Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock by reason of
their ownership of such stock, an amount equal to $0.5173 (subject to
appropriate adjustment for stock splits, stock dividends, combinations or other
similar recapitalizations affecting such shares occurring after the filing of
this Fourth Amended and Restated Certificate of Incorporation) for each share of
Series B Preferred or Series B-1 Preferred then held by them. If
-3-
<PAGE>
upon the occurrence of a liquidation, dissolution or winding up of the
Corporation the assets and funds thus distributed among the holders of the
Series B Preferred and the holders of the Series B-1 Preferred shall be
insufficient to permit the payment to such holders of the full preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution (after the payments required under Subsections 2(a) and 2(b)
have been made) shall be distributed ratably among the holders of the Series B
Preferred and the holders of the Series B-1 Preferred in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(d) After setting apart or paying in full the preferential amounts due
pursuant to Subsections 2(a), 2(b) and 2(c) above, the holders of the Series C
Preferred and the holders of the Series D Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock or any other
series of Preferred Stock by reason of their ownership of such stock, (i) an
amount equal to $4.702, in the case of Series C Preferred, or $38.576, in the
case of Series D Preferred, (subject in each case to appropriate adjustment for
stock splits, stock dividends, combinations or other similar recapitalizations
affecting such shares occurring after the filing of this Fourth Amended and
Restated Certificate of Incorporation) for each share of Series C Preferred or
Series D Preferred then held by them and (ii) an amount equal to all declared
but unpaid dividends on the Series C Preferred or Series D Preferred, as the
case may be. If upon the occurrence of a liquidation, dissolution or winding up
of the Corporation the assets and funds thus distributed among the holders of
the Series C Preferred and Series D Preferred shall be insufficient to permit
the payment to such holders of the full preferential amount, then the entire
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series C Preferred and the holders
of the Series D Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive in accordance with the preceding
sentence.
(e) After setting apart or paying in full the preferential amounts due
pursuant to Subsections 2(a), 2(b), 2(c) and 2(d) above, the remaining assets of
the Corporation available for distribution to stockholders, if any, shall be
distributed to the holders of the Common Stock on a pro rata basis, based on the
number of shares of Common Stock then held by each holder.
(f) A consolidation or merger of this Corporation with or into any
other corporation or corporations in which the shareholders of the Corporation
immediately prior to such transaction own 50% or less of the voting power of the
surviving entity immediately following such transaction, or a sale, conveyance
or disposition of all or substantially all of the assets of this Corporation, or
the effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of (each, a "Liquidity Event"), shall be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 2.
(g) In the event the Corporation proposes to distribute assets other
than cash in connection with any liquidation, dissolution or winding up of the
Corporation, the value of the assets to be distributed to the holder of shares
of Preferred Stock and Common Stock shall be
-4-
<PAGE>
determined in good faith by the Board. Any securities not subject to investment
letter or similar restrictions on free marketability shall be valued as follows:
(i) If traded on a securities exchange or quoted on the Nasdaq
National Market, the value shall be deemed to be the average of the security's
closing prices on such exchange over the ten (10) day period ending one (1) day
prior to the distribution;
(ii) If quoted on the Nasdaq Small Cap Market or actively
traded over-the-counter, the value shall be deemed to be the average of the
closing bid prices over the thirty (30) day period ending three (3) days prior
to the distribution; and
(iii) If there is no active public market, the value shall be
the fair market value thereof as determined in good faith by the Board.
The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be adjusted to make an
appropriate discount from the market value determined as above in clauses (i),
(ii) or (iii) to reflect the fair market value thereof as determined in good
faith by the Board. The holders of at least a majority of the outstanding Series
B Preferred, Series B-1 Preferred, Series C Preferred and Series D Preferred,
voting together as a single class, shall have the right to challenge any
determination by the Board of fair market value pursuant to this Section 2(g),
in which case the determination of fair market value shall be made by an
independent appraiser selected jointly by the Board and the challenging parties,
the cost of such appraisal to be borne equally by the Corporation and the
challenging parties.
3. Voting Rights.
(a) General Voting Rights. Except as otherwise required by law or as
set forth herein, the holder of each share of Common Stock issued and
outstanding shall have one vote for each share of Common Stock held by such
holder, and the holder of each share of Series A Preferred, Series B Preferred,
Series B-1 Preferred, Series C Preferred and Series D Preferred shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share could be converted at the record date for determination of
the stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
stockholders is solicited, such votes to be counted together with all other
shares of stock of the Corporation having general voting power and not counted
separately as a class. Holders of Common Stock, Series A Preferred, Series B
Preferred, Series B-1 Preferred, Series C Preferred and Series D Preferred shall
be entitled to notice of any stockholders' meeting in accordance with the Bylaws
of the Corporation.
(b) Series B Right to Elect Two Directors. So long as at least
625,000 shares of Series B Preferred (subject to appropriate adjustment for
stock splits, stock dividends, combinations or other similar recapitalizations
affecting such shares occurring after the filing of this Fourth Amended and
Restated Certificate of Incorporation) are issued and outstanding, the holders
of Series B Preferred, voting together as a separate class, shall have the right
to elect two
-5-
<PAGE>
members of the Board, each by majority vote. Each representative may be removed
from the Board only by the majority vote of the Series B Preferred.
(c) Series B-1 Right to Elect One Director. So long as at least
250,000 shares of Series B-1 Preferred (subject to appropriate adjustment for
stock splits, stock dividends, combinations or other similar recapitalizations
affecting such shares occurring after the filing of this Fourth Amended and
Restated Certificate of Incorporation) are issued and outstanding, the holders
of Series B-1 Preferred, voting together as a separate class, shall have the
right to elect one member of the Board, by majority vote. Such representative
may be removed from the Board only by the majority vote of the Series B-1
Preferred.
(d) All other members of the Board shall be elected by the holders of
Common Stock, Series A Preferred, Series B Preferred, Series B-1 Preferred,
Series C Preferred and Series D Preferred voting together as a class in
accordance with Subsection 3(a).
4. Conversion. The holders of Series A Preferred, Series B Preferred,
Series B-1 Preferred, Series C Preferred and Series D Preferred have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert Series A Preferred, Series B Preferred, Series
B-1 Preferred, Series C Preferred and Series D Preferred. Each share of Series A
Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and
Series D Preferred shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or any transfer agent for the Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined, (i) in the
case of the Series A Preferred, by dividing $0.20 by the Series A Conversion
Price, determined as hereinafter provided, in effect at the time of the
conversion; (ii) in the case of the Series B Preferred, by dividing $1.0346 by
the Series B Conversion Price, determined as hereinafter provided, in effect at
the time of the conversion; (iii) in the case of the Series B-1 Preferred, by
dividing $1.0346 by the Series B-1 Conversion Price, determined as hereinafter
provided, in effect at the time of the conversion; (iv) in the case of the
Series C Preferred, by dividing $4.702 by the Series C Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion; and
(v) in the case of the Series D Preferred, by dividing $38.576 by the Series D
Conversion Price, determined as hereinafter provided, in effect at the time of
conversion. The price at which shares of Common Stock shall be deliverable upon
conversion of the Series A Preferred (the "Series A Conversion Price") initially
shall be $0.20 per share of Common Stock, the price at which shares of Common
Stock shall be deliverable upon conversion of the Series B Preferred (the
"Series B Conversion Price") initially shall be $1.0346 per share of Common
Stock, the price at which shares of Common Stock shall be deliverable upon
conversion of the Series B-1 Preferred (the "Series B-1 Conversion Price")
initially shall be $1.0346 per share of Common Stock, the price at which shares
of Common Stock shall be deliverable upon conversion of the Series C Preferred
(the "Series C Conversion Price") initially shall be $4.702 per share of Common
Stock and the price at which shares of Common Stock shall be deliverable upon
conversion of the Series D Preferred (the "Series D Conversion Price") initially
shall be $38.576 per share of Common Stock. The Series A, Series B, Series B-1,
Series C and Series D Conversion Prices shall be subject to adjustment as
hereinafter provided.
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Such rights of conversion shall be exercised by the holder thereof
giving written notice that the holder elects to convert a stated number of
shares of Preferred Stock into Common Stock and by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of Preferred
Stock) at any time during its usual business hours on the date set forth in such
notice, together with a statement of the name or names (with address and
taxpayer identification number) in which the certificate or certificates for
shares of Common Stock shall be issued.
(b) Automatic Conversion. If at any time the Corporation shall effect
a firm commitment underwritten public offering of shares of Common Stock
pursuant to an effective registration statement, covering the offer and sale of
securities for the account of the Corporation to the public with aggregate gross
proceeds to the Corporation of not less than Twenty Million Dollars
($20,000,000) and with a price to the public of at least $38.576 per share
(subject to appropriate adjustment for stock splits, stock dividends,
combinations or other similar recapitalizations affecting such shares occurring
after the filing of this Fourth Amended and Restated Certificate of
Incorporation), then effective upon the closing of the sale of such shares by
the Corporation pursuant to such public offering, all outstanding shares of
Series A Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred
and Series D Preferred shall convert automatically to shares of Common Stock in
accordance with Subsection 4(a).
(c) Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in Subsection 4(a) and
surrender of the certificate or certificates for the share or shares of Series A
Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or
Series D Preferred to be converted, the Corporation shall issue and deliver to
the holder a certificate or certificates, registered in such name or names as
such holder may direct, for the number of whole shares of Common Stock issuable
upon the conversion of such share or shares of Series A Preferred, Series B
Preferred, Series B-1 Preferred, Series C Preferred or Series D Preferred. Such
conversion shall be deemed to have been effected and the Series A Conversion
Price, Series B Conversion Price, Series B-1 Conversion Price, Series C
Conversion Price or Series D Conversion Price (as applicable) shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred or Series D
Preferred (as applicable) shall cease, and the person or persons in whose name
or names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby. Notwithstanding the
foregoing, in the event of the automatic conversion of the Series A Preferred,
Series B Preferred Series B-1 Preferred, Series C Preferred or Series D
Preferred upon a public offering as set forth in Subsection 4(b), the person(s)
entitled to receive the Common Stock issuable upon such conversion of Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Fractional Shares; Dividends; Partial Conversion. No fractional
shares of Common Stock shall be issued upon conversion of Series A Preferred,
Series B Preferred,
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Series B-1 Preferred, Series C Preferred or Series D Preferred into Common Stock
and no payment or adjustment shall be made upon any conversion on account of any
cash dividends on the Common Stock issued upon such conversion, the record date
for which dividends is prior to the date such conversion is deemed to be
effective as provided in Subsection 4(c). In case the number of shares of
Preferred Stock represented by the certificate or certificates surrendered
pursuant to Subsection 4(a) exceeds the number of shares converted into Common
Stock, the Corporation shall, upon such conversion, execute and deliver to the
holder, at the expense of the Corporation, a new certificate or certificates for
the number of shares of Series A Preferred, Series B Preferred Series B-1
Preferred, Series C Preferred or Series D Preferred (as applicable) represented
by the certificate or certificates surrendered which are not to be converted. If
any fractional share of Common Stock would, except for the provisions of the
first sentence of this Subsection 4(d), be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Series A Preferred, Series B Preferred, Series B-1
Preferred, Series C Preferred or Series D Preferred for conversion an amount in
cash equal to the greater of (a) the then current value of such fractional share
as determined pursuant to Subsection 2(g) and (b) the pro rata amount of the
applicable Conversion Price of such fractional share.
(e) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred, Series B Preferred, Series B-1 Preferred,
Series C Preferred and Series D Preferred such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred, Series B Preferred, Series B-1
Preferred, Series C Preferred and Series D Preferred, and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred and Series D
Preferred, in addition to such other remedies as shall be available to the
holders of Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
(f) No Reissuance of Preferred Stock. Shares of Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred and Series D
Preferred which are converted into shares of Common Stock as provided herein
shall not be reissued.
5. Adjustments to Conversion Price.
(a) Special Definitions. For purposes of this Section 5, the
following definitions shall apply:
(i) "Options" mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Common Stock or Convertible Securities.
(ii) "Series A Original Issue Date" shall mean the date on which
the first share of Series A Preferred was issued.
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(iii) "Series B Original Issue Date" shall mean the date on
which the first share of Series B Preferred was issued.
(iv) "Series B-1 Original Issue Date" shall mean and shall be
deemed to be (solely for purposes of this Section 5) the date on which the first
share of Series B Preferred was issued.
(v) "Series C Original Issue Date" shall mean and shall be
deemed to be (solely for purposes of this Section 5) the date on which the first
share of Series C Preferred was issued.
(vi) "Series D Original Issue Date" shall mean and shall be
deemed to be (solely for purposes of this Section 5) the date on which the first
share of Series D Preferred was issued.
(vii) "Original Issue Date" shall mean the Series A Original
Issue Date, the Series B Original Issue Date, Series B-1 Original Issue Date,
the Series C Original Issue Date or the Series D Original Issue Date, as
applicable.
(viii) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Series A Preferred, Series B Preferred, Series
B-1 Preferred, Series C Preferred, Series D Preferred and Common Stock) or other
securities directly or indirectly convertible into or exchangeable for Common
Stock.
(ix) "Additional Shares of Common Stock" shall mean all shares
(including reissued shares) of Common Stock issued (or, pursuant to Subsection
5(c), deemed to be issued) by the Corporation after the Original Issue Date,
other than:
(A) shares of Common Stock issued upon conversion of the
Series A Preferred, the Series B Preferred, the Series B-1 Preferred, the Series
C Preferred and the Series D Preferred authorized herein;
(B) up to 600,000 (with respect to Series A Preferred, the
Series B Preferred and the Series B-1 Preferred) and up to 900,000 (with respect
to Series C Preferred and the Series D Preferred) shares of Common Stock
(including any of such shares which are repurchased) issued to officers,
directors, employees and consultants of the Corporation pursuant to stock option
or purchase plans or agreements or other incentive stock arrangements approved
by the Board of Directors;
(C) as a dividend or distribution on Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred or Series D
Preferred or any event for which adjustment is made pursuant to Subsections
5(e), 5(f) or 5(g) hereof;
(D) up to 46,255 shares of Common Stock issued or issuable
upon exercise of warrants issued in connection with the Corporation's bridge
financing in December 1997; and
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(E) up to 2,415 shares of Series B Preferred issued upon
exercise of options granted to a finder in connection with a portion of the
Corporation's Series B Preferred financing.
(b) No Adjustment of Conversion Price. No adjustment in the Series A
Conversion Price shall be made in respect of the issuance of Additional Shares
of Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
Series A Conversion Price of such series in effect on the date of and
immediately prior to such issue; no adjustment in the Series B Conversion Price
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued by the Corporation is less than the Series B
Conversion Price of such series in effect on the date of and immediately prior
to such issue; no adjustment in the Series B-1 Conversion Price shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Series B-1 Conversion Price of
such series in effect on the date of and immediately prior to such issue; and no
adjustment in the Series C Conversion Price shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Series C Conversion Price of such series in effect
on the date of and immediately prior to such issue; and no adjustment in the
Series D Preferred Conversion Price shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share for an
Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Series D Conversion Price of such series in effect
on the date of and immediately prior to such issue.
(c) Deemed Issue of Additional Shares of Common Stock. In the event
the Corporation at any time or from time to time after the Original Issue Date
for Series A Preferred, Series B Preferred, Series B-1 Preferred, Series C
Preferred or Series D Preferred shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number that would result in an adjustment pursuant
to clause (ii) below) of Common Stock issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion
or exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business on such record
date, provided that Additional Shares of Common Stock shall not be deemed to
have been issued unless the consideration per share (determined pursuant to
paragraph 5(e) hereof) of such Additional Shares of Common Stock would be less
than the Series A Conversion Price, Series B Conversion Price, Series B-1
Conversion Price, Series C Conversion Price or Series D Conversion Price (as
applicable) in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such case
in which Additional Shares of Common Stock are deemed to be issued:
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(i) no further adjustment in the Series A Conversion Price,
Series B Conversion Price, Series B-1 Conversion Price, Series C Conversion
Price or Series D Conversion Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or increase or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Series A Conversion Price, the Series B Conversion Price,
the Series B-1 Conversion Price, the Series C Conversion Price and the Series D
Conversion Price (as applicable) computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(iii) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Series A Conversion Price, the Series B Conversion Price,
the Series B-1 Conversion Price, the Series C Conversion Price and the Series D
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(A) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common Stock issued were shares of
Common Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by the Corporation
for the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Corporation upon the issue of
the Convertible Securities with respect to which such Options were actually
exercised;
(iv) no readjustment pursuant to clause (ii) or (iii) above
shall have the effect of increasing the Series A Conversion Price, the Series B
Conversion Price, the Series B-1 Conversion Price, the Series C Conversion Price
and the Series D Conversion Price(as applicable) to an amount which exceeds the
lower of (i) the Series A Conversion Price, the
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Series B Conversion Price, the Series B-1 Conversion Price, the Series C
Conversion Price or the Series D Conversion Price (as applicable) on the
original adjustment date, or (ii) the Series A Conversion Price, Series B
Conversion Price, Series B-1 Conversion Price, Series C Conversion Price or the
Series D Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date; and
(v) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of the Series A
Conversion Price, the Series B Conversion Price, the Series B-1 Conversion
Price, the Series C Conversion Price or the Series D Conversion Price shall be
made until the expiration or exercise of all such Options, whereupon such
adjustment shall be made in the manner provided in clause (iii) above.
(d) Weighted Average Adjustment of Series A Conversion Price Upon
Issuance of Additional Shares of Common Stock. If and whenever the Corporation
shall issue or sell or is, in accordance with this Section 5, deemed to have
issued or sold any Additional Shares of Common Stock for a consideration per
share less than the Series A Conversion Price in effect immediately prior to the
time of such issuance or sale, then forthwith upon such issuance or sale, the
Series A Conversion Price shall be reduced to an amount equal to the quotient
obtained by dividing:
(i) an amount equal to the sum of
(x) the number of shares of all Common Stock outstanding
or deemed in accordance with this Section 5 to be issued and outstanding
immediately prior to such issuance or sale (with each share of Series A
Preferred being deemed for such purpose to be equal to the number of shares of
Common Stock, including fractions of a share, into which such share is
convertible immediately prior to such issuance or sale) multiplied by the Series
A Conversion Price in effect immediately prior to the time of such issuance or
sale, plus
(y) the aggregate consideration received by the
Corporation for such issuance or sale, by
(ii) the total number of shares of Common Stock outstanding or
deemed in accordance with this Section 5 hereof to be issued and outstanding
immediately after such issuance or sale (with each share of Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred and Series D
Preferred being deemed for such purpose to be equal to the number of shares of
Common Stock, including fractions of a share, into which such share is
convertible immediately prior to such issuance or sale).
(e) Full Ratchet Adjustment of Series B Conversion Price Upon
Issuance of Additional Shares of Common Stock. If and whenever the Corporation
shall issue or sell or is, in accordance with this Section 5, deemed to have
issued or sold any Additional Shares of Common Stock for a consideration per
share less than the Series B Conversion Price in effect immediately prior to the
time of such issuance or sale, then forthwith upon such issuance or sale, the
Series B Conversion Price shall be reduced to an amount equal to the per share
consideration received by the Corporation for such Additional Shares of Common
Stock.
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(f) Full Ratchet Adjustment of Series B-1 Conversion Price Upon
Issuance of Additional Shares of Common Stock. If and whenever the Corporation
shall issue or sell or is, in accordance with this Section 5, deemed to have
issued or sold any Additional Shares of Common Stock for a consideration per
share less than the Series B-1 Conversion Price in effect immediately prior to
the time of such issuance or sale, then forthwith upon such issuance or sale,
the Series B-1 Conversion Price shall be reduced to an amount equal to the per
share consideration received by the Corporation for such Additional Shares of
Common Stock.
(g) 1998 Revenue Adjustment of Series B Conversion Price. If the
actual total revenues of the Corporation for the 1998 fiscal year, as reflected
in the audited financial statements of the Corporation (the "1998 Revenues"),
are less than $1,032,860, then the Series B Conversion Price at the time the
auditors' report on such financial statements is issued (which in no event shall
be later than March 31, 1999) shall be reduced to the amount obtained by
multiplying the then-effective Series B Conversion Price by a fraction, the
numerator of which is the 1998 Revenues and the denominator of which is
$1,032,860; provided, however, that in no event shall such fraction be less than
0.60 or greater than 1.00.
(h) Weighted Average Adjustment of Series C Conversion Price and
Series D Conversion Price Upon Issuance of Additional Shares of Common Stock.
If and whenever the Corporation shall issue or sell or is, in accordance with
this Section 5, deemed to have issued or sold any Additional Shares of Common
Stock for a consideration per share less than the Series C Conversion Price or
the Series D Conversion Price, as the case may be, in effect immediately prior
to the time of such issuance or sale, then forthwith upon such issuance or sale,
the Series C Conversion Price or the Series D Conversion Price, as the case may
be, shall be reduced to an amount equal to the quotient obtained by dividing:
(i) an amount equal to the sum of
(x) the number of shares of all Common Stock outstanding or
deemed in accordance with this Section 5 to be issued and outstanding
immediately prior to such issuance or sale (with each share of Series C
Preferred or Series D Preferred, as the case may be, being deemed for such
purpose to be equal to the number of shares of Common Stock, including fractions
of a share, into which such share is convertible immediately prior to such
issuance or sale) multiplied by the Series C Conversion Price or the Series D
Conversion Price, as the case may be, in effect immediately prior to the time of
such issuance or sale, plus
(y) the aggregate consideration received by the Corporation
for such issuance or sale, by
(ii) the total number of shares of Common Stock outstanding or deemed
in accordance with this Section 5 hereof to be issued and outstanding
immediately after such issuance or sale (with each share of Series A Preferred,
Series B Preferred, Series B-1 Preferred, Series C Preferred and Series D
Preferred being deemed for such purpose to be equal to the number of shares of
Common Stock, including fractions of a share, into which such share is
convertible immediately prior to such issuance or sale).
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(i) Determination of Consideration. For purposes of this Section 5,
the consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Except as provided in clause (ii) below,
such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as determined in
good faith by the Board; provided, however, that no value shall be attributed to
any serviced performed by any employee, officer or director of the Corporation;
and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received with respect to such Additional Shares of Common
Stock, computed as provided in clauses (A) and (B) above, as determined in good
faith by the Board.
(ii) Expenses. In the event the Corporation pays or incurs
expenses, commissions or compensation, or allows concessions or discounts to
underwriters, dealers or others performing similar services in connection with
such issue, in an aggregate amount in excess of 10% of the aggregate
consideration received by the Corporation for such issue, as determined in
clause (i) above, consideration shall be computed as provided in clause (i)
above after deducting the aggregate amount in excess of 10% of the aggregate
consideration received by the Corporation for the issue.
(j) Subdivision or Combination of Common Stock. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Series A Conversion Price, the Series B Conversion Price, the Series
B-1 Conversion Price, the Series C Conversion Price and the Series D Conversion
Price in effect immediately prior to such subdivision shall be proportionately
reduced, and, conversely, in case the outstanding shares of Common Stock shall
be combined into a smaller number of shares, the Series A Conversion Price, the
Series B Conversion Price, the Series B-1 Conversion Price, the Series C
Conversion Price and the Series D Conversion Price in effect immediately prior
to such combination shall be proportionately increased.
(k) Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of shares of Series A
Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or
Series D Preferred shall thereupon have the right to receive, upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock immediately theretofore receivable upon the conversion of such
shares of Series A
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Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or
Series D Preferred, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock receivable
upon such conversion had such reorganization or reclassification not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including without limitation provisions for adjustments of the applicable
Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
(l) Notice of Adjustment. Upon any adjustment of the Series A
Conversion Price, the Series B Conversion Price, the Series B-1 Conversion
Price, the Series C Conversion Price or the Series D Conversion Price, the
Corporation shall give written notice thereof, by first class mail, postage
prepaid or by telex or facsimile, addressed to each holder of shares of Series A
Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or
Series D Preferred (as applicable) at the address of such holder as shown on the
books of the Corporation, which notice shall state the Series A Conversion
Price, Series B Conversion Price, Series B-1 Conversion Price, Series C
Conversion Price or Series D Conversion Price (as applicable) resulting from
such adjustment, setting forth in reasonable detail the calculation upon which
such adjustment is based.
(m) Notices. In case at any time:
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into, or a sale of all or substantially all
its assets to, another entity or entities; or
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of such cases, the Corporation shall give, by first
class mail, postage prepaid, or by telecopier to non-U.S. residents, addressed
to each holder of any shares of Preferred Stock at the address of such holder as
shown on the books of the Corporation, (i) at least 10 days prior written notice
of the date on which the books of the Corporation shall close or a record shall
be taken for such dividend or distribution or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 10 days prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
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clause (1) shall also specify, in the case of any such dividend or distribution,
the date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (2) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
(n) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(o) Miscellaneous.
(i) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one hundredth (1/100) of a share, as the case may
be.
(ii) The holders of at least 60% of the outstanding Series A
Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or
Series D Preferred (as applicable) shall have the right to challenge any
determination by the Board of fair value pursuant to this Section 5, in which
case such determination of fair value shall be made by an independent appraiser
selected jointly by the Board and the challenging parties, the cost of such
appraisal to be borne equally by the Corporation and the challenging parties.
(iii) No adjustment in the Series A Conversion Price, the Series
B Conversion Price, the Series B-1 Conversion Price, the Series C Conversion
Price or the Series D Conversion Price need be made if such adjustment would
result in a change in such Conversion Price of less than $0.01. Any adjustment
of less than $0.01 which is not made shall be carried forward and shall be made
at the time of and together with any subsequent adjustment which, on a
cumulative basis, amounts to an adjustment of $0.01 or more in such Conversion
Price.
(p) Definition of Common Stock. As used in this paragraph 5, the term
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
$0.001 par value, as constituted on the date of filing of this Fourth Amended
and Restated Certificate of Incorporation, and shall also include any capital
stock of any class of the Corporation thereafter authorized which shall neither
be limited to a fixed sum or percentage of par value in respect of the rights of
the holders thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series A Preferred, Series B
Preferred, Series B-1 Preferred, Series C Preferred and Series D Preferred shall
include only shares designated as Common Stock of the Corporation on the date of
filing of this instrument, or in case of any reorganization or reclassification
of the outstanding shares thereof, the stock, securities or assets provided for
in Subsection 5(j).
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6. Redemption at Election of Series B Preferred, Series B-1 Preferred,
Series C Preferred, and Series D Preferred.
(a) Upon the written request of a holder of then outstanding shares of
Series B Preferred or Series B-1 Preferred received by the Corporation at any
time from and after March 5, 2003, the Corporation will, subject to the
conditions set forth in Subsection 6(b) below, within thirty (30) days of
receipt of any such request (the "Series B/B-1 Redemption Date"), redeem all of
the outstanding shares of Series B Preferred or Series B-1 Preferred (as
applicable) held by such holder, by paying $2.0692 per share, plus any declared
but unpaid dividends thereon (subject to appropriate adjustment for stock
splits, stock dividends, combinations or other similar recapitalizations
affecting such shares occurring after the filing of this Fourth Amended and
Restated Certificate of Incorporation) in cash for each share of Series B
Preferred or Series B-1 Preferred then redeemed (hereinafter referred to as the
"Series B/B-1 Redemption Price").
(b) If the funds of the Corporation legally available for redemption
of Series B Preferred and Series B-1 Preferred on the Series B/B-1 Redemption
Date are insufficient to redeem the number of shares of Series B Preferred and
Series B-1 Preferred required under this Section 6 to be redeemed on such date,
those funds which are legally available will be used to redeem the maximum
possible number of such shares of Series B Preferred and Series B-1 Preferred
ratably on the basis of the number of shares of Series B Preferred and Series B-
1 Preferred which would have been redeemed on such date if the funds of the
Corporation legally available therefor had been sufficient to redeem all shares
of Series B Preferred and Series B-1 Preferred required to be redeemed on such
date. At any time thereafter when additional funds of the Corporation become
legally available for the redemption of Series B Preferred and Series B-1
Preferred, such funds will be used, at the end of the next succeeding fiscal
quarter, to redeem the balance of the shares which the Corporation was
theretofore obligated to redeem, ratably on the basis set forth in the preceding
sentence.
(c) Within five (5) days after receipt of the written request of a
holder pursuant to Section 6(a), the Corporation shall provide written notice of
such request to each other holder of then outstanding shares of Series B
Preferred or Series B-1 Preferred by first class or certified mail, return
receipt requested, at the address for such holder last shown on the records of
the transfer agent therefor (or the records of the Corporation, if it serves as
its own transfer agent). Upon the written request of any such other holder
received by the Corporation within ten (10) days after the Corporation mails
such notice, the Corporation will redeem on the Series B/B-1 Redemption Date all
of the outstanding shares of Series B Preferred or Series B-1 Preferred (as
applicable) held by such other holder, by paying the Series B/B-1 Redemption
Price therefor.
(d) On or prior to the Series B/B-1 Redemption Date, the Corporation
shall deposit the Series B/B-1 Redemption Price of all shares of Series B
Preferred and Series B-1 Preferred designated for redemption in the notice of
redemption and not yet redeemed with a bank or trust company having aggregate
capital and surplus in excess of $50,000,000 as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
company to pay the Series B/B-1 Redemption Price for such shares to their
respective holders on or after the
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Series B/B-1 Redemption Date upon receipt of notification from the Corporation
that such holder has surrendered his or its share certificate to the
Corporation. Such instructions shall also provide that any moneys deposited by
the Corporation pursuant to this Subsection 6(d) for the redemption of shares
thereafter converted into shares of the Corporation's Common Stock pursuant to
Section 4 hereof no later than the close of business on the fifth full day
preceding the Series B/B-1 Redemption Date shall be returned to the Corporation
on the Series B/B-1 Redemption Date.
The balance of any monies deposited by the Corporation pursuant to
this Subsection 6(d) remaining unclaimed at the expiration of one year following
the Series B/B-1 Redemption Date shall thereafter be returned to the Corporation
upon its request expressed in a resolution of its Board of Directors.
(e) Unless there shall have been a default in payment of the Series
B/B-1 Redemption Price, no share of Series B Preferred or Series B-1 Preferred
shall be entitled to any dividends declared after its Series B/B-1 Redemption
Date, and on such Series B/B-1 Redemption Date all rights of the holder of such
share as a stockholder of the Corporation by reason of the ownership of such
share will cease, except the right to receive the Series B/B-1 Redemption Price
of such share, without interest, upon presentation and surrender of the
certificate representing such share, and such share will not from and after such
Series B/B-1 Redemption Date be deemed to be outstanding.
(f) Any Series B Preferred or Series B-1 Preferred redeemed pursuant
to this Section 6 will be canceled and will not under any circumstances be
reissued, sold or transferred and the Corporation may from time to time take
such appropriate action as may be necessary to reduce the authorized Series B
Preferred or Series B-1 Preferred accordingly.
(g) Subject to the prior right of each holder of Series B Preferred or
Series B-1 Preferred which has so requested to have its shares of Series B
Preferred or Series B-1 Preferred (as applicable) redeemed in full in accordance
with paragraphs (a) through (f) of this Section 6, upon the written request of a
holder of then outstanding shares of Series C Preferred or Series D Preferred
received by the Corporation at any time from and after September 9, 2004, the
Corporation will, subject to the conditions set forth in Subsection 6(h) below,
within thirty (30) days of receipt of any such request (the "Series C/D
Redemption Date"), redeem all of the outstanding shares of Series C Preferred or
Series D Preferred, as the case may be, held by such holder, by paying $9.404
per share, plus any declared but unpaid dividends thereon (subject to
appropriate adjustment for stock splits, stock dividends, combinations or other
similar recapitalizations affecting such shares occurring after the filing of
this Fourth Amended and Restated Certificate of Incorporation) in cash for each
share of Series C Preferred then redeemed (hereinafter referred to as the
"Series C Redemption Price"), and by paying $77.152 per share, plus any declared
but unpaid dividends thereon (subject to appropriate adjustment for stock
splits, stock dividends, combinations or other similar recapitalizations
affecting such shares occurring after the filing of this Fourth Amended and
Restated Certificate of Incorporation) in cash for each share of Series D
Preferred then redeemed (hereinafter the "Series D Redemption Price").
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(h) If the funds of the Corporation legally available for redemption
of Series C Preferred and Series D Preferred on the Series C/D Redemption Date
are insufficient to redeem the number of shares of Series C Preferred and Series
D Preferred required under this Section 6 to be redeemed on such date, those
funds which are legally available, after the redemption of all shares of Series
B Preferred and Series B-1 Preferred sought to be redeemed which have not yet
been redeemed, will be used to redeem the maximum possible number of such shares
of Series C Preferred and Series D Preferred ratably on the basis of the number
of shares of Series C Preferred and Series D Preferred which would have been
redeemed on such date if the funds of the Corporation legally available
therefor, after the redemption of all shares of Series B Preferred and Series B-
1 Preferred sought to be redeemed which have not yet been redeemed, had been
sufficient to redeem all shares of Series C Preferred and Series D Preferred
required to be redeemed on such date. At any time thereafter when additional
funds of the Corporation become legally available, after the redemption of all
shares of Series B Preferred and Series B-1 Preferred sought to be redeemed
which have not yet been redeemed, for the redemption of Series C Preferred and
Series D Preferred, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of the shares which the Corporation was
theretofore obligated to redeem, ratably on the basis set forth in the preceding
sentence.
(i) Within five (5) days after receipt of the written request of a
holder pursuant to Section 6(g), the Corporation shall provide written notice of
such request to each other holder of then outstanding shares of Series C
Preferred or Series D Preferred by first class or certified mail, return receipt
requested, at the address for such holder last shown on the records of the
transfer agent therefor (or the records of the Corporation, if it serves as its
own transfer agent). Upon the written request of any such other holder received
by the Corporation within ten (10) days after the Corporation mails such notice,
the Corporation will, subject to the prior right of each holder of Series B
Preferred or Series B-1 Preferred which has so requested to have its shares of
Series B Preferred or Series B-1 Preferred (as applicable) redeemed in full in
accordance with paragraphs (a) through (f) of this Section 6, redeem on the
Series C/D Redemption Date all of the outstanding shares of Series C Preferred
or Series D Preferred (as applicable) held by such other holder, by paying the
Series C Redemption Price or Series D Redemption Price (as applicable) therefor.
(j) On or prior to the Series C/D Redemption Date, the Corporation
shall deposit the Series C Redemption Price of all shares of Series C Preferred
designated for redemption in the notice of redemption and not yet redeemed, and
the Series D Redemption Price of all shares of Series D Preferred designated for
redemption in the notice of redemption and not yet redeemed, with a bank or
trust company having aggregate capital and surplus in excess of $50,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed, with irrevocable instructions and authority
to the bank or trust company to pay the Series C Redemption Price or Series D
Redemption Price (as applicable) for such shares to their respective holders on
or after the Series C/D Redemption Date upon receipt of notification from the
Corporation that such holder has surrendered his or its share certificate to the
Corporation. Such instructions shall also provide that any moneys deposited by
the Corporation pursuant to this Subsection 6(j) for the redemption of shares
thereafter converted into shares of the Corporation's Common Stock pursuant to
Section 4 hereof no later than the
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close of business on the fifth full day preceding the Series C/D Redemption Date
shall be returned to the Corporation on the Series C/D Redemption Date.
The balance of any monies deposited by the Corporation pursuant to
this Subsection 6(j) remaining unclaimed at the expiration of one year following
the Series C/D Redemption Date shall thereafter be returned to the Corporation
upon its request expressed in a resolution of its Board of Directors.
(k) Unless there shall have been a default in payment of the Series C
Redemption Price or the Series D Redemption Price, as the case may be, no share
of Series C Preferred or Series D Preferred (as applicable) shall be entitled to
any dividends declared after its Series C/D Redemption Date, and on such Series
C/D Redemption Date all rights of the holder of such share as a stockholder of
the Corporation by reason of the ownership of such share will cease, except the
right to receive the Series C Redemption Price or the Series D Redemption Price
(as applicable) of such share, without interest, upon presentation and surrender
of the certificate representing such share, and such share will not from and
after such Series C/D Redemption Date be deemed to be outstanding.
(l) Any Series C Preferred or Series D Preferred redeemed pursuant to
this Section 6 will be canceled and will not under any circumstances be
reissued, sold or transferred and the Corporation may from time to time take
such appropriate action as may be necessary to reduce the authorized Series C
Preferred or Series D Preferred accordingly.
7. Protective Provisions.
(a) Series A Preferred. At any time when shares of Series A
Preferred are outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Corporation is required by law or
by the Corporation's Certificate of Incorporation, and in addition to any other
vote required by law or the Corporation's Certificate of Incorporation, the
Corporation will not without the approval of the holders of at least a majority
of the then outstanding shares of Series A Preferred, voting as a class, either
in writing or by ballot at a duly called meeting increase the authorized number
of shares of Series A Preferred or alter the powers, preferences or rights of
the holders of shares of Series A Preferred so as to affect them adversely. The
holders of at least a majority of the Series A Preferred may waive their rights
under this paragraph, in which event holders of the then outstanding Series A
Preferred shall vote together with the holders of the Common Stock and, subject
to Subsection 7(b) below, the Series B Preferred, as a single class, with
respect to any stockholder actions required for the foregoing matters.
(b) Series B Preferred. So long as any shares of Series B Preferred
are outstanding, the Corporation shall not, without first obtaining the approval
of the holders of at least a majority of the then-outstanding shares of Series B
Preferred, take any action that:
(i) increases the authorized number of shares of Series B
Preferred or amends or changes the rights, preferences, powers, privileges or
restrictions of the Series B Preferred;
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(ii) authorizes, creates or issues shares of any class or
series of stock having a preference superior to or on a parity with the Series B
Preferred;
(iii) reclassifies stock into shares having a preference over
or on a parity with the Series B Preferred;
(iv) amends the Corporation's Certificate of Incorporation in
a manner that adversely affects the rights of the Series B Preferred;
(v) results in a merger or consolidation of the Corporation
with one or more other corporations or other entities in which the stockholders
of the Corporation immediately prior to such merger or consolidation had stock
representing less than a majority of the voting power of the outstanding shares
of the Corporation or resulting entity immediately after such merger or
consolidation;
(vi) results in the sale or other transaction in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Corporation, or otherwise results in the reorganization of the
Corporation;
(vii) results in the dissolution, liquidation or winding up of
the Corporation;
(viii) declares or pays a dividend on the Common Stock (other
than a dividend payable solely in shares of Common Stock);
(ix) results in the incurrence of indebtedness in excess of
$50,000;
(x) materially alters or changes the strategic direction or
business operations of the Corporation in a manner that is not contemplated by
the Corporation's most recent board-approved business plan; or
(xi) amends ARTICLE IX ("Indemnification") of the
Corporation's By-Laws.
(c) Series B-1 Preferred. So long as any shares of Series B-1
Preferred are outstanding, the Corporation shall not, without first obtaining
the approval of the holders of at least a majority of the then-outstanding
shares of Series B-1 Preferred, take any action that:
(i) increases the authorized number of shares of Series B-1
Preferred or amends or changes the rights, preferences, powers, privileges or
restrictions of the Series B-1 Preferred;
(ii) authorizes, creates or issues shares of any class or
series of stock having a preference superior to or on a parity with the Series
B-1 Preferred which is not similarly superior to or on parity with the Series B
Preferred;
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(iii) reclassifies stock into shares having a preference over or
on a parity with the Series B-1 Preferred which do not similarly have a
preference over or on a parity with the Series B Preferred;
(iv) alters the rights, preferences, powers or privileges of
the Series B Preferred in any way which benefits the Series B Preferred (other
than the rights of the Series B Preferred set forth in Section 5(g) hereof)
without similarly altering the rights, preferences, powers or privileges of the
Series B-1 Preferred; or
(v) amends the Corporation's Certificate of Incorporation in a
manner that adversely affects the rights of the Series B-1 Preferred.
(d) Series C Preferred. So long as any shares of Series C Preferred
are outstanding, the Corporation shall not, without first obtaining the approval
of the holders of at least a majority of the then-outstanding shares of Series C
Preferred, take any action that:
(i) increases the authorized number of shares of Series C
Preferred or amends or changes the rights, preferences, powers, privileges or
restrictions of the Series C Preferred ;
(ii) authorizes, creates or issues shares of any class or
series of stock having a preference superior to or on a parity with the Series C
Preferred;
(iii) reclassifies stock into shares having a preference over or
on a parity with the Series C Preferred;
(iv) amends the Corporation's Certificate of Incorporation in a
manner that adversely affects the rights of the Series C Preferred;
(v) results in a merger or consolidation of the Corporation
with one or more other corporations or other entities in which the stockholders
of the Corporation immediately prior to such merger or consolidation had stock
representing less than a majority of the voting power of the outstanding shares
of the Corporation or resulting entity immediately after such merger or
consolidation;
(vi) results in the sale or other transaction in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Corporation, or otherwise results in the reorganization of the
Corporation;
(vii) results in the dissolution, liquidation or winding up of
the Corporation;
(viii) declares or pays a dividend on the Common Stock (other
than a dividend payable solely in shares of Common Stock);
(ix) results in the incurrence of indebtedness in excess of
$50,000;
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<PAGE>
(x) materially alters or changes the strategic direction or
business operations of the Corporation in a manner that is not contemplated by
the Corporation's most recent board-approved business plan; or
(xi) amends the indemnification provisions of the Corporation's
By-Laws.
(e) Series D Preferred. So long as any shares of Series D Preferred
are outstanding, the Corporation shall not, without first obtaining the approval
of the holders of at least a majority of the then-outstanding shares of Series D
Preferred, take any action that:
(i) increases the authorized number of shares of Series D
Preferred or amends or changes the rights, preferences, powers, privileges or
restrictions of the Series D Preferred;
(ii) authorizes, creates or issues shares of any class or
series of stock having a preference superior to or on a parity with the Series D
Preferred;
(iii) reclassifies stock into shares having a preference over or
on a parity with the Series D Preferred;
(iv) amends the Corporation's Certificate of Incorporation in a
manner that adversely affects the rights of the Series D Preferred;
(v) results in a merger or consolidation of the Corporation
with one or more other corporations or other entities in which the stockholders
of the Corporation immediately prior to such merger or consolidation had stock
representing less than a majority of the voting power of the outstanding shares
of the Corporation or resulting entity immediately after such merger or
consolidation;
(vi) results in the sale or other transaction in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Corporation, or otherwise results in the reorganization of the
Corporation;
(vii) results in the dissolution, liquidation or winding up of
the Corporation;
(viii) declares or pays a dividend on the Common Stock (other
than a dividend payable solely in shares of Common Stock);
(ix) materially alters or changes the strategic direction or
business operations of the Corporation in a manner that is not contemplated by
the Corporation's most recent board-approved business plan; or
(x) amends the indemnification provisions of the Corporation's
By-Laws.
ARTICLE V
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For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The number of directors which shall constitute the whole Board of
Directors shall be seven. The phrase "whole Board" and the phrase "total number
of directors" shall be deemed to have the same meaning, to wit, the total number
of directors which the Corporation would have if there were no vacancies. No
election of directors need be by written ballot unless the By-Laws of the
Corporation so provide.
2. After the original or other By-Laws of the Corporation have been
adopted, amended, or repealed, as the case may be, in accordance with the
provisions of Section 109 of the General Corporation Law of the State of
Delaware, and, after the Corporation has received any payment for any of its
stock, the power to adopt, amend, or repeal the By-Laws of the Corporation may
be exercised by vote of a majority of the directors of the Corporation present
at a duly called and held meeting of the Board of Directors at which a quorum is
present, but such right of the directors shall not divest or limit the right of
the stockholders to alter, amend or repeal the By-Laws.
3. No director of the Corporation shall have any personal liability
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided, however, that the foregoing shall not
eliminate or limit the liability of a director of the Corporation (i) for any
breach of such director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transactions from which the director derived an improper personal benefit.
ARTICLE VI
The corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have the power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ARTICLE VII
From time to time any of the provisions of this Amended and Restated
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the
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time prescribed by said laws, and all rights at any time conferred upon the
stockholders of the Corporation by this Amended and Restated Certificate of
Incorporation are granted subject to the provisions of this Article VII.
* * * *
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
February 1, 2000.
By: /s/Timothy B. Bancroft
-------------------------------
Timothy B. Bancroft
Assistant Secretary
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EXHIBIT 3.2
BY-LAWS
OF
INTERNET TECHNOLOGIES CHINA INCORPORATED
ARTICLE I
Offices
-------
SECTION 1. Registered Office. The registered office of Internet
-----------------
Technologies China Incorporated (the "Corporation") in the State of Delaware,
shall be 1013 Centre Road, Wilmington, Delaware 19805, in the County of New
Castle. The name of the registered agent at such office shall be The Prentice
Hall Corporation System, Inc.
SECTION 2. Other Offices. The Corporation may also have offices at such
-------------
other places either within or without the State of Delaware as the Board of
Directors (the "Board") may from time to time determine.
ARTICLE 11
Meetings of Stockholders
------------------------
SECTION 1. Annual Meetings. The annual meeting of the stockholders of the
---------------
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held at such hour and
place as the Board may determine on the second Tuesday in May of each year or on
such other date as the Board may determine. If for any reason the annual meeting
shall not be held on the date fixed herein, a special meeting in lieu of the
annual meeting may be held, with all the force and effect of an annual meeting,
on such date and at such place and hour as shall be designated by the Board in
the notice thereof. At the annual meeting any business may be transacted
whether or not the notice of such meeting shall have contained a reference
thereto, except where such a reference is required by law, the Certificate of
Incorporation or these By-Laws.
SECTION 2. Special Meetings. A special meeting of the stockholders for
----------------
any purpose or purposes may be called at any time by the Board or by the
President, and such meeting shall be held on such date and at such place and
hour as shall be designated in the notice thereof.
SECTION 3. Notice of Meetings. Except as otherwise expressly required by
------------------
these By-laws or by law, notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of record entitled to notice of, or to vote at,
such meeting by delivering a notice thereof to such stockholder personally or by
depositing such notice in the United States mail, directed to such stockholder
at such stockholder's address as it appears on
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<PAGE>
the stock records of the Corporation. Every such notice shall state the place,
date and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called. Notice of any adjourned meeting of
the stockholders shall not be required to be given if the time and place thereof
are announced at the meeting at which the adjournment is taken and a new record
date for the adjourned meeting is not thereafter fixed.
SECTION 4. Quorum and Manner of Acting. Except as otherwise expressly
---------------------------
required by law, if stockholders holding of record a majority of the shares of
stock of the Corporation issued, outstanding and entitled to be voted at the
particular meeting shall be present in person or by proxy, a quorum for the
transaction of business at any meeting of the stockholders shall exist. In the
absence of a quorum at any such meeting or any adjournment or adjournments
thereof, a majority in voting interest of those present in person or by proxy
and entitled to vote thereat may adjourn such meeting from time to time until
stockholders holding the amount of stock requisite for a quorum shall be present
in person or by proxy. At any such adjourned meeting at which a quorum is
present any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 5. Voting. Except as otherwise provided in the Certificate of
------
Incorporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of stock of the
Corporation which has voting power on the matter in question held by such
stockholder and registered in such stockholder's name on the stock record of the
Corporation:
(a) on the date fixed pursuant to the provisions of Section 6 of
Article VII of these By-laws as the record date for the determination of
stockholders who shall be entitled to receive notice of and to vote at such
meeting; or
(b) if no record date shall have been so fixed, at the close of
business on the day next given or, if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the meeting
shall be held.
At all meetings of the stockholders all matters, except as otherwise provided in
the Certificate of Incorporation, in these By-laws or by law, shall be decided
by the vote of a majority in voting interest of the stockholders present in
person or by proxy and entitled to vote thereat, a quorum being present.
SECTION 6. Consent in Lieu of Meeting. Any action required to be taken or
--------------------------
any other action which may be taken at any annual or special meeting of
stockholders, may be taken without a meeting, without prior notice and without a
vote if a consent in writing, setting forth the action so taken, shall be signed
by the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted, provided that
prompt notice of the taking of the corporate action without a
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<PAGE>
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing,
SECTION 7. Inspectors. Either the Board or, in the absence of a
----------
designation of inspectors by the Board, the chairman of the meeting may, in the
discretion of the Board or the chairman, appoint one or more inspectors, who
need not be stockholders, who shall receive and take charge of ballots and
proxies and decide all questions relating to the qualification of those
asserting the right to vote and the validity of ballots and proxies. In the
event of the failure or refusal to serve of any inspector designated by the
Board, the chairman of the meeting shall appoint an inspector to act in place of
each such inspector designated by the Board.
ARTICLE III
Board of Directors
------------------
SECTION 1. General Powers. The property, business, affairs and policies
--------------
of the Corporation shall be managed by or under the direction of the Board.
SECTION 2. Number and Term of Office. The number of directors which shall
-------------------------
constitute the initial Board shall be one (1) and thereafter the number shall be
fixed from time to time by resolution of the Board of Directors. Each of the
directors of the Corporation shall hold office until the annual meeting after
such director's election and until such director's successor shall be elected
and shall qualify or until such director's earlier death or resignation or
removal in the manner hereinafter provided.
SECTION 3. Meetings.
--------
(A) Annual Meeting. The annual meeting of the Board, for the
--------------
purpose of organization, the election of officers and the transaction of other
business, shall be held as promptly as practicable after each annual meeting of
stockholders or the special meeting in lieu thereof.
(B) Regular Meetings. Regular meetings of the Board or any
----------------
committee thereof shall be held at such time and place, within or without the
State of Delaware, as the Board or such committee shall from time to time
determine.
(C) Special Meetings. Special meetings of the Board may be called
----------------
by order of the President or by a majority of the directors then in office.
(D) Notice of Meetings. No notice of regular meetings of the Board
------------------
or of any committee thereof or of any adjourned meeting thereof need be given.
The Secretary shall give prior notice to each director of the time and place of
each special meeting of the Board or adjournment thereof. Such notice shall be
given to each director in person or by telephone, fax or ordinary mail, not less
than two days before the meeting if given in person or by telephone or fax and,
if given by mail, post marked at least four
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(4) days prior to the special meeting if given by mail, and sent to such
director at the director's residence or usual business address. Each such notice
shall state the time and place of the meeting and purpose thereof. In lieu of
the notice to be given as set forth above, a waiver thereof in writing, signed
by the director or directors entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto for purposes of this
Section 3(D). No notice to or waiver by any director with respect to any special
meeting shall be required if such director shall be present at said meeting.
(E) Quorum and Manner of Acting
---------------------------
(a) At all meetings of the Board of Directors, each
Director present shall have one vote, irrespective of the number of shares of
stock, if any, which he may hold.
(b) Except as otherwise expressly required by these By-laws
or by law, a majority of the directors then in office and a majority of the
members of any committee shall be present in person at any meeting thereof in
order to constitute a quorum for the transaction of business at such meeting,
and the vote of a majority of the directors present at any such meeting at which
a quorum is present shall be necessary for the passage of any resolution or for
an act to be the act of the Board or such committee. In the absence of a quorum,
a majority of the directors present thereat may adjourn such meeting either
finally or from time to time to another time and place until a quorum shall be
present thereat. In the latter case notice of the adjourned time and place shall
be given as aforesaid to all Directors.
(F) Consent in Lieu of Meeting. Any action required or permitted to
--------------------------
be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in a writing or writings and such writing or writings are filed
with the minutes of the proceedings of the Board or committee. Such consents
shall be treated for all purposes as a vote at a meeting.
(G) Action by Communications Equipment. The directors may
----------------------------------
participate in a meeting of the Board or any committee thereof by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other and such participation
shall constitute presence in person at such meeting.
SECTION 4. Compensation. Each director, in consideration of serving as
------------
such, may receive from the Corporation such amount per annum and such fees and
expenses incurred for attendance at meetings of the Board or of any committee,
or both, as the Board may from time to time determine. Nothing contained in this
Section shall be construed to preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
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<PAGE>
SECTION 5. Restoration, Removal and Vacancies. Any director may resign at
----------------------------------
any time by giving written notice, of such resignation to the President or the
Secretary.
Any such resignation shall take effect at the time specified therein or, if
not specified therein, upon receipt. Unless otherwise specified in the
resignation, its acceptance shall not be necessary to make it effective. Except
as provided for in the Certificate of Incorporation, any or all of the directors
may be removed at any time, with or without cause, by vote of a majority of
shares then entitled to vote at an election of directors.
If the office of any director becomes vacant at any time by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, or if any new directorship is created by any increase in the
authorized number of directors, a majority of the directors then in office,
though less than a quorum, or the sole remaining director, may choose a
successor or fill the newly created directorship and the director so chosen
shall hold office, subject to the provisions of these By-laws, until the next
annual election of directors and until his successor shall be duly elected and
shall qualify. In the event that a vacancy arising as aforesaid shall not have
been filled by the Board, such vacancy may be filled by the stockholders at any
meeting thereof after such office becomes vacant. If one or more directors shall
resign from the Board, effective at a future date, a majority of the directors
then in office, including those who have so prospectively resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each director
so chosen shall hold office as herein provided in the filling of other
vacancies.
SECTION 6. Committees. The directors may, by vote of a majority of the
----------
directors then in office, appoint from their number one or more committees and
delegate to such committees some or all of their powers to the extent permitted
by law, the Certificate of Incorporation or these By-Laws. Except as the board
of Directors may otherwise determine, any such committee may, by majority vote
of the entire committee, make rules for the conduct of its business. The
directors shall have the power at any time to fill vacancies in any such
committee, to change its membership or to discharge the committee.
ARTICLE IV
Officers
--------
SECTION 1. Election and Appointment and Term of Office. The officers of
-------------------------------------------
the Corporation shall be a President, such number, if any, of Vice Presidents
(including any Executive or Senior Vice Presidents) as the Board may from time
to time determine, a Secretary and a Treasurer. Each such officer shall be
elected by the Board at its annual meeting and hold office for such term as may
be prescribed by the Board. Two or more offices may be held by the same person.
The President may, but need not, be chosen from among the Directors.
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<PAGE>
The Board may elect or appoint (and may authorize the President to appoint)
such other officers (including one or more Assistant Secretaries and Assistant
Treasurers) as it deems necessary who shall have such authority and shall
perform such duties as the Board or the President may from time to time
prescribe.
If additional officers are elected or appointed during the year, each shall
hold office until the next annual meeting of the Board at which officers are
regularly elected or appointed and until such officer's successor is elected or
appointed and qualified or until such officer's earlier death or resignation or
removal in the manner hereinafter provided.
SECTION 2. Duties and Functions.
---------------------
(A) President. The President shall be the chief executive officer of the
----------
Corporation and shall have general direction and supervision over the business
and affairs of the Corporation, subject to the directions and limitations
imposed by the Board and these By-laws, and shall see that all orders and
resolutions of the Board are carried into effect. The President shall, if
present, preside at all meetings of stockholders and of the Board and shall also
perform such other duties and have such other powers as are prescribed by these
By-laws or as may be from time to time prescribed by the Board, or these By-
laws.
(B) Vice Presidents. Each Vice President shall have such powers and
---------------
duties as shall be prescribed by the Board.
(C) Secretary. The Secretary shall attend and keep the records of all
---------
meetings of the Stockholders, the Board and all other committees, if any, in one
or more books kept for that purpose. The Secretary shall give or cause to be
given due notice of all meetings accordance with these By-laws and as required
by law. The Secretary shall notify the several officers of the Corporation of
all action taken by the Board concerning matters relating to their duties and
shall transmit to the appropriate officers copies of all contracts and
resolutions approved by the Board. The Secretary shall be custodian of the seal
of the Corporation and of all contracts, deeds, documents and other corporate
papers, records (except financial and accounting records) and indicia of title
to properties owned by the Corporation as shall not be committed to the custody
of another officer by the Board or by the President. The Secretary shall affix
or cause to be affixed the seal of the Corporation to instruments requiring the
same when the same have been signed on behalf of the Corporation by a duly
authorized officer. The Secretary shall perform all duties and have all powers
incident to the office of Secretary and shall perform such other duties as shall
be assigned by the Board or the President. The Secretary may be assisted by one
or more Assistant Secretaries, who shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary.
(D) Treasurer. The Treasurer shall have charge and custody of the
---------
corporate funds and other valuable effects, including securities. The Treasurer
shall keep true and full accounts of all assets, liabilities, receipts and
disbursements and other transactions of the Corporation and shall cause regular
audits of the books and records of
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the Corporation to be made. The Treasurer shall perform all duties and have all
powers incident to the office of Treasurer and shall perform such other duties
as shall be assigned by the Board or the President. The Treasurer may be
assisted by one or more Assistant Treasurers, who shall, in the absence or
disability of the Treasurer, perform the duties or exercise the powers of the
Treasurer.
SECTION 4. Resignation, Removal and Vacancies. Any officer may resign at
----------------------------------
any time by giving written notice of such resignation to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein or, if not specified therein, when accepted by action of
the Board.
Any officer, agent or employee may be removed, with or without cause, at
any time by the Board or by the officer who made such appointment.
A vacancy in any office may be filled for the unexpired portion of the term
in the same manner as provided in these By-laws for election or appointment to
such office.
ARTICLE V
Waiver of Notices; Place of Meetings
------------------------------------
SECTION 1. Waiver of Notices. Whenever notice is required to be given by
-----------------
the Certificate of Incorporation, by these By-laws or by law, a waiver thereof
in writing, signed by the person entitled to such notice, or by attorney
thereunto authorized, shall be deemed equivalent to notice, whether given before
or after the time specified therein. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except where the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
SECTION 2. Place of Meetings. Any meeting of the Stockholders, the Board
------------------
or any committee of the Board may be held within or outside the State of
Delaware.
ARTICLE VI
Execution and Delivery of Documents:
------------------------------------
Deposits; Proxies; Books and Records
------------------------------------
SECTION 1. Execution and Delivery of Documents: Delegation. The Board
-----------------------------------------------
shall designate the officers, employees and agents of the Corporation who shall
have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks, drafts and other orders for the payment of money and other
documents for and in the name of the Corporation and may authorize such
officers, employees and agents to delegate such power (including authority to
redelegate) by written instrument to other officers, employees or agents of the
Corporation.
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<PAGE>
SECTION 2. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board or the President or any other officer, employee or agent
of the Corporation to whom power in that respect shall have been delegated by
the Board or these By-laws shall select.
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
--------------------------------------------------------
Corporations. The President or any officer of the Corporation designated by the
- ------------
Board shall have the authority from time to time to appoint and instruct an
agent or agents of the Corporation to exercise in the name and on behalf of the
Corporation the powers and rights which the Corporation may have as the holder
of stock or other securities in any other corporation, to vote or consent in
respect of such stock or securities and to execute or cause to be executed in
the name and on behalf of the Corporation and under its corporate seal or
otherwise, such written proxies, powers of attorney or other instruments as the
President or such officer may deem necessary or proper in order that the
Corporation may exercise such powers and rights.
SECTION 4. Books and Records. The books and records of the Corporation may
------------------
be kept at such places within or without the State of Delaware as the Board may
from time to time determine.
ARTICLE VII
Certificates; Stock Record; Transfer and
----------------------------------------
Registration; New Certificates; Record Date; etc.
-------------------------------------------------
SECTION 1. Certificates for Stock. Every owner of stock of the Corporation
------------------------
shall be entitled to have a certificate certifying the number of shares owned by
such stockholder in the Corporation and designating the class of stock to which
such shares belong, which shall otherwise be in such form as the Board shall
prescribe. Each such certificate shall be signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation. Any of or all such signatures may be
facsimiles. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may nevertheless be issued by the Corporation with the same effect as
if such person were such officer, transfer agent or registrar at the date of
issue. Every certificate surrendered to the Corporation for exchange or transfer
shall be canceled and a new certificate or certificates shall not be issued in
exchange for any existing certificate until such existing certificate shall have
been so canceled, except in cases provided for in Section 4 of this Article.
SECTION 2. Stock Record. A stock record in one or more counterparts shall
------------
be kept of the name of the person, firm or corporation owning the stock
represented by each such certificate for stock of the Corporation issued, the
number of shares represented by
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<PAGE>
each such certificate, the date thereof and, in the case of cancellation, the
date of cancellation.
SECTION 3. Transfer and Registration of Stock. Registration of transfers
----------------------------------
of shares of the Corporation shall be made only on the books of the Corporation
by the registered holder thereof, or by such holder's attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary, and
on the surrender of the certificate or certificates for such shares properly
endorsed or accompanied by a stock power duly executed, with any necessary
transfer stamps affixed and with such proof of authenticity of signatures and
such proof of authority to make the transfer as may be required by the
Corporation or its transfer agent.
SECTION 4. New Certificates.
-----------------
(A) Lost, Stolen or Destroyed Certificates. The Board may direct a
--------------------------------------
new share certificate or certificates to be issued by the Corporation for any
certificate or certificates alleged to have been lost, stolen, mutilated or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen, mutilated or destroyed. When authorizing
such issue of a new certificate or certificates, the Board may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, mutilated or destroyed certificate or certificates,
or such owner's legal representative, to give the Corporation a bond in such sum
and in such form as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen, mutilated or destroyed.
SECTION 5. Regulations. The Board may make such rules and regulations as
-----------
it may deem expedient, not inconsistent with these By-laws, concerning the
issue, transfer and registration of certificates for stock of the Corporation.
SECTION 6. Fixing Date for Determination of Stockholders of Record. In
-------------------------------------------------------
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting
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<PAGE>
ARTICLE VIII
Seal
----
The Board shall provide a corporate seal which shall bear the full name of
the Corporation and the year and state of its incorporation.
ARTICLE IX
Indemnification
---------------
SECTION 1. Actions, Etc. Other Than By or in the Right of the Corporation.
---------------------------------------------------------------
The Corporation shall, to the full extent legally permissible, indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, including a grand jury proceeding,
and all appeals (but excluding any such action, suit or proceeding by or in the
right of the Corporation), by reason of the fact that such person is or was a
director, executive officer (as hereinafter defined) or advisory council member
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct in question was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
----------------
itself, create a presumption that such person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, that such person had reasonable cause to believe that the conduct in
question was unlawful. As used in this Article IX, an "executive officer" of the
Corporation is the president, treasurer, a vice president given the title of
executive vice president, or any officer designated as such pursuant to vote of
the Board of Directors.
SECTION 2. Actions, Etc., By or in the Right of the Corporation. The
-------------------------------------------------------
Corporation shall, to the full extent legally permissible, indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit, including appeals, by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person is or was a director or executive officer of the Corporation as
defined in Section I of this Article, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person
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<PAGE>
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
SECTION 3. Determination of Right of Indemnification. Any indemnification
-----------------------------------------
of a director or officer (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
such indemnification is proper in the circumstances because the director or
executive officer has met the applicable standard of conduct as set forth in
Sections 1 and 2 hereof. Such a determination shall be reasonably and promptly
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) (if
such a quorum is not obtainable, or, even if obtainable if a quorum of
disinterested directors so directs) by independent legal counsel in a written
opinion, or (iii) by the stockholders.
SECTION 4. Indemnification Against Expenses of Successful Party.
-----------------------------------------------------
Notwithstanding any other provision of this Article, to the extent that a
director or officer of the Corporation has been successful in whole or in part
on the merits or otherwise, including the dismissal of an action without
prejudice, in defense of any action, suit or proceeding or in defense of any
claim, issue or matter therein, such person shall be indemnified against all
expenses incurred in connection therewith.
SECTION 5. Advances of Expenses. Expenses incurred by a director or
--------------------
officer in any action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of thereof, if such person shall undertake to
repay such amount in the event that it is ultimately determined, as provided
herein, that such person is not entitled to indemnification. Notwithstanding the
foregoing, no advance shall be made by the Corporation if a determination is
reasonably and promptly made (i) by the Board of Directors by a majority vote of
a quorum of disinterested directors, or (ii) (if such a quorum is not obtainable
or, even if obtainable, if a quorum of disinterested directors so directs) by
independent legal counsel in a written opinion, that, based upon the facts known
to the Board of Directors or such counsel at the time such determination is
made, such person has not met the relevant standards set forth for
indemnification in Section I or 2, as the case may be.
SECTION 6. Right to Indemnification Upon Application: Procedure Upon
---------------------------------------------------------
Application. Any indemnification or advance under Sections 1, 2, 4 or 5 of this
- -----------
Article shall be made promptly, and in any event within ninety days, upon the
written request of the person seeking to be indemnified, unless a determination
is reasonably and promptly made by the Board of Directors that such person acted
in a manner set forth in such Sections so as to justify the Corporation's not
indemnifying such person or making such
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<PAGE>
an advance. In the event no quorum of disinterested directors is obtainable, the
Board of Directors shall promptly appoint independent legal counsel to decide
whether the person acted in the manner set forth in such Sections so as to
justify the Corporation's not indemnifying such person or making such an
advance. The right to indemnification or advances as granted by this Article
shall be enforceable by such person in any court of competent jurisdiction, if
the Board of Directors or independent legal counsel denies the claim therefor,
in whole or in part, or if no disposition of such claim is made within ninety
days.
SECTION 7. Other Right and Remedies; Continuation of Rights. The
------------------------------------------------
indemnification and advancement of expenses provided by this Article shall not
be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any By-law,
agreement, vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office. All rights to indemnification or advancement under this Article
shall be deemed to be in the nature of contractual rights bargained for and
enforceable by each director and executive officer as defined in Section 1 of
this Article who serves in such capacity at any time while this Article and
other relevant provisions of the General Corporation Law of the State of
Delaware and other applicable laws, if any, are in effect. All rights to
indemnification under this Article or advancement of expenses shall continue as
to a person who has ceased to be a director or executive officer, and shall
inure to the benefit of the heirs, executors and administrators of such a
person. No repeal or modification of this Article shall adversely affect any
such rights or obligations then existing with respect to any state of facts then
or theretofore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such state of facts. The
Corporation shall also indemnify any person for attorneys' fees, costs, and
expenses in connection with the successful enforcement of such person's rights
under this Article.
SECTION 8. Other Indemnities. The Board of Directors may, by general vote
-----------------
or by vote pertaining to a specific officer, employee or agent, advisory council
member or class thereof, authorize indemnification of the Corporation's
employees and agents, in addition to those executive officers and to whatever
extent it may determine, which may be in the same mariner and to the same extent
provided above.
SECTION 9. Insurance. Upon resolution passed by the Board of Directors,
---------
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee, advisory council member or agent of the
Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
status as such, whether or not the Corporation would have the power to indemnify
such person against such liability under the provisions of this Article.
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<PAGE>
SECTION 10. Constituent Corporations. For the purposes of this Article,
------------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors and officers so that any person who is or was a director or officer of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
SECTION 11. Savings Clause. If this Article or any portion hereof shall
--------------
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, executive officer,
advisory council member, and those employees and agents of the Corporation
granted indemnification pursuant to Section 3 hereof as to expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any a action, suit or proceeding, whether civil, criminal, administrative or
investigative including grand jury proceeding, and all appeals, and any action
by the Corporation, to the full extent permitted by any applicable portion of
this Article that shall not have been invalidated or by any other applicable
law.
SECTION 12. Other Enterprises, Fines, and Serving at Corporation's
------------------------------------------------------
Request. For purposes of this Article, references to "other enterprises" shall
- -------
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of any employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
ARTICLE X
Dividends
---------
Subject to the applicable provision of the Certificate of Incorporation, if
any, dividends upon the outstanding shares of the Corporation may be declared by
the Board of Directors at any regular or special meeting pursuant to law and may
be paid in cash, in property, or in shares of the Corporation.
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ARTICLE XI
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
ARTICLE XII
Amendments
----------
These By-laws may be amended, altered or repealed either by the affirmative
vote of the holders of a majority of the stock issued and outstanding and
entitled to vote in respect thereof and represented in person or by proxy at any
annual or special meeting of the stockholders, or by the Board of Directors at
any regular or special meeting of the Board of Directors.
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<PAGE>
Exhibit 3.3
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SOHU.COM INC.
Sohu.com Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
A. The name of the Corporation is Sohu.com Inc. The date of the filing of
its original Certificate of Incorporation (the "Original Certificate of
Incorporation") with the Secretary of State of the State of Delaware was August
2, 1996, under the name of Internet Technologies China Incorporated. The
Original Certificate of Incorporation was amended and restated on March 10,
1998, subsequently amended and restated on August 7, 1998, amended on September
28, 1999, amended and restated on October 15, 1999, and subsequently amended and
restated on February 1, 2000 (the "Fourth Amended and Restated Certificate of
Incorporation").
B. This Fifth Amended and Restated Certificate of Incorporation (the
"Certificate"), which amends, restates and integrates the provisions of the
Fourth Amended and Restated Certificate of Incorporation, as amended to date,
was duly adopted by the Board of Directors of the Corporation in accordance with
the provisions of Sections 141(f), 242 and 245 of the General Corporation Law of
the State of Delaware, as amended from time to time (the "DGCL"), and was duly
adopted by the written consent of the stockholders of the Corporation in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
DGCL.
C. The text of the Fourth Amended and Restated Certificate of
Incorporation, as amended to date, is hereby amended and restated in its
entirety to provide as herein set forth in full.
ARTICLE I
The name of this corporation (the "Corporation") is Sohu.com Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the DGCL.
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<PAGE>
ARTICLE IV
A. Number of Shares and Classes of Stock. The Corporation is authorized
-------------------------------------
to issue two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares of stock which the Corporation
shall have authority to issue is Thirty Million (30,000,000) shares, consisting
of Twenty Nine Million (29,000,000) shares of Common Stock, $0.001 par value per
share, and One Million (1,000,000) shares of Preferred Stock, $0.001 par value
per share.
B. Preferred Stock; The Power to Designate. The Board of Directors of
---------------------------------------
the Corporation is hereby expressly vested with the power to issue one or more
series of the Preferred Stock of the Corporation from time to time and by
resolution to designate the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of any such series to the extent permitted under the
DGCL.
Subject to the rights of the holders of any series of Preferred Stock, the
number of authorized shares of any class or series of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote, irrespective of the provisions of 242(b)(2)
of the DGCL or any corresponding provision hereafter enacted.
ARTICLE V
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The number of directors of the Corporation shall be determined in
accordance with the By-Laws. Commencing with the first annual meeting of the
stockholders after the effective date hereof, the directors of the Corporation
shall be divided into two classes, as nearly equal as reasonably possible, as
determined by the Board of Directors, with the initial term of office of the
first class of such Directors ("Class I") to expire at the second annual meeting
of the stockholders after the effective date hereof and the initial term of
office of the second class of such directors ("Class II") to expire at the third
annual meeting of the stockholders after the effective date hereof, with each
class of directors to hold office until their successors have been elected and
qualified. At each annual meeting of stockholders, directors elected to succeed
the directors whose terms expire at such annual meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders in the second
year following the year of their election and until their successors have been
duly elected and qualified. Elections of directors need not be by written ballot
except and to the extent provided in the By-Laws of the Corporation.
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<PAGE>
2. The board of directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-Laws of the Corporation. The By-Laws of the
Corporation may also be altered or repealed and new By-Laws may be adopted at
any annual or special meeting of stockholders, by the affirmative vote of the
holders of not less than a majority of the voting power of all outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, considered for purposes hereof as a single class.
3. Any action required or permitted to be taken by the stockholders
of the Corporation must be taken at a duly called annual or special meeting of
such holders and may not be taken by any consent in writing by such holders.
Except as otherwise provided for herein or required by law, special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
by the Board or by the President, and any power of stockholders to call a
special meeting is specifically denied.
4. No director of the Corporation shall have any personal liability
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing shall not
-------- -------
eliminate or limit the liability of a director of the Corporation (i) for any
breach of such director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transactions from which the director derived an
improper personal benefit. If the DGCL is amended after the effective date of
this Certificate to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any proposed alteration, amendment or repeal of any provision of
Article V shall require the affirmative vote of the holders of not less than 80%
of the voting power of all outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, considered
for the purposes hereof as a single class; provided, however, that any such
-------- -------
alteration, amendment or repeal by the stockholders of the Corporation (or by
operation of law) shall not adversely affect any right or protection of a
director of the Corporation with respect to any acts or omissions of such
directors occurring prior to such amendment or repeal.
ARTICLE VI
The corporation shall, to the fullest extent permitted by Section 145 of
the DGCL, as the same may be amended and supplemented, indemnify directors of
the Corporation from and against any and all of the expenses, liabilities or
other matters referred to in or covered by said section and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
those indemnified may be entitled under any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
capacity as a director and as to action in another capacity during his tenure as
a director, and shall continue as to a person who has ceased to be a director,
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
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<PAGE>
Any amendment, modification or repeal of Article VI shall not adversely
affect any right or protection in favor of any director existing at the time of,
or increase the liability of any director of the Corporation with respect to any
acts or omissions of such person occurring prior to such amendment, modification
or repeal.
ARTICLE VII
From time to time any of the provisions of this Amended and Restated
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this Amended and Restated Certificate of Incorporation are granted subject to
the provisions of this Article VII.
* * * *
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
__________, 2000.
By: _________________________
Timothy B. Bancroft
Assistant Secretary
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<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BY-LAWS
OF
SOHU.COM INC.
ARTICLE I
Offices
-------
SECTION 1. Registered Office. The registered office of Sohu.com Inc. (the
-----------------
"Corporation") in the State of Delaware, shall be 1209 Orange Street,
Wilmington, Delaware 19805, in the County of New Castle. The name of the
registered agent at such office shall be The Corporation Trust Company.
SECTION 2. Other Offices. The Corporation may also have offices at such
-------------
other places either within or without the State of Delaware as the Board of
Directors (the "Board") may from time to time determine.
ARTICLE 11
Meetings of Stockholders
------------------------
SECTION 1. Annual Meetings. The annual meeting of the stockholders of the
---------------
Corporation for the election of directors and for the transaction of such other
business as may properly come before the meeting shall be held at such hour and
place as the Board may determine on the second Tuesday in May of each year or on
such other date as the Board may determine. If for any reason the annual meeting
shall not be held on the date fixed herein, a special meeting in lieu of the
annual meeting may be held, with all the force and effect of an annual meeting,
on such date and at such place and hour as shall be designated by the Board in
the notice thereof. At the annual meeting any business may be transacted
whether or not the notice of such meeting shall have contained a reference
thereto, except where such a reference is required by law, the Certificate of
Incorporation or these By-laws.
SECTION 2. Special Meetings. A special meeting of the stockholders for
----------------
any purpose or purposes may be called at any time by the Board or by the
President, and such meeting shall be held on such date and at such place and
hour as shall be designated in the notice thereof. Any power of stockholders to
call a special meeting is specifically denied.
SECTION 3. Notice of Meetings. Except as otherwise expressly required by
------------------
these By-laws or by law, notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each
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<PAGE>
stockholder of record entitled to notice of, or to vote at, such meeting by
delivering a notice thereof to such stockholder personally or by depositing such
notice in the United States mail, directed to such stockholder at such
stockholder's address as it appears on the stock records of the Corporation.
Every such notice shall state the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called. Notice of any adjourned meeting of the stockholders shall not be
required to be given if the time and place thereof are announced at the meeting
at which the adjournment is taken and a new record date for the adjourned
meeting is not thereafter fixed.
SECTION 4. Quorum and Manner of Acting. Except as otherwise expressly
---------------------------
required by law, if stockholders holding of record a majority of the shares of
stock of the Corporation issued, outstanding and entitled to be voted at the
particular meeting shall be present in person or by proxy, a quorum for the
transaction of business at any meeting of the stockholders shall exist. In the
absence of a quorum at any such meeting or any adjournment or adjournments
thereof, a majority in voting interest of those present in person or by proxy
and entitled to vote thereat may adjourn such meeting from time to time until
stockholders holding the amount of stock requisite for a quorum shall be present
in person or by proxy. At any such adjourned meeting at which a quorum is
present any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 5. Voting. Except as otherwise provided in the Certificate of
------
Incorporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of stock of the
Corporation which has voting power on the matter in question held by such
stockholder and registered in such stockholder's name on the stock record of the
Corporation:
(a) on the date fixed pursuant to the provisions of Section 6 of
Article VII of these By-laws as the record date for the determination of
stockholders who shall be entitled to receive notice of and to vote at such
meeting; or
(b) if no record date shall have been so fixed, at the close of
business on the day next given or, if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the meeting
shall be held.
At all meetings of the stockholders all matters, except as otherwise provided in
the Certificate of Incorporation, in these By-laws or by law, shall be decided
by the vote of a majority in voting interest of the stockholders present in
person or by proxy and entitled to vote thereat, a quorum being present.
SECTION 6. Written Consent of Stockholders in Lieu of Meeting Not
------------------------------------------------------
Permitted. Any action required to be taken or any other action which may be
- ---------
taken must be taken at a duly called annual or special meeting of stockholders,
and may not be taken by a consent in writing by such holders.
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<PAGE>
SECTION 7. Advance Notice of Stockholder Proposals. At any annual or
---------------------------------------
special meeting of stockholders, proposals by stockholders and persons nominated
for election as directors by stockholders shall be considered only if advance
notice thereof has been timely given as provided herein and such proposals or
nominations are otherwise proper for consideration under applicable law and the
Certificate of Incorporation and By-laws of the Corporation. Notice of any
proposal to be presented by any stockholder or of the name of any person to be
nominated by any stockholder for election as a director of the Corporation at
any meeting of stockholders shall be delivered to the Secretary of the
Corporation at its principal executive office not less than 60 nor more than 90
days prior to the date of the meeting, provided, however, that if the date of
-------- -------
the meeting is first publicly announced or disclosed (in a public filing or
otherwise) less than 70 days prior to the date of the meeting, such advance
notice shall be given not more than ten days after such date is first so
announced or disclosed. Public notice shall be deemed to have been given more
than 70 days in advance of the annual meeting if the Corporation shall have
previously disclosed, in these By-laws or otherwise, that the annual meeting in
each year is to be held on a determinable date, unless and until the Board
determines to hold the meeting on a different date.
Any stockholder who gives notice of any such proposal shall deliver
therewith the text of the proposal to be presented and a brief written statement
of the reasons why such stockholder favors the proposal and setting forth such
stockholder's name and address, the number and class of all shares of each class
of stock of the Corporation beneficially owned by such stockholder and any
material interest of such stockholder in the proposal (other than as a
stockholder). Any stockholder desiring to nominate any person for election as a
director of the Corporation shall deliver with such notice a statement in
writing setting forth the name of the person to be nominated, the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such person, the information regarding such person required by paragraphs
(a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and
Exchange Commission (or the corresponding provisions of any regulation
subsequently adopted by the Securities and Exchange Commission applicable to the
Corporation), such person's signed consent to serve as a director of the
Corporation if elected, such stockholder's name and address and the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such stockholder.
The person presiding at the meeting, in addition to making any other
determinations that may be appropriate to the conduct of the meeting, shall
determine whether such notice has been given and shall direct that proposals and
nominees not be considered if such notice has not been given.
SECTION 8. Inspectors. Either the Board or, in the absence of a
----------
designation of inspectors by the Board, the chairman of the meeting may, in the
discretion of the Board or the chairman, appoint one or more inspectors, who
need not be stockholders, who shall receive and take charge of ballots and
proxies and decide all questions relating to the qualification of those
asserting the right to vote and the validity of ballots and proxies. In the
event of the failure or refusal to serve of any inspector designated by the
Board, the
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<PAGE>
chairman of the meeting shall appoint an inspector to act in place of each such
inspector designated by the Board.
ARTICLE III
Board of Directors
------------------
SECTION 1. General Powers. The property, business, affairs and policies
--------------
of the Corporation shall be managed by or under the direction of the Board.
SECTION 2. Number and Term of Office. The number of directors which shall
-------------------------
constitute the entire Board shall be seven (7) initially and thereafter the
number shall be fixed from time to time by resolution of the Board.
SECTION 3. Meetings.
--------
(A) Annual Meeting. The annual meeting of the Board, for the purpose
--------------
of organization, the election of officers and the transaction of other business,
shall be held as promptly as practicable after each annual meeting of
stockholders or the special meeting in lieu thereof.
(B) Regular Meetings. Regular meetings of the Board or any committee
----------------
thereof shall be held at such time and place, within or without the State of
Delaware, as the Board or such committee shall from time to time determine.
(C) Special Meetings. Special meetings of the Board may be called by
----------------
order of the President or by a majority of the directors then in office.
(D) Notice of Meetings. No notice of regular meetings of the Board
------------------
or of any committee thereof or of any adjourned meeting thereof need be given.
The Secretary shall give prior notice to each director of the time and place of
each special meeting of the Board or adjournment thereof. Such notice shall be
given to each director in person or by telephone, fax or ordinary mail, not less
than two days before the meeting if given in person or by telephone or fax and,
if given by mail, post marked at least four (4) days prior to the special
meeting if given by mail, and sent to such director at the director's residence
or usual business address. Each such notice shall state the time and place of
the meeting and purpose thereof. In lieu of the notice to be given as set forth
above, a waiver thereof in writing, signed by the director or directors entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto for purposes of this Section 3(D). No notice to or waiver by
any director with respect to any special meeting shall be required if such
director shall be present at said meeting.
(E) Quorum and Manner of Acting.
---------------------------
(a) At all meetings of the Board, each director present shall
have one vote, irrespective of the number of shares of stock, if any, which he
may hold.
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<PAGE>
(b) Except as otherwise expressly required by these By-laws or by
law, a majority of the directors then in office and a majority of the members of
any committee shall be present in person at any meeting thereof in order to
constitute a quorum for the transaction of business at such meeting, and the
vote of a majority of the directors present at any such meeting at which a
quorum is present shall be necessary for the passage of any resolution or for an
act to be the act of the Board or such committee. In the absence of a quorum, a
majority of the directors present thereat may adjourn such meeting either
finally or from time to time to another time and place until a quorum shall be
present thereat. In the latter case notice of the adjourned time and place shall
be given as aforesaid to all directors.
(F) Consent in Lieu of Meeting. Any action required or permitted to
--------------------------
be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in a writing or writings and such writing or writings are filed
with the minutes of the proceedings of the Board or committee. Such consents
shall be treated for all purposes as a vote at a meeting.
(G) Action by Communications Equipment. The directors may participate
----------------------------------
in a meeting of the Board or any committee thereof by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
SECTION 4. Compensation. Each director, in consideration of serving as
------------
such, may receive from the Corporation such amount per annum and such fees and
expenses incurred for attendance at meetings of the Board or of any committee,
or both, as the Board may from time to time determine. Nothing contained in this
Section shall be construed to preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
SECTION 5. Restoration, Removal and Vacancies. Any director may resign at
----------------------------------
any time by giving written notice, of such resignation to the President or the
Secretary.
Any such resignation shall take effect at the time specified therein or, if
not specified therein, upon receipt. Unless otherwise specified in the
resignation, its acceptance shall not be necessary to make it effective. Except
as provided for in the Certificate of Incorporation, any or all of the directors
may be removed at any time at a duly called and duly held meeting of
shareholders by vote of a majority of shares then entitled to vote at an
election of directors.
If the office of any director becomes vacant at any time by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, or if any new directorship is created by any increase in the
authorized number of directors, a majority of the directors then in office,
though less than a quorum, or the sole remaining director,
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<PAGE>
may choose a successor or fill the newly created directorship and the director
so chosen shall hold office, subject to the provisions of these By-laws, until
the next annual election of directors and until his successor shall be duly
elected and shall qualify. In the event that a vacancy arising as aforesaid
shall not have been filled by the Board, such vacancy may be filled by the
stockholders at any meeting thereof after such office becomes vacant. If one or
more directors shall resign from the Board, effective at a future date, a
majority of the directors then in office, including those who have so
prospectively resigned, shall have the power to fill such vacancy or vacancies,
the vote thereon to take effect when such resignation or resignations shall
become effective, and each director so chosen shall hold office as herein
provided in the filling of other vacancies.
In the event of any increase or decrease in the authorized number of
directors: (a) each director then serving as such shall nonetheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his earlier death, retirement, resignation, or removal; and (b)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board among the two classes of directors so
as to maintain such classes as nearly equal in number as reasonably possible.
SECTION 6. Committees. The directors may, by vote of a majority of the
----------
directors then in office, appoint from their number one or more committees and
delegate to such committees some or all of their powers to the extent permitted
by law, the Certificate of Incorporation or these By-laws. Except as the Board
may otherwise determine, any such committee may, by majority vote of the entire
committee, make rules for the conduct of its business. The directors shall have
the power at any time to fill vacancies in any such committee, to change its
membership or to discharge the committee.
ARTICLE IV
Officers
--------
SECTION 1. Election and Appointment and Term of Office. The officers of
-------------------------------------------
the Corporation shall be a President, such number, if any, of Vice Presidents
(including any Executive or Senior Vice Presidents) as the Board may from time
to time determine, a Secretary and a Treasurer. Each such officer shall be
elected by the Board at its annual meeting and hold office for such term as may
be prescribed by the Board. Two or more offices may be held by the same person.
The President may, but need not, be chosen from among the directors.
The Board may elect or appoint (and may authorize the President to appoint)
such other officers (including one or more Assistant Secretaries and Assistant
Treasurers) as it deems necessary who shall have such authority and shall
perform such duties as the Board or the President may from time to time
prescribe.
If additional officers are elected or appointed during the year, each shall
hold
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<PAGE>
office until the next annual meeting of the Board at which officers are
regularly elected or appointed and until such officer's successor is elected or
appointed and qualified or until such officer's earlier death or resignation or
removal in the manner hereinafter provided.
SECTION 2. Duties and Functions.
---------------------
(A) President. The President shall be the chief executive officer of
----------
the Corporation and shall have general direction and supervision over the
business and affairs of the Corporation, subject to the directions and
limitations imposed by the Board and these By-laws, and shall see that all
orders and resolutions of the Board are carried into effect. The President
shall, if present, preside at all meetings of stockholders and of the Board and
shall also perform such other duties and have such other powers as are
prescribed by these By-laws or as may be from time to time prescribed by the
Board, or these By-laws.
(B) Vice Presidents. Each Vice President shall have such powers and
---------------
duties as shall be prescribed by the Board.
(C) Secretary. The Secretary shall attend and keep the records of
---------
all meetings of the stockholders, the Board and all other committees, if any, in
one or more books kept for that purpose. The Secretary shall give or cause to be
given due notice of all meetings accordance with these By-laws and as required
by law. The Secretary shall notify the several officers of the Corporation of
all action taken by the Board concerning matters relating to their duties and
shall transmit to the appropriate officers copies of all contracts and
resolutions approved by the Board. The Secretary shall be custodian of the seal
of the Corporation and of all contracts, deeds, documents and other corporate
papers, records (except financial and accounting records) and indicia of title
to properties owned by the Corporation as shall not be committed to the custody
of another officer by the Board or by the President. The Secretary shall affix
or cause to be affixed the seal of the Corporation to instruments requiring the
same when the same have been signed on behalf of the Corporation by a duly
authorized officer. The Secretary shall perform all duties and have all powers
incident to the office of Secretary and shall perform such other duties as shall
be assigned by the Board or the President. The Secretary may be assisted by one
or more Assistant Secretaries, who shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary.
(D) Treasurer. The Treasurer shall have charge and custody of the
---------
corporate funds and other valuable effects, including securities. The Treasurer
shall keep true and full accounts of all assets, liabilities, receipts and
disbursements and other transactions of the Corporation and shall cause regular
audits of the books and records of the Corporation to be made. The Treasurer
shall perform all duties and have all powers incident to the office of Treasurer
and shall perform such other duties as shall be assigned by the Board or the
President. The Treasurer may be assisted by one or more Assistant Treasurers,
who shall, in the absence or disability of the Treasurer, perform the duties or
exercise the powers of the Treasurer.
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<PAGE>
SECTION 4. Resignation, Removal and Vacancies. Any officer may resign at
----------------------------------
any time by giving written notice of such resignation to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the time
specified therein or, if not specified therein, when accepted by action of the
Board.
Any officer, agent or employee may be removed, with or without cause, at
any time by the Board or by the officer who made such appointment.
A vacancy in any office may be filled for the unexpired portion of the term
in the same manner as provided in these By-laws for election or appointment to
such office.
ARTICLE V
Waiver of Notices; Place of Meetings
------------------------------------
SECTION 1. Waiver of Notices. Whenever notice is required to be given by
-----------------
the Certificate of Incorporation, by these By-laws or by law, a waiver thereof
in writing, signed by the person entitled to such notice, or by attorney
thereunto authorized, shall be deemed equivalent to notice, whether given before
or after the time specified therein. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except where the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
SECTION 2. Place of Meetings. Any meeting of the stockholders, the Board
-----------------
or any committee of the Board may be held within or outside the State of
Delaware.
ARTICLE VI
Execution and Delivery of Documents:
------------------------------------
Deposits; Proxies; Books and Records
------------------------------------
SECTION 1. Execution and Delivery of Documents; Delegation. The Board
-----------------------------------------------
shall designate the officers, employees and agents of the Corporation who shall
have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks, drafts and other orders for the payment of money and other
documents for and in the name of the Corporation and may authorize such
officers, employees and agents to delegate such power (including authority to
redelegate) by written instrument to other officers, employees or agents of the
Corporation.
SECTION 2. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board or the President or any other officer, employee or agent
of the Corporation to whom power in that respect shall have been delegated by
the Board or these By-laws shall select.
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<PAGE>
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
--------------------------------------------------------
Corporations. The President or any officer of the Corporation designated by the
- ------------
Board shall have the authority from time to time to appoint and instruct an
agent or agents of the Corporation to exercise in the name and on behalf of the
Corporation the powers and rights which the Corporation may have as the holder
of stock or other securities in any other corporation, to vote or consent in
respect of such stock or securities and to execute or cause to be executed in
the name and on behalf of the Corporation and under its corporate seal or
otherwise, such written proxies, powers of attorney or other instruments as the
President or such officer may deem necessary or proper in order that the
Corporation may exercise such powers and rights.
SECTION 4. Books and Records. The books and records of the Corporation
------------------
may be kept at such places within or without the State of Delaware as the Board
may from time to time determine.
ARTICLE VII
Certificates; Stock Record; Transfer and
----------------------------------------
Registration; New Certificates; Record Date; etc.
-------------------------------------------------
SECTION 1. Certificates for Stock. Every owner of stock of the
----------------------
Corporation shall be entitled to have a certificate certifying the number of
shares owned by such stockholder in the Corporation and designating the class of
stock to which such shares belong, which shall otherwise be in such form as the
Board shall prescribe. Each such certificate shall be signed by the President
or a Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation. Any of or all such
signatures may be facsimiles. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may nevertheless be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue. Every certificate surrendered to the Corporation for
exchange or transfer shall be canceled and a new certificate or certificates
shall not be issued in exchange for any existing certificate until such existing
certificate shall have been so canceled, except in cases provided for in Section
4 of this Article.
SECTION 2. Stock Record. A stock record in one or more counterparts
------------
shall be kept of the name of the person, firm or corporation owning the stock
represented by each such certificate for stock of the Corporation issued, the
number of shares represented by each such certificate, the date thereof and, in
the case of cancellation, the date of cancellation.
SECTION 3. Transfer and Registration of Stock. Registration of
----------------------------------
transfers of shares of the Corporation shall be made only on the books of the
Corporation by the registered holder thereof, or by such holder's attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary, and on the surrender of the certificate
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<PAGE>
or certificates for such shares properly endorsed or accompanied by a stock
power duly executed, with any necessary transfer stamps affixed and with such
proof of authenticity of signatures and such proof of authority to make the
transfer as may be required by the Corporation or its transfer agent.
SECTION 4. New Certificates.
-----------------
(A) Lost, Stolen or Destroyed Certificates. The Board may direct a
--------------------------------------
new share certificate or certificates to be issued by the Corporation for any
certificate or certificates alleged to have been lost, stolen, mutilated or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen, mutilated or destroyed. When authorizing
such issue of a new certificate or certificates, the Board may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, mutilated or destroyed certificate or certificates,
or such owner's legal representative, to give the Corporation a bond in such sum
and in such form as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen, mutilated or destroyed.
SECTION 5. Regulations. The Board may make such rules and regulations as
-----------
it may deem expedient, not inconsistent with these By-laws, concerning the
issue, transfer and registration of certificates for stock of the Corporation.
SECTION 6. Fixing Date for Determination of Stockholders of Record. In
-------------------------------------------------------
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action. A determination of stockholders entitled to notice of or to vote
at a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting
ARTICLE VIII
Seal
----
The Board shall provide a corporate seal which shall bear the full name of
the Corporation and the year and state of its incorporation.
ARTICLE IX
Indemnification
---------------
-10-
<PAGE>
SECTION 1. Actions, Etc. Other Than By or in the Right of the Corporation.
--------------------------------------------------------------
The Corporation shall, to the full extent legally permissible, indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, including a grand jury proceeding,
and all appeals (but excluding any such action, suit or proceeding by or in the
right of the Corporation), by reason of the fact that such person is or was a
director or executive officer (as hereinafter defined), or is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee or agent of another Corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the conduct in question was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---------------
shall not, of itself, create a presumption that such person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, that such person had reasonable cause to believe
that the conduct in question was unlawful. As used in this Article IX, an
"executive officer" of the Corporation shall be any officer designated as such
pursuant to a vote of the Board of Directors.
SECTION 2. Actions, Etc., By or in the Right of the Corporation. The
----------------------------------------------------
Corporation shall, to the full extent legally permissible, indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit, including appeals, by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person is or was a director or executive officer of the Corporation as
defined in Section I of this Article, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
SECTION 3. Determination of Right of Indemnification. Any indemnification
-----------------------------------------
of a director or officer (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
such indemnification is proper in the circumstances because the director or
executive officer has met the
-11-
<PAGE>
applicable standard of conduct as set forth in Sections 1 and 2 hereof. Such a
determination shall be reasonably and promptly made (i) by the Board by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (ii) (if such a quorum is not obtainable, or,
even if obtainable if a quorum of disinterested directors so directs) by
independent legal counsel in a written opinion, or (iii) by the stockholders.
SECTION 4. Indemnification Against Expenses of Successful Party.
----------------------------------------------------
Notwithstanding any other provision of this Article, to the extent that a
director or officer of the Corporation has been successful in whole or in part
on the merits or otherwise, including the dismissal of an action without
prejudice, in defense of any action, suit or proceeding or in defense of any
claim, issue or matter therein, such person shall be indemnified against all
expenses incurred in connection therewith.
SECTION 5. Advances of Expenses. Expenses incurred by a director or
--------------------
executive officer in any action, suit or proceeding may be paid by the
Corporation in advance of the final disposition thereof, if such person shall
undertake to repay such amount in the event that it is ultimately determined, as
provided herein, that such person is not entitled to indemnification.
Notwithstanding the foregoing, no advance shall be made by the Corporation if a
determination is reasonably and promptly made (i) by the Board by a majority
vote of a quorum of disinterested directors, or (ii) (if such a quorum is not
obtainable or, even if obtainable, if a quorum of disinterested directors so
directs) by independent legal counsel in a written opinion, that, based upon the
facts known to the Board or such counsel at the time such determination is made,
such person has not met the relevant standards set forth for indemnification in
Section 1 or 2 hereof, as the case may be.
SECTION 6. Right to Indemnification Upon Application; Procedure Upon
---------------------------------------------------------
Application. Any indemnification or advance under Sections 1, 2, 4 or 5 of this
- -----------
Article shall be made promptly, and in any event within ninety days, upon the
written request of the person seeking to be indemnified, unless a determination
is reasonably and promptly made by the Board that such person acted in a manner
set forth in such Sections so as to justify the Corporation's not indemnifying
such person or making such an advance. In the event no quorum of disinterested
directors is obtainable, the Board shall promptly appoint independent legal
counsel to decide whether the person acted in the manner set forth in such
Sections so as to justify the Corporation's not indemnifying such person or
making such an advance. The right to indemnification or advances as granted by
this Article shall be enforceable by such person in any court of competent
jurisdiction, if the Board or independent legal counsel denies the claim
therefor, in whole or in part, or if no disposition of such claim is made within
ninety days.
SECTION 7. Other Right and Remedies; Continuation of Rights. The
------------------------------------------------
indemnification and advancement of expenses provided by this Article shall not
be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any By-law,
agreement, vote of stockholders or disinterested directors, the General
Corporation Law of the State of
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<PAGE>
Delaware or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office. All rights to
indemnification or advancement under this Article shall be deemed to be in the
nature of contractual rights bargained for and enforceable by each director and
executive officer as defined in Section 1 of this Article who serves in such
capacity at any time while this Article and other relevant provisions of the
General Corporation Law of the State of Delaware and other applicable laws, if
any, are in effect. All rights to indemnification under this Article or
advancement of expenses shall continue as to a person who has ceased to be a
director or executive officer, and shall inure to the benefit of the heirs,
executors and administrators of such a person. No repeal or modification of this
Article shall adversely affect any such rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought based in whole or in part upon
any such state of facts. The Corporation shall also indemnify any person for
attorneys' fees, costs, and expenses in connection with the successful
enforcement of such person's rights under this Article.
SECTION 8. Other Indemnities. The Board may, by general vote or by vote
-----------------
pertaining to a specific officer, employee or agent, advisory council member or
class thereof, authorize indemnification of the Corporation's employees and
agents, in addition to those executive officers and to whatever extent it may
determine, which may be in the same mariner and to the same extent provided
above.
SECTION 9. Insurance. Upon resolution passed by the Board, the
---------
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, advisory council member or agent of the
Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
status as such, whether or not the Corporation would have the power to indemnify
such person against such liability under the provisions of this Article.
SECTION 10. Constituent Corporations. For the purposes of this Article,
------------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors and officers so that any person who is or was a director or officer of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
SECTION 11. Savings Clause. If this Article or any portion hereof shall
--------------
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, executive officer and
those employees and
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<PAGE>
agents of the Corporation granted indemnification pursuant to Section 3 hereof
as to expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any a action, suit or proceeding, whether civil,
criminal, administrative or investigative including grand jury proceeding, and
all appeals, and any action by the Corporation, to the full extent permitted by
any applicable portion of this Article that shall not have been invalidated or
by any other applicable law.
SECTION 12. Other Enterprises, Fines, and Serving at Corporation's
------------------------------------------------------
Request. For purposes of this Article, references to "other enterprises" shall
- -------
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of any employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
ARTICLE X
Dividends
---------
Subject to the applicable provision of the Certificate of Incorporation, if
any, dividends upon the outstanding shares of the Corporation may be declared by
the Board at any regular or special meeting pursuant to law and may be paid in
cash, in property, or in shares of the Corporation.
ARTICLE XI
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by resolution of the
Board.
ARTICLE XII
Amendments
----------
These By-laws may be amended, altered or repealed either by the affirmative
vote of the holders of a majority of the stock issued and outstanding and
entitled to vote in respect thereof and represented in person or by proxy at any
annual or special meeting of the stockholders, or by the Board at any regular or
special meeting of the Board.
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<PAGE>
Exhibit 10.1
SOHU.COM INC.
2000 STOCK INCENTIVE PLAN
1. Purpose. This 2000 Stock Incentive Plan (the "Plan") is intended to
-------
provide incentives: (a) to the officers and other employees of Sohu.com Inc., a
Delaware corporation (the "Company"), and any present or future parent or
subsidiaries of the Company (collectively, "Related Corporations") by providing
them with opportunities to purchase stock in the Company pursuant to options
granted hereunder which qualify as "incentive stock options" under Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO" or
"ISOs"), (b) to directors, officers, employees, consultants and advisors of the
Company and Related Corporations by providing them with (i) opportunities to
purchase stock in the Company pursuant to options granted hereunder which do not
qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options") or (ii) by
providing them with opportunities to make direct purchases of common stock of
the Company ("Restricted Stock Purchases"). Both ISOs and Non-Qualified Options
are referred to hereafter individually as an "Option" and collectively as
"Options." Options and Restricted Stock Purchases are referred to hereafter
individually as a "Stock Right" and collectively as "Stock Rights." As used
herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation," respectively, as those terms are defined in Section
424 of the Code.
2. Administration of the Plan.
--------------------------
A. Board or Committee Administration. The Plan shall be administered by
---------------------------------
the Board of Directors of the Company (the "Board"). The Board may appoint a
Compensation Committee (as the case may be, the "Committee") of two (2) or more
of its members to administer the Plan and to grant Stock Rights hereunder,
provided such Committee is delegated such powers in accordance with applicable
state law. (All references in this Plan to the "Committee" shall mean the Board
if no such Compensation Committee has been so appointed). If the Company
registers any class of any equity security pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan shall
be administered in accordance with the applicable rules set forth in Rule 16b-3
or any successor provisions of the Exchange Act or the rules under the Exchange
Act or any such successor provision ("Rule 16b-3"). From and after the date the
Company becomes subject to Section 162(m) of the Code with respect to
compensation earned under the Plan, each member of the Committee shall also be
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
B. Authority of Board or Committee. Subject to the terms of the Plan,
-------------------------------
the Committee shall have the authority to: (i) determine the employees of the
Company and Related Corporations (from among the class of employees eligible
under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine
(from among the class of individuals and entities eligible under paragraph 3 to
receive Non-Qualified Options and
-1-
<PAGE>
to make purchases of Restricted Stock) to whom Non-Qualified Options or rights
to make Restricted Stock Purchases may be granted; (ii) determine the time or
times at which Options may be granted or Restricted Stock Purchases made; (iii)
determine the exercise price of shares subject to each Option, which price shall
not be less than the minimum price specified in paragraph 6, and the purchase
price of shares subject to each Restricted Stock Purchase, which price shall be
not less than 85% of the fair market value of shares of common stock on the date
of the grant of the right to make a Restricted Stock Purchase; (iv) determine
whether each Option granted shall be an ISO or a Non-Qualified Option; (v)
determine (subject to paragraph 7) the time or times when each Option shall
become exercisable and the duration of the exercise period; (vi) determine
whether restrictions such as repurchase options are to be imposed on shares
subject to Options and Restricted Stock Purchases and the nature of any such
restrictions; (vii) impose such other terms and conditions with respect to Stock
Rights not inconsistent with the terms of this Plan as it deems necessary or
desirable; and (viii) interpret the Plan and prescribe and rescind rules and
regulations relating to it.
If the Committee decides to issue a Non-Qualified Option, the Committee
shall take whatever actions it deems necessary, under the Code and the
regulations promulgated thereunder, to ensure that such Option is not treated as
an ISO. The interpretation and construction by the Committee of any provisions
of the Plan or of any Stock Right granted under it shall be final unless
otherwise determined by the Board. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem best. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Stock Right
granted under it.
C. Committee Actions. The Committee may select one of its members as its
-----------------
chairman and shall hold meetings at such time and places as it may determine.
Acts by a majority of the Committee, acting at a meeting (whether held in person
or by teleconference), or acts reduced to or approved in writing by all of the
members of the Committee, shall be the valid acts of the Committee. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies however caused, or remove all members
of the Committee and thereafter directly administer the Plan, subject to
compliance with paragraph 2A.
D. Grant of Stock Rights to Board Members. Stock Rights may be granted
--------------------------------------
to members of the Board, subject to compliance with Rule 16b-3 when required by
paragraph 2A. All grants of Stock Rights to members of the Board shall be made
in all respects in accordance with the provisions of this Plan applicable to
other eligible persons.
3. Eligible Employees and Others. ISOs may be granted to any employee
-----------------------------
of the Company or any Related Corporation. Those officers and directors of the
Company who are not employees may not be granted ISOs under the Plan. Non-
Qualified Options and authorizations to make Restricted Stock Purchases may be
granted to any employee,
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<PAGE>
officer or director (whether or not also an employee) or consultant or advisor
of the Company or any Related Corporation. The Committee may take into
consideration a recipient's individual circumstances in determining whether to
grant a Stock Right. Granting a Stock Right to any individual or entity shall
neither entitle that individual or entity to, nor disqualify him from,
participation in any other grant of Stock Rights.
4. Common Stock. The stock subject to Stock Rights shall be authorized
------------
but unissued shares of Common Stock of the Company, $.001 par value (the "Common
Stock"), or shares of Common Stock reacquired by the Company in any manner. The
aggregate number of shares which may be issued pursuant to the Plan is 900,000
minus that number of shares which are the subject of option grants made, or were
purchased pursuant to the exercise of options that were granted, to employees,
officers directors, or consultants of the Company or Related Corporations prior
to the date of the adoption of this plan by the Company's Board of Directors,
subject to adjustment as provided in paragraph 13. Any such shares may be issued
pursuant to the exercise of ISOs or Non-Qualified Options or pursuant to
Restricted Stock Purchases, so long as the aggregate number of shares so issued
does not exceed such number, as adjusted. Until such time as the Company becomes
subject to Section 162(m) of the Code with respect to compensation earned under
this Plan, if any Stock Right granted under the Plan shall expire or terminate
for any reason without having been exercised in full or shall cease for any
reason to be exercisable in whole or in part or if any shares of Common Stock
issued pursuant to a Stock Right have been repurchased by the Company in
accordance with the terms of the agreement or instrument pursuant to which the
Stock Right is granted, then the unpurchased shares subject to such Stock Right
and any shares issued pursuant to a Stock Right that have been so repurchased by
the Company (or shares in substitution thereof) shall again be available for
grants of Stock Right under the Plan.
5. Granting of Stock Rights. Stock Rights may be granted under the Plan
------------------------
at any time after January 24, 2000 and prior to January 24, 2010. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant. The Committee shall have the right, with the consent of the optionee, to
convert an ISO granted under the Plan to a Non-Qualified Option pursuant to
paragraph 17.
6. Minimum Option Price; ISO Limitations.
-------------------------------------
A. Price for ISOs. The exercise price per share specified in the
--------------
agreement relating to each ISO granted under the Plan shall not be less than the
fair market value per share of Common Stock on the date of such grant. In the
case of an ISO to be granted to an employee owning stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than one hundred ten percent
(110%) of the fair market value per share of Common Stock on the date of grant.
-3-
<PAGE>
B. $100,000 Annual Limitation on ISOs. Each eligible employee may be
----------------------------------
granted ISOs only to the extent that, in the aggregate under this Plan and all
other incentive stock option plans of the Company and any Related Corporation,
such ISOs do not become exercisable for the first time by such employee during
any calendar year in a manner which would entitle the employee to purchase more
than $100,000 in fair market value (determined at the time the ISOs were
granted) of Common Stock in that year. Any Options granted to an employee in
excess of such amount will be granted as Non-Qualified Options.
C. Determination of Fair Market Value. If, at the time an Option is
----------------------------------
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the last business day for which the
prices or quotes discussed in this sentence are available prior to the date such
Option is granted and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange, or on the Nasdaq National Market or the Nasdaq
Small Cap Market, if the Common Stock is not then traded on a national
securities exchange; or (ii) the average of the low bid and high ask prices as
quoted on that date by an established quotation service for over-the-counter
securities, if the Common Stock is not then traded on a national securities
exchange or the Nasdaq National Market or the Nasdaq Small Cap Market. If the
Common Stock is not publicly traded at the time an Option is granted under the
Plan, "fair market value" shall be deemed to be the fair value of the Common
Stock as determined by the Committee after taking into consideration all factors
in good faith it deems appropriate, including, without limitation, recent sale
and offer prices of the Common Stock in private transactions negotiated at arm's
length, if any.
7. Option Duration. Subject to earlier termination as provided in
---------------
paragraphs 9, 10, and 13B, each Option shall expire on the date specified by the
Committee and set forth in the original stock option agreement granting such
Option, provided that ISOs shall in any event expire not more than ten years
from the date of grant and ISOs granted to an employee owning stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Related Corporation, such ISOs shall expire not more
than five years from the date of grant. Non-Qualified Options shall expire on
the date specified in the agreement granting such Non-Qualified Options, subject
to extension as determined by the Committee. ISOs, or any part thereof, that
have been converted into Non-Qualified Options may be extended as provided in
paragraph 17.
8. Exercise of Option. Subject to the provisions of paragraphs 9
------------------
through 13, each Option granted under the Plan shall be exercisable as follows:
A. Vesting. Unless otherwise specified by the Committee or the Board of
-------
Directors and subject to paragraphs 9 and 10 with respect to ISO's, Options
granted to employees shall vest on a schedule at least as rapid as the
following: (a) as to 25% of the shares subject to the Option, on the first
anniversary of the date of grant of the Option;
-4-
<PAGE>
and (b) as to the remaining 75% of the shares subject to the Option, in 12 equal
quarterly installments beginning one calendar quarter after the date of such
anniversary. The Committee may also specify such other conditions precedent as
it deems appropriate to the exercise of an Option.
B. Full Vesting of Installments. Once an installment becomes
----------------------------
exercisable it shall remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee.
C. Partial Exercise. Each Option or installment may be exercised at any
----------------
time or from time to time, in whole or in part, for up to the total number of
shares with respect to which it is then exercisable, provided that the Committee
may specify a certain minimum number or percentage of the shares issuable upon
exercise of any Option that must be purchased upon any exercise.
D. Acceleration of Vesting. The Committee shall have the right to
-----------------------
accelerate the date of exercise of any installment of any Option, despite the
fact that such acceleration may: (i) cause the application of Sections 280G and
4999 of the Code if an Acquisition, as defined below in paragraph 13B, occurs,
or (ii) disqualify all or part of the Option as an ISO.
9. Termination of Employment. If an ISO optionee ceases to be employed
-------------------------
by the Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his ISOs shall
become exercisable following the date of such cessation of employment, and his
ISOs shall terminate after the passage of ninety (90) days from the date of
termination of his employment, but in no event later than on their specified
expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 17. Nothing in the Plan shall be deemed to give any grantee of any
Stock Right the right to be retained in employment or other service by the
Company or any Related Corporation for any period of time.
The Board or Committee may establish such provisions in particular Stock
Right grant agreements as it may deem appropriate with respect to the treatment
of Stock Rights other than ISOs upon the termination of the employment of the
holder of the Stock Right.
10. Death; Disability.
-----------------
A. Death. If an ISO optionee ceases to be employed by the Company and
-----
all Related Corporations by reason of his death, any ISO of his may be
exercised, to the extent of the number of shares with respect to which he could
have exercised it on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by the laws of
descent and distribution, at any time prior to the earlier of the specified
expiration date of the ISO or one hundred and eighty (180) days from the date of
such optionee's death.
-5-
<PAGE>
B. Disability. If an ISO optionee ceases to be employed by the Company
----------
and all Related Corporations by reason of his disability, he or, in the event of
his death, his estate, personal representative or beneficiary who has acquired
the ISO by will or by the laws of descent and distribution, shall have the right
to exercise any ISO held by him on the date of termination of employment, to the
extent of the number of shares with respect to which he could have exercised it
on that date, at any time prior to the earlier of the specified expiration date
of the ISO or one (1) year from the date of the termination of the optionee's
employment. For the purposes of the Plan, the term "disability" shall mean
"permanent and total disability" as defined in Section 22(e)(3) of the Code or
successor statute.
-6-
<PAGE>
11. Assignability. No ISO, and unless specified in the agreement or
-------------
instrument pursuant to which the Option is granted, no Non-Qualified Option
shall be assignable or transferable by the optionee except by will or by the
laws of descent and distribution, and during the lifetime of the grantee each
Stock Right shall be exercisable only by him or her. No Stock Right, and no
right to exercise any portion thereof, shall be subject to execution,
attachment, or similar process, assignment, or any other alienation or
hypothecation. Upon any attempt so to transfer, assign, pledge, hypothecate, or
otherwise dispose of any Stock Right, or of any right or privilege conferred
thereby, contrary to the provisions thereof or hereof or upon the levy of any
attachment or similar process upon any Stock Right, right or privilege, such
Stock Right and such rights and privileges shall immediately become null and
void.
12. Terms and Conditions of Stock Rights. Stock Rights shall be
------------------------------------
evidenced by instruments (which need not be identical) in such forms as the
Committee may from time to time approve. Such instruments shall conform to the
terms and conditions set forth in paragraphs 6 through 11 hereof to the extent
applicable and may contain such other provisions as the Committee deems
advisable which are not inconsistent with the Plan. Without limiting the
foregoing, such provisions may include transfer restrictions, rights of refusal,
vesting provisions, repurchase rights and drag-along rights with respect to
shares of Common Stock issuable upon exercise of Stock Rights, and such other
restrictions applicable to shares of Common Stock issuable upon exercise of
Stock Rights as the Committee may deem appropriate. In granting any Non-
Qualified Option, the Committee may specify that such Non-Qualified Option shall
be subject to the restrictions set forth herein with respect to ISOs, or to such
other termination, cancellation or other provisions as the Committee may
determine. The Committee may from time to time confer authority and
responsibility on one or more of its own members and/or one or more officers of
the Company to execute and deliver such instruments. The proper officers of the
Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.
13. Adjustments. Upon the occurrence of any of the following events, an
-----------
optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the optionee and the Company relating to such Option:
A. Stock Dividends and Stock Splits. If the shares of Common Stock
--------------------------------
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
B. Consolidations, Mergers or Sales of Assets or Stock. If the Company
---------------------------------------------------
is to be consolidated with or acquired by another person or entity in a merger,
sale of all or substantially all of the Company's assets or stock or otherwise
(an "Acquisition"), the
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<PAGE>
Committee or the board of directors of any entity assuming the obligations of
the Company hereunder (the "Successor Board") shall, with respect to outstanding
Options or shares acquired upon exercise of any Option, take one or more of the
following actions: (i) make appropriate provision for the continuation of such
options by substituting on an equitable basis for the shares then subject to
such Options the consideration payable with respect to the outstanding shares of
Common Stock in connection with the Acquisition; (ii) accelerate the date of
exercise of such Options or of any installment of any such Options; (iii) upon
written notice to the optionees, provide that all Options must be exercised, to
the extent then exercisable, within a specified number of days of the date of
such notice, at the end of which period the Options, including those which are
not then exercisable, shall terminate; (iv) terminate all Options in exchange
for a cash payment equal to the excess of the fair market value of the shares
subject to such Options (to the extent then exercisable) over the exercise price
thereof; or (v) in the event of a stock sale, require that the optionee sell to
the purchaser to whom such stock sale is to be made, all shares previously
issued to such optionee upon exercise of any Option, at a price equal to the
portion of the net consideration from such sale which is attributable to such
shares. Nothing contained herein will be deemed to require the Company to take,
or refrain from taking, any one or more of the foregoing actions.
C. Recapitalization or Reorganization. In the event of a
----------------------------------
reorganization of the Company (other than a transaction described in
subparagraph B above) pursuant to which securities of the Company or of
another corporation are issued with respect to the outstanding shares of Common
Stock, an optionee upon exercising an Option shall be entitled to receive for
the purchase price paid upon such exercise the securities he would have received
if he had exercised his Option prior to such recapitalization or reorganization
and had been the owner of the Common Stock receivable upon such exercise at such
time.
D. Modification of ISOs. Notwithstanding the foregoing, any
--------------------
adjustments made pursuant to the foregoing subparagraphs A, B or C with respect
to ISOs shall be made only after the Committee, after consulting with counsel
for the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the Code
or any successor thereto) or would cause any adverse tax consequences for the
holders of such ISOs. If the Committee determines that such adjustments made
with respect to ISOs would constitute a modification of such ISOs, it may
refrain from making such adjustments.
E. Issuances of Securities and Non-Stock Dividends. Except as expressly
-----------------------------------------------
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to Options. No adjustments shall be made for dividends paid in
cash or in property other than securities of the Company (and, in the case of
securities of the Company, such adjustments shall be made pursuant to the
foregoing subparagraph A).
-8-
<PAGE>
F. Fractional Shares. No fractional shares shall be issued under the
-----------------
Plan, and the optionee shall receive from the Company cash in lieu of such
fractional shares.
G. Adjustments. Upon the happening of any of the foregoing events
-----------
described in subparagraphs A, B or C above, the class and aggregate number of
shares set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board, as applicable, shall determine the
specific adjustments to be made under this paragraph 13 and its determination
shall be conclusive.
If any person or entity owning Common Stock obtained by exercise of a Stock
Right made hereunder receives shares or securities or cash in connection with a
corporate transaction described in subparagraphs A, B or C above as a result of
owning such Common Stock, except as otherwise provided in subparagraph B, such
shares or securities or cash shall be subject to all of the conditions and
restrictions applicable to the Common Stock with respect to which such shares or
securities or cash were issued, unless otherwise determined by the Committee or
the Board of Directors of the Surviving Entity.
H. Pooling-of-Interests Accounting. If the Company proposes to engage
-------------------------------
in an Acquisition intended to be accounted for as a pooling-of-interests, and in
the event that the provisions of this Plan or of any agreement hereunder, or any
actions of the Board taken in connection with such Acquisition, are determined
by the Company's or the Surviving Entity's independent public accountants to
cause such Acquisition to fail to be accounted for as a pooling-of-interests,
then such provisions or actions may be amended or rescinded at the election of
the Committee, without the consent of any grantee, to be consistent with
pooling-of-interests accounting treatment for such Acquisition.
14. Means of Exercising Stock Rights. A Stock Right (or any part or
--------------------------------
installment thereof) shall be exercised by the holder thereof giving written
notice to the Company at its principal office address. Such notice shall
identify the Stock Right being exercised and specify the number of shares as to
which such Stock Right is being exercised, accompanied by full payment of the
purchase price therefor either (a) in United States dollars in cash or by check,
or (b) at the discretion of the Committee, delivery of an irrevocable and
unconditional undertaking, satisfactory in form and substance to the Company, by
a creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery to the Company of a copy of irrevocable and
unconditional instructions, satisfactory in form and substance to the Company,
to a creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price, or (c) at the discretion of the Committee,
through delivery of shares of Common Stock having a fair market value equal as
of the date of the exercise to the cash exercise price of the Stock Right, or
(d) at the discretion of the Committee, by delivery of the grantee's personal
recourse note bearing interest payable not less than annually at no less than
100% of the applicable Federal rate, as defined in Section 1274(d) of the Code,
or (e) at the discretion of the Committee, by any combination of (a), (b) (c)
and (d) above.
-9-
<PAGE>
The holder of a Stock Right shall not have the rights of a shareholder with
respect to the shares covered by his Stock Right until the date of issuance of a
stock certificate to him for the shares subject to the Stock Right. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. Term and Amendment of Plan. This Plan was originally adopted by the
--------------------------
Board on January 24, 2000 and will be presented to the stockholders of the
Company for approval on or prior to January 24, 2001. If the approval of
stockholders is not obtained by such date, ISOs granted under the Plan prior to
that date will be converted automatically to Non-Qualified Options, without any
action on the part of the Board, the Committee, or the holder of the Option. The
Plan shall expire on that date which is ten years from the date of its adoption
by the Board (except as to Options outstanding on the expiration date). Options
may be granted under the Plan prior to the date of stockholder approval of the
Plan.
The Board may terminate or amend the Plan in any respect at any time,
except that, without the approval of the stockholders obtained within 12 months
before or after the Board adopts a resolution authorizing any of the following
actions: (a) the total number of shares that may be issued under the Plan may
not be increased (except by adjustment pursuant to paragraph 13); (b) the
provisions of paragraph 3 regarding eligibility for grants of ISOs may not be
modified; (c) the provisions of paragraph 6(B) regarding the exercise price at
which shares may be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan
may not be extended.
16. Section 162(m) Notwithstanding anything herein to the contrary, no
----------------
Stock Right shall become exercisable, vested or realizable if such Stock Right
is granted to an employee that is a "covered employee" as defined in Section
162(m) of the Code and the Committee has determined that such Stock Right should
be structured so that it is not "applicable employee remuneration" under such
Section 162(m) unless and until the terms of this Plan, including any amendment
hereto, have been approved by the Company's stockholders in the manner and to
the extent required under such Section 162(m).
17. Amendment of Stock Rights. The Board or Committee may amend, modify
-------------------------
or terminate any outstanding Stock Rights including, but not limited to,
substituting therefor another Stock Right of the same or a different type,
changing the date of exercise or realization, and converting an ISO to a Non-
Qualified Option; provided that, except as otherwise provided in paragraphs 9,
10, and 15, the grantee's consent to such action shall be required unless the
Board or Committee determines that the action, taking into account any related
action, would not materially and adversely affect the grantee.
-10-
<PAGE>
18. Application Of Funds. The proceeds received by the Company from the
--------------------
exercise of Options granted and Restricted Stock Purchases authorized under the
Plan shall be used for general corporate purposes.
19. Governmental Regulation. The Company's obligation to sell and deliver
-----------------------
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
20. Withholding of Additional Income Taxes. Upon the exercise of a Non-
--------------------------------------
Qualified Option, the making of a Restricted Stock Purchase for less than its
fair market value, the making of a Disqualifying Disposition (as defined in
paragraph 21) or the vesting of forfeitable stock purchased pursuant to a
Restricted Stock Purchase, the Company, in accordance with Section 3402(a) of
the Code, may require the holder of the Stock Right to pay additional
withholding taxes in respect of the amount that is considered compensation
includible in such person's gross income. The Committee in its discretion may
condition (i) the exercise of an Option, (ii) a the making of a Restricted Stock
Purchase Award, or (iii) the vesting of forfeitable stock purchased pursuant to
a Restricted Stock Purchase, on the grantee's payment of such additional
withholding taxes.
21. Notice to Company of Disqualifying Disposition. Each employee who
----------------------------------------------
receives an ISO must agree to notify the Company in writing immediately after
the employee makes a Disqualifying Disposition of any Common Stock acquired
pursuant to the exercise of an ISO. A "Disqualifying Disposition" is any
disposition (including any sale) of such Common Stock before the later of:
A. two years after the date the employee was granted the ISO, and
B. one year after the date the employee acquired Common Stock by
exercising the ISO. If the employee has died before such stock is sold, these
holding period requirements do not apply and no Disqualifying Disposition can
occur thereafter.
22. Governing Law; Construction. The validity and construction of the
----------------------------
Plan and the instruments evidencing Options shall be governed by the laws of the
state of Delaware. In construing this Plan, the singular shall include the
plural and the masculine gender shall include the feminine and neuter, unless
the context otherwise requires.
-11-
<PAGE>
Exhibit 10.2
[FORM OF OPTION GRANT FOR EMPLOYEES]
SOHU.COM INC.
Memorandum of Agreement Evidencing Granting of Non-Qualified Stock Option
Stock Option Agreement dated as of December 5, 1999 between Sohu.com Inc.,
a Delaware corporation (the "Company"), and [___________] (the "Grantee").
1) The Company hereby grants to the Grantee, as of the date set forth above,
in consideration of the Grantee's continued employment with the Company or
a direct or indirect subsidiary of the Company, an option (the "Option") to
purchase an aggregate of [__________] shares of the Common Stock of the
Company, US$.001 par value per share, at an exercise price of US$[_______]
per share, subject to the vesting, exercise provisions and other terms and
conditions set forth below.
2) The shares subject to the Option shall vest (a) as to 25% of the shares
subject to the Option, on the first anniversary of the date of grant of the
Option; and (b) as to the remaining 75% of the shares subject to the
Option, in 12 equal quarterly installments beginning one calendar quarter
after the date of such anniversary.
3) If the Grantee ceases for any reason to be an employee of the Company, or
any direct or indirect subsidiary of the Company, any part of the Option
not then vested will be cancelled and will be of no further force or
effect. If the Grantee ceases for any reason, other than death or
Disability (as defined below), to be an employee of the Company, or any
direct or indirect subsidiary of the Company, any part of the Option then
vested and not exercised within ninety (90) days after the date of the
termination of his employment will be cancelled and will be of no further
force or effect, provided that such 90-day period may be extended by the
Company's Board of Directors in its sole discretion.
4) If the Grantee dies while in the employ of the Company, or any direct or
indirect subsidiary of the Company, the Option may be exercised, to the
extent of the number of shares with respect to which the Grantee could have
exercised it on the date of his death, by his estate, personal
representative or beneficiary, at any time within 180 days after the date
of death. If the Grantee ceases to be employed by the Company, or a direct
or indirect subsidiary of the Company, by reason of his Disability, the
Option may be exercised, to the extent of the number of shares with respect
to which he could have exercised it on the date of the termination of his
employment, at any time within one (1) year after such termination. At the
expiration of such 180-day or one year period, whichever is the earlier,
the Option shall terminate and the only rights hereunder shall be those as
to which the Option was properly exercised before such termination.
"Disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or any
successor statute.
5) If the Company determines in good faith that the Grantee has violated any
obligation of confidentiality, non-competition or non-solicitation of
employees, customers or suppliers owed to the Company, then, in the sole
discretion of the Company's Board of Directors,
-1-
<PAGE>
(1) any part of the Option not yet exercised will be cancelled and will be
of no further force or effect, effective upon written notice from the
Company to the Grantee and (2) any shares of the capital stock of the
Company held by the Grantee which were purchased by the Grantee through
exercise of the Option or any part of the Option will be repurchased by the
Company at a price equal to the exercise price paid by the Grantee,
effective upon written notice from the Company to the Grantee accompanied
by the Company's tender of the price for such repurchase, and will cease to
be held by the Grantee. The Company may, in the sole discretion of the
Company's Board of Directors, exercise either, both or neither of the
foregoing remedies, and such remedies shall be in addition to all other
remedies available to the Company for violations of any such obligation.
6) The Option is exercisable, in whole or in part, with respect to any then
vested shares only from and after the first to occur of the following
events: (a) the closing of an underwritten public offering of shares of
Common Stock of the Company; or (b) any liquidation, dissolution or winding
up of the Company or any consolidation or merger of the Company with or
into any other corporation or corporations in which the stockholders of the
Company immediately prior to such transaction own 50% or less of the voting
power of the surviving entity immediately following such transaction, or a
sale, conveyance or disposition of all or substantially all of the assets
of the Company, or the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power
of the Corporation is disposed of.
7) The Option (or any part or installment thereof) may be exercised by the
Grantee's delivering to the Company a duly executed Notice of Exercise of
Option as described below, together with provision for payment of the full
purchase price in accordance with this Agreement for the shares as to which
the Option is being exercised, and upon compliance with any other
conditions set forth in this Agreement. Such written notice must be signed
by the Grantee, state the number of shares with respect to which the Option
is being exercised and contain any representations required by this
Agreement. Payment of the purchase price for the shares as to which the
Option is being exercised may be made (i) in United States dollars in cash
or by check, or (ii) at the discretion of the Company's Board of Directors,
by any other means, including a promissory note of the Grantee, which the
Board of Directors determines to be acceptable.
8) The Option granted herein is subject to the following additional terms and
provisions:
a) The Option is not transferable by the Grantee otherwise than by will
or laws of descent and distribution to the Grantee's spouse and lineal
descendants, and is exercisable, during the Grantee's lifetime, only
by him or her.
b) The Option may be exercised in whole or in part from time to time,
provided that the Option may not be exercised as to less than one
hundred (100) shares at any one time, unless it is being exercised in
full and the balance of shares subject to the Option is less than one
hundred.
-2-
<PAGE>
c) The shares of Common Stock underlying the Option and the exercise
price therefor and the minimum number of shares that may be purchased
at any one time will be appropriately adjusted from time to time for
stock splits, reverse stock splits, stock dividends and
reclassifications of shares.
d) If the Company is to be consolidated with or acquired by another
entity in a merger, or in the event of a sale of all or substantially
all of the Company's assets (an "Acquisition"), the Company may take
such action with respect to the Option as the Company's Board of
Directors may deem to be equitable and in the best interests of the
Company and its stockholders under the circumstances, including,
without limitation, (i) making appropriate provision for the
continuation of the Option by substituting on an equitable basis for
the shares then subject to the Option either the consideration payable
with respect to the outstanding shares of Common Stock in connection
with the Acquisition or securities of any successor or acquiring
entity or (ii) giving the Grantee reasonable advance notice of the
pendency of the Acquisition and canceling the Option effective upon
the Acquisition if it is not exercised prior to the Acquisition.
Nothing contained herein will be deemed to require the Company to
take, or refrain from taking, any one or more of the foregoing
actions.
e) The Grantee will not have any rights as a stockholder with respect to
any shares of Common Stock covered by the Option except after due
exercise of the Option and tender of the full purchase price for the
shares being purchased pursuant to such exercise and registration of
the shares in the Company's share register in the name of the Grantee.
f) Unless the offering and sale of the shares to be issued upon the
exercise of the Option has been registered under the Securities Act
and any applicable State "Blue Sky" laws, the Company will be under no
obligation to issue the shares covered by such exercise unless
i) the person who exercises the Option represents and warrants to
the Company at the time of such exercise that such person is
acquiring such shares for his or her own account for investment
and not with a view to, or for sale in connection with, the
distribution of any such shares and
ii) the Company has received an opinion of its counsel that the
shares may be issued upon such exercise in compliance with the
Securities Act and any applicable State Blue Sky laws without
registration thereunder.
g) Each certificate representing shares of Common Stock issued upon
exercise of the Option (except to the extent that the restrictions
described in any such legend are no longer applicable) will be bear
legends in substantially the following form (in addition to any legend
required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
-3-
<PAGE>
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
LOCK-UP RESTRICTION OF UP TO 180 DAYS FOLLOWING THE INITIAL
UNDERWRITTEN PUBLIC OFFERING OF THE COMPANY'S SECURITIES.
h) In connection with the initial underwritten public offering of the
Company's Common Stock, the Grantee will not, without the prior
written consent of the Company, sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of or
transfer his or her economic risk with respect to any shares of Common
Stock for a period of 180 days after the date of the final prospectus
used in connection with such offering. The Grantee will execute and
deliver such documents as the Company may request confirming the
foregoing.
9) At any time when the Grantee wishes to exercise the Option, in whole or in
part, the Grantee will submit to the Company, a duly executed Notice of
Exercise of Option in the form attached hereto as Exhibit A. Copies of such
---------
notice are available from the Secretary or an Assistant Secretary of the
Company.
10) All notices made pursuant to this Agreement shall be in writing and shall
be conclusively deemed to have been duly given (a) when hand delivered to
the other party (b) when received, if sent by an overnight delivery
service, postage prepaid, addressed, if to the Grantee, as set forth below,
and if to the Company, to the Company's principal offices.
-4-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
name by its President or a Vice President or its Secretary or an Assistant
Secretary and the Grantee has hereunto set his or her hand as of the date first
above written.
SOHU.COM INC.
By:______________________________
Name:
Title:
_________________________________
(signature)
[___________________]
(printed name)
_________________________________
(address)
_________________________________
-5-
<PAGE>
EXHIBIT A
Sohu.com Inc.
7 Jianguomen Nei Avenue
Bright China Chang An Building
Tower 2 Room 519
Beijing, China 100005
Ladies and Gentlemen:
I hereby elect to exercise the stock option granted to me on ___________
___, 20__, by Sohu.com Inc., a Delaware corporation ("Sohu"), with respect to
______________ shares (the "Shares") of common stock, par value $.001 per share
("Common Stock"), at the option price of $___________ per share for a total
purchase price of $__________.
I understand that the stock option that I am electing to exercise is not
qualified as an "incentive stock option" under Section 422 of the United States
Internal Revenue Code of 1986.
I wish to make payment of the exercise price for the Shares as indicated
below (check one or more boxes):
______ Cash, my check in the amount of $__________ is enclosed
herewith.
______ Already owned Common Stock; _____ such Common Stock
with a total value of $______ enclosed herewith, duly
endorsed for transfer to the Company. I understand that
this method of payment may be rejected by Sohu's Board
of Directors of or a duly authorized Compensation
Committee of the Board of Directors in its sole
discretion.
Signature: _________________________
Print Name: _________________________
Address: _________________________
_________________________
_________________________
Dated:________________
-1-
<PAGE>
EXHIBIT 10.4
[Translation]
[LOGO OF ITC]
ITC ELECTRONIC TECHNOLOGY (BEIJING) CO., LTD.
EMPLOYMENT CONTRACT
Party A : ITC Electronic Technology (Beijing) Co., Ltd.
--------------------------------------------
Party B : ____________________________________________
Certificatation
---------------
I, Victor Koo, Senior Vice President, Corporate Business Development
of Sohu.com Inc., a corporation organized under the laws of the State of
Delaware, hereby certify that the attached English translation of the employment
contract is, in my opinion, a fair and accurate translation of the original
employment contract written in the Chinese language.
/s/ Victor Koo
----------------------------------------
Victor Koo
Senior Vice President
Corporate Business Development
<PAGE>
Page 1
- --------------------------------------------------------------------------------
THIS EMPLOYMENT CONTRACT (hereinafter as the "Contract") is made in Beijing,
People's Republic of China ("China") on this [ ] day of [ ] 1999.
by and between
Party A: ITC Electronic Technology (Beijing) Co., Ltd
Legal Status : Wholly Foreign-owned Enterprise
Legal Representative : Charles Zhang
Address : Suite 519, Tower 2, Bright China Chang An
Building, No. 7 Jianguomen Nei Avenue,
Beijing, China
and
Party B:
Name :
Education :
Gender :
Date of Birth :
Resident ID No :
Home Address :
Neighbourhood Office :
(individually a "Party" and collectively the "Parties").
In accordance with the Labour Law of the People's Republic of China, the
Regulations on the Labour Administration of Foreign Investment Enterprises, [ ]
and other relevant Chinese laws and regulations and, based on the principles of
equality, free will and mutual consent, the Parties hereby agree to enter into
this Contract and to adhere to the articles listed hereof.
- --------------------------------------------------------------------------------
<PAGE>
Page 2
- --------------------------------------------------------------------------------
CHAPTER 1: TERM OF CONTRACT, EFFECTIVE DATE AND
-----------------------------------------------
PROBATIONARY PERIOD
-------------------
1.1 Term
----
This Contract is a fixed-term employment contract. The duration of this
Contract shall be for a fixed term of [ ] year(s), commencing [ ] and
ending [ ], unless terminated earlier or renewed pursuant to Chapter 10.
1.2 Effective Date
--------------
The effective date of this Contract shall be the date of signing hereof.
1.3 Probationary Period
-------------------
Party B shall, commencing from the effective date of this Contract, serve
a probationary period of [ ] months.
CHAPTER 2: RESPONSIBILITIES AND PERFORMANCE
-------------------------------------------
2.1 Responsibilities
----------------
(a) Party A shall assign Party B to the position of [ ].
(b) Depending on its operational needs, Party A may assign Party B to
undertake other responsibilities.
2.2 Performance
-----------
Party B shall, according to Party A's legally permissible request, fulfil
the set amount of work on a timely basis and meet the quality standard
formulated by Party A.
CHAPTER 3: OCCUPATIONAL HEALTH AND SAFETY
-----------------------------------------
3.1 Party A's Obligations
---------------------
Party A shall assume the following obligations:
(a) to provide Party B with a safe and hygienic working environment in
accordance with the standards stipulated by the State;
(b) to provide Party B with training in business practice and occupational
health and safety; and
(c) be responsible for formulating the system operation procedures,
occupational safety and hygienic system and its standards.
- --------------------------------------------------------------------------------
<PAGE>
Page 3
- --------------------------------------------------------------------------------
3.2 Party B's Rights
----------------
Party B shall be entitled to enjoy the following rights:
(a) to work in an environment meeting State standards for occupational
health and safety;
(b) to refuse to engage in any work which in violation of Chinese law
poses a danger to the health and safety of Party B; and
(c) to reject any of Party A's instructions which are in violation of its
rules and regulations.
CHAPTER 4: EMPLOYMENT RULES
---------------------------
4.1 Working Rules
-------------
During the term of this Contract, Party B must comply with the policies and
systems as well as any other production and working rules implemented by
Party A (please see for details the Policies and Procedures Guidelines
"Sohu and You" attached hereto as Appendix I), the principal rules of which
include:
(a) arriving and departing from work on time according to Party A's
working hours;
(b) maintaining strict compliance with operational procedures and ensuring
safety production;
(c) maintaining the confidentiality of Party A's trade secrets;
(d) protecting and properly using equipment, not wasting office resources
and utilities, and not intentionally damaging or misappropriate Party
A's property;
(e) following management instructions and not engage in games, create
noises or cause interruptions to production and working order during
working hours; and
(f) not unilaterally handling matters which are outside the scope of
his/her authority and immediately requesting instructions regarding
the same form his/her immediate supervisor.
4.2 Punishment
----------
If Party B violates any of Party A's employment rules, Party A may,
pursuant to the Policies and Procedures Guidelines ("Sohu and You"), impose
an administrative penalty and/or a fine as well as terminate this Contract.
- --------------------------------------------------------------------------------
<PAGE>
Page 4
- --------------------------------------------------------------------------------
CHAPTER 5: WORKING HOURS, AND WORKING
-------------------------------------
OVERTIME SHIFTS AND HOURS
-------------------------
5.1 Working Hours
-------------
(a) Party A adopts a system of standard working hours and will arrange for
Party B to work eight (8) hours per day (excluding the time for Party
B to come to work and return home, the time for meal and rest) and not
exceed forty (40) hours per week.
(b) Party B shall work five (5) days per week (40 hours) with two (2) rest
days.
(c) Party A may adopt other work and rest methods which are not subject to
the stipulations set out in Article 5.1(b) in accordance with the
production requirements and upon the approval of the labour
administrative department.
5.2 Working Overtime Shifts and Hours
---------------------------------
Party A does not in principle encourage Party B to work overtime. However,
in special cases where working overtime shifts and hours is necessary,
Party A may only do so after consultation with Party B, in which event
Party A will make separate arrangements regarding the rest days or effect
wages for overtime shifts and hours in accordance with relevant State
stipulations.
CHAPTER 6: WAGES
----------------
6.1 General Principle
-----------------
Party B's wages shall be set in accordance with the principle of "to each
according to his work" and shall be based on equal pay for equal work.
6.2 Wages
-----
Party A shall pay Party B a monthly wage of RMB [ ] during Party B's
probationary period. After Party B's successful completion of the
probationary period, Party A shall pay Party B a monthly wage of RMB [ ].
6.3 Holiday Pay
-----------
During rest days, official holidays, marriage / bereavement leave and leave
for participating in civic activities in accordance with the law, Party A
shall pay wages to Party B pursuant to the standards stipulated by law and
the Policies and Procedures Guidelines.
6.4 Method and Time of Payment
--------------------------
(a) Party A shall pay Party B's total wages with lawful currency on the
last day of each month and shall provide Party B with a wage slip. If
the
- --------------------------------------------------------------------------------
<PAGE>
Page 5
- --------------------------------------------------------------------------------
said day falls on a rest day or an official holiday, Party A shall pay
Party B's total wages on the preceding working day.
(b) Party B shall open an account with the [Beijing] branch of a
commercial bank specified by Party A. Party A shall deposit into such
bank account Party B's wage in lawful currency. Party A shall
withhold individual income tax payment as well as contributions to
relevant social insurance funds on behalf of Party B.
CHAPTER 7: SOCIAL SECURITY AND BENEFITS
---------------------------------------
Pursuant to the service contract signed by and between Party A and the human
resources service entity, Party A shall appoint the said entity to administer
Party B's social security benefits. The said entity's responsibilities shall
include the payment of contributions on behalf of Party A to each of the pension
fund, unemployment fund, serious accidental injury fund, housing fund and
medical insurance fund. The details concerning the specific social security and
other benefits administered by the said entity are attached as Appendix II.
CHAPTER 8: HOLIDAYS AND LEAVE
-----------------------------
8.1 Legal Holidays
--------------
(a) Party B shall be entitled to the specific number of holidays (ten (10)
days) permitted under Chinese law, including the following:
Legal Holidays No. of Day(s)
-------------- -------------
New Year's Day (January 1st) 1
Spring Festival (Lunar calendar
January 1st, 2nd and 3rd) 3
International Labour Day (May 1st, 2nd and 3rd) 3
National Day (October 1st, 2nd and 3rd) 3
(b) For all holidays celebrated nationally that fall on either a Saturday
or a Sunday, such holiday shall be recognized on the following work
day. However, for holidays falling on a Saturday or Sunday that are
only celebrated by a portion of the population, such holiday shall not
be taken on the following work day.
(c) Women employees are entitled to a half-day holiday on Women's Day
(March 8th).
8.2 Annual Leave
------------
(a) If Party B has worked for any organization on a continuous basis for
more than one (1) year, Party B shall be entitled to enjoy paid annual
- --------------------------------------------------------------------------------
<PAGE>
Page 6
- --------------------------------------------------------------------------------
leave, which shall in no event exceed two (2) weeks.
(b) If Party B wishes to take paid annual leave, he/she should apply
fifteen (15) days in advance in writing to Party A. Party A shall
determine and make appropriate arrangements for such leave based on
Party A's production and operation requirements.
8.3 Other Leave
-----------
Party B shall be entitled to other leave for marriage, bereavement, family
visits, personal illness and medical treatment as outlined in the Policies
and Procedures Guidelines ("Sohu and You").
CHAPTER 9: CONFIDENTIALITY
--------------------------
9.1 Definition
----------
Trade secrets shall refer to any operational information which is not known
to the general public and is owned by Party A in any form, for which Party
A has taken proper steps to restrict dissemination to the public, and which
brings economic benefits to Party A, including all the information and
matters in relation to Party A's businesses, such as the information about
investing and financing, salary, bonus, incentives, know-how, software
development, marketing strategies, clients lists, commercial partners and
co-operation details related to them, management methods, financial and
market information, future commercial blueprint and Party A's intellectual
property information.
9.2 Confidentiality Obligations
---------------------------
Party B shall abide by the confidentiality guidelines adopted by Party A
and shall not disclose to any third party Party A's trade secrets in any
form, directly or indirectly, during the term of this Contract and for a
period of three (3) years after the termination of this Contract. Party B
is prohibited from using without authorisation Party A's trade secrets or
allowing the use of the same by any third party. If Party B breaches the
confidentiality obligations herein and causes harm to Party A, Party A may
terminate this Contract immediately in accordance with Article 12.2(b)
hereof. In addition, Party B shall be liable to Party A for compensation
pursuant to Article 12.2(b) hereof.
9.3 Confirmation
------------
If Party B is uncertain about the nature and degree of confidentiality
concerning any trade secrets, Party B should ask for confirmation from
his/her immediate supervisor.
9.4 Return of Party A's Property
----------------------------
Irrespective of the circumstances of termination of this Contract, Party B
shall
- --------------------------------------------------------------------------------
<PAGE>
Page 7
- --------------------------------------------------------------------------------
immediately return all company files, records, equipment and any other
property obtained from Party A during the course of his/her employment
(including, but not limited to Party A's trade secrets). If Party B fails to
return any of the said files or such property, Party A is entitled to make an
appropriate deduction from any amount payable to Party B and may adopt any other
appropriate method to obtain the return of such property.
CHAPTER 10 : AMENDMENT, RENEWAL AND TERMINATION
-----------------------------------------------
10.1 Amendment
---------
(a) This Contract may only be amended in the following circumstances:
(i) Upon their mutual agreement, the Parties may amend certain
provisions hereof as required; or
(ii) If there is any change to the law, regulations or rules
pursuant to which this Contract and its appendices were entered
into.
(b) If either Party wishes to amend this Contract, thirty (30) days' prior
written notice must be given to the other Party.
(c) This Contract may only be amended by the mutual written agreement of
the Parties.
10.2 Renewal
-------
Upon expiry, this Contract shall be automatically renewed. Either Party may
request, in writing, for renewal of this Contract at least thirty (30) days
prior to its expiration. Upon the mutual consent of the Parties after
consultation, this Contract can be renewed.
10.3 Termination
-----------
This Contract can be terminated upon mutual agreement of both Parties
after consultation.
10.4 Immediate Termination
---------------------
Party A may immediately terminate this Contract if Party B has engaged in
any of the following activities:
(a) where it has been proved during the probationary period that he/she is
unable to meet the requirements of his/her position;
(b) by committing a serious violation of labor rules or Party A's policies
and systems;
(c) by committing serious dereliction of his/her duties or practising
graft or
- --------------------------------------------------------------------------------
<PAGE>
Page 8
- --------------------------------------------------------------------------------
favoritism which results in serious losses to Party A; or
(d) by being found criminally liable under Chinese law.
10.5 Termination with Prior Notice
-----------------------------
Party A may terminate this Contract upon thirty (30) days' prior written
notice to Party B under any of the following circumstances:
(a) where Party B, after undergoing a period of medical treatment and
recuperation from an illness or a non-work-related injury, remains
unable to return to the original position, and is also unfit for
reassignment;
(b) where Party B is unable to fulfil the duties of his position and,
despite undergoing training or a transfer of his position, remains
unable to fulfil his/her duties;
(c) where there has been a substantial change in the objective
circumstances upon which this Contract was based, thereby rendering
performance of this Contract impossible and, after consultation, the
Parties have failed to agree on amendments hereto reflecting such
changes.
10.6 Restrictions on Party A's Right to Terminate
--------------------------------------------
Notwithstanding Article 10.5 above, Party A may not terminate this
Contract under any of the following circumstances:
(a) where Party B, after having suffered an occupational disease or a
work-related injury, has been confirmed to have lost the partial or
total ability to work;
(b) where Party B is suffering from illness or injury during his/her
stipulated medical treatment period;
(c) where Party B is a female employee and is pregnant, is in labour, or
is within the stipulated nursing period, and has not violated any
labour rules; or
(d) other circumstances specified by Chinese laws and administrative
regulations.
10.7 Termination by Party B
----------------------
(a) Party B may terminate this Contract upon thirty .30. days' prior
written notice to Party A. However, Party B may not terminate this
Contract even if he/she has provided Party A with thirty (30) days'
written notice if Party B has caused financial losses to Party A and
the issue has not been resolved, or if Party B is under investigation
for misconduct.
- --------------------------------------------------------------------------------
<PAGE>
Page 9
- --------------------------------------------------------------------------------
(b) Party B may terminate this Contract at any time in writing under any
of the following circumstances:
(i) during the probationary period;
(ii) if Party A forces Party B to work by means of force, threat or
illegal restriction of personal freedom; or
(iii) if Party A fails to pay wages or to provide a safe working
environment as stipulated hereunder.
10.8 Termination
-----------
This Contract shall automatically terminate under any of the following
circumstances:
(a) upon expiration (unless renewed by the Parties in accordance with
Article 10.2 above);
(b) when Party B reaches legal retirement age under Chinese law;
(c) upon the death of Party B;
(d) if Party A is dissolved, ceases operations, is declared bankrupt or
its business licence is revoked; or
(e) upon the occurrence of any one of the events of termination as agreed
by the Parties.
CHAPTER 11 : TERMINATION COMPENSATION
-------------------------------------
11.1 Principle
---------
Party A shall, in accordance with the stipulations of Chinese law, effect
Party B with relevant compensation in the event of violating or terminating
this Contract.
11.2 Calculation of Compensation
---------------------------
(a) For the purposes of calculating the amount of compensation under this
Chapter, when the term "wages" is used, it refers to the average
monthly wage paid to Party B during his/her previous twelve (12)
months of employment under normal working conditions prior to
termination.
(b) Party A shall pay Party B compensation based on Party B's period of
employment with Party A, in the amount of one (1) month's wage for
each year of employment and the maximum amount payable not to exceed a
total of twelve (12) months' wages. If Party B has worked for
- --------------------------------------------------------------------------------
<PAGE>
Page 10
- --------------------------------------------------------------------------------
less than one (1) year, Party A shall pay any such compensation to
Party B based on the standard for one (1) year.
11.3 Payment Term
------------
Party A shall pay to Party B any compensation in a lump-sum payment within
one (1) month of completion of Party B's termination procedures. Any monies
owing to Party A by Party B may deducted from such payment.
11.4 Exceptions
----------
(a) Under any of the following circumstances occurs, Party B shall not be
entitled to receive any compensation from Party A:
(i) upon the expiry of this Contract;
(ii) upon the occurrence of one of the agreed conditions for
termination of this Contract; or
(iii) Party A terminates this Contract in accordance with Article
10.4 above.
(b) Where Party B terminates this Contract during the probationary period,
no compensation will be paid to Party B. However, Party A must pay
wages to Party B based on his/her actual number of work days.
CHAPTER 12 : RESPONSIBILITIES FOR BREACH
----------------------------------------
12.1 General Provisions
------------------
If Party A causes any damage to Party B by breach of this Contract, Party A
shall pay compensation to Party B according to the Measures of Compensation
for the Breach of Employment Contracts Under the Labour Law (hereinafter
referred to as "Compensation Measures").
12.2 Party B's Breach of Contract
----------------------------
(a) If Party B violates Chinese law or the stipulations of this Contract
and causes Party A to suffer economic losses, Party A has the right to
impose administrative penalty and (or) a fine on Party B. In
addition, Party A is entitled to have Party B assume the compensation
responsibilities through legal methods.
(b) If Party B breaches the confidentiality provisions of Chapter 9 of
this Contract in relation to trade secrets and thus causes losses to
Party A, it must pay compensation to Party A according to the
Compensation Measures and Article 20 of the Anti-unfair Competition
Law.
(c) If Party B terminates this Contract in violation of Chinese law and/or
the
- --------------------------------------------------------------------------------
<PAGE>
Page 11
- --------------------------------------------------------------------------------
terms hereof and causes losses to Party A, it shall be liable to
pay Party A for the following:
(i) recruitment expenses paid by Party A for Party B;
(ii) direct losses relating to production, operational and/ or work
functions.
CHAPTER 13 : LABOUR DISPUTES
----------------------------
13.1 Friendly Consultations
----------------------
If a dispute arises in the implementation of this Contract, the Parties
shall attempt in the first instance to resolve such dispute through
friendly consultations:
13.2 Mediation and Arbitration
-------------------------
(a) If the dispute cannot be resolved in the manner outlined in Article
13.1, either Party may, in accordance with Chinese law, apply to Party
A's mediation committee for mediation;
(b) If mediation fails or if either Party requests for arbitration, the
dispute may be submitted for arbitration within sixty (60) days of the
occurrence of the labour dispute to the labour dispute arbitration
committee with jurisdiction; or either Party may directly apply for
arbitration to the labour dispute arbitration committee with
jurisdiction.
13.3 Litigation
----------
If either Party disagree with the arbitrage decision, such Party may
initiate a lawsuit in the people's court with jurisdiction.
CHAPTER 14 : GOVERNING LAW
--------------------------
The validity, interpretation and implementation of and settlement of disputes
under this Contract shall be governed by the laws of China.
CHAPTER 15 : MISCELLANEOUS PROVISIONS
-------------------------------------
15.1 Entire Agreement
----------------
This Contract and its Appendices constitute the entire agreement between
the Parties and supersede all prior discussions, negotiations and
agreements. If there is any inconsistency between the provisions of this
Contract and any of the Appendices, the provisions of this Contract shall
prevail to the extent of the inconsistency.
15.2 Severibility
------------
<PAGE>
Page 12
- --------------------------------------------------------------------------------
The invalidity of any article of this Contract shall not affect the
validity of any other article hereof.
15.3 Waiver
------
Waiver on the part of either Party to any right under this Contract shall
not operate or be interpreted as a waiver of similar rights or other rights
under this Contract thereafter.
15.4 Days
----
Any references to a day herein shall mean a calendar day except the
working days referred in Article 6.4(a) hereof.
15.5 Authentication
--------------
After signing, any alteration to an article of this Contract shall be
invalid. The parties shall, within thirty (30) days of the execution of the
Contract, carry out authentication with local labour administrative
department.
15.6 Language
---------
This Contract is executed in three (3) originals in the Chinese language,
each having equal validity. Each Party and the contract authentication
authority shall hold one (1) original. Party A may not retain possession of
Party B's original version of this Contract.
15.7 Supplementary Matters
---------------------
Any extensions of this Contract, amendment agreements or other matters
agreed by the Parties must be in writing and signed by the Parties, and
attached hereto. Each page of any such document must be initialled by the
Parties or the same shall be without legal effect.
15.8 Matters Not Covered
-------------------
Any matters not addressed herein shall be carried out in accordance with
Chinese law.
Party A
Legal Representative (seal)
or
Authorized Agent (seal)
Name:
- --------------------------------------------------------------------------------
<PAGE>
Page 13
- --------------------------------------------------------------------------------
Title:
Date of Execution: date/month/year
Party B (Signature or Seal)
___________________________
Authentication Authority: __________________________
(Seal)
Name of Authentication Official: __________________________
(Seal)
Date of Authentication: ___________________________
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.5
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series B Preferred Stock Purchase Agreement (the "Agreement") is entered
---------
into as of _____________, 1998 (the "Effective Date"), by and between Internet
--------------
Technologies China Incorporated, a Delaware corporation (the "Company"), and
-------
the persons and entities set forth on Exhibit A hereto (each, an "Investor"
and, collectively, the "Investors"). Charles Zhang is a party to this
Agreement for the sole purpose of making the representations and warranties set
forth in Section 4B hereof.
In consideration of the mutual promises, covenants and conditions hereinafter
set forth, the parties hereto agree as follows:
1. DEFINITIONS.
-----------
1.1 Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following respective meanings:
"Common Stock" shall mean the Company's Common Stock, $.01 par
------------
value.
"Proceeds" shall mean whatever is received when assets, whether
--------
tangible or intangible, are sold, changed, collected or otherwise disposed of,
both cash and non-cash, including the Proceeds of insurance payable by reason of
loss or damage to Proceeds.
"Proprietary Assets" shall mean all patents, patent applications,
------------------
trademarks, service marks, trade names, copyrights, moral rights, maskworks,
trade secrets, confidential and proprietary information, compositions of matter,
formulas, designs, proprietary rights, know-how, processes, domain names and
URLs.
1.2 Index of Other Defined Terms. In addition to the terms defined
----------------------------
above, the following terms shall have the respective meanings given thereto in
the sections indicated below:
Defined Term Section
------------ -------
"Act" 4.5(b)
---
"Agreement" Preamble
---------
"Business Plan" 4.25
-------------
"Bylaws" 4.12
------
"CERCLA" 4.22
------
"Certificate" 2.1
-----------
"Code" 4.20
----
"Company" Preamble
-------
"Confidential Information" 9.13
------------------------
"Conversion Shares" 4.2(c)
-----------------
"Disclosing Party" 9.13
----------------
-1-
<PAGE>
"Effective Date" Preamble
--------------
"Financial Statements" 4.16
--------------------
"First Closing" 3.1
-------------
"Hazardous Materials" 4.22
-------------------
"Investor" Preamble
--------
"Non-Disclosing Party" 9.13
--------------------
"Disclosure Schedule" 4
-------------------
"SEC" 4.14
---
"Second Closing" 3.2
--------------
"Shares" 2.3
------
"Tranche I Shares" 2.2
----------------
"Tranche II Shares" 2.3
-----------------
2. AGREEMENT TO PURCHASE AND SELL STOCK
------------------------------------
2.1. Authorization. As of the First Closing (as defined below), the
-------------
Company will have authorized the issuance, pursuant to the terms and conditions
of this Agreement, of up to 390,000 shares of the Company's Series B Convertible
Preferred Stock, $0.01 par value, ("Series B Preferred Stock") having the
rights, preferences, privileges and restrictions set forth in the Amended and
Restated Certificate of Incorporation of the Company attached to this Agreement
as Exhibit B (the "Certificate").
--------- -----------
2.2. Agreement to Purchase and Sell at the First Closing. Subject to
---------------------------------------------------
the terms and conditions hereof, on the date of the First Closing, the Company
will issue and sell to the Investors, and the Investors agree to purchase from
the Company, an aggregate of 125,653 shares of Series B Convertible Preferred
Stock (the "Tranche I Shares") at a price of $5.173 per share for an aggregate
----------------
purchase price of $650,002.98. The number of Tranche I Shares to be purchased by
each Investor is set forth next to such Investor's name in Exhibit A. The
purchase price for the Tranche I Shares shall be paid by wire transfer of funds
to a designated account of the Company, provided that wire transfer instructions
are delivered to each Investor at least one (1) business day prior to the First
Closing.
2.3 Agreement to Purchase and Sell at the Second Closing. Subject to
----------------------------------------------------
the terms and conditions hereof (including without limitation, the satisfaction
of the conditions of Section 7), on the date of the Second Closing (as defined
below), the Company will issue and sell to the Investors, and the Investors
agree to purchase from the Company, between 125,653 and 260,309 shares of Series
B Preferred Stock (the "Tranche II Shares") at a price of $5.173 per share for
-----------------
an aggregate purchase price between $650,002.97 and $1,346,578.46. The number of
Tranche II Shares to be purchased by each Investor is set forth next to such
Investor's name on Exhibit A. At the Second Closing, each of and Kummell
Investments Limited ("Kummell") shall purchase at least 19,331 Tranche II Shares
and, together, Harrison Enterprises, Inc. ("Harrison") and Kummell shall have
the right, at their option and as they may mutually agree, to purchase an
aggregate total of 154,650 Tranche II Shares. At the Second Closing, PTV-China,
Inc. ("PTV China") shall purchase at least 9,666 Tranche II Shares and shall
have the right, at its option, to purchase an aggregate total of 28,334 Tranche
II Shares. The purchase price for the Tranche II
2
<PAGE>
Shares shall be paid by wire transfer of funds to a designated account of the
Company, provided that wire transfer instructions are delivered to each Investor
at least one (1) business day prior to the Second Closing. The Tranche I Shares
and the Tranche II Shares are sometimes referred to herein collectively as the
"Shares."
2.4 Currency. All monetary amounts set forth herein shall be in
--------
United States dollars.
3. CLOSING; DELIVERY.
-----------------
3.1. The First Closing. The purchase and sale of the Tranche I
-----------------
Shares hereunder shall be held at the offices of Gibson, Dunn & Crutcher LLP,
1530 Page Mill Road, Palo Alto, California 94304, on ______________, 1998, or at
such other time and place as the Company and the purchasers of a majority of the
Shares may mutually agree upon (the "First Closing").
-------------
3.2 The Second Closing. The purchase and sale of the Tranche II
------------------
Shares hereunder, if consummated, shall be held at the offices of Gibson, Dunn &
Crutcher LLP, 1530 Page Mill Road, Palo Alto, California 94304, on June 30,
1998, or at such other time and place as Company and the holders of a majority
of the Shares may mutually agree upon (the "Second Closing").
--------------
3.3. Delivery. At the First Closing, and also at the Second Closing
--------
if consummated, the Company will deliver to each Investor a certificate
representing the Shares to be purchased by each Investor hereunder against
payment of the full purchase price therefor by wire transfer.
4. COMPANY REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
--------------------------------------
warrants to the Investors that, except as set forth in the Disclosure Schedule
("Disclosure Schedule") attached to this Agreement as Exhibit C (which
-------- ---------
Disclosure Schedule shall be deemed to be representations and warranties to the
Investors), the statements in the following paragraphs of this Section 4 are all
true and correct:
4.1. Organization, Good Standing and Qualification. The Company is
---------------------------------------------
a corporation duly organized, validly existing and in good standing under, and
by virtue of, the laws of the State of Delaware and has all requisite corporate
power and authority to own its properties and assets and to carry on its
business as now conducted and as presently proposed to be conducted. The
Company is qualified to do business as a foreign corporation in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.
4.2. Capitalization. Immediately before the First Closing, the
--------------
authorized capital stock of the Company will consist of the following:
(a) Common Stock. A total of 5,000,000 authorized shares of
------------
Common Stock ($0.01 par value) of which 712,719 shares are issued and
outstanding.
3
<PAGE>
(b) Preferred Stock. A total of 625,000 authorized shares of
---------------
Preferred Stock ($0.01 par value), of which 225,000 are designated as Series A
Convertible Preferred Stock ("Series A Preferred Stock"), all of which are be
outstanding, and 400,000 are designated as Series B Convertible Preferred Stock,
none of which are issued or outstanding.
(c) Options, Warrants, Reserved Shares. The Company has reserved
----------------------------------
400,000 shares of its Common Stock for possible issuance upon the conversion of
the shares of Series B Preferred Stock to be issued hereunder (the "Conversion
----------
Shares"). Except for (i) the conversion privileges of the Series B Preferred
- ------
Stock to be issued hereunder, (ii) the rights to acquire the Tranche II Shares
as set forth herein, (iii) the 120,000 shares of Common Stock reserved for
issuance or to be reserved for issuance under the Company's stock option plan
under which options to purchase 23,125 shares of Common Stock are outstanding,
and (iv) warrants to purchase up to 33,531 shares33,531shares of Common Stock of
the Company, issued in connection with the Company's bridge financing in
December 1997, provided that such warrants shall be exercisable for only an
aggregate of 5,781 shares of Common Stock if such bridge financing is repaid
before June 30, 1998, there are no options, warrants, conversion privileges or
other rights, or agreements with respect to the issuance thereof, presently
outstanding to purchase any of the capital stock of the Company. Apart from the
exceptions noted in this Section 4.2, no shares (including the Shares and
Conversion Shares) of the Company's outstanding capital stock, or stock
issuable upon exercise or exchange of any outstanding options or other stock
issuable by the Company, are subject to any rights of first refusal or other
rights to purchase such stock (whether in favor of the Company or any other
person), pursuant to any agreement or commitment of the Company.
(d) Outstanding Security Holders. Section 4.2(d) of the
----------------------------
Disclosure Schedule sets forth a complete list of all outstanding shareholders,
option holders and other security holders of the Company as of the Effective
Date.
4.3. Subsidiaries. The Company owns all of the issued and
------------
outstanding stock of ITC Electronic Technology Beijing Co. Ltd., a company
organized under the laws of the People's Republic of China ("ITC China").
ITC China is a wholly foreign owned enterprise (WFOE) authorized by the
government of China and has the government permits, approvals authorizations and
licenses necessary to engage in the business currently conducted and currently
proposed to be conducted by ITC China. No other person or entity other than the
Company has any right to acquire any equity or other ownership interest of ITC
China. Except for the Company's ownership of ITC China, the Company does not
presently own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, trust, joint venture,
association, or other entity.
4.4. Due Authorization. All corporate action on the part of the
-----------------
Company and ITC China, their officers, directors and shareholders necessary for
the authorization, execution and delivery of, and the performance of all
obligations of the Company under, this Agreement, and the authorization,
issuance, reservation for issuance and delivery of all of the Shares being sold
under this Agreement has been taken or will be taken before the First Closing.
This Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium,
4
<PAGE>
reorganization and similar laws affecting creditors' rights generally and to
general equitable principles. The Shares are not subject to any preemptive
rights or rights of first refusal.
4.5. Valid Issuance of Stock.
-----------------------
(a) The Shares, when issued, sold and delivered in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid
and nonassessable. The Conversion Shares have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate,
will be duly and validly issued, fully paid and nonassessable.
(b) The outstanding shares of the capital stock of the Company
and ITC China are duly and validly issued, fully paid and nonassessable, and
such shares of such capital stock, and all outstanding stock, options and other
securities of the Company and ITC China have been issued in full compliance with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended (the "Act"), and the registration and qualification
---
requirements of all applicable state securities laws, or in compliance with
applicable exemptions therefrom, and all other provisions of applicable federal
and state securities laws, including, without limitation, anti-fraud provisions.
4.6. Liabilities. Other than promissory notes in the amount of
-----------
$100,000 issued in connection with the Company's bridge financing in December
1997, plus interest accrued at 10% since such date, neither the Company nor ITC
China has any indebtedness for borrowed money that the Company or ITC China has
directly or indirectly created, incurred, assumed, or guaranteed, or with
respect to which the Company or ITC China has otherwise become directly or
indirectly liable.
4.7. Title to Properties and Assets. Each of the Company and ITC
------------------------------
China has good and marketable title to its properties and assets held in each
case subject to no mortgage, pledge, lien, encumbrance, security interest or
charge of any kind. With respect to the property and assets it leases, each of
the Company and ITC China is in compliance with such leases and, to the best of
the Company's knowledge, each of the Company and ITC China holds valid
leasehold interests in such assets free of any liens, encumbrances, security
interests or claims of any party other than the lessors of such property and
assets.
4.8. Status of Proprietary Assets.
----------------------------
(a) Ownership. Each of the Company and ITC China has full title
---------
and ownership of, or has license to, all Proprietary Assets necessary to enable
it to carry on its business as now conducted and as presently proposed to be
conducted without any conflict with or infringement of the rights of others. No
third party has any ownership right, title, interest, claim in or lien on any of
the Company's or ITC China's Proprietary Assets and the Company and ITC China
have taken, and in the future will use their best efforts to take, all steps
reasonably necessary to preserve their respective legal rights in, and the
secrecy of, all its Proprietary Assets, except those for which disclosure is
required for legitimate business or legal reasons.
5
<PAGE>
(b) Licenses; Other Agreements. Neither the Company nor ITC
--------------------------
China has granted, and there are not outstanding, any options, licenses or
agreements of any kind relating to any Proprietary Asset of the Company or ITC
China, nor is the Company or ITC China bound by or a party to any option,
license or agreement of any kind with respect to any of their respective
Proprietary Assets. Neither the Company nor ITC China is obligated to pay any
royalties or other payments to third parties with respect to the marketing,
sale, distribution, manufacture, license or use of any Proprietary Asset or any
other property or rights.
(c) No Infringement. Neither the Company nor ITC China has
---------------
violated or infringed, and is not currently violating or infringing any
Proprietary Asset of any other person or entity. Neither the Company nor ITC
China has received any communications alleging that the Company or ITC China (or
any of their respective employees or consultants) has violated or infringed or,
by conducting its business as proposed, would violate or infringe, any
Proprietary Asset of any other person or entity.
(d) No Breach by Employee. After due inquiry, neither the
---------------------
Company nor ITC China is aware that any employee or consultant of the Company or
ITC China is obligated under any agreement (including licenses, covenants or
commitments of any nature) or subject to any judgment, decree or order of any
court or administrative agency, or any other restriction that would interfere
with the use of his or her best efforts to carry out his or her duties for the
Company or ITC China or to promote the interests of the Company or ITC China or
that would conflict with the Company's or ITC China's business as proposed to be
conducted. The carrying on of each of the Company's and ITC China's business by
the employees and contractors of the Company and ITC China and the conduct of
the Company's and ITC China's business as presently proposed, will not, to the
best of the Company's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees or contractors of the
Company or ITC China are now obligated. Neither the Company nor ITC China
believes it is or will be necessary to utilize any inventions of any employees
of the Company or ITC China (or persons the Company or ITC China currently
intends to hire) made prior to their employment by the Company or ITC China. To
the best of the Company's knowledge, at no time during the conception of or
reduction of any of the Company's or ITC China's Proprietary Assets to practice
was any developer, inventor or other contributor to such patents operating under
any grants from any governmental entity or agency or private source, performing
research sponsored by any governmental entity or agency or private source or
subject to any employment agreement or invention assignment or nondisclosure
agreement or other obligation with any third party that could adversely affect
the Company's or ITC China's rights in such Proprietary Assets.
4.9. Material Contracts and Obligations. All agreements, contracts,
----------------------------------
leases, licenses, instruments, commitments (oral or written), indebtedness,
liabilities and other obligations to which the Company or ITC China is a party
or by which they are bound that (i) are material to the conduct and operations
of the businesses and properties of the Company or ITC China; (ii) involve any
of the officers, consultants, directors, employees or shareholders of the
Company or ITC China; or (iii) obligate the Company or ITC China to share,
license or develop any product or technology are listed in Section 4.9 of the
Disclosure Schedule and have been made available for inspection by the Investors
and their respective counsel. For purposes of this
6
<PAGE>
Section 4.9, "material" shall mean any agreement, contract, indebtedness,
liability or other obligation either: (i) having an aggregate value, cost or
amount in excess of $10,000, or (ii) not terminable upon thirty days notice.
4.10. Litigation. There is no action, suit, proceeding, claim,
----------
arbitration or investigation ("Action") pending (or, to the best of the
------
Company's knowledge, currently threatened) against the Company or ITC China,
their activities, properties or assets or, to the best of the Company's
knowledge, against any officer, director or employee of the Company or ITC China
in connection with such officer's, director's or employee's relationship
with, or actions taken on behalf of the Company or ITC China. To the best of
the Company's knowledge, there is no factual or legal basis for any such Action
that might result, individually or in the aggregate, in any material adverse
change in the business, properties, assets, financial condition, affairs or
prospects of the Company or ITC China. By way of example but not by way of
limitation, there are no Actions pending or, to the best of the Company's
knowledge, threatened (or any basis therefor known to the Company or ITC China)
relating to the prior employment of any of the Company's or ITC China's
employees or consultants, their use in connection with the Company's or ITC
China's business of any information, technology or techniques allegedly
proprietary to any of their former employers, clients or other parties, or their
obligations under any agreements with prior employers, clients or other parties.
Neither the Company nor ITC China is a party to or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality and there is no Action by the Company or ITC China
currently pending or which the Company or ITC China intends to initiate.
4.11. Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any federal, state or local governmental authority on the part of
each of the Company and ITC China required in connection with the consummation
of the transactions contemplated herein shall have been obtained prior to and be
effective as of the First Closing. Based in part on the representations of the
Investors set forth in Section 5 below, the offer, sale and issuance of the
Shares in conformity with the terms of this Agreement are exempt from the
registration and prospectus delivery requirements of the Act.
4.12. Compliance with Other Instruments. Neither the Company nor
---------------------------------
ITC China is in, nor will the conduct of their businesses as proposed to be
conducted result in, any violation, breach or default of any term of the
Company's Certificate or ITC China's charter or the Company's or ITC China's
bylaws (collectively, the "Bylaws") or in any material respect of any term or
provision of any mortgage, indenture, contract, agreement or instrument to which
the Company or ITC China is a party or by which it may be bound, or of any
provision of any foreign or domestic state or federal judgment, decree, order,
statute, rule or regulation applicable to or binding upon the Company or ITC
China. The execution, delivery and performance of and compliance with this
Agreement and the consummation of the transactions contemplated hereby will not
result in any such violation or default, or be in conflict with or constitute,
with or without the passage of time or the giving of notice or both, either a
default under the Company's Certificate or Bylaws or ITC China's charter or
Bylaws, or any agreement or contract of the Company or ITC China, or, to the
best of the Company's knowledge, a violation of any statutes,
7
<PAGE>
laws, regulations or orders, or an event which results in the creation of any
lien, charge or encumbrance upon any asset of the Company or ITC China.
4.13. Disclosure. No representation or warranty by the Company in
----------
this Agreement or in any statement or certificate signed by any officer of the
Company or ITC China furnished or to be furnished to the Investors pursuant to
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading.
4.14. Registration Rights. Except as provided in the Investor
-------------------
Rights Agreement, neither the Company nor ITC China has granted or agreed to
grant any person or entity any rights (including piggyback registration rights)
to have any securities of the Company or ITC China registered with the United
States Securities and Exchange Commission ("SEC") or any other governmental
---
authority.
4.15. Insurance. Each of the Company and ITC China have obtained,
---------
or will obtain (within 15 days of the First Closing) and will maintain, fire and
casualty insurance policies with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
4.16. Financial Statements. Section 4.16(a) of the Disclosure
--------------------
Schedule sets forth an unaudited income statement of the Company for the period
ended December 31, 1997 (the "Financial Statements"). The Financial
--------------------
Statements include the consolidated financial results of the Company and ITC
China. Such Financial Statements (a) are in accordance with the books and
records of the Company, and (b) are true, correct and complete and present
fairly the results of operations for the period therein specified. Other than
promissory notes in the amount of $100,000 issued in connection with the
Company's bridge financing in December 1997, plus interest accrued at 10% since
such date, neither the Company nor ITC China has any material indebtedness or
other material liability. From and after the date hereof (beginning with the
monthly financial statements for March 1998 which shall be delivered on or prior
to April 30, 1998), all financial statements prepared by the Company shall be
prepared in accordance with United States generally accepted accounting
principles (GAAP), and all audits of the Company's financial statements shall
be conducted by one of the United States based "Big Six" accounting firms.
Section 4.16(b) of the Disclosure Schedule sets forth the Company current
business plan and the Company's projections as to the Company's possible
financial performance for each quarter of the fiscal year ending December 31,
1998. Such projections were prepared by the Company in good faith and based on
assumptions which the Company believes to be reasonable in view of information
currently available to the Company; provided that the Company makes no
representation or warranty that such projections will be met.
4.17. Certain Actions. Since December 31, 1997, neither the Company
---------------
nor ITC China has: (a) declared or paid any dividends, or authorized or made
any distribution upon or with respect to any class or series of its capital
stock; (b) incurred any indebtedness for money borrowed or incurred any other
liabilities individually in excess of $10,000 or in excess of $25,000 in the
aggregate; (c) made any loans or advances to any person, other than ordinary
8
<PAGE>
advances for travel expenses; (d) sold, exchanged or otherwise disposed of any
material assets or rights other than the sale of inventory in the ordinary
course of its business; or (e) entered into any transactions with any of its
officers, directors or employees or any entity controlled by any of such
individuals.
4.18. Activities Since Income Statement Date. Since December 31,
--------------------------------------
1997, there has not been:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets,
properties, financial condition, operating results, prospects
or business of the Company or ITC China (as presently conducted
and as presently proposed to be conducted);
(b) any waiver by the Company or ITC China of a valuable right or
of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company or ITC China,
except such a satisfaction, discharge or payment made in the
ordinary course of business that is not material to the assets,
properties, financial condition, operating results or business
of the Company or ITC China;
(d) any material change or amendment to a material contract or
arrangement by which the Company or ITC China or any of their
assets or properties is bound or subject, except for changes or
amendments which are expressly provided for or disclosed in
this Agreement;
(e) any material change in any compensation arrangement or
agreement with any present or prospective employee, contractor
or director not approved by the Company's or ITC China's Board
of Directors; or
(f) to the Company's knowledge, any other event or condition of any
character which would materially and adversely affect the
assets, properties, financial condition, operating results or
business of the Company or ITC China.
4.19. Tax Matters. The Company has made sufficient provision for,
-----------
and has adequate resources to pay, all accrued and unpaid federal, state,
provincial, foreign, county and local taxes of each of the Company and ITC
China, whether or not assessed or disputed as of the date hereof. There have
been no examinations or audits of any tax returns or reports by any applicable
federal, state or local governmental agency. Except as set forth in the
Disclosure Schedule, each of the Company and ITC China have duly filed all
federal, state, county and local tax returns required to have been filed by it
and paid all taxes shown to be due on such returns. To the extent that any tax
returns have not been filed as reflected on the Disclosure Schedule , such
failure to file has not had and will not have any material adverse effect on the
Company or
9
<PAGE>
ITC China. There are in effect no waivers of applicable statutes of limitations
with respect to taxes for any year.
4.20. Tax Elections. Neither the Company nor ITC China has elected
-------------
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
----
treated as an "S" corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has the Company or ITC China made
any other elections pursuant to the Code (other than elections which relate
solely to matters of accounting, depreciation or amortization) which would have
a material affect on the Company or ITC China, their financial conditions, their
businesses as presently conducted or presently proposed to be conducted or any
of their properties or material assets.
4.21. Invention Assignment and Confidentiality Agreement. The
--------------------------------------------------
Company has used its best efforts to caused each employee, officer, consultant
and contractor of each of the Company and ITC China to enter into and execute an
Invention Assignment and Confidentiality Agreement in the form attached to this
Agreement as Exhibit D, an employment or consulting agreement containing
----------
substantially similar terms, or the Employee, Non-Competition, Confidential
Information and Work Product Agreement described on page 9 of the attachment to
Section 4.9 (Material Contracts) of the Disclosure Schedule. The persons listed
on page 9 of such attachment have signed the agreement described on page 9 of
the attachment.
4.22. Environmental Matters. During the period that each of the
---------------------
Company and ITC China has owned or leased its properties and facilities, (a)
there have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on, from or under such properties or facilities,
(b) neither the Company nor ITC China, nor to the Company's knowledge any third
party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or facilities
any Hazardous Materials. Neither the Company nor ITC China has knowledge of any
presence, disposals, releases or threatened releases of Hazardous Materials on,
from or under any of such properties or facilities, which may have occurred
prior to the Company or ITC China having taken possession of any of such
properties or facilities. For purposes of this Agreement, the terms
"disposal", "release", and "threatened release" shall have the definitions
-------- ------- ------------------
assigned thereto by the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA").
------
For the purposes of this Section, "Hazardous Materials" shall mean any
-------------------
hazardous or toxic substance, material or waste which is regulated under, or
defined as a "hazardous substance", "pollutant", "contaminant", "toxic
chemical", "hazardous material", "toxic substance", or "hazardous
chemical" under (1) CERCLA; (2) the Emergency Planning and Community Right-to-
Know Act, 42 U.S.C. Section 11001 et seq.; (3) the Hazardous Materials
-- ---
Transportation Act, 49 U.S.C. Section 1801, et seq.; (4) the Toxic Substances
-- ---
Control Act, 15 U.S.C. Section 2601 et seq.; (5) the Occupational Safety and
-- ---
Health Act of 1970, 29 U.S.C. Section 651 et seq.; (6) regulations promulgated
-- ---
under any of the above statutes; or (7) any applicable state or local statute,
ordinance, rule, or regulation that has a scope or purpose similar to those
statutes identified above.
4.23. Interested Party Transactions. To the best knowledge of the
-----------------------------
Company, no officer or director of the Company or ITC China or any "affiliate"
or "associate" (as those terms
10
<PAGE>
are defined in Rule 405 promulgated under the 1933 Act) of any such person has
had, either directly or indirectly, a material interest in: (i) any person or
entity which purchases from or sells, licenses or furnishes to the Company or
ITC China any goods, property, technology, intellectual or other property rights
or services; or (ii) any contract or agreement to which the Company or ITC China
is a party or by which it may be bound or affected.
4.24. Stock Restriction Agreements. Each person who, pursuant of
----------------------------
any benefit, bonus or incentive plan of the Company or ITC China, holds any
currently outstanding shares of Common Stock or other securities of either the
Company or ITC China or any option, warrant or right to acquire such shares or
other securities, has entered into or is otherwise bound by, an agreement
granting the Company or ITC China (i) the right to repurchase the shares for the
original purchase price, or to cancel the option, warrant or right, in the event
the holder's employment or services with the Company or ITC China terminate for
any reason, subject to release of such repurchase or cancellation right on terms
and conditions specified by the Board of Directors of the Company, and (ii) a
right of first refusal with respect to all such shares. Each of the Company and
ITC China has furnished to each Investor true and complete copies of the forms
of all such stock restriction agreements.
4.25 Business Plan. The business plan prepared by the Company and
-------------
delivered to each Investor on or before the date hereof (the "Business Plan")
was prepared in good faith and is not materially misleading.
4B. REPRESENTATIONS AND WARRANTIES OF CHARLES ZHANG. Charles Zhang
-----------------------------------------------
represents and warrants to the Investors as follows:
4B.1 Conflicting Agreements. He is not, as a result of the nature of
----------------------
the business conducted or proposed to be conducted by the Company or for any
other reason, in violation of (i) any fiduciary or confidential relationship,
(ii) any term of any contract or covenant (either with the Company or with
another entity) relating to employment, patents, proprietary information
disclosure, non-competition or non-solicitation, or (iii) any other contract or
agreement, or any judgment, decree or order of any court or administrative
agency relating to or affecting the right of Mr. Zhang to be employed by the
Company. No such relationship, term, judgment, decree, or order conflicts with
Mr. Zhang obligations to use his best efforts to promote the interests of the
Company nor does the execution and delivery of this Agreement and the
transactions contemplated hereby, nor the carrying on of the Company's business
as an officer or key employee of the Company, conflict with any such
relationship, term, judgment, decree or order.
4B.2 Litigation. There is no action, suit or proceeding, or
----------
governmental inquiry or investigation, pending or, to the best of Mr. Zhang's
knowledge, threatened against Mr. Zhang and, to the best of his knowledge, there
is no basis for any such action, suit, proceeding, or governmental inquiry or
investigation.
4B.3 Stockholder Agreements. Except as contemplated by or disclosed
----------------------
in this Agreement, Mr. Zhang is not a party to and has no knowledge of any
agreements, written or oral, relating to the acquisition, disposition,
registration under the Securities Act, or voting of the capital stock of the
Company.
11
<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor
-----------------------------------------------
represents and warrants to the Company as follows:
5.1. Authorization. This Agreement when executed and delivered by
-------------
the Investor will constitute a valid and legally binding obligation of the
Investor, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles.
5.2. Investigation; Economic Risk. The Investor acknowledges that
----------------------------
it is an "accredited investor" within the meaning that term as defined in Rule
50l(a) of Regulation D of the Securities Act. The Investor's address set forth
on the Exhibit A represents its state of domicile, upon which the Company may
---------
rely for the purpose of complying with applicable state "Blue Sky" laws. The
Investor acknowledges that it has had an opportunity to discuss the business,
affairs and current prospects of the Company with its officers. The Investor
further acknowledges having had access to information about the Company that it
has requested. The Investor acknowledges that it is able to fend for itself in
the transactions contemplated by this Agreement and has the ability to bear the
economic risks of its investment pursuant to this Agreement.
5.3. Purchase for Own Account. The Shares and the Conversion Shares
------------------------
will be acquired for its own account, not as a nominee or agent, and not with a
view to or in connection with the sale or distribution of any part thereof.
5.4. Exempt from Registration; Restricted Securities. The Investor
-----------------------------------------------
understands that the Shares and the Conversion Shares will not be registered
under the Act, on the ground that the sale provided for in this Agreement is
exempt from registration under of the Act, and that the reliance of the Company
on such exemption is predicated in part on the Investor's representations set
forth in this Agreement. The Investor understands that the Shares and the
Conversion Shares being purchased hereunder are restricted securities within the
meaning of Rule 144 under the Act; that the Shares and the Conversion Shares are
not registered and must be held indefinitely unless they are subsequently
registered or an exemption from such registration is available.
5.5. Restrictive Legends. It is understood that each certificate
-------------------
representing (a) the Shares, (b) the Conversion Shares, and (c) any other
securities issued in respect of the any of the foregoing upon any stock split,
stock dividend, recapitalization, merger or similar event shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES
LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY
12
<PAGE>
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY
TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN
COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
5.6 Removal of Restrictive Legend. The legend set forth above shall
-----------------------------
be removed by the Company from any certificate evidencing Shares or Conversion
Shares upon delivery to the Company of an opinion by counsel, reasonably
satisfactory to the Company, that a registration statement under the Act is at
that time in effect with respect to the legended security or that such security
can be freely transferred in a public sale without such a registration statement
being in effect and that such transfer will not jeopardize the exemption or
exemptions from registration pursuant to which the Company issued the Shares or
Conversion Shares.
6. COVENANTS OF THE COMPANY. The Company covenants to each Investor as
------------------------
follows:
6.1 Use of Proceeds. The Company will use the Proceeds from the
---------------
sale of the Shares for business expansion, capital expenditures, general working
capital and the repayment of promissory notes of the Company, including accrued
interest thereon, in the aggregate principal amount of $100,000.
6.2 Implementation of Business Plan. The Company shall use its best
-------------------------------
efforts to take all necessary actions to implement and carry out the Business
Plan, including, without limitation, hiring employees, renting office space,
employing legal and technical consultants and undertaking other customary
business activities.
6.3 Other Investors. The Company shall not engage any strategic
---------------
investors for the purpose of obtaining additional financing without the prior
written consent of the holders of a majority of the Shares.
6.4 Vesting. In addition, any Common Stock or other securities of
-------
the Company issued after the First Closing to employees, directors and
consultants of the Company pursuant to any benefit, bonus or incentive plan of
the Company shall be subject to customary vesting provisions over a period of
four (4) years (other than Common Stock issued pursuant to the exercise of
options held by Edward Roberts and Andrew Mason as of the date hereof), and a
minimum of 50% of the shares issued to Charles Zhang shall be subject to four
(4) years of customary vesting and repurchase provisions at the original issue
price.
6.4 Expenses of Directors. The Company shall promptly reimburse in
---------------------
full each director of the Company who is not an employee of the Company for all
of his reasonable out-of-pocket expenses incurred in attending each meeting of
the Board of Directors of the Company or any committee hereof.
7. CONDITIONS TO THE INVESTORS' OBLIGATIONS AT THE CLOSINGS. The
----------------------------------------------------------
obligations of each Investor to purchase the Tranche I Shares at the First
Closing and the Tranche II Shares at the Second Closing are subject to the
fulfillment, to the satisfaction each
13
<PAGE>
Investor, on or before the First Closing and Second Closing, respectively, of
the following conditions:
7.1. Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 4 hereof shall be true and correct (i)
when made, (ii) as of the date of the First Closing, and (iii) as of the date of
the Second Closing, if consummated; such representations and warranties shall
have the same force and effect as if made on and as of such dates, subject to
changes contemplated by this Agreement; and the Company shall have performed all
obligations and conditions herein required to be performed or observed by it (i)
on or before the First Closing, with respect to the issuance and sale of the
Tranche I Shares, and (ii) on or before the Second Closing, if consummated, with
respect to the issuance and sale of the Tranche II Shares.
7.2. Performance of Obligations. The Company shall have performed
--------------------------
and complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it (i) on or
before the First Closing, with respect to the issuance and sale of the Tranche I
Shares, and (ii) on or before the Second Closing, with respect to the issuance
and sale of the Tranche II Shares; and the Company shall have obtained all
approvals, consents and qualifications necessary to complete the purchases and
sales described herein.
7.3. Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be satisfactory in substance and
form to the Investor, and the Investor shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
7.4. Consents and Waivers. The Company shall have obtained any and
--------------------
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
7.5. Compliance Certificate. At the First Closing, the Company shall
----------------------
deliver to each Investor a certificate, dated as of the First Closing, signed by
the Company's President certifying that the conditions specified in Paragraphs
7.1 and 7.2 have been fulfilled. In addition, at the Second Closing, if
consummated, the Company shall deliver to each Investor another certificate,
dated as of the Second Closing, signed by the Company's President certifying
that the conditions specified in Sections 7.1 and 7.2 have been fulfilled.
7.6. Securities Laws. The offer and sale of the Shares to the
---------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Act and the registration and/or qualification requirements
of all applicable state securities laws.
7.7. Amendment to Certificate. The Certificate shall have been duly
------------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
14
<PAGE>
7.8. Opinion of Company's Counsel. At both the First Closing and
-----------------------------
the Second Closing, each Investor shall have received from counsel to the
Company an opinion addressed to the Investor, dated the date of the respective
Closing, in form and substance reasonably acceptable to the Investor.
7.9. Board of Directors. The Company's Certificate of Incorporation
------------------
and bylaws shall provide for a Board of 45 Directors. The number of Directors
shall not be changed except by amendment. The Company's Board of Directors on
the date of both First Closing and Second Closing shall consist of Charles
Zhang, Edward B. Roberts and two representatives selected by the holders of the
Series B Preferred Stock. The fifth seat on the Board of Directors shall be
either vacant or filled by vote of the Common Stock, Series A Preferred Stock
and Series B Preferred Stock, voting together as a single class.
7.10 Achievement of Revenue Plan; Audited Financial Statements;
----------------------------------------------------------
Information Rights. With respect to the obligation of the Investors to purchase
- ------------------
the Tranche II Shares at the Second Closing, the Company shall (i) have achieved
revenues of at least $117,090 with respect to the period from January 1, 1998,
through May 31, 1998, (ii) have provided audited financial statements for both
the Company and ITC China for the year ending December 31, 1997, no later than
May 31, 1998, and (iii) be in compliance with Sections 1.1 and 1.3 of that
certain Investor Rights Agreement, dated as of the date hereof, by and between
the Company and the Investors.
8. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSINGS. The obligations
----------------------------------------------------
of the Company under this Agreement are subject to the fulfillment, on or before
both the First Closing and the Second Closing, of the following conditions:
8.1. Representations and Warranties. The representations and
------------------------------
warranties of the Investors contained in Section 5 hereof shall be true as of
both the First and Second Closing.
8.2. Payment of Purchase Price. Each Investor shall have delivered
-------------------------
to the Company the purchase price in accordance with the provisions of Section
3.
8.3. Certificate Effective. The Certificate shall have been duly
---------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders, and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
8.4. Securities Exemptions. The offer and sale of the Shares to
---------------------
the Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Act, and the registration and/or qualification requirements
of all applicable state securities laws.
9. MISCELLANEOUS.
-------------
9.1. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of Delaware without regard to provisions regarding
choice of laws.
9.2. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any party hereto
and the closing of all the transactions contemplated hereby.
15
<PAGE>
9.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto whose rights or obligations hereunder are affected by such
amendments. This Agreement and the rights and obligations therein may not be
assigned by any Investor without the written consent of the Company except to a
parent corporation, a subsidiary or affiliate. This Agreement and the rights and
obligations therein may not be assigned by the Company without the written
consent of the holders of a majority of the Shares purchased by Intel
Corporation pursuant hereto and the holders of a majority of the Shares
purchased by Harrison and Kummell pursuant hereto.
9.4. Entire Agreement. This Agreement and the exhibits hereto which
----------------
are hereby expressly incorporated herein by this reference constitute the entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof; provided, however, that nothing in this Agreement shall be
-------- -------
deemed to terminate or supersede the provisions of any confidentiality and
nondisclosure agreements executed by the parties hereto prior to the date
hereof, which agreements shall continue in full force and effect until
terminated in accordance with their respective terms.
9.5. Notices. Except as may be otherwise provided herein, all
-------
notices, requests, waivers and other communications made pursuant to this
Agreement shall be in writing and shall be conclusively deemed to have been duly
given (a) when hand delivered to the other party; (b) when received when sent by
facsimile at the address and number set forth below; (c) three business days
after deposit in the U.S. mail with first class or certified mail receipt
requested postage prepaid and addressed to the other party as set forth below;
or (d) the next business day after deposit with a national overnight delivery
service, postage prepaid, addressed to the parties as set forth in Exhibit A
with next-business-day delivery guaranteed, provided that the sending party
receives a confirmation of delivery from the delivery service provider. Each
person making a communication hereunder by facsimile shall promptly confirm by
telephone to the person to whom such communication was addressed each
communication made by it by facsimile pursuant hereto but the absence of such
confirmation shall not affect the validity of any such communication. A party
may change or supplement the addresses given in Exhibit A, or designate
additional addresses, for purposes of this Section 9.5 by giving the other party
written notice of the new address in the manner set forth above.
9.6. Amendments and Waivers. Any term of this Agreement may be
----------------------
amended only with the written consent of the Company and the holders of a
majority of shares of Series B Preferred Stock, or rights to acquire Shares.
9.7. Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any Investor, upon any
breach or default of any party hereto under this Agreement, shall impair any
such right, power or remedy of the Company, or the Investor nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of any similar breach of default thereafter occurring; nor shall any
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
Company or any Investor of any breach of default under this Agreement or any
waiver on the part of the Company or any Investor
16
<PAGE>
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, or by law or otherwise afforded to the
Company or any Investor shall be cumulative and not alternative.
9.8. Legal Fees. In the event of any action at law, suit in equity
----------
or arbitration proceeding in relation to this Agreement or any Shares or other
securities of the Company issued or to be issued, the prevailing party, shall be
paid by the other party a reasonable sum for attorney's fees and expenses for
such prevailing party.
9.9. Finder's Fees. Each party (a) represents and warrants to the
-------------
other party hereto that, except as set forth in Section 9.9 of the Disclosure
Schedule, it has retained no finder or broker in connection with the
transactions contemplated by this Agreement, and (b) hereby agrees to indemnify
and to hold harmless the other party hereto from and against any liability for
any commission or compensation in the nature of a finder's fee of any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the indemnifying party or any of its
employees or representatives are responsible.
9.10. Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
9.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.12. Severability. Should any provision of this Agreement be
------------
determined to be illegal or unenforceable, such determination shall not affect
the remaining provisions of this Agreement.
9.13 Protection of Confidential Information. Confidential or
--------------------------------------
proprietary information disclosed by either party under this Agreement, as well
as the terms of this Agreement and each Investor's investment in the Company,
shall be considered confidential information (the "Confidential Information")
and shall not be disclosed by the Company or any other party to this Agreement
to any third party, subject to Section 9.14 below. Each party shall immediately
notify the other parties of any information that comes to its attention which
might indicate that there has been a loss of confidentiality with respect to the
Confidential Information. In the event that the Company or any other party
becomes legally compelled (by statute or regulation or by oral questions,
interrogatories, request for information or documents, subpoena, criminal or
civil investigative demand or similar process, including without limitation, in
connection with any public or private offering of the Company's capital stock)
to disclose any of the Confidential Information, such party (the "Disclosing
Party") shall provide the other party (the "Non-Disclosing Party") with prompt
written notice of that fact so that the appropriate party may seek (with the
cooperation and reasonable efforts of the other parties) a protective order,
confidential treatment or other appropriate remedy. In such event, the
Disclosing Party shall furnish only that portion of the Confidential Information
which is legally required and shall
17
<PAGE>
exercise reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded the Confidential Information to the extent reasonably
requested by the Non-Disclosing Party. The provisions of this Section 9.13 shall
be in addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by the parties hereto with respect to the
transaction contemplated hereby.
9.14 Disclosure of Terms; Press Releases. Notwithstanding the
-----------------------------------
provisions of Section 9.13 above, from and after the First Closing, the Company
may disclose the existence of this Agreement and the terms hereof, as well as
each Investor's investment in the Company solely to the Company's investors,
investment bankers, lenders, accountants, legal counsel, business partners, and
bona fide prospective investors, employees, lenders and business partners, in
each case only where such persons or entities are under appropriate
nondisclosure obligations. In addition, the Company may disclose the fact that
the Investor is an investor in the Company to third parties without the
requirement of nondisclosure obligations. Within sixty (60) days of the First
Closing, the Company may issue a press release disclosing that the Investor has
invested in the Company; provided that the release does not disclose the amount
or other specific terms of the investment and is approved in advance in writing
by the Investor. Each Investor, at its sole discretion, may provide an
executive quote or other material regarding its investment in the Company. No
other announcement regarding the Investor's investment in the Company in a
press conference, in any professional or trade publication, in any marketing
materials or otherwise to the general public may be made without the prior
written consent of the Investor, which consent may be withheld at the sole
discretion of the Investor. Notwithstanding the foregoing, the Investor may
disclose its investment in the Company and the terms thereof to third parties or
to the public at its discretion, and the Company shall have the right to
disclose to third parties any such information disclosed by the Investor in a
press release or other public announcement. If the Company or the Investor
determines that any disclosure not otherwise authorized by this Agreement is
required by law or regulation, then the provisions of Section 9.13 regarding
disclosure of Confidential Information by a Disclosing Party shall govern.
9.15 Dispute Resolution. The parties agree to negotiate in good
------------------
faith to resolve any dispute between them regarding this Agreement. If the
negotiations do not resolve the dispute to the reasonable satisfaction of both
parties, then each party shall nominate one senior officer of the rank of Vice
President or higher as its representative. These representatives shall, within
thirty (30) days of a written request by either party to call such a meeting,
meet in person and alone (except for one assistant for each party) and shall
attempt in good faith to resolve the dispute. If the disputes cannot be resolved
by such senior managers in such meeting, the parties agree that they shall, if
requested in writing by either party, meet within thirty (30) days after such
written notification for one day with an impartial mediator and consider dispute
resolution alternatives other than litigation. If an alternative method of
dispute resolution is not agreed upon within thirty (30) days after the one day
mediation, either party may begin litigation proceedings. This procedure shall
be a prerequisite before taking any additional action hereunder.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year herein above first written.
INVESTOR
INTERNET TECHNOLOGIES
CHINA INCORPORATED ___________________________
(Name of Investor)
_______________________ ___________________________
Signature Signature
_______________________ ___________________________
Printed Name Printed Name
_______________________ ___________________________
Title Title
CHARLES ZHANG
Executed solely for the purpose of making
the representations and warranties set
forth in Section 4B hereof:
_______________________
Charles C.Y. Zhang
[SIGNATURE PAGE FOR SERIES B PREFERRED
STOCK PURCHASE AGREEMENT]
-19-
<PAGE>
EXHIBIT 10.6
SERIES B-1 PREFERRED STOCK PURCHASE AGREEMENT
---------------------------------------------
This Series B-1 Preferred Stock Purchase Agreement (the "Agreement") is entered
---------
into as of August 18, 1998 (the "Effective Date"), by and between Internet
--------------
Technologies China Incorporated, a Delaware corporation (the "Company"), and Dow
-------
Jones & Company, Inc., a Delaware corporation (the "Investor"). Charles Zhang
is a party to this Agreement for the sole purpose of making the representations
and warranties set forth in Section 4B hereof.
In consideration of the mutual promises, covenants and conditions hereinafter
set forth, the parties hereto agree as follows:
1. DEFINITIONS.
-----------
1.1 Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following respective meanings:
"Common Stock" shall mean the Company's Common Stock, $.01 par value.
------------
"Proceeds" shall mean whatever is received when assets, whether
--------
tangible or intangible, are sold, changed, collected or otherwise disposed of,
both cash and non-cash, including the Proceeds of insurance payable by reason of
loss or damage to Proceeds.
"Proprietary Assets" shall mean all patents, patent applications,
------------------
trademarks, service marks, trade names, copyrights, moral rights, maskworks,
trade secrets, confidential and proprietary information, compositions of matter,
formulas, designs, proprietary rights, know-how, processes, domain names and
URLs.
1.2 Index of Other Defined Terms. In addition to the terms defined
----------------------------
above, the following terms shall have the respective meanings given thereto in
the sections indicated below:
Defined Term Section
------------ -------
"Agreement" Preamble
---------
"Bylaws" 4.12
------
"CERCLA" 4.22
------
"Certificate" 2.1
-----------
"Closing" 3.1
-------
"Code" 4.20
----
"Company" Preamble
-------
"Confidential Information" 9.13
------------------------
"Conversion Shares" 4.2(c)
-----------------
"Disclosing Party" 9.13
----------------
-1-
<PAGE>
"Effective Date" Preamble
--------------
"Financial Statements" 4.16
--------------------
"Hazardous Materials" 4.22
-------------------
"Investor" Preamble
--------
"Non-Disclosing Party" 9.13
--------------------
"Disclosure Schedule" 4
-------------------
"SEC" 4.14
---
"Securities Act" 4.5(b)
--------------
"Shares" 2.2
------
2. AGREEMENT TO PURCHASE AND SELL STOCK
------------------------------------
2.1. Authorization. As of the First Closing (as defined below), the
-------------
Company will have authorized the issuance, pursuant to the terms and conditions
of this Agreement, of 67,659 shares of the Company's Series B-1 Convertible
Preferred Stock, $0.01 par value, ("Series B-1 Preferred") having the rights,
preferences, privileges and restrictions set forth in the Form of Amended and
Restated Certificate of Incorporation of the Company attached to this Agreement
as Exhibit A (the "Certificate").
--------- -----------
2.2. Agreement to Purchase and Sell at the Closing. Subject to the
---------------------------------------------
terms and conditions hereof, on the date of the Closing, the Company will issue
and sell to the Investor, and the Investor agrees to purchase from the Company,
an aggregate of 67,659 shares of Series B-1 Preferred (the "Shares") at a price
of $5.173 per share for an aggregate purchase price of $350,000.01 The purchase
price for the Shares shall be paid by wire transfer of funds to a designated
account of the Company, provided that wire transfer instructions are delivered
to the Investor at least one (1) business day prior to the Closing.
2.3 Currency. All monetary amounts set forth herein shall be in
--------
United States dollars.
3. CLOSING; DELIVERY.
-----------------
3.1. The Closing. The purchase and sale of the Shares hereunder
-----------
shall be held at the offices of Goulston & Storrs, P.C., on August 18, 1998, or
at such other time and place as the Company and the Investor may agree upon (the
"Closing").
-------
3.2. Delivery. At the Closing the Company will deliver to the
--------
Investor a certificate representing the Shares against payment of the full
purchase price therefor by wire transfer.
4. COMPANY REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
--------------------------------------
warrants to the Investors that, except as set forth in the Disclosure Schedule
("Disclosure Schedule") attached to this Agreement as Exhibit B (which
-------- ---------
Disclosure Schedule shall be deemed to be representations and warranties to the
Investor), the statements in the following paragraphs of this Section 4 are all
true and correct:
-2-
<PAGE>
4.1. Organization, Good Standing and Qualification. The Company is
---------------------------------------------
a corporation duly organized, validly existing and in good standing under, and
by virtue of, the laws of the State of Delaware and has all requisite corporate
power and authority to own its properties and assets and to carry on its
business as now conducted and as presently proposed to be conducted. The
Company is qualified to do business as a foreign corporation in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.
4.2. Capitalization. Immediately before the Closing, the authorized
--------------
capital stock of the Company will consist of the following:
(a) Common Stock. A total of 5,000,000 authorized shares of
------------
Common Stock, $0.01 par value ("Common Stock")) of which 712,719 shares are
issued and outstanding 478,281 shares are reserved for issuance upon conversion
of outstanding shares of Preferred Stock.
(b) Preferred Stock. A total of 722,000 authorized shares of
---------------
Preferred Stock, $0.01 par value ("Preferred Stock"), of which 225,000 shares
are designated as Series A Convertible Preferred Stock ("Series A Preferred"),
all of which are be outstanding, 400,000 shares are designated as Series B
Convertible Preferred Stock ("Series B Preferred), 347,299 shares of which are
issued or outstanding, and 96,656 shares are designated as Series B-1 Preferred,
none of which are issued and outstanding.
(c) Options, Warrants, Reserved Shares. The Company has
----------------------------------
reserved 67,659 shares of its Common Stock for possible issuance upon the
conversion of shares of Series B-1 Preferred (the "Conversion Shares"). Except
-----------------
as set forth in Section 4.2(d) of the Disclosure Schedule and except for (i) the
conversion privileges of the Series A Preferred and the Series B Preferred, (ii)
the conversion privileges of the Series B-1 Preferred to be issued hereunder and
one or more similar agreements, (iii) the 120,000 shares of Common Stock
reserved for issuance or to be reserved for issuance under the Company's stock
option plan, under which options to purchase 16,188 shares of Common Stock are
outstanding, and (iv) warrants to purchase 5,781 shares of Common Stock of the
Company, issued in connection with the Company's bridge financing in December
1997, there are no options, warrants, conversion privileges or other rights, or
agreements with respect to the issuance thereof, presently outstanding to
purchase any of the capital stock of the Company. Apart from the exceptions
noted in this Section 4.2, no shares (including the Shares and Conversion
Shares) of the Company's outstanding capital stock, or stock issuable upon
exercise or exchange of any outstanding options or other stock issuable by the
Company, are subject to any rights of first refusal or other rights to purchase
such stock (whether in favor of the Company or any other person), pursuant to
any agreement or commitment of the Company.
(d) Outstanding Security Holders. Section 4.2(d) of the
----------------------------
Disclosure Schedule sets forth a complete list of all outstanding shareholders,
option holders and other security holders of the Company as of the Effective
Date.
-3-
<PAGE>
4.3. Subsidiaries. The Company owns all of the issued and
------------
outstanding stock of ITC Electronic Technology Beijing Co. Ltd., a company
organized under the laws of the People's Republic of China ("ITC China"). ITC
China is a wholly foreign owned enterprise (WFOE) authorized by the government
of China and has the government permits, approvals authorizations and licenses
necessary to engage in the business currently conducted and currently proposed
to be conducted by ITC China. No other person or entity other than the Company
has any right to acquire any equity or other ownership interest of ITC China.
Except for the Company's ownership of ITC China, the Company does not presently
own or control, directly or indirectly, any interest in any other corporation,
partnership, limited liability company, trust, joint venture, association, or
other entity.
4.4. Due Authorization. All corporate action on the part of the
-----------------
Company and ITC China, their officers, directors and shareholders necessary for
the authorization, execution and delivery of, and the performance of all
obligations of the Company under, this Agreement, and the authorization,
issuance, reservation for issuance and delivery of all of the Shares being sold
under this Agreement has been taken or will be taken before the Closing. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium, reorganization and similar laws affecting
creditors' rights generally and to general equitable principles. The Shares are
not subject to any preemptive rights or rights of first refusal, except such as
have been waived.
4.5. Valid Issuance of Stock.
-----------------------
(a) The Shares, when issued, sold and delivered in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid
and nonassessable. The Conversion Shares have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate,
will be duly and validly issued, fully paid and nonassessable.
(b) The outstanding shares of the capital stock of the Company
and ITC China are duly and validly issued, fully paid and nonassessable, and
such shares of such capital stock, and all outstanding stock, options and other
securities of the Company and ITC China have been issued in full compliance with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the registration and qualification
--------------
requirements of all applicable state securities laws, or in compliance with
applicable exemptions therefrom, and all other provisions of applicable federal
and state securities laws, including, without limitation, anti-fraud provisions.
4.6. Liabilities. Neither the Company nor ITC China has any
-----------
indebtedness for borrowed money that the Company or ITC China has directly or
indirectly created, incurred, assumed, or guaranteed, or with respect to which
the Company or ITC China has otherwise become directly or indirectly liable.
4.7. Title to Properties and Assets. Each of the Company and ITC
------------------------------
China has good and marketable title to its properties and assets held in each
case subject to no mortgage,
-4-
<PAGE>
pledge, lien, encumbrance, security interest or charge of any kind. With respect
to the property and assets it leases, each of the Company and ITC China is in
compliance with such leases and, to the best of the Company's knowledge, each of
the Company and ITC China holds valid leasehold interests in such assets free of
any liens, encumbrances, security interests or claims of any party other than
the lessors of such property and assets.
4.8. Status of Proprietary Assets.
----------------------------
(a) Ownership. Each of the Company and ITC China has full
---------
title and ownership of, or has license to, all Proprietary Assets necessary to
enable it to carry on its business as now conducted and as presently proposed to
be conducted without any conflict with or infringement of the rights of others.
No third party has any ownership right, title, interest, claim in or lien on any
of the Company's or ITC China's Proprietary Assets and the Company and ITC China
have taken, and in the future will use their best efforts to take, all steps
reasonably necessary to preserve their respective legal rights in, and the
secrecy of, all its Proprietary Assets, except those for which disclosure is
required for legitimate business or legal reasons.
(b) Licenses; Other Agreements. Neither the Company nor ITC
-------------------------
China has granted, and there are not outstanding, any options, licenses or
agreements of any kind relating to any Proprietary Asset of the Company or ITC
China, nor is the Company or ITC China bound by or a party to any option,
license or agreement of any kind with respect to any of their respective
Proprietary Assets. Neither the Company nor ITC China is obligated to pay any
royalties or other payments to third parties with respect to the marketing,
sale, distribution, manufacture, license or use of any Proprietary Asset or any
other property or rights.
(c) No Infringement. To the knowledge of the Company, neither
---------------
the Company nor ITC China has violated or infringed, and is not currently
violating or infringing, any Proprietary Asset of any other person or entity.
Neither the Company nor ITC China has received any communications alleging that
the Company or ITC China (or any of their respective employees or consultants)
has violated or infringed or, by conducting its business as proposed, would
violate or infringe, any Proprietary Asset of any other person or entity.
(d) No Breach by Employee. After due inquiry, neither the
---------------------
Company nor ITC China is aware that any employee or consultant of the Company or
ITC China is obligated under any agreement (including licenses, covenants or
commitments of any nature) or subject to any judgment, decree or order of any
court or administrative agency, or any other restriction that would interfere
with the use of his or her best efforts to carry out his or her duties for the
Company or ITC China or to promote the interests of the Company or ITC China or
that would conflict with the Company's or ITC China's business as proposed to be
conducted. The carrying on of each of the Company's and ITC China's business by
the employees and contractors of the Company and ITC China and the conduct of
the Company's and ITC China's business as presently proposed, will not, to the
best of the Company's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees or contractors of the
Company or ITC China are now obligated. Neither the Company nor ITC China
believes it is or will be necessary to utilize any inventions of any employees
of the Company or ITC China (or
-5-
<PAGE>
persons the Company or ITC China currently intends to hire) made prior to their
employment by the Company or ITC China. To the Company's knowledge, at no time
during the conception of or reduction of any of the Company's or ITC China's
Proprietary Assets to practice was any developer, inventor or other contributor
to such patents operating under any grants from any governmental entity or
agency or private source, performing research sponsored by any governmental
entity or agency or private source or subject to any employment agreement or
invention assignment or nondisclosure agreement or other obligation with any
third party that could adversely affect the Company's or ITC China's rights in
such Proprietary Assets.
4.9. Material Contracts and Obligations. All agreements, contracts,
----------------------------------
leases, licenses, instruments, commitments (oral or written), indebtedness,
liabilities and other obligations to which the Company or ITC China is a party
or by which they are bound that (i) are material to the conduct and operations
of the businesses and properties of the Company or ITC China; (ii) involve any
of the officers, consultants, directors, employees or shareholders of the
Company or ITC China; or (iii) obligate the Company or ITC China to share,
license or develop any product or technology are listed in Section 4.9 of the
Disclosure Schedule and have been made available for inspection by the Investor.
For purposes of this Section 4.9, "material" shall mean any agreement, contract,
indebtedness, liability or other obligation either: (i) having an aggregate
value, cost or amount in excess of $10,000 or (ii) not terminable upon thirty
days notice.
4.10. Litigation. There is no action, suit, proceeding, claim,
----------
arbitration or investigation ("Action") pending (or, to the Company's knowledge,
------
currently threatened) against the Company or ITC China, their activities,
properties or assets or, to the Company's knowledge, against any officer,
director or employee of the Company or ITC China in connection with such
officer's, director's or employee's relationship with, or actions taken on
behalf of the Company or ITC China. To the Company's knowledge, there is no
factual or legal basis for any such Action that might result, individually or in
the aggregate, in any material adverse change in the business, properties,
assets, financial condition, affairs or prospects of the Company or ITC China.
By way of example but not by way of limitation, there are no Actions pending or,
to the Company's knowledge, threatened (or any basis therefor known to the
Company or ITC China) relating to the prior employment of any of the Company's
or ITC China's employees or consultants, their use in connection with the
Company's or ITC China's business of any information, technology or techniques
allegedly proprietary to any of their former employers, clients or other
parties, or their obligations under any agreements with prior employers, clients
or other parties. Neither the Company nor ITC China is a party to or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality and there is no Action by the Company or
ITC China currently pending or which the Company or ITC China intends to
initiate.
4.11. Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any federal, state or local governmental authority on the part of
each of the Company and ITC China required in connection with the consummation
of the transactions contemplated herein shall have been obtained prior to and be
effective as of the First Closing. Based in part on the representations of
-6-
<PAGE>
the Investor set forth in Section 5 below, the offer, sale and issuance of the
Shares in conformity with the terms of this Agreement are exempt from the
registration and prospectus delivery requirements of the Securities Act.
4.12. Compliance with Other Instruments. Neither the Company nor
---------------------------------
ITC China is in, nor will the conduct of their businesses as proposed to be
conducted result in, any violation, breach or default of any term of the
Company's Certificate or ITC China's charter or the Company's or ITC China's
bylaws (collectively, the "Bylaws") or in any material respect of any term or
provision of any mortgage, indenture, contract, agreement or instrument to which
the Company or ITC China is a party or by which it may be bound, or of any
provision of any foreign or domestic state or federal judgment, decree, order,
statute, rule or regulation applicable to or binding upon the Company or ITC
China. The execution, delivery and performance of and compliance with this
Agreement and the consummation of the transactions contemplated hereby will not
result in any such violation or default, or be in conflict with or constitute,
with or without the passage of time or the giving of notice or both, either a
default under the Company's Certificate or Bylaws or ITC China's charter or
Bylaws, or any agreement or contract of the Company or ITC China, or, to the
Company's knowledge, a violation of any statutes, laws, regulations or orders,
or an event which results in the creation of any lien, charge or encumbrance
upon any asset of the Company or ITC China.
4.13. Disclosure. No representation or warranty by the Company in
----------
this Agreement or in any statement or certificate signed by any officer of the
Company or ITC China furnished or to be furnished to the Investors pursuant to
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading.
4.14. Registration Rights. Except as provided in the Investor
-------------------
Rights Agreement and except for rights granted to the holders of the Series B
Preferred, neither the Company nor ITC China has granted or agreed to grant any
person or entity any rights (including piggyback registration rights) to have
any securities of the Company or ITC China registered with the United States
Securities and Exchange Commission ("SEC") or any other governmental authority.
---
4.15. Insurance. Each of the Company and ITC China have obtained,
---------
and will maintain, fire and casualty insurance policies with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
any of its properties that might be damaged or destroyed.
4.16. Financial Statements. The Company has supplied to the
--------------------
Investor (i) the audited balance sheet of the Company as at December 31, 1997
and the related audited statements of income, changes in stockholders' equity
and cash flow of the Company for the fiscal year then ended, accompanied by the
report thereon by Coopers & Lybrand CIEC, the Company's independent certified
public accountants (together with the related schedules and notes thereto, the
"Audited Financial Statements") and (ii) the unaudited balance sheet of the
Company as at May 31, 1998 and the related unaudited statements of income,
changes in
-7-
<PAGE>
stockholders' equity and cash flow of the Company for the quarter then ended
(the "Interim Financial Statements") (the Audited Financial Statements and the
Interim Financial Statements are referred to herein collectively as the
"Financial Statements").
The Financial Statements present fairly the financial condition of the
Company as of the respective dates thereof, and the income, changes in
stockholders' equity and cash flow of the Company for the year and period then
ended and have been prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied consistently throughout the periods
involved, except that some or all footnotes required by GAAP for year-end
financial statements are not included in the Interim Financial Statements.
Other than as set forth in the Disclosure Schedule, neither the Company nor ITC
China has any material indebtedness or other material liability.
4.17. Certain Actions. Since the date of the Interim Financial
---------------
Statements, neither the Company nor ITC China has (a) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock; (b) incurred any indebtedness for money
borrowed or incurred any other liabilities individually in excess of $10,000 or
in excess of $25,000 in the aggregate; (c) made any loans or advances to any
person, other than ordinary advances for travel expenses; (d) sold, exchanged or
otherwise disposed of any material assets or rights other than the sale of
inventory in the ordinary course of its business; or (e) entered into any
transactions with any of its officers, directors or employees or any entity
controlled by any of such individuals.
4.18. Activities Since Interim Financial Statement Date. Since the
-------------------------------------------------
date of the Interim Financial Statements, there has not been:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets,
properties, financial condition, operating results, prospects
or business of the Company or ITC China (as presently conducted
and as presently proposed to be conducted);
(b) any waiver by the Company or ITC China of a valuable right or
of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company or ITC China,
except such a satisfaction, discharge or payment made in the
ordinary course of business that is not material to the assets,
properties, financial condition, operating results or business
of the Company or ITC China;
(d) any material change or amendment to a material contract or
arrangement by which the Company or ITC China or any of their
assets or properties is bound or subject, except for changes or
amendments which are expressly provided for or disclosed in
this Agreement;
-8-
<PAGE>
(e) any material change in any compensation arrangement or
agreement with any present or prospective employee, contractor
or director not approved by the Company's or ITC China's Board
of Directors; or
(f) to the Company's knowledge, any other event or condition of any
character which would materially and adversely affect the
assets, properties, financial condition, operating results or
business of the Company or ITC China.
4.19. Tax Matters. The Company has made sufficient provision for,
-----------
and has adequate resources to pay, all accrued and unpaid federal, state,
provincial, foreign, county and local taxes of each of the Company and ITC
China, whether or not assessed or disputed as of the date hereof. There have
been no examinations or audits of any tax returns or reports by any applicable
federal, state or local governmental agency. Except as set forth in the
Disclosure Schedule, each of the Company and ITC China have duly filed all
federal, state, county and local tax returns required to have been filed by it
and paid all taxes shown to be due on such returns. To the extent that any tax
returns have not been filed as reflected on the Disclosure Schedule, such
failure to file has not had and will not have any material adverse effect on the
Company or ITC China. There are in effect no waivers of applicable statutes of
limitations with respect to taxes for any year.
4.20. Tax Elections. Neither the Company nor ITC China has elected
-------------
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
----
treated as an "S" corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has the Company or ITC China made
any other elections pursuant to the Code (other than elections which relate
solely to matters of accounting, depreciation or amortization) which would have
a material affect on the Company or ITC China, their financial conditions, their
businesses as presently conducted or presently proposed to be conducted or any
of their properties or material assets.
4.21. Invention Assignment and Confidentiality Agreement. The
--------------------------------------------------
Company has caused each employee, officer, consultant and contractor of each of
the Company and ITC China to enter into and execute an agreement as to
assignment to the Company of inventions made during employment and the
confidentiality of proprietary information of the Company.
4.22. Environmental Matters. During the period that each of the
---------------------
Company and ITC China has owned or leased its properties and facilities, (a)
there have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on, from or under such properties or facilities,
(b) neither the Company nor ITC China, nor to the Company's knowledge any third
party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or facilities
any Hazardous Materials. Neither the Company nor ITC China has knowledge of any
presence, disposals, releases or threatened releases of Hazardous Materials on,
from or under any of such properties or facilities, which may have occurred
prior to the Company or ITC China having taken possession of any of such
properties or facilities. For purposes of this Agreement, the terms "disposal",
--------
"release", and "threatened release" shall have the definitions assigned thereto
------- ------------------
by the Comprehensive
-9-
<PAGE>
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
Section 9601 et seq., as amended ("CERCLA"). For the purposes of this Section,
------
"Hazardous Materials" shall mean any hazardous or toxic substance, material or
-------------------
waste which is regulated under, or defined as a "hazardous substance",
"pollutant", "contaminant", "toxic chemical", "hazardous material", "toxic
substance", or "hazardous chemical" under (1) CERCLA; (2) the Emergency
Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 et
--
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
- --- --
seq.; (4) the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (5)
- --- -- ---
the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.;
-- ---
(6) regulations promulgated under any of the above statutes; or (7) any
applicable state or local statute, ordinance, rule, or regulation that has a
scope or purpose similar to those statutes identified above.
4.23. Interested Party Transactions. To the knowledge of the
-----------------------------
Company, no officer or director of the Company or ITC China or any "affiliate"
or "associate" (as those terms are defined in Rule 405 promulgated under the
Securities Act) of any such person has had, either directly or indirectly, a
material interest in: (i) any person or entity which purchases from or sells,
licenses or furnishes to the Company or ITC China any goods, property,
technology, intellectual or other property rights or services; or (ii) any
contract or agreement to which the Company or ITC China is a party or by which
it may be bound or affected, except that Dr. Shelley Harrison, a director of the
Company, is a major stockholder of a company that shares office space and
expenses with ITC China in Shanghai, China.
4.24. Stock Restriction Agreements. Each person who, pursuant to
----------------------------
any benefit, bonus or incentive plan of the Company or ITC China, holds any
currently outstanding shares of Common Stock or other securities of either the
Company or ITC China or any option, warrant or right to acquire such shares or
other securities, has entered into or is otherwise bound by, an agreement
granting the Company or ITC China (i) the right to repurchase the shares for the
original purchase price, or to cancel the option, warrant or right, in the event
the holder's employment or services with the Company or ITC China terminate for
any reason, subject to release of such repurchase or cancellation right on terms
and conditions specified by the Board of Directors of the Company, and (ii) a
right of first refusal with respect to all such shares, except that there are no
restrictions imposed upon shares underlying options granted to Edward B. Roberts
and Andrew Mason. Each of the Company and ITC China has furnished to each
Investor true and complete copies of the forms of all such stock restriction
agreements.
4B. REPRESENTATIONS AND WARRANTIES OF CHARLES ZHANG. Charles Zhang
-----------------------------------------------
represents and warrants to the Investors as follows:
4B.1 Conflicting Agreements. He is not, as a result of the nature of
----------------------
the business conducted or proposed to be conducted by the Company or for any
other reason, in violation of (i) any fiduciary or confidential relationship,
(ii) any term of any contract or covenant (either with the Company or with
another entity) relating to employment, patents, proprietary information
disclosure, non-competition or non-solicitation, or (iii) any other contract or
agreement, or any judgment, decree or order of any court or administrative
agency relating to or affecting the right of Mr. Zhang to be employed by the
Company. No such relationship, term, judgment, decree, or order conflicts with
Mr. Zhang obligations to use his best efforts to promote the interests of the
-10-
<PAGE>
Company nor does the execution and delivery of this Agreement and the
transactions contemplated hereby, nor the carrying on of the Company's business
as an officer or key employee of the Company, conflict with any such
relationship, term, judgment, decree or order.
4B.2 Litigation. There is no action, suit or proceeding, or
----------
governmental inquiry or investigation, pending or, to the best of Mr. Zhang 's
knowledge, threatened against Mr. Zhang and, to the best of his knowledge, there
is no basis for any such action, suit, proceeding, or governmental inquiry or
investigation.
4B.3 Stockholder Agreements. Except as contemplated by or disclosed
----------------------
in this Agreement, Mr. Zhang is not a party to and has no knowledge of any
agreements, written or oral, relating to the acquisition, disposition,
registration under the Securities Act, or voting of the capital stock of the
Company.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
----------------------------------------------
represents and warrants to the Company as follows:
5.1. Authorization. This Agreement when executed and delivered by
-------------
the Investor will constitute a valid and legally binding obligation of the
Investor, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles.
5.2. Investigation; Economic Risk. The Investor acknowledges that
----------------------------
it is an "accredited investor" within the meaning that term as defined in Rule
50l(a) of Regulation D of the Securities Act (meaning that, in the case of a
corporation, it either has total assets in excess of $5,000,000 and was not
formed for the specific purpose of acquiring the Shares, or each of its equity
owners are "accredited investors"). The Investor's address is 200 Liberty
Street, New York, New York 10281, which represents its state of domicile, upon
which the Company may rely for the purpose of complying with applicable state
"Blue Sky" laws. The Investor acknowledges that it has had an opportunity to
discuss the business, affairs and current prospects of the Company with its
officers. The Investor further acknowledges having had access to information
about the Company that it has requested. The Investor acknowledges that it is
able to fend for itself in the transactions contemplated by this Agreement and
has the ability to bear the economic risks of its investment pursuant to this
Agreement.
5.3. Purchase for Own Account. The Shares and the Conversion Shares
-----------------------
will be acquired for the Investor's own account, not as a nominee or agent, and
not with a view to or in connection with the sale or distribution of any part
thereof.
5.4. Exempt from Registration; Restricted Securities. The Investor
-----------------------------------------------
understands that the Shares and the Conversion Shares will not be registered
under the Securities Act, on the ground that the sale provided for in this
Agreement is exempt from registration under of the Securities Act, and that the
reliance of the Company on such exemption is predicated in part on the
Investor's representations set forth in this Agreement. The Investor
understands that the Shares and the Conversion Shares being purchased hereunder
are restricted securities within the meaning of Rule 144 under the Securities
Act; that the Shares and the Conversion Shares
-11-
<PAGE>
are not registered and must be held indefinitely unless they are subsequently
registered or an exemption from such registration is available.
5.5. Restrictive Legends. It is understood that each certificate
-------------------
representing (a) the Shares, (b) the Conversion Shares, and (c) any other
securities issued in respect of the any of the foregoing upon any stock split,
stock dividend, recapitalization, merger or similar event shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS
OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY
TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN
COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
5.6 Removal of Restrictive Legend. The legend set forth above shall
-----------------------------
be removed by the Company from any certificate evidencing Shares or Conversion
Shares upon delivery to the Company of an opinion of counsel, reasonably
satisfactory to the Company, that a registration statement under the Securities
Act is at that time in effect with respect to the legended security or that such
security can be freely transferred in a public sale without such a registration
statement being in effect and that such transfer will not jeopardize the
exemption or exemptions from registration pursuant to which the Company issued
the Shares or Conversion Shares.
6. COVENANTS OF THE COMPANY. The Company covenants to the Investor as
------------------------
follows:
6.1 Use of Proceeds. The Company will use the Proceeds from the
---------------
sale of the Shares for business expansion, capital expenditures and general
working capital.
6.2 Vesting. Any Common Stock or other securities of the Company
-------
issued after the Closing to employees, directors and consultants of the Company
pursuant to any benefit, bonus or incentive plan of the Company shall be subject
to customary vesting provisions over a period of four (4) years (other than
Common Stock issued pursuant to the exercise of options held by Edward Roberts
and Andrew Mason as of the date hereof), and a minimum of 50% of the shares
issued to Charles Zhang shall be subject to four (4) years of customary vesting
and repurchase provisions at the original issue price.
-12-
<PAGE>
7. CONDITIONS TO THE INVESTOR'S OBLIGATIONS AT THE CLOSING. The
--------------------------------------------------------
obligation of the Investor to purchase the Shares at the Closing is subject to
the fulfillment, to the satisfaction the Investor, on or before the Closing, of
the following conditions:
7.1. Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 4 hereof shall be true and correct (i)
when made and (ii) as of the date of the Closing. Such representations and
warranties shall have the same force and effect as if made on and as of such
date, subject to changes contemplated by this Agreement.
7.2. Performance of Obligations. The Company shall have performed and
--------------------------
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and the Company shall have obtained all approvals, consents and
qualifications necessary to complete the purchase and sale described herein.
7.3. Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be satisfactory in substance and
form to the Investor, and the Investor shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
7.4. Consents and Waivers. The Company shall have obtained any and
--------------------
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
7.5. Compliance Certificate. At the Closing, the Company shall
----------------------
deliver to the Investor a certificate, dated as of the Closing, signed by the
Company's President certifying that the conditions specified in Paragraphs 7.1
and 7.2 have been fulfilled.
7.6. Securities Laws. The offer and sale of the Shares to the
---------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act and the registration and/or qualification
requirements of all applicable state securities laws.
7.7. Amendment to Certificate. The Certificate shall have been duly
------------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
7.8. Opinion of Company's Counsel. At the Closing, the Investor shall
----------------------------
have received from counsel to the Company an opinion addressed to the Investor,
dated the date of the Closing, in form and substance reasonably acceptable to
the Investor.
8. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSINGS. The obligations
---------------------------------------------------
of the Company under this Agreement are subject to the fulfillment, on or before
the Closing, of the following conditions:
-13-
<PAGE>
8.1. Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 5 hereof shall be true as of the
Closing.
8.2. Payment of Purchase Price. The Investor shall have delivered to
-------------------------
the Company the purchase price in accordance with the provisions of Section 3.
8.3. Certificate Effective. The Certificate shall have been duly
---------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders, and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
8.4. Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, and the requirements of all applicable state
securities laws.
9. MISCELLANEOUS.
-------------
9.1. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of Delaware without regard to provisions regarding
choice of laws.
9.2. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any party hereto
and the closing of all the transactions contemplated hereby.
9.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto whose rights or obligations hereunder are affected by such
amendments. This Agreement and the rights and obligations therein may not be
assigned by the Investor without the written consent of the Company except to a
parent corporation, a subsidiary or an affiliate. This Agreement and the rights
and obligations herein may not be assigned by the Company without the written
consent of the Investor.
9.4. Entire Agreement. This Agreement and the exhibits hereto which
----------------
are hereby expressly incorporated herein by this reference constitute the entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof; provided, however, that nothing in this Agreement shall be
-------- -------
deemed to terminate or supersede the provisions of any confidentiality and
nondisclosure agreements executed by the parties hereto prior to the date
hereof, which agreements shall continue in full force and effect until
terminated in accordance with their respective terms.
9.5. Notices. Except as may be otherwise provided herein, all notices,
-------
requests, waivers and other communications made pursuant to this Agreement shall
be in writing and shall be conclusively deemed to have been duly given (a) when
hand delivered to the other party; (b) when received when sent by facsimile at
the address and number set forth below; (c) for notices between parties both of
which are located in the United States, three business days after deposit in the
U.S. mail with first class or certified mail return receipt requested postage
prepaid and addressed to the other party as set forth below; or (d) when
received, if sent by a national
-14-
<PAGE>
overnight delivery service, postage prepaid, addressed to the parties as set
forth below, provided that the sending party receives a confirmation of delivery
from the delivery service provider. Each person making a communication hereunder
by facsimile shall promptly confirm by telephone to the person to whom such
communication was addressed each communication made by it by facsimile pursuant
hereto but the absence of such confirmation shall not affect the validity of any
such communication. A party may change or supplement the addresses given below,
or designate additional addresses, for purposes of this Section 9.5 by giving
the other party written notice of the new address in the manner set forth above.
If to the Company:
Internet Technologies China Incorporated
7 Jianguomen Nei Avenue
Bright China Chang An Building
Tower 2 Room 519
Beijing, China 100005
Phone: 011 8610 6510 2165
Fax: 011 8610 6510 2159
with a copy to:
Goulston & Storrs, P.C.
400 Atlantic Avenue
Boston, MA 02110
Attn: Timothy B. Bancroft
Phone: (617) 574-3511
Fax: (617) 574-4112
If to the Investor:
Kummell Investments Limited
Suite 922C, Europort
Gibralter
Fax Number 350-736-25
with a copy to:
9.6. Amendments and Waivers. Any term of this Agreement may be amended
----------------------
only with the written consent of the Company and the Investor.
9.7. Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Company or to the Investor, upon any breach or
default of any party hereto under this Agreement, shall impair any such right,
power or remedy of the Company, or
-15-
<PAGE>
the Investor nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of any similar breach of default
thereafter occurring; nor shall any waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of the Company or the Investor of any breach
of default under this Agreement or any waiver on the part of the Company or the
Investor of any provisions or conditions of this Agreement, must be in writing
and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement, or by law or otherwise
afforded to the Company or the Investor shall be cumulative and not alternative.
9.8. Legal Fees. In the event of any action at law, suit in equity
----------
or arbitration proceeding in relation to this Agreement or any Shares or other
securities of the Company issued or to be issued, the prevailing party, shall be
paid by the other party a reasonable sum for attorney's fees and expenses for
such prevailing party.
9.9. Finder's Fees. Each party (a) represents and warrants to the
-------------
other party hereto that it has retained no finder or broker in connection with
the transactions contemplated by this Agreement, and (b) hereby agrees to
indemnify and to hold harmless the other party hereto from and against any
liability for any commission or compensation in the nature of a finder's fee of
any broker or other person or firm (and the costs and expenses of defending
against such liability or asserted liability) for which the indemnifying party
or any of its employees or representatives are responsible.
9.10. Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
9.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.12. Severability. Should any provision of this Agreement be
------------
determined to be illegal or unenforceable, such determination shall not affect
the remaining provisions of this Agreement.
9.13 Protection of Confidential Information. Confidential or
--------------------------------------
proprietary information disclosed by either party under this Agreement, as well
as the terms of this Agreement and each Investor's investment in the Company,
shall be considered confidential information (the "Confidential Information")
and shall not be disclosed by the Company or any other party to this Agreement
to any third party, subject to Section 9.14 below. Each party shall immediately
notify the other parties of any information that comes to its attention which
might indicate that there has been a loss of confidentiality with respect to the
Confidential Information. In the event that the Company or any other party
becomes legally compelled (by statute or regulation or by oral questions,
interrogatories, request for information or documents, subpoena, criminal or
civil investigative demand or similar process, including without limitation, in
connection with any public or private offering of the Company's capital stock)
to disclose any of
-16-
<PAGE>
the Confidential Information, such party (the "Disclosing Party") shall provide
the other party (the "Non-Disclosing Party") with prompt written notice of that
fact so that the appropriate party may seek (with the cooperation and reasonable
efforts of the other parties) a protective order, confidential treatment or
other appropriate remedy. In such event, the Disclosing Party shall furnish only
that portion of the Confidential Information which is legally required and shall
exercise reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded the Confidential Information to the extent reasonably
requested by the Non-Disclosing Party. The provisions of this Section 9.13 shall
be in addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by the parties hereto with respect to the
transaction contemplated hereby.
9.14 Disclosure of Terms; Press Releases. Notwithstanding the
-----------------------------------
provisions of Section 9.13 above, from and after the Closing, the Company may
disclose the existence of this Agreement and the terms hereof, as well as the
Investor's investment in the Company solely to the Company's investors,
investment bankers, lenders, accountants, legal counsel, business partners, and
bona fide prospective investors, employees, lenders and business partners, in
each case only where such persons or entities are under appropriate
nondisclosure obligations. In addition, the Company may disclose the fact that
the Investor is an investor in the Company to third parties without the
requirement of nondisclosure obligations. Within sixty (60) days of the
Closing, the Company may issue a press release disclosing that the Investor has
invested in the Company; provided that the release does not disclose the amount
or other specific terms of the investment and is approved in advance in writing
by the Investor. The Investor, at its sole discretion, may provide an executive
quote or other material regarding its investment in the Company. No other
announcement regarding the Investor's investment in the Company in a press
conference, in any professional or trade publication, in any marketing materials
or otherwise to the general public may be made without the prior written consent
of the Investor, which consent may be withheld at the sole discretion of the
Investor. Notwithstanding the foregoing, the Investor may disclose its
investment in the Company and the terms thereof to third parties or to the
public at its discretion, and the Company shall have the right to disclose to
third parties any such information disclosed by the Investor in a press release
or other public announcement. If the Company or the Investor determines that
any disclosure not otherwise authorized by this Agreement is required by law or
regulation, then the provisions of Section 9.13 regarding disclosure of
Confidential Information by a Disclosing Party shall govern.
9.15 Dispute Resolution. The parties agree to negotiate in good faith
------------------
to resolve any dispute between them regarding this Agreement. If the
negotiations do not resolve the dispute to the reasonable satisfaction of both
parties, then each party shall nominate one senior officer of the rank of Vice
President or higher as its representative. These representatives shall, within
thirty (30) days of a written request by either party to call such a meeting,
meet in person and alone (except for one assistant for each party) and shall
attempt in good faith to resolve the dispute. If the disputes cannot be resolved
by such senior managers in such meeting, the parties agree that they shall, if
requested in writing by either party, meet within thirty (30) days after such
written notification for one day with an impartial mediator and consider dispute
resolution alternatives other than litigation. If an alternative method of
dispute resolution is not agreed upon
-17-
<PAGE>
within thirty (30) days after the one day mediation, either party may begin
litigation proceedings. This procedure shall be a prerequisite before taking any
additional action hereunder.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year herein above first written.
THE COMPANY: INVESTOR:
INTERNET TECHNOLOGIES CHINA INCORPORATED DOW JONES & COMPANY, INC.
By:______________________________ By:______________________________
Name: Name:
Title: Title:
CHARLES ZHANG:
Executed solely for the purpose of making
the representations and warranties set
forth in Section 4B hereof:
________________________________
Charles C.Y. Zhang
[SIGNATURE PAGE FOR SERIES B-1 PREFERRED STOCK PURCHASE AGREEMENT]
-19-
<PAGE>
EXHIBIT 10.7
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series C Preferred Stock Purchase Agreement (the "Agreement") is entered
---------
into as of October 18, 1999 (the "Effective Date"), by and between Sohu.com, a
--------------
Delaware corporation formerly known as Internet Technologies China Incorporated
(the "Company"), ITC Electronic Technology Beijing Co. Ltd., a company organized
-------
under the laws of the People's Republic of China ("ITC China"), the persons and
entities set forth on Exhibit A-1 hereto (each, a "Tranche I Investor" and,
----------- ------------------
together, the "Tranche I Investors"), and the persons and entities set forth on
-------------------
Exhibit A-2 hereto (each, a "Tranche II Investor" and, collectively, the
- ----------- -------------------
"Tranche II Investors") (each Tranche I Investor or Tranche II Investor, an
- ---------------------
"Investor" and the Tranche I Investors and Tranche II Investors collectively,
- ---------
the "Investors").
---------
In consideration of the mutual promises, covenants and conditions hereinafter
set forth, the parties hereto agree as follows:
1. DEFINITIONS.
-----------
1.1 Certain Defined Terms. As used in this Agreement, the following
---------------------
terms shall have the following respective meanings:
"Common Stock" shall mean the Company's Common Stock, $.001 par value.
------------
"Proceeds" shall mean whatever is received when assets, whether
--------
tangible or intangible, are sold, changed, collected or otherwise disposed of,
both cash and non-cash, including the Proceeds of insurance payable by reason of
loss or damage to Proceeds.
"Proprietary Assets" shall mean all patents, patent applications,
------------------
trademarks, service marks, trade names, copyrights, moral rights, maskworks,
trade secrets, confidential and proprietary information, compositions of matter,
formulas, designs, proprietary rights, know-how, processes, domain names and
URLs.
1.2 Index of Other Defined Terms. In addition to the terms defined
----------------------------
above, the following terms shall have the respective meanings given thereto in
the sections indicated below:
Defined Term Section
------------ -------
"Agreement" Preamble
---------
"Business Plan" 4.25
-------------
"Bylaws" 4.12
------
"CERCLA" 4.22
------
"Certificate" 2.1
-----------
1
<PAGE>
"Code" 4.20
----
"Company" Preamble
-------
"Confidential Information" 9.13
------------------------
"Conversion Shares" 4.2(c)
-----------------
"Disclosing Party" 9.13
----------------
"Disclosure Schedule" 4.0
-------------------
"Effective Date" Preamble
--------------
"Financial Statements" 4.16
--------------------
"First Closing" 3.1
-------------
"Hazardous Materials" 4.22
-------------------
"Investors", "Investor" Preamble
--------- --------
"Investor Rights Agreement" 4.2(c)
-------------------------
"ITC China" Preamble
---------
"Kummell" 2.2
-------
"Kummell Note" 2.2
------------
"Non-Disclosing Party" 9.13
--------------------
"Right of First Refusal and Co-Sale Agreement" 7.8
--------------------------------------------
"Second Closing" 3.2
--------------
"Stockholders' Voting Agreement" 7.8
------------------------------
"SEC" 4.14
---
"Securities Act" 4.5(b)
--------------
"Series C Preferred Stock" 2.1
------------------------
"Shares" 2.2
------
"Tranche I Shares" 2.2
----------------
"Tranche II Shares" 2.3
-----------------
2. AGREEMENT TO PURCHASE AND SELL STOCK
------------------------------------
2.1. Authorization. As of the First Closing (as defined below), the
-------------
Company has authorized the issuance, pursuant to the terms and conditions of
this Agreement, of up to 1,848,885 shares of the Company's Series C Convertible
Preferred Stock ("Series C Preferred Stock") having the rights, preferences,
privileges and restrictions set forth in the form of the Third Amended and
Restated Certificate of Incorporation of the Company attached to this Agreement
as Exhibit B (the "Certificate").
--------- -----------
2.2. Agreement to Purchase and Sell at the First Closing. Subject to
---------------------------------------------------
the terms and conditions hereof, on the date hereof, (a) the Company will issue
and sell to Kummell Investments Limited ("Kummell") and Kummell agrees to
purchase from the Company 1,318,588 shares of Series C Preferred Stock, (b) the
Company will issue and sell to Edward B. Roberts, as trustee of the Roberts
Family Trust (Mr. Roberts as trustee, "Roberts") and Roberts agrees to purchase
from the Company 31,902 shares of Series C Preferred Stock, (c) the Company will
issue and sell to Brant C. Binder ("Binder") and Binder agrees to purchase from
the Company 31,902 shares of Series C Preferred Stock, and (d) the Company will
issue and sell to Nicholas Negroponte, to one or more designees consisting of
Mr. Negroponte's ancestors, descendants or spouse, one or more trusts for the
benefit of such persons, or an entity owned solely by Mr. Negroponte or one or
more of such persons, or to any combination of
2
<PAGE>
Mr. Negroponte and one or more such designees (Mr. Negroponte and each such
designee, "Negroponte"), and Negroponte agrees to purchase from the Company
31,902 shares of Series C Preferred Stock (the "Tranche I Shares"), in each case
----------------
at a price of $4.702 per share for an aggregate purchase price of $6,650,010.
The purchase price for the Tranche I Shares shall be paid by wire transfer of
funds to a designated account of the Company, provided that (i) wire transfer
instructions are delivered to Kummell, Roberts, Binder and Negroponte at least
one (1) business day prior to the First Closing and (ii) the purchase price for
319,013 of the Shares purchased by Kummell shall be paid through the conversion
and cancellation (in accordance with the terms and conditions thereof) of that
certain Convertible Promissory Note of the Company to Kummell, dated as of July
20, 1999 in the original principal amount of $1,500,000 (the "Kummell Note").
2.3 Agreement to Issue and Sell at the Second Closing. Subject to
-------------------------------------------------
the terms and conditions hereof, on the date of the Second Closing (as defined
below), the Company will issue and sell to the Tranche II Investors, at the
election of each Tranche II Investor, up to an aggregate of 433,454 shares of
Series C Preferred Stock (the "Tranche II Shares") at a price of $4.702 per
-----------------
share for an aggregate purchase price of up to $2,038,101. The number of Tranche
II Shares that may be purchased by each Tranche II Investor is set forth next to
such Investor's name on Exhibit A-2. The purchase price for the Tranche II
-----------
Shares shall be paid by wire transfer of funds to a designated account of the
Company, provided that wire transfer instructions are delivered to each Investor
at least one (1) business day prior to the Second Closing. The Tranche I Shares
and the Tranche II Shares are sometimes referred to herein collectively as the
"Shares."
2.4 Currency. All monetary amounts set forth herein shall be in
--------
United States dollars.
3. CLOSING; DELIVERY.
-----------------
3.1. The First Closing. The purchase and sale of the Tranche I Shares
-----------------
hereunder shall be held at the offices of Goulston & Storrs, P.C. on the date
hereof (the "First Closing").
-------------
3.2. The Second Closing. The purchase and sale of the Tranche II
------------------
Shares hereunder (the "Second Closing") shall be held at the offices of Goulston
--------------
& Storrs, P.C. on that date which is 28 days after the date of this Agreement
(provided that if such date falls on a day which is not a business day, the
Second Closing will occur on the next succeeding business day) or such earlier
date as the Company and the Tranche II Investors may agree upon.
3.3 Delivery. At the First Closing, and also at the Second Closing,
--------
the Company will deliver to each Investor a certificate representing the Shares
purchased by each Investor hereunder against payment of the full purchase price
therefor by wire transfer (and against delivery of the Kummell Note for
cancellation in the case of the Tranche I Shares to be purchased by conversion
and cancellation of the Kummell Note).
4. COMPANY REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
--------------------------------------
warrants to the Investors that, except as set forth in the Disclosure Schedule
3
<PAGE>
("Disclosure Schedule") attached to this Agreement as Exhibit C (which
------------------- ---------
Disclosure Schedule shall be deemed to be representations and warranties to the
Investors), the statements in the following paragraphs of this Section 4 are all
true and correct:
4.1. Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under, and by
virtue of, the laws of the State of Delaware and has all requisite corporate
power and authority to own its properties and assets and to carry on its
business as now conducted and as presently proposed to be conducted. The
Company is qualified to do business as a foreign corporation in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.
4.2. Capitalization. Immediately before the First Closing, the
--------------
authorized capital stock of the Company will consist of the following:
(a) Common Stock. A total of 11,000,000 authorized shares of
------------
Common Stock ($0.001 par value) of which 3,621,410 shares are issued and
outstanding.
(b) Preferred Stock. A total of 5,100,000 authorized shares of
---------------
Preferred Stock ($0.001 par value), of which 1,125,000 are designated as Series
A Convertible Preferred Stock ("Series A Preferred Stock"), all of which are
outstanding; 1,738,910 are designated as Series B Convertible Preferred Stock
("Series B Preferred Stock"), all of which are outstanding; 338,295 are
designated as Series B-1 Convertible Preferred Stock ("Series B-1 Preferred
Stock"), all of which are outstanding; and 1,848,885 are designated as Series C
Preferred, none of which is issued or outstanding.
(c) Options, Warrants, Reserved Shares. The Company has
----------------------------------
reserved up to 1,441,880 shares of its Common Stock for possible issuance upon
the conversion of the shares of the Series C Preferred (the "Conversion
----------
Shares"). Except as set forth in Section 4.2(d) of the Disclosure Schedule and
- ------ --------------
except for (i) the conversion privileges of the Series A Preferred, the Series B
Preferred and the Series B-1 Preferred, (ii) the conversion privileges of the
Series C Preferred to be issued hereunder and one or more similar agreements,
(iii) the 472,810 shares of Common Stock reserved for issuance upon the exercise
of options granted or contemplated to be granted to employees of the Company,
under which options to purchase 117,500 shares of Common Stock (including
options for the purchase of 50,000 shares of Common Stock to be granted to
Charles Zhang effective upon the First Closing) are outstanding, and (iv)
warrants to purchase 17,345 shares of Common Stock of the Company, issued in
connection with the Company's bridge financing in December 1997, there are no
options, warrants, conversion privileges or other rights, or agreements with
respect to the issuance thereof, presently outstanding to purchase any of the
capital stock of the Company. Apart from the exceptions noted in this Section
4.2, no shares (including the Shares and Conversion Shares) of the Company's
outstanding capital stock, or stock issuable upon exercise or exchange of any
outstanding options or other stock issuable by the Company, are subject to any
rights of first refusal or other rights to purchase such stock (whether in favor
of the Company or any other person), pursuant to any agreement or commitment of
the Company, except as set forth in the Amended and Restated Investor Rights
Agreement dated as of August 18, 1998 (the "Investor Rights Agreement") between
the Company and the persons listed in Schedule B thereto.
4
<PAGE>
(d) Outstanding Security Holders. Section 4.2(d) of the
---------------------------- --------------
Disclosure Schedule sets forth a complete and accurate list of all outstanding
shareholders, option holders and other security holders of the Company as of the
Effective Date.
4.3. Subsidiaries. The Company owns all of the issued and
------------
outstanding stock of ITC China. ITC China is a wholly foreign owned enterprise
(WFOE) authorized by the government of China and seeks to have the government
permits, approvals authorizations and licenses necessary to engage in the
business currently conducted and currently proposed to be conducted by ITC
China. ITC China may not be licensed to engage in all aspects of its business
in the People's Republic of China (the "PRC"), however, and Minister Wu Jichuan
of the PRC Ministry of the Information Industry announced recently that PRC law
prohibits foreign ownership of Internet content providers. No other person or
entity other than the Company has any right to acquire any equity or other
ownership interest of ITC China. Except for the Company's ownership of ITC
China, the Company does not presently own or control, directly or indirectly,
any interest in any other corporation, partnership, limited liability company,
trust, joint venture, association, or other entity.
4.4. Due Authorization. All corporate action on the part of the
-----------------
Company and ITC China, their officers, directors and shareholders necessary for
the authorization, execution and delivery of, and the performance of all
obligations of the Company under, this Agreement, and the authorization,
issuance, reservation for issuance and delivery of all of the Shares being sold
under this Agreement has been taken or will be taken before the Closing. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject, as to enforcement of remedies, to applicable
bankruptcy, insolvency, moratorium, reorganization and similar laws affecting
creditors' rights generally and to general equitable principles. The Shares are
not subject to any preemptive rights or rights of first refusal, except such as
have been waived or are being accommodated under the terms of this Agreement.
4.5. Valid Issuance of Stock.
-----------------------
(a) The Shares, when issued, sold and delivered in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid
and nonassessable. The Conversion Shares have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Certificate,
will be duly and validly issued, fully paid and nonassessable.
(b) The outstanding shares of the capital stock of the Company
and ITC China are duly and validly issued, fully paid and nonassessable, and
such shares of such capital stock, and all outstanding stock, options and other
securities of the Company and ITC China have been issued in full compliance with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the registration and qualification
--------------
requirements of all applicable state securities laws, or in compliance with
applicable exemptions therefrom, and all other provisions of applicable federal
and state securities laws, including, without limitation, anti-fraud provisions.
4.6. Liabilities. Other than as evidenced by the Kummell Note,
-----------
neither the Company nor ITC China has any indebtedness for borrowed money that
the Company or ITC
5
<PAGE>
China has directly or indirectly created, incurred, assumed, or guaranteed, or
with respect to which the Company or ITC China has otherwise become directly or
indirectly liable.
4.7. Title to Properties and Assets. Each of the Company and ITC
------------------------------
China has good and marketable title to its properties and assets held in each
case subject to no mortgage, pledge, lien, encumbrance, security interest or
charge of any kind. With respect to the property and assets it leases, each of
the Company and ITC China is in compliance with such leases and, to the best of
the Company's knowledge, each of the Company and ITC China holds valid leasehold
interests in such assets free of any liens, encumbrances, security interests or
claims of any party other than the lessors of such property and assets.
4.8. Status of Proprietary Assets.
----------------------------
(a) Ownership. Each of the Company and ITC China has full
---------
title and ownership of, or has license to, all Proprietary Assets necessary to
enable it to carry on its business as now conducted and as presently proposed to
be conducted, including but not limited to those Proprietary Assets set forth in
Schedule 4.8(a) of the Disclosure Schedule, without any conflict with or
- ---------------
infringement of the rights of others. No third party has any ownership right,
title, interest, claim in or lien on any of the Company's or ITC China's
Proprietary Assets and the Company and ITC China have taken, and in the future
will use their best efforts to take, all steps reasonably necessary to preserve
their respective legal rights in, and the secrecy of, all its Proprietary
Assets, except those for which disclosure is required for legitimate business or
legal reasons.
(b) Licenses; Other Agreements. Neither the Company nor ITC
--------------------------
China has granted, and there are not outstanding, any options, licenses or
agreements of any kind relating to any Proprietary Asset of the Company or ITC
China, nor is the Company or ITC China bound by or a party to any option,
license or agreement of any kind with respect to any of their respective
Proprietary Assets. Neither the Company nor ITC China is obligated to pay any
royalties or other payments to third parties with respect to the marketing,
sale, distribution, manufacture, license or use of any Proprietary Asset or any
other property or rights.
(c) No Infringement. Neither the Company nor ITC China has
---------------
violated or infringed, and is not currently violating or infringing any
Proprietary Asset of any other person or entity. Neither the Company nor ITC
China has received any communications alleging that the Company or ITC China (or
any of their respective employees or consultants) has violated or infringed or,
by conducting its business as proposed, would violate or infringe, any
Proprietary Asset of any other person or entity.
(d) No Breach by Employee. After due inquiry, neither the
---------------------
Company nor ITC China is aware that any employee or consultant of the Company or
ITC China is obligated under any agreement (including licenses, covenants or
commitments of any nature) or subject to any judgment, decree or order of any
court or administrative agency, or any other restriction that would interfere
with the use of his or her best efforts to carry out his or her duties for the
Company or ITC China or to promote the interests of the Company or ITC China or
that would conflict with the Company's or ITC China's business as proposed to be
conducted. The carrying on of each of the Company's and ITC China's business by
the employees and
6
<PAGE>
contractors of the Company and ITC China and the conduct of the Company's and
ITC China's business as presently proposed, will not, to the best of the
Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees or contractors of the
Company or ITC China are now obligated. Neither the Company nor ITC China
believes it is or will be necessary to utilize any inventions of any employees
of the Company or ITC China (or persons the Company or ITC China currently
intends to hire) made prior to their employment by the Company or ITC China. To
the best of the Company's knowledge, at no time during the conception of or
reduction of any of the Company's or ITC China's Proprietary Assets to practice
was any developer, inventor or other contributor to such patents operating under
any grants from any governmental entity or agency or private source, performing
research sponsored by any governmental entity or agency or private source or
subject to any employment agreement or invention assignment or nondisclosure
agreement or other obligation with any third party that could adversely affect
the Company's or ITC China's rights in such Proprietary Assets.
4.9. Material Contracts and Obligations. All agreements, contracts,
----------------------------------
leases, licenses, instruments, commitments (oral or written), indebtedness,
liabilities and other obligations to which the Company or ITC China is a party
or by which they are bound that (i) are material to the conduct and operations
of the businesses and properties of the Company or ITC China; (ii) involve any
of the officers, consultants, directors, employees or shareholders of the
Company or ITC China; or (iii) obligate the Company or ITC China to share,
license or develop any product or technology are listed in Section 4.9 of the
-----------
Disclosure Schedule and have been made available for inspection by the Investors
and their respective counsel. For purposes of this Section 4.9, "material"
shall mean any agreement, contract, indebtedness, liability or other obligation
having an aggregate value, cost or amount in excess of $10,000.
4.10. Litigation. There is no action, suit, proceeding, claim,
----------
arbitration or investigation ("Action") pending (or, to the best of the
------
Company's knowledge, currently threatened) against the Company or ITC China,
their activities, properties or assets or, to the best of the Company's
knowledge, against any officer, director or employee of the Company or ITC China
in connection with such officer's, director's or employee's relationship with,
or actions taken on behalf of the Company or ITC China. To the best of the
Company's knowledge, there is no factual or legal basis for any such Action that
might result, individually or in the aggregate, in any material adverse change
in the business, properties, assets, financial condition, affairs or prospects
of the Company or ITC China. By way of example but not by way of limitation,
there are no Actions pending or, to the best of the Company's knowledge,
threatened (or any basis therefor known to the Company or ITC China) relating to
the prior employment of any of the Company's or ITC China's employees or
consultants, their use in connection with the Company's or ITC China's business
of any information, technology or techniques allegedly proprietary to any of
their former employers, clients or other parties, or their obligations under any
agreements with prior employers, clients or other parties. Neither the Company
nor ITC China is a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality and there is no Action by the Company or ITC China currently
pending or which the Company or ITC China intends to initiate.
4.11. Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any federal, state or local
7
<PAGE>
governmental authority on the part of each of the Company and ITC China required
in connection with the consummation of the transactions contemplated herein have
been obtained prior to and be effective as of the First Closing and will have
been obtained prior to and be effective as of the Second Closing. Based in part
on the representations of the Investors set forth in Section 5 below, the offer,
sale and issuance of the Shares in conformity with the terms of this Agreement
are exempt from the registration and prospectus delivery requirements of the
Securities Act.
4.12. Compliance with Other Instruments. Neither the Company nor ITC
---------------------------------
China is in, nor will the conduct of their businesses as proposed to be
conducted result in, any violation, breach or default of any term of the
Company's Certificate or ITC China's charter or the Company's or ITC China's
bylaws (together, the "Bylaws") or in any material respect of any term or
provision of any mortgage, indenture, contract, agreement or instrument to which
the Company or ITC China is a party or by which it may be bound, or of any
provision of any foreign or domestic state or federal judgment, decree, order,
statute, rule or regulation applicable to or binding upon the Company or ITC
China, except that Minister Wu Jichuan of the PRC Ministry of the Information
Industry announced recently that PRC law prohibits foreign ownership of Internet
content providers, and ITC China may not be fully licensed to conduct its
business in the PRC. The execution, delivery and performance of and compliance
with this Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation or default, or be in conflict with or
constitute, with or without the passage of time or the giving of notice or both,
either a default under the Company's Certificate or Bylaws or ITC China's
charter or Bylaws, or any agreement or contract of the Company or ITC China, or,
to the best of the Company's knowledge, a violation of any statutes, laws,
regulations or orders, or an event which results in the creation of any lien,
charge or encumbrance upon any asset of the Company or ITC China.
4.13. Disclosure. No representation or warranty by the Company in
----------
this Agreement or in any statement or certificate signed by any officer of the
Company or ITC China furnished or to be furnished to the Investors pursuant to
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading.
4.14. Registration Rights. Except as provided in the Investor Rights
-------------------
Agreement, neither the Company nor ITC China has granted or agreed to grant any
person or entity any rights (including piggyback registration rights) to have
any securities of the Company or ITC China registered with the United States
Securities and Exchange Commission ("SEC") or any other governmental authority.
---
4.15. Insurance. Each of the Company and ITC China has obtained and
---------
will maintain, fire and casualty insurance policies with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
any of its properties that might be damaged or destroyed.
4.16. Financial Statements. The Company has supplied to the
--------------------
Investors (i) the audited balance sheet of the Company as at December 31, 1998
and the related audited
8
<PAGE>
statements of income, changes in stockholders' equity and cash flow of the
Company for the fiscal year then ended, accompanied by the report thereon by
Coopers & Lybrand CIEC, the Company's independent certified public accountants
(together with the related schedules and notes thereto, the "Audited Financial
Statements") and (ii) the unaudited balance sheet of the Company as at July 31,
1999 and the related unaudited statements of income, changes in stockholders'
equity and cash flow of the Company for the quarter then ended (the "Interim
Financial Statements"). The Financial Statements present fairly the financial
condition of the Company as of the respective dates thereof, and the income,
changes in stockholders' equity and cash flow of the Company for the year and
period then ended and have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied consistently
throughout the periods involved, except that some or all footnotes required by
GAAP for year-end financial statements are not included in the Interim Financial
Statements. Other than as set forth in the Disclosure Schedule, neither the
Company nor ITC China has any material indebtedness or other material liability.
4.17. Certain Actions. Since the date of the Audited Financial
---------------
Statements, neither the Company nor ITC China has: (a) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock; (b) incurred any indebtedness for money
borrowed or incurred any other liabilities individually in excess of $10,000 or
in excess of $25,000 in the aggregate (other than as evidenced by the Kummell
Note); (c) made any loans or advances to any person, other than ordinary
advances for travel expenses; (d) sold, exchanged or otherwise disposed of any
material assets or rights other than the sale of inventory in the ordinary
course of its business; or (e) entered into any transactions with any of its
officers, directors or employees or any entity controlled by any of such
individuals.
4.18. Activities Since Audited Financial Statement Date. Since the
-------------------------------------------------
date of the Audited Financial Statements, there has not been:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets,
properties, financial condition, operating results, prospects or
business of the Company or ITC China (as presently conducted and
as presently proposed to be conducted);
(b) any waiver by the Company or ITC China of a valuable right or of
a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company or ITC China, except
such a satisfaction, discharge or payment made in the ordinary
course of business that is not material to the assets,
properties, financial condition, operating results or business
of the Company or ITC China;
(d) any material change or amendment to a material contract or
arrangement by which the Company or ITC China or any of their
assets or properties is bound or subject, except for changes or
amendments which are expressly provided for or disclosed in this
Agreement;
9
<PAGE>
(e) any material change in any compensation arrangement or agreement
with any present or prospective employee, contractor or director
not approved by the Company's or ITC China's Board of Directors;
or
(f) to the Company's knowledge, any other event or condition of any
character which would materially and adversely affect the
assets, properties, financial condition, operating results or
business of the Company or ITC China.
4.19. Tax Matters. The Company has made sufficient provision for, and
-----------
has adequate resources to pay, all accrued and unpaid federal, state,
provincial, foreign, county and local taxes of each of the Company and ITC
China, whether or not assessed or disputed as of the date hereof. There have
been no examinations or audits of any tax returns or reports by any applicable
federal, state or local governmental agency. Each of the Company and ITC China
has duly filed all federal, state, county and local tax returns required to have
been filed by it and paid all taxes shown to be due on such returns. There are
in effect no waivers of applicable statutes of limitations with respect to taxes
for any year.
4.20. Tax Elections. Neither the Company nor ITC China has elected
-------------
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
----
treated as an "S" corporation or a collapsible corporation pursuant to Section
341(f) or Section 1362(a) of the Code, nor has the Company or ITC China made
any other elections pursuant to the Code (other than elections which relate
solely to matters of accounting, depreciation or amortization) which would have
a material affect on the Company or ITC China, their financial conditions, their
businesses as presently conducted or presently proposed to be conducted or any
of their properties or material assets.
4.21. Invention Assignment and Confidentiality Agreement. The Company
--------------------------------------------------
has caused each employee, officer, consultant and contractor of each of the
Company and ITC China to enter into and execute an agreement as to assignment to
the Company of inventions made during employment and the confidentiality of
proprietary information of the Company.
4.22. Environmental Matters. During the period that each of the
---------------------
Company and ITC China has owned or leased its properties and facilities, (a)
there have been no disposals, releases or threatened releases of Hazardous
Materials (as defined below) on, from or under such properties or facilities,
(b) neither the Company nor ITC China, nor to the Company's knowledge any third
party, has used, generated, manufactured or stored on, under or about such
properties or facilities or transported to or from such properties or facilities
any Hazardous Materials. Neither the Company nor ITC China has knowledge of any
presence, disposals, releases or threatened releases of Hazardous Materials on,
from or under any of such properties or facilities, which may have occurred
prior to the Company or ITC China having taken possession of any of such
properties or facilities. For purposes of this Agreement, the terms "disposal",
--------
"release", and "threatened release" shall have the definitions assigned thereto
------- ------------------
by the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA"). For the purposes
------
of this Section, "Hazardous Materials" shall mean any hazardous or toxic
-------------------
substance, material or waste which is regulated under, or defined as a
"hazardous substance", "pollutant", "contaminant", "toxic chemical", "hazardous
material",
10
<PAGE>
"toxic substance", or "hazardous chemical" under (1) CERCLA; (2) the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 et
--
seq.; (3) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
- --- --
seq.; (4) the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (5)
- --- -- ---
the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.;
-- ---
(6) regulations promulgated under any of the above statutes; or (7) any
applicable state or local statute, ordinance, rule, or regulation that has a
scope or purpose similar to those statutes identified above.
4.23. Interested Party Transactions. To the best knowledge of the
-----------------------------
Company, no officer or director of the Company or ITC China or any "affiliate"
or "associate" (as those terms are defined in Rule 405 promulgated under the
Securities Act) of any such person has had, either directly or indirectly, a
material interest in: (i) any person or entity which purchases from or sells,
licenses or furnishes to the Company or ITC China any goods, property,
technology, intellectual or other property rights or services; or (ii) any
contract or agreement to which the Company or ITC China is a party or by which
it may be bound or affected, except that Charles Zhang is a stockholder of a
Chinese entity popularly referred to as "Sohu."
4.24. Stock Restriction Agreements. Each person who, pursuant to any
----------------------------
benefit, bonus or incentive plan of the Company or ITC China, holds any
currently outstanding shares of Common Stock or other securities of either the
Company or ITC China or any option, warrant or right to acquire such shares or
other securities, has entered into or is otherwise bound by, an agreement
granting the Company or ITC China the right to repurchase the shares for the
original purchase price, or to cancel the unvested portion of the option,
warrant or right, in the event the holder's employment or services with the
Company or ITC China terminate for any reason, subject to release of such
repurchase or cancellation right on terms and conditions specified by the Board
of Directors of the Company.
4.25. Year 2000 Compatibility. All of the Company's and ITC China's
-----------------------
systems will record, store, process and calculate and present calendar dates
falling on and after January 1, 2000, and will calculate any information
dependent on or relating to such dates in the same manner and with the same
functionality, data integrity and performance as the products record, store,
process, calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates (collectively
"Year 2000 Compliant"). All of the Company's and ITC China's systems will lose
no functionality with respect to the introduction of records containing dates
falling on or after January 1, 2000. All of the Company's and ITC China's
internal computer systems, including without limitation, its accounting systems,
are Year 2000 Compliant.
4B. REPRESENTATIONS AND WARRANTIES OF CHARLES ZHANG. Charles Zhang
-----------------------------------------------
represents and warrants to the Investors as follows:
4B.1 Conflicting Agreements. He is not, as a result of the nature of
----------------------
the business conducted or proposed to be conducted by the Company or for any
other reason, in violation of (i) any fiduciary or confidential relationship,
(ii) any term of any contract or covenant (either with the Company or with
another entity) relating to employment, patents, proprietary information
disclosure, non-competition or non-solicitation, or (iii) any other contract or
agreement, or any judgment, decree or order of any court or administrative
agency relating to or
11
<PAGE>
affecting the right of Mr. Zhang to be employed by the Company. No such
relationship, term, judgment, decree, or order conflicts with Mr. Zhang
obligations to use his best efforts to promote the interests of the Company nor
does the execution and delivery of this Agreement and the transactions
contemplated hereby, nor the carrying on of the Company's business as an officer
or key employee of the Company, conflict with any such relationship, term,
judgment, decree or order.
4B.2 Litigation. There is no action, suit or proceeding, or
----------
governmental inquiry or investigation, pending or, to the best of Mr. Zhang's
knowledge, threatened against Mr. Zhang and, to the best of his knowledge, there
is no basis for any such action, suit, proceeding, or governmental inquiry or
investigation.
4B.3 Stockholder Agreements. Except as contemplated by or disclosed
----------------------
in this Agreement, Mr. Zhang is not a party to and has no knowledge of any
agreements, written or oral, relating to the acquisition, disposition,
registration under the Securities Act, or voting of the capital stock of the
Company.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor
-----------------------------------------------
represents and warrants to the Company as follows:
5.1. Authorization. This Agreement when executed and delivered by
-------------
the Investor will constitute a valid and legally binding obligation of the
Investor, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, moratorium, reorganization and similar laws affecting creditors'
rights generally and to general equitable principles.
5.2. Investigation; Economic Risk. The Investor acknowledges that it
----------------------------
is an "accredited investor" within the meaning that term as defined in Rule
50l(a) of Regulation D of the Securities Act (meaning that, in the case of a
corporation, partnership, or limited liability company, it either has total
assets in excess of $5,000,000 and was not formed for the specific purpose of
acquiring the Shares, or each of its equity owners are "accredited investors"
and, in the case of an individual, that the Investor has either (a) net worth
(or net worth with the Investor's spouse) in excess of $1 million, or net income
(not including any net income of the Investor's spouse) in excess of $200,000,
or joint income with the Investor's spouse in excess of $300,000, in each of the
two most recent years, with a reasonable expectation of reaching the same income
level in the current year). The Investor's address as set forth on Exhibit A
hereto represents its state or other jurisdiction of domicile, upon which the
Company may rely for the purpose of complying with applicable state "Blue Sky"
laws. The Investor acknowledges that it has had an opportunity to discuss the
business, affairs and current prospects of the Company with its officers. The
Investor further acknowledges having had access to information about the Company
that it has requested. The Investor acknowledges that it is able to fend for
itself in the transactions contemplated by this Agreement and has the ability to
bear the economic risks of its investment pursuant to this Agreement. The
Investor acknowledges that it is aware that Minister Wu Jichuan of the PRC
Ministry of the Information Industry announced recently that PRC law prohibits
foreign ownership of Internet content providers.
12
<PAGE>
5.3. Purchase for Own Account. The Shares and the Conversion Shares
------------------------
will be acquired for the Investor's own account, not as a nominee or agent, and
not with a view to or in connection with the sale or distribution of any part
thereof.
5.4. Exempt from Registration; Restricted Securities. The Investor
-----------------------------------------------
understands that the Shares and the Conversion Shares will not be registered
under the Securities Act, on the ground that the sale provided for in this
Agreement is exempt from registration under the Securities Act, and that the
reliance of the Company on such exemption is predicated in part on the
Investor's representations set forth in this Agreement. The Investor understands
that the Shares and the Conversion Shares being purchased hereunder are
restricted securities within the meaning of Rule 144 under the Securities Act;
that the Shares and the Conversion Shares are not registered and must be held
indefinitely unless they are subsequently registered or an exemption from such
registration is available.
5.5. Restrictive Legends. It is understood that each certificate
-------------------
representing (a) the Shares, (b) the Conversion Shares, and (c) any other
securities issued in respect of the any of the foregoing upon any stock split,
stock dividend, recapitalization, merger or similar event shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT
TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE
TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
5.6 Removal of Restrictive Legend. The legend set forth above shall
-----------------------------
be removed by the Company from any certificate evidencing Shares or Conversion
Shares upon delivery to the Company of an opinion of counsel, reasonably
satisfactory to the Company, that a registration statement under the Securities
Act is at that time in effect with respect to the legended security or that such
security can be freely transferred in a public sale without such a registration
statement being in effect and that such transfer will not jeopardize the
exemption or exemptions from registration pursuant to which the Company issued
the Shares or Conversion Shares.
5A. ACKNOWLEDGMENTS AND RELEASES BY HOLDERS OF SERIES A CONVERTIBLE
---------------------------------------------------------------
PREFERRED STOCK. Edward B. Roberts ("Ed Roberts"), Binder and Negroponte, in
- ---------------
their capacities as holders of Common Stock of the Company and/or Series A
Preferred Stock, each hereby acknowledges and agrees as follows:
13
<PAGE>
5A.1 No Preemptive Rights; Settlement of Dispute. As a holder of
-------------------------------------------
Common Stock of the Company and/or Series A Preferred Stock, he has no
preemptive rights with respect to the issuance and sale by the Company of shares
of its capital stock. Nevertheless, in order to prevent any future dispute, and
to resolve and settle any claims he may believe he may have as to the fairness,
from a financial point of view, to the Company and its stockholders of the
transactions contemplated by this Agreement, the Company, acting through its
Board of Directors, has offered to him or his designees the opportunity to
purchase 31,902 shares of Series C Preferred Stock as set forth herein.
5A.2 Waiver of Certain Rights by Holders of Series B Preferred Stock
---------------------------------------------------------------
and Series B-1 Preferred Stock. Holders of shares of Series B Preferred Stock
- ------------------------------
and Series B-1 Preferred Stock have preemptive rights with respect to the
issuance of capital stock of the Company. Nevertheless, in order to facilitate
the prevention of any future dispute and the resolution and settlement of any
potential claims of Ed Roberts, Binder or Negroponte as described above, such
holders have agreed to waive such preemptive rights with respect to the shares
of Series C Preferred Stock being offered to and purchased by Ed Roberts, Binder
and Negroponte or their designees as set forth herein.
5A.3 Acknowledgment and Release. In consideration of the foregoing,
--------------------------
and the Company's issuance and sale of shares of Series C Preferred Stock in
accordance with this Agreement, each of Ed Roberts, Binder and Negroponte hereby
(1) acknowledges that he has relied on no representations, warranties or
agreements of the Company or its directors, officers, stockholders or agents
except as set forth in this Agreement in making the acknowledgments and
agreements set forth in this Section 5A , (2) acknowledges that he has had the
opportunity to consult with legal counsel as to the subject matter hereof, (3)
acknowledges and agrees that the transactions contemplated by this Agreement are
fair, from a financial point of view, to the Company and each of its
stockholders, and (4) releases and forever discharges the Company and each of
its subsidiary and affiliate corporations, successors, assigns, officers,
directors, agents, consultants, attorneys, stockholders, employees, and insurers
from any and all claims, demands, liabilities, rights or causes of action,
actions, suits, and costs and fees of any kind or nature whatsoever relating to
the fairness, from a financial point of view, to the Company and each of its
stockholders of the transactions contemplated by this Agreement.
6. COVENANTS OF THE COMPANY. The Company covenants to each Investor as
------------------------
follows:
6.1 Use of Proceeds. The Company will use the Proceeds from the
---------------
sale of the Shares for business expansion, capital expenditures and general
working capital.
6.2 Vesting. Any Common Stock or other securities of the Company
-------
issued after the First Closing to employees, directors and consultants of the
Company pursuant to any benefit, bonus or incentive plan of the Company shall be
subject to customary vesting provisions over a period of four (4) years (other
than Common Stock issued pursuant to the exercise of options held by Edward
Roberts and Andrew Mason as of the date hereof), and a minimum of 50% of the
shares issued to Charles Zhang shall be subject to four (4) years of customary
vesting and repurchase provisions at the original issue price, except that
options for the purchase of
14
<PAGE>
50,000 shares of Common Stock, at an exercise price of $4.702 being granted to
Mr. Zhang effective upon the First Closing will vest quarterly over a one-year
period.
6.3 Initial Public Offering. The Company will use its efforts to
-----------------------
conduct a firm commitment underwritten public offering of its Common Stock
within twelve months after the date hereof.
7. CONDITIONS TO THE INVESTORS' OBLIGATIONS AT THE CLOSINGS. The
---------------------------------------------------------
obligations of each Tranche I Investor to purchase the Tranche I Shares at the
First Closing and of each Tranche II Investor who has elected to purchase Shares
to purchase Tranche II Shares at the Second Closing are subject to the
fulfillment, to the satisfaction each Investor, on or before the First Closing
and Second Closing, respectively, of the following conditions:
7.1. Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 4 hereof shall be true and correct (i)
as of the date of the First Closing, and (ii) as of the date of the Second
Closing, subject to changes contemplated by this Agreement; and the Company
shall have performed all obligations and conditions herein required to be
performed or observed by it (i) on or before the First Closing, with respect to
the issuance and sale of the Tranche I Shares, and (ii) on or before the Second
Closing, if consummated, with respect to the issuance and sale of the Tranche II
Shares.
7.2. Performance of Obligations. The Company shall have performed and
--------------------------
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it (i) on or
before the First Closing, with respect to the issuance and sale of the Tranche I
Shares, and (ii) on or before the Second Closing, with respect to the issuance
and sale of the Tranche II Shares; and the Company shall have obtained all
approvals, consents and qualifications necessary to complete the purchases and
sales described herein.
7.3. Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be satisfactory in substance and
form to the Investor, and the Investor shall have received all such counterpart
originals or certified or other copies of such documents as it may reasonably
request.
7.4. Consents and Waivers. The Company shall have obtained any and
--------------------
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
7.5. Compliance Certificate. At the First Closing, the Company shall
----------------------
deliver to each Tranche I Investor a certificate, dated as of the First Closing,
signed by the Company's President certifying that the conditions specified in
Paragraphs 7.1 and 7.2 have been fulfilled. At the Second Closing the Company
shall deliver to each Tranche II Investor another certificate, dated as of the
Second Closing, signed by the Company's President certifying that the conditions
specified in Sections 7.1 and 7.2 have been fulfilled.
15
<PAGE>
7.6. Securities Laws. The offer and sale of the Shares to the
---------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act and the registration and/or qualification
requirements of all applicable state securities laws.
7.7. Amendment to Certificate. The Certificate shall have been duly
------------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and stockholders and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
7.8 Execution and Delivery of Other Agreements. Execution and
------------------------------------------
delivery of amendments to accommodate and include the Series C therein and the
Investors as parties thereto of (a) the Investor Rights Agreement, (b) that
certain Amended and Restated Right of First Refusal and Co-Sale Agreement dated
as of August 18, 1998 between the Company, the persons listed on Exhibit B
thereto, Charles Zhang, Brant Binder, Nicholas Negroponte and Edward B. Roberts
(the "Right of First Refusal and Co-Sale Agreement") and (c) that certain
Amended and Restated Stockholders' Voting Agreement dated as of August 18, 1998
between the Company, the persons listed on Exhibit B thereto, Charles Zhang,
Brant Binder, Nicholas Negroponte and Edward B. Roberts (the "Stockholders'
Voting Agreement"), in each case by the parties whose participation is necessary
to effectuate such respective amendments.
7.9. Opinion of Company's Counsel. At the First Closing each Tranche
----------------------------
I Investor and, at the Second Closing, each Tranche II Investor, shall have
received from counsel to the Company an opinion addressed to the Investor, dated
the date of the Closing, in form and substance reasonably acceptable to the
Investor.
8. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSINGS. The obligations
---------------------------------------------------
of the Company under this Agreement are subject to the fulfillment, on or before
the First Closing and the Second Closing, of the following conditions:
8.1. Representations and Warranties. The representations and
------------------------------
warranties of the Tranche I Investors contained in Section 5 hereof shall be
true as of the First Closing and the representations and warranties of the
Tranche II Investors contained in Section 5 hereof shall be true as of the
Second Closing.
8.2. Payment of Purchase Price. Each Investor shall have delivered
-------------------------
to the Company the purchase price in accordance with the provisions of Section
3.
8.3. Certificate Effective. The Certificate shall have been duly
---------------------
adopted by the Company by all necessary corporate action of its Board of
Directors and shareholders, and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
8.4. Securities Exemptions. The offer and sale of the Shares to the
---------------------
Investors pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, and the registration and/or qualification
requirements of all applicable state securities laws.
8.5 Execution of Other Agreements. Execution and delivery by the
-----------------------------
Investors of amendments to accommodate and include the Series C therein and the
Investors as parties thereto or beneficiaries of rights equivalent to those set
forth in (a) the Investor Rights
16
<PAGE>
Agreement, (b) the Right of First Refusal and Co-Sale Agreement and (c) the
Stockholders' Voting Agreement.
9. MISCELLANEOUS.
-------------
9.1. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of Delaware without regard to provisions regarding
choice of laws.
9.2. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any party hereto
and the closing of all the transactions contemplated hereby.
9.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto whose rights or obligations hereunder are affected by such
amendments. This Agreement and the rights and obligations therein may not be
assigned by any Investor without the written consent of the Company except to a
parent corporation, a subsidiary or affiliate. This Agreement and the rights and
obligations therein may not be assigned by the Company.
9.4. Entire Agreement. This Agreement and the exhibits hereto which
----------------
are hereby expressly incorporated herein by this reference constitute the entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof; provided, however, that nothing in this Agreement shall be
-------- -------
deemed to terminate or supersede the provisions of any confidentiality and
nondisclosure agreements executed by the parties hereto prior to the date
hereof, which agreements shall continue in full force and effect until
terminated in accordance with their respective terms.
9.5. Notices. Except as may be otherwise provided herein, all
-------
notices, requests, waivers and other communications made pursuant to this
Agreement shall be in writing and shall be conclusively deemed to have been duly
given (a) when hand delivered to the other party; (b) when received when sent by
facsimile at the address and number set forth below; (c) for notices between
parties both of which are located in the United States, three business days
after deposit in the U.S. mail with first class or certified mail return receipt
requested postage prepaid and addressed to the other party as set forth below;
or (d) when received, if sent by a national overnight delivery service, postage
prepaid, addressed to the parties as set forth below, provided that the sending
party receives a confirmation of delivery from the delivery service provider.
Each person making a communication hereunder by facsimile shall promptly confirm
by telephone to the person to whom such communication was addressed each
communication made by it by facsimile pursuant hereto but the absence of such
confirmation shall not affect the validity of any such communication. A party
may change or supplement the addresses given below, or designate additional
addresses, for purposes of this Section 9.5 by giving the other party written
notice of the new address in the manner set forth above.
17
<PAGE>
If to the Company:
Sohu.com Inc.
7 Jianguomen Nei Avenue
Bright China Chang An Building
Tower 2 Room 519
Beijing, China 100005
Phone: 011 8610 6510 2165
Fax: 011 8610 6510 2159
with a copy to:
Goulston & Storrs, P.C.
400 Atlantic Avenue
Boston, MA 02110
Attn: Timothy B. Bancroft
Phone: (617) 574-3511
Fax: (617) 574-4112
If to the Investors to the address for such Investors set forth on
Exhibit A hereto.
9.6. Amendments and Waivers. Any term of this Agreement may be
----------------------
amended only with the written consent of the Company and the holders of a
majority of the shares of Series C Preferred Stock.
9.7. Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to any Investor, upon any
breach or default of any party hereto under this Agreement, shall impair any
such right, power or remedy of the Company, or the Investor nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of any similar breach of default thereafter occurring; nor shall any
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
Company or any Investor of any breach of default under this Agreement or any
waiver on the part of the Company or any Investor of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, or by law or otherwise afforded to the Company or any Investor
shall be cumulative and not alternative.
9.8. Legal Fees. In the event of any action at law, suit in equity
----------
or arbitration proceeding in relation to this Agreement or any Shares or other
securities of the Company issued or to be issued, the prevailing party, shall be
paid by the other party a reasonable sum for attorney's fees and expenses for
such prevailing party.
9.9. Finder's Fees. Except as set forth in Section 9.9 of the
------------- -----------
Disclosure Schedule, each party (a) represents and warrants to the other party
hereto that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement, and (b) hereby agrees to indemnify
and to hold harmless the other party hereto from and against any liability for
any commission or compensation in the nature of a finder's fee of any broker or
18
<PAGE>
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the indemnifying party or any of its
employees or representatives are responsible.
9.10. Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
9.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.12. Severability. Should any provision of this Agreement be
------------
determined to be illegal or unenforceable, such determination shall not affect
the remaining provisions of this Agreement.
9.13 Protection of Confidential Information. Confidential or
--------------------------------------
proprietary information disclosed by either party under this Agreement, as well
as the terms of this Agreement and each Investor's investment in the Company,
shall be considered confidential information (the "Confidential Information")
and shall not be disclosed by the Company or any other party to this Agreement
to any third party, subject to Section 9.14 below. Each party shall immediately
notify the other parties of any information that comes to its attention which
might indicate that there has been a loss of confidentiality with respect to the
Confidential Information. In the event that the Company or any other party
becomes legally compelled (by statute or regulation or by oral questions,
interrogatories, request for information or documents, subpoena, criminal or
civil investigative demand or similar process, including without limitation, in
connection with any public or private offering of the Company's capital stock)
to disclose any of the Confidential Information, such party (the "Disclosing
Party") shall provide the other party (the "Non-Disclosing Party") with prompt
written notice of that fact so that the appropriate party may seek (with the
cooperation and reasonable efforts of the other parties) a protective order,
confidential treatment or other appropriate remedy. In such event, the
Disclosing Party shall furnish only that portion of the Confidential Information
which is legally required and shall exercise reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded the Confidential
Information to the extent reasonably requested by the Non-Disclosing Party. The
provisions of this Section 9.13 shall be in addition to, and not in substitution
for, the provisions of any separate nondisclosure agreement executed by the
parties hereto with respect to the transaction contemplated hereby; provided
that, except as expressly set forth herein, disclosure of information and
exchange of information between the Company and Intel Corporation ("Intel")
(including without limitation any exchanges or disclosures of information with
any Intel board observer) shall be governed by the terms of the Corporate Non-
Disclosure Agreement, No. 101698, executed by Intel and ITC.
9.14 Disclosure of Terms; Press Releases. Notwithstanding the
-----------------------------------
provisions of Section 9.13 above, from and after the First Closing, the Company
may disclose the existence of this Agreement and the terms hereof, as well as
each Investor's investment in the Company solely to the Company's investors,
investment bankers, lenders, accountants, legal counsel, business partners, and
bona fide prospective investors, employees, lenders and business partners,
19
<PAGE>
in each case only where such persons or entities are under appropriate
nondisclosure obligations. In addition, the Company may disclose the fact that
any Investor is an investor in the Company to third parties without the
requirement of nondisclosure obligations. Within sixty (60) days of the First
Closing, the Company may issue a press release disclosing that any Investor has
invested in the Company; provided that the release does not disclose the amount
or other specific terms of the investment and is approved in advance in writing
by the Investors. Each Investor, at its sole discretion, may provide an
executive quote or other material regarding its investment in the Company. No
other announcement regarding an Investor's investment in the Company in a press
conference, in any professional or trade publication, in any marketing materials
or otherwise to the general public may be made without the prior written consent
of such Investor, which consent may be withheld at the sole discretion of the
Investor. Notwithstanding the foregoing, an Investor may disclose its investment
in the Company to third parties or to the public at its discretion, and the
Company shall have the right to disclose to third parties any such information
disclosed by the Investor in a press release or other public announcement. If
the Company or an Investor determines that any disclosure not otherwise
authorized by this Agreement is required by law or regulation, then the
provisions of Section 9.13 regarding disclosure of Confidential Information by a
Disclosing Party shall govern.
9.15 Dispute Resolution. The parties agree to negotiate in good
------------------
faith to resolve any dispute between them regarding this Agreement. If the
negotiations do not resolve the dispute to the reasonable satisfaction of both
parties, then each party shall nominate one senior officer of the rank of Vice
President or higher as its representative. These representatives shall, within
thirty (30) days of a written request by either party to call such a meeting,
meet in person and alone (except for one assistant for each party) and shall
attempt in good faith to resolve the dispute. If the disputes cannot be resolved
by such senior managers in such meeting, the parties agree that they shall, if
requested in writing by either party, meet within thirty (30) days after such
written notification for one day with an impartial mediator and consider dispute
resolution alternatives other than litigation. If an alternative method of
dispute resolution is not agreed upon within thirty (30) days after the one day
mediation, either party may begin litigation proceedings. This procedure shall
be a prerequisite before taking any additional action hereunder.
[SIGNATURE PAGE FOLLOWS]
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year herein above first written.
SOHU.COM INC. For and on behalf of
KUMMELL INVESTMENTS LIMITED
By: __________________________
Printed Name: __________________ _______________________________
Title: _________________________ Printed Name: _________________
Title: ________________________
ITC ELECTRONIC TECHNOLOGY
BEIJING CO. LTD. _______________________________
Printed Name: _________________
Title: ________________________
By: __________________________
Printed Name: __________________
Title: _________________________
HARRISON ENTERPRISES, INC. INTEL CORPORATION
By: __________________________ By: __________________________
Printed Name: __________________ Printed Name: _________________
Title: _________________________ Title: ________________________
DOW JONES & COMPANY, INC. PTV-CHINA, INC.
By: __________________________ By: __________________________
Printed Name: __________________ Printed Name: _________________
Title: _________________________ Title: ________________________
____________________________ ____________________________
EDWARD B. ROBERTS, as trustee of the NICHOLAS NEGROPONTE
Roberts Family Trust and individually as to
Section 5A
____________________________
BRANT C. BINDER
SIGNATURE PAGES OF SERIES C PREFERRED STOCK PURCHASE AGREEMENT
-21-
<PAGE>
CHARLES ZHANG
Executed solely for the purpose of making
the representations and warranties set forth
in Section 4B hereof:
_____________________________________
Charles C.Y. Zhang
SIGNATURE PAGES OF SERIES C PREFERRED STOCK PURCHASE AGREEMENT
22
<PAGE>
Exhibit 10.9
SOHU.COM INC.
SECOND AMENDED AND RESTATED STOCKHOLDERS' VOTING AGREEMENT
This Second Amended and Restated Stockholders' Voting Agreement, (the
"Agreement") is made as of October 18, 1999 by and among Sohu.com Inc., a
Delaware corporation (the "Company") formerly known as Internet Technologies
China Incorporated, the persons listed as Investors on Exhibit A (the
"Investors") and Charles Zhang, Brant Binder, Nicholas Negroponte and Edward B.
Roberts (the "Founders"). The Investors and the Founders will be referred to
herein collectively as the "Holders."
WHEREAS, the Investors are parties to (a) a Series B Preferred Stock
Purchase Agreement (the "Series B Purchase Agreement") dated as of March 10,
1998 between the Company and the Investors named therein (b) a Series B-1
Preferred Stock Purchase Agreement (the "Series B-1 Purchase Agreement") dated
as of August 18, 1998 between the Company and the Investor named therein or (c)
a Series C Preferred Stock Purchase Agreement (the "Series C Purchase
Agreement") dated as of the date hereof between the Company and the Investors
named therein;
WHEREAS, the Company and the Investors which are parties to the Series B
Purchase Agreement and the Series B-1 Purchase Agreements (the "Initial
Investors") are parties to an Amended and Restated Stockholders' Voting
Agreement dated as of August 18, 1998 (the "First Amended and Restated
Stockholders' Voting Agreement");
WHEREAS, certain of the obligations of the Company and of the Investors
which are parties thereto under the Series C Purchase Agreements (the
"Additional Investors") are conditioned upon the amendment and restatement of
the First Amended and Restated Stockholders' Voting Agreement to add the
Additional Investors as parties and to make such additional changes as are set
forth herein; and
WHEREAS, the Company and the Initial Investors wish to amend and restate
the First Amended and Restated Stockholders' Voting Agreement as set forth
herein and the parties hereto wish to have this Agreement govern certain voting
by the Holders in elections for directors of the Company and to clarify certain
provisions of the Company's Third Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation").
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
the parties hereto agree as follows:
1. Voting.
------
1.1 In all elections of Directors of the Company held during the term
of this Agreement (whether at a meeting or by written consent in lieu of a
meeting), each of the Holders unconditionally agrees to vote all shares of the
Company's Common Stock, $.01 par value
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<PAGE>
"Common Stock"), and all shares of the Company's Preferred Stock, $.01 par value
("Preferred Stock"), and any other voting securities of the Company now owned or
hereafter acquired or controlled by it or him, whether by purchase, conversion
of other securities, exercise of rights, warrants or options, stock dividends or
otherwise, to elect to the Board of Directors of the Company (i) at least one
nominee selected by Intel Corporation ("Intel"), (ii) at least one nominee
selected by the holders of a majority in interest of such voting securities held
by Harrison Enterprises Inc. ("Harrison") and Kummell Investments Limited
("Kummell"), and (iii) at least one nominee selected by Dow Jones & Company,
Inc. ("Dow Jones").
1.2 No Holder will vote to remove any member of the Board of Directors of
the Company designated in accordance with the foregoing provisions of this
Section, other than for cause, unless the person or persons entitled to nominate
or approve that Director so votes or otherwise consents, and, if the person or
persons so entitled to nominate or approve so votes or otherwise consents, then
all Holders will vote likewise.
1.3 Without the approval of the holders of a majority of the Preferred
Stock purchased by Intel pursuant to the Series B Purchase Agreement and the
holders of a majority of the Preferred Stock purchased by Kummell pursuant to
the Series B Purchase Agreement, the Company will not take, and no Holder will
vote in favor of, any action which:
(i) increases the number of authorized shares of the Series B
Convertible Preferred Stock of the Company (the "Series B Preferred") or amends
or changes the rights, preferences, powers, privileges or restrictions of the
Series B Preferred;
(ii) authorizes, creates or issues shares of any class or series of
stock having a preference superior to or on a parity with the Series B
Preferred;
(iii) reclassifies stock into shares having a preference over or on a
parity with the Series B Preferred;
(iv) amends the Company's Certificate of Incorporation in a manner
that adversely affects the rights of the Series B Preferred;
(v) results in a merger or consolidation of the Company with one or
more other corporations or other entities in which the stockholders of the
Company immediately prior to such merger or consolidation hod stock representing
less than a majority of the voting power of the outstanding shares of the
Company or resulting entity immediately after such merger or consolidation;
(vi) results in the sale or other transaction in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Company, or otherwise results in the reorganization of the
Company;
(vii) results in the dissolution, liquidation or winding up of the
Company;
(viii) declares or pays a dividend on the Common Stock (other than a
dividend payable solely in shares of Common Stock);
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<PAGE>
(ix) results in the incurrence of indebtedness in excess of $50,000;
(x) materially alters or changes the strategic direction or
business operations of the Company in a manner that is not contemplated by the
Company's most recent board-approved business plan; or
(xi) amends ARTICLE IX ("Indemnification") of the Company's By-Laws.
1.4 Without the approval of the holders of a majority of the Series C
Convertible Preferred Stock of the Company (the "Series C Preferred"), the
Company will not take, and no Holder will vote in favor of, any action which:
(i) increases the authorized number of shares of the Series C
Preferred or amends or changes the rights, preferences, powers, privileges or
restrictions of the Series C Preferred;
(ii) authorizes, creates or issues shares of any class or series of
stock having a preference superior to or on a parity with the Series C
Preferred;
(iii) reclassifies stock into shares having a preference over or on a
parity with the Series C Preferred;
(iv) amends the Company's Certificate of Incorporation in a manner
that adversely affects the rights of the Series C Preferred
(v) results in a merger or consolidation of the Company with one or
more other corporations or other entities in which the stockholders of the
Company immediately prior to such merger or consolidation had stock representing
less than a majority of the voting power of the outstanding shares of the
Company or resulting entity immediately after such merger or consolidation;
(vi) results in the sale or other transaction in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Company, or otherwise results in the reorganization of the
Company;
(vii) results in the dissolution, liquidation or winding up of the
Company;
(viii) declares or pays a dividend on the Common Stock (other than a
dividend payable solely in shares of Common Stock);
(ix) results in the incurrence of indebtedness in excess of $50,000;
(x) materially alters or changes the strategic direction or
business operations of the Company in a manner that is not contemplated by the
Company's most recent board-approved business plan; or
(xi) amends the indemnification provisions of the Company's By-Laws.
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<PAGE>
2. Legend. For so long as this Agreement is in effect, each certificate
------
representing shares of Common Stock, Preferred Stock or other voting securities
of the Company now or hereafter owned by a Holder or any transferee of a holder
will be endorsed with the following legend:
VOTING OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A CERTAIN STOCKHOLDERS' VOTING AGREEMENT BY AND
AMONG THE STOCKHOLDER, THE COMPANY AND CERTAIN
HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO
THE SECRETARY OF THE COMPANY.
3. Termination.
-----------
(i) The obligations of the Holders as to clause (i) of Section
1.1 above will terminate at such time as Intel does not hold either (a) at least
50% of the Preferred Stock purchased by it pursuant to the Series B Purchase
Agreement or (b) at least 50% of the Preferred Stock purchased by it pursuant to
the Series C Purchase Agreement or, in either such case, Common Stock into which
any such Preferred Stock has been converted.
(ii) The obligations of the Holders as to clause (ii) of
Section 1.1 above will terminate at such time as Harrison and Kummell do not
between them hold either (a) at least 50% of the Preferred Stock purchased by
them pursuant to the Series B Purchase Agreement or (b) at least 50% of the
Preferred Stock purchased by them pursuant to the Series C Purchase Agreement
or, in either such case, Common Stock into which any such Preferred Stock has
been converted.
(iii) The obligations of the Holders as to clause (iii) of
Section 1.1 above will terminate at such time as Dow Jones does not hold either
(a) at least 50% of the Preferred Stock purchased by it pursuant to the Series B
Purchase Agreement or (b) at least 50% of the Preferred Stock purchased by it
pursuant to the Series C Purchase Agreement or, in either such case, Common
Stock into which any such Preferred Stock has been converted.
(iv) Sections 1.1 and 1.2 of this Agreement will terminate in
their entirety at such time as none of Intel, Harrison and Kummell together, or
Dow Jones holds at least 50% of the aggregate amount of Preferred Stock so
purchased by it or, in any such case, Common Stock into which any such Preferred
Stock has been converted.
4. Miscellaneous.
-------------
4.1 Specific Performance; Other Rights. The Company and the Holders
----------------------------------
recognize that the rights of the parties under this Agreement are unique, and
accordingly Intel, Harrison and Kummell and Dow Jones will, in addition to such
other remedies as may be available to any of them at law or in equity, have the
right to enforce their rights hereunder by actions for injunctive relief and
specific performance to the extent permitted by law. Except as provided herein,
this
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<PAGE>
Agreement is not intended to limit or abridge any rights of the parties which
may exist apart from this Agreement.
4.2 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of Delaware as applied to agreements among Delaware
residents, made and to be performed entirely within the State of Delaware.
4.3 Obligations of Transferees. This Agreement and the obligations of the
--------------------------
parties hereunder shall be binding upon the parties hereto and, their respective
successors, assigns, and transferees.
4.4 Severability. In the event one or more of the provisions of this
------------
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement and this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein.
4.5 Attorney Fees. In the event that any dispute among the parties to this
-------------
Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
4.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.7 Stock Split. All references to numbers of shares in this Agreement
-----------
shall be appropriately adjusted to reflect any stock dividend, split,
combination or other recapitalization of shares by the Company occurring after
the date of this Agreement.
4.8 Aggregation of Stock. All shares of Common Stock held or acquired by
--------------------
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
4.9 Termination of the First Amended and Restated Stockholders' Voting
------------------------------------------------------------------
Agreement. The First Amended and Restated Stockholders' Voting Agreement is
- ---------
hereby terminated in its entirety and replaced by this Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SOHU.COM INC.
By:_______________________________
Charles Zhang
President
INVESTORS:
__________________________________
(Printed Name of Investor)
By:_______________________________
Name:
Title:
FOUNDERS:
__________________________________
(Signature of Founder)
__________________________________
(Printed Name of Founder)
[SIGNATURE PAGE TO SECOND AMENDED AND RESTATED
STOCKHOLDERS' VOTING AGREEMENT]
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<PAGE>
EXHIBIT 23.1
SULLIVAN & CROMWELL
28th Floor
Nine Queen's Road Central
Hong Kong
Tel: 852-2826-8688
Fax: 852-2522-2280
VIA EDGAR
- ---------
Sohu.com Inc.,
7 Jianguomen Nei Avenue,
Suite 519, Tower 2,
Bright China Chang An Building,
Beijing 100005,
People's Republic of China.
Dear Sirs:
We hereby consent to the reference to us under the caption "Validity
of Common Stock" in the Prospectus of Sohu.com Inc. included in the Registration
Statement filed by Sohu.com Inc. with the United States Securities and Exchange
Commission as of the date hereof.
In giving this consent, we do not hereby admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE>
Consent of PRC Counsel
The Board of Directors
Sohu.com Inc.
We consent to the reference of our firm under the heading "Experts" in the
prospectus.
/s/ TransAsia Lawyers
Beijing
People's Republic of China
Date: May 26, 2000
<PAGE>
Exhibit 23.3
Consent of Independent Accountants
The Board of Directors
Sohu.com Inc.
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 2, 2000 relating to the financial statements and
financial statement schedules of Sohu.com Inc., which appear in such
Registration Statement. We also consent to the references to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Beijing, China
Date: May 26, 2000
<PAGE>
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles Zhang, Thomas Gurnee and Victor
Koo, and each of them, his or her true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
on Form S-1 of Sohu.com Inc. (File No. 333-96137) and any and all additional
registration statements pursuant to Rule 462(b) of the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Date:
Signature Title
--------- -----
/s/ Mary Ma Director of Sohu.com Inc.
--------------------------
Mary Ma
