<PAGE>
As filed with the Securities and Exchange Commission on February 4, 2000.
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
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 519, 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. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Titelof Each Class of Proposed Maximum Amount of
Securiies to be Registeredt 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 , 2000
Shares
Sohu.com Inc.
Common Stock
--------
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 underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<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
Warburg Dillon Read
The date of this prospectus is , 2000.
<PAGE>
[Inside front cover--screen shot of Sohu home page.]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Enforceability of Civil
Liabilities........................ 23
Cautionary Notice Regarding Forward-
Looking Statements................. 23
Use of Proceeds..................... 24
Dividend Policy..................... 24
Capitalization...................... 25
Dilution............................ 27
Exchange Rate Information........... 28
Selected Consolidated Financial
Data............................... 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 31
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 40
Regulation of the PRC Internet
Industry........................ 55
Management....................... 59
Principal Shareholders........... 67
Certain Transactions............. 68
Shares Eligible for Future Sale.. 69
Description of Capital Stock..... 72
Taxation......................... 76
Underwriting..................... 79
Notice to Canadian Residents..... 83
Validity of Common Stock......... 84
Experts.......................... 84
Where You Can Find More
Information..................... 84
Index to Financial Statements.... F-1
</TABLE>
------------
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.
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.
As used in this prospectus, references to "us", "we", "our", "our company",
"Sohu.com" and "Sohu" are to Sohu.com Inc., a company organized under the laws
of the State of Delaware, 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 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
underwriters 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.
Sohu.com Inc.
Our Business
We are a leading Internet portal in China. During January 2000, we averaged
in excess of six million page views per day. In addition, as of January 31,
2000, we had over 880,000 registered e-mail users. Our portal consists of the
following:
. sophisticated Chinese language Web navigational and search capabilities;
. twelve main content channels and seven special features;
. Web-based communications 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 December 31, 1999, 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 70 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.
1
<PAGE>
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.
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 $220 million in 2003. 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.
2
<PAGE>
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 Sohu ITC Information Technology (Beijing) Co., Ltd., or
Beijing Sohu, our wholly owned PRC subsidiary.
Our principal executive offices are located at 7 Jianguomen Nei Avenue,
Suite 519, 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.
3
<PAGE>
The Offering
Common stock offered...... shares.
Over-allotment option..... Up to shares to the underwriters in this
offering. Unless we state otherwise, the
information in this prospectus does not take into
account the possible sale of these additional
shares.
Common stock to be
outstanding after this
offering................. shares or shares if the underwriters
exercise their over-allotment option in full.
Excluded are 527,647 shares of common stock
reserved for issuance upon exercise of outstanding
options and 99,143 shares of common stock reserved
for issuance upon exercise of outstanding warrants.
Use of proceeds........... We intend to use approximately $17.0 million of the
net proceeds to fund capital expenditures,
consisting primarily of additions to our networking
and computer infrastructure. The remainder of the
net proceeds will be used for general corporate
purposes, including working capital, expansion of
our sales and marketing activities 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
pending or proposed acquisitions.
Proposed Nasdaq Symbol.... SOHU.
4
<PAGE>
Summary Consolidated Financial Data
The following summary consolidated financial data have been derived from our
audited consolidated financial statements for the three-year period ended
December 31, 1999 and from our unaudited consolidated pro forma balance sheet
as of December 31, 1999, 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 pro
forma balance sheet as of December 31, 1999, 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.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1998 1999
--------- ---------- ----------
(in thousands, except for per
share and share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues................................... $ 78 $ 472 $ 1,617
Total costs and expenses................... (238) (1,082) (5,077)
Operating loss............................. (160) (610) (3,460)
Net loss................................... (160) (615) (3,449)
Net loss attributable to common
stockholders.............................. (160) (859) (4,366)
Basic and diluted net loss per share
attributable to common stockholders....... $ (0.05) $ (0.24) $ (1.22)
Shares used in computing basic and diluted
net loss per share........................ 3,500,000 3,564,000 3,588,000
Basic and diluted pro forma net loss per
share attributable
to common stockholders.................... $ (0.41)
Shares used in computing basic and diluted
pro forma net loss per share ............. 8,314,000
</TABLE>
The pro forma balance sheet data as of December 31, 1999 give effect to the
sale of 518,459 shares of Series D preferred stock for $38.576 per share on
January 29, 2000 and the sale of 259,229 shares of Series D preferred stock for
$38.576 per share on February 2, 2000. The pro forma as adjusted balance sheet
data as of December 31, 1999 give effect to:
. the mandatory conversion of all outstanding Series A, B, B-1, C and D
preferred stock into common stock upon the consummation of this
offering; 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 estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $3,924 $33,924 $
Working capital................................. 2,577 32,557
Total assets.................................... 7,076 37,076
Total liabilities............................... 1,911 1,911 1,911
Mandatorily redeemable convertible preferred
stock.......................................... 10,207 40,207 --
Total shareholders' equity (deficit)............ (5,042) (5,042)
</TABLE>
5
<PAGE>
RISK FACTORS
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. If any of the
risks described below actually occurs, our business, financial condition and
results of operations could be materially adversely affected. The trading price
of our shares could decline, and you may lose all or part of your investment.
Risks relating to Sohu.com
We have a limited operating history and 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
sohu.com. We have only a limited operating history upon which you may evaluate
our business and prospects. We have incurred significant net losses since
inception and had an accumulated deficit of approximately $5.4 million as of
December 31, 1999. We anticipate that we will continue to incur substantial net
losses due to a high level of planned operating and capital expenditures,
increased sales and marketing costs, additional personnel hires, greater levels
of product development and our general growth objectives. Our net losses will
increase in the future and we may never achieve or sustain profitability.
You must consider the risks, expenses and uncertainties that an early stage
company like ours faces. These risks include our ability to:
. increase our revenues from online advertising and other sources;
. derive revenues from e-commerce activities;
. increase awareness of the Sohu brand and continue to build user loyalty;
. expand the content and services on our portal;
. attract a larger audience to our portal;
. maintain our current, and develop new, strategic relationships;
. implement a successful sales strategy;
. attract, retain and motivate qualified personnel;
. respond effectively to competitive pressures; and
. continue to develop and upgrade our technology.
If we are unsuccessful in addressing these risks, our business, financial
condition and results of operations will be materially and adversely affected.
We and our shareholders may be adversely affected by PRC government
regulation of Internet companies
Our entire Internet business is owned and conducted by our wholly owned
subsidiary, Sohu ITC Information Technology (Beijing) Co., Ltd., or Beijing
Sohu, which is a PRC wholly-foreign owned enterprise, or a WFOE. We are a
Delaware corporation and a foreign person under PRC law. Accordingly, our
Internet business is 100% foreign-owned.
There are various issues, risks and uncertainties regarding the legality of
foreign investment in the PRC Internet sector, the various businesses and
activities of Internet companies in the PRC and securities offerings by
companies operating in the PRC Internet sector. As described below, in the
opinion of TransAsia Lawyers, our PRC counsel, the ownership structure of
Beijing Sohu and its businesses do not violate any existing PRC laws or
regulations, and no PRC governmental approvals are required for this offering.
However, as described
6
<PAGE>
below, there are substantial uncertainties regarding the proper interpretation
of existing PRC laws and regulations and there are likely to be new PRC laws
and regulations relating to the Internet sector adopted in the future.
The issues, risks and uncertainties relating to PRC government regulation of
the PRC Internet sector include the following:
. Foreign investment is prohibited in businesses providing value-added
telecommunication services, including computer information services or
electronic mail box services as defined in a 1995 PRC regulation.
However, the relevant regulation is silent as to whether the Internet
business is included in these businesses in which foreign investment is
prohibited.
. Various officials of the PRC Ministry of Information Industry, or MII,
have during 1999 stated publicly that foreign investment is prohibited
in the PRC Internet sector, including in Internet service providers and
Internet content providers.
. 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. At this time, we do not know the timing or terms of
these new laws or regulations or whether or how they will apply to us.
. 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. According to press reports, various
government authorities 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. We do not know the timing or terms of such possible
new laws and regulations or whether or how they will apply to us or this
offering.
. According to press reports, under the agreement reached in November 1999
between China and the United States concerning the United States'
support of China's entry into the World Trade Organization, or WTO,
foreign investment in PRC Internet services will be liberalized at the
same rate as other key telecommunications services. In addition,
according to press reports, key telecommunication services in the PRC
will be subject to a foreign ownership limit of 49% for the first two
years after China's entry into the WTO and 50% thereafter. We do not
know if this agreement will in fact be implemented or the timing thereof
or the terms of any new laws or regulations resulting from such
implementation or whether our Internet business will be subject to these
foreign ownership limits.
. A WFOE is prohibited from engaging in the businesses of providing or
distributing advertisements as defined under the 1994 PRC Advertising
Law. The relevant law is silent as to whether online advertising is
covered by the law.
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
businesses, including our business.
In the opinion of TransAsia Lawyers, our PRC counsel, the ownership
structure of Sohu and our wholly owned subsidiary, Beijing Sohu, both currently
and after giving effect to this offering, and the current and proposed
businesses and operations of Sohu and Beijing Sohu as described in this
prospectus, do not violate or breach any of the 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 structure, businesses and operations
or this offering. TransAsia Lawyers is also of the opinion that:
. Our business activities in the PRC do not fall within the definition of
"computer information services" or "electronic mail box services" as
defined under the 1995 regulation described above.
7
<PAGE>
. 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 and e-commerce.
. Online advertising is neither regulated nor prohibited by any existing
PRC laws, including the 1994 PRC Advertising Law.
However, the opinion of TransAsia Lawyers contains the following
qualifications:
. Since September 1999, senior MII officials have made various statements
regarding the restrictions on foreign investment in the PRC Internet
sector and the positions set forth in such statements may ultimately be
adopted to varying degrees by the relevant PRC regulatory authorities as
the basis for subsequent legislation.
. In the event that new legislation restricting foreign investment in the
PRC Internet sector is enacted by the relevant PRC regulatory
authorities, such PRC regulatory authorities may request Beijing Sohu to
restructure its operations accordingly.
As described above, the laws and regulations applicable to PRC Internet
companies are uncertain and in a state of flux. In addition, there will likely
be new laws and regulations adopted in the future. Accordingly, we cannot
assure you whether the PRC government may ultimately take a contrary view to
the opinions of our PRC counsel on the various issues discussed above. It is
possible that the relevant PRC authorities could, at any time, assert that any
portion or all of our existing or future ownership structure and businesses, or
this offering, violate existing or future PRC laws and regulations. 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 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. For example,
China's potential entry into the WTO will likely affect the terms of any new
laws and regulations, and may result in the PRC government adopting a 49% or
50% limit on foreign investment in Internet businesses, as well as affect the
interpretation of existing regulations relating to the PRC Internet sector.
Furthermore, as expressed in the legal opinion of TransAsia Lawyers, the MII's
positions set forth in the statements discussed above may become the official
PRC government policy, which may result in new laws or regulations prohibiting
any of the businesses or the ownership structure of Beijing Sohu or requiring
governmental approvals for this offering.
If we 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 a violation, including, without limitation, the following:
. levying fines;
. revoking our business license;
. requiring us to restructure our ownership structure or operations;
and/or
. requiring us to discontinue any portion or all of our Internet business
or our investment in Beijing Sohu.
Any such action would have a material adverse effect on our business,
financial condition and results of operations and on our shareholders. See
"Regulation of the PRC Internet Industry".
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 and 1999, online advertising revenues
represented approximately 75% and 93% 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.
8
<PAGE>
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 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 will depend, among other things, on:
. advertisers' acceptance of the Internet as an effective and sustainable
advertising medium in the PRC;
. the development of a large base of users of our portal possessing
demographic characteristics attractive to advertisers;
. the effectiveness of our online advertising delivery, tracking and
reporting systems;
. our ability to compete successfully with other Web sites seeking online
advertising revenue and with off-line advertising media;
. the growth of Internet users and Internet penetration in China; and
. the development of televisions and mobile telephones as alternative
distribution channels for online advertising.
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.
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, financial condition and results of operations.
In addition, an element of our strategy is to diversify our revenue stream
by entering into Web site sponsorship arrangements and by introducing e-
commerce services. We cannot assure you that we will be successful in
implementing this strategy.
Our operating results are likely to fluctuate significantly and may differ
from market expectations
Because a high percentage of our expenses, particularly bandwidth leasing
costs and employee compensation, are fixed, our annual and quarterly operating
results 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 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.
Factors which may cause fluctuations in our revenues and earnings include,
among other things:
. advertising budgeting and placement cycles of advertisers;
. amount and timing of capital expenditures and other significant costs;
. introduction of new products or services;
. pricing and other changes in our industry; and
. technical difficulties we may encounter.
9
<PAGE>
We will not be able to attract visitors or advertisers if we do not maintain
and develop the Sohu brand
Maintaining and 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 and advertisers. This could have
a material and adverse effect on our business, financial condition and results
of operations.
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:
. 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;
. economic, political and other conditions in the PRC;
. PRC governmental policies relating to foreign currency borrowings; and
. PRC governmental regulation of foreign investment in Internet companies.
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 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 strategic 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,
Cosmopolitan, 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 financially attractive terms.
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We depend on key personnel and our business may suffer 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. We rely on his expertise in our
business operations and on his personal relationships with our shareholders,
the relevant regulatory authorities and our customers and suppliers. 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, and our business,
financial condition and results 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 Sohu, 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 and other facilities. 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 successful
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 the
most 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
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 another provider.
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.
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The loss of one of our significant advertisers would reduce our advertising
revenues and materially and adversely affect our business
We depend on a small group of advertisers for a significant portion of our
total revenues. For 1999, two of our advertisers, one 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. 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 affiliates
of these entities 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 not be successful and may result in equity or earnings dilution
As a component of our growth strategy, we 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 and significant amortization expenses related to goodwill and other
intangible assets, each of which could materially and adversely affect our
business, financial condition and results of operations. These acquisitions
involve numerous risks, including:
. expenses incurred and difficulties in identifying potential targets and
consummating suitable acquisitions;
. expenses related to undisclosed or potential legal liabilities of
acquired companies, including those related to intellectual property and
employment;
. the need to obtain the approval of the relevant PRC governmental
authorities;
. difficulties in the integration and assimilation of the operations,
technologies, products and personnel of the acquired business;
. the diversion of management's attention from other business concerns;
. the unavailability of favorable acquisition financing; and
. the potential loss of key employees of any acquired business.
The failure to successfully identify and consummate suitable acquisitions or
integrate any acquired assets, technologies and businesses could have a
material adverse effect on our business, financial condition and results of
operations.
We rely on income from dividends and other distributions 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 Sohu, our wholly owned subsidiary in the PRC that owns and conducts our
entire Internet business. We will rely on dividends and other distributions
paid by Beijing Sohu for our cash requirements, including the funds necessary
to service any debt we may incur. If Beijing Sohu incurs debt on its own behalf
in the future, the instruments governing the debt may restrict Beijing Sohu's
ability to pay dividends or make other distributions to us. In addition, PRC
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legal restrictions permit payment of dividends by Beijing Sohu only out of its
net income, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC law Beijing Sohu 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.
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".
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 may adversely
affect our business and we may be subject to intellectual property
infringement claims
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
our 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.
In addition, 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.
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We may be subject to claims based on the content 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
. 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
If the Internet is not widely accepted as a medium for advertising and
commerce, our business will suffer
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 and commerce, our business will
suffer. The Internet advertising and e-commerce markets are new and rapidly
evolving, particularly in China. As a result, we cannot determine their
effectiveness or long-term market acceptance as compared with traditional media
and commerce.
Many of our current or 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. 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 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.
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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., as
well as domestic PRC Internet companies that are affiliated with large
corporations such as American Online, Inc. and Softbank Corporation. These
competitors may have certain advantages over us, including:
. substantially greater financial and technical resources;
. more extensive and well developed marketing and sales networks;
. 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.
Our growth within the Internet market in China depends on the establishment
of an adequate telecommunications infrastructure
The telecommunications infrastructure in China is not well developed. In
addition, access to the Internet is accomplished primarily by means of the
Internet backbones of separate national interconnecting networks that connect
through several international gateways to the Internet outside of China. The
Internet backbones and international gateways are all owned and operated by the
Chinese government and are the only channels through which the domestic China
Internet network can connect to the international Internet network. Although
private sector Internet service providers exist in China, almost all access to
the Internet is accomplished through ChinaNet, China's primary commercial
network, which is owned and operated by the Chinese government. We rely on this
backbone, China Telecom and the Beijing Telecom Administration to provide data
communications capacity primarily through local telecommunications lines. As a
result, we will continue to 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 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. 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 by the Chinese
government and state-owned enterprises, our business, financial condition and
results of operations could be materially and adversely affected.
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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.
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
Unexpected network interruptions caused by system failures may result in
reduced visitor traffic, reduced revenue and harm to our reputation
As the amount of Web pages and traffic increase, we cannot assure you that
we will be able to increase the scale of our systems proportionately. We are
also 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.
In addition, we have limited backup systems and redundancy and we 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 pursuant to one-year server hosting agreements. We do not
maintain any back-up servers outside Beijing. The BTA is the only provider of
interconnection services to the ChinaNet backbone. 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. To the extent we do not address the capacity restraints and redundancy
described above, such constraints could have a material adverse effect on our
business, financial condition and results of operations.
Concerns about security of e-commerce transactions and confidentiality of
information on the Internet may 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 significant costs
to protect against the threat of security breaches or to alleviate problems
caused by these
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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
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.
PRC laws regulating the use of encryption software may adversely affect the
operation of our business
Based on the Regulations for the Administration of Commercial Encryption
promulgated at the end of 1999, foreign and domestic PRC companies operating in
China must register details of the commercial encryption products they use.
These regulations are new and we are uncertain as to their precise meaning and
whether or how they will be applied to our business. Since these regulations do
not specify the definition of the term "encryption products", it is not clear
what type of software would be covered by these regulations. We may be required
to apply for permits and register with the relevant PRC regulatory authorities
in connection with the use of our existing software or any new software we may
acquire in the future. 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. 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.
Political, Economic and Regulatory Risks
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet that could adversely affect our business
The legal and regulatory environment in China that pertains to the Internet
is uncertain and may change. Uncertainty and new regulations could increase our
costs of doing business and prevent us from delivering our products and
services over the Internet. The growth of the Internet in the PRC may also be
slowed significantly. This could delay the increase in demand for our portal
and limit the growth of our revenues.
In addition to new laws and regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may address the following
issues, among others:
. foreign investment;
. online content, advertising and e-commerce;
. sales and other taxes;
. user privacy;
. pricing controls;
. characteristics and quality of products and services;
. consumer protection;
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. cross-border commerce;
. libel and defamation;
. copyright, trademark and patent infringement; and
. other claims based on the nature and content of Internet materials.
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 Chinese laws
prohibiting the distribution of content deemed to be socially destabilizing.
Because many Chinese 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 Chinese 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.
In addition, 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. 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.
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;
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. level of development;
. level of capital reinvestment;
. growth rate;
. control of foreign exchange; and
. methods of allocating resources.
Since 1949, China has primarily been a planned economy subject to a system
of macroeconomic management. Although the Chinese government still owns the
majority of 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 Sohu, is a
wholly- foreign owned enterprise, or WFOE, which is an enterprise incorporated
in mainland China and wholly-owned by foreign investors. Beijing Sohu 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 Sohu 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
Sohu may also retain foreign exchange in its current account (subject to a
ceiling approved by 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
Sohu's ability to obtain foreign exchange through debt or equity financing,
including by means of loans or capital contributions from us.
19
<PAGE>
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 underwriters 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 the underwriters exercise their over-
allotment option in full. In addition, as of January 31, 2000, there were
outstanding options and warrants to purchase 626,790 shares, including options
and warrants to purchase 195,328 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 10,886,872 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.
20
<PAGE>
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
underwriters' consent. However, the 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
underwriters 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 "Certain Transactions" and "Principal
Shareholders" for more information regarding the share ownership of our
officers, directors and significant shareholders.
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 December 31, 1999, after giving
effect to this offering and the assumed initial public offering price per share
of $ per share. In addition,
21
<PAGE>
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 Delaware's 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.
22
<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.
23
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $ million, or approximately $ million if the underwriters'
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, consisting primarily of additions to our networking and
computer infrastructure. The remainder of the net proceeds will be used for
general corporate purposes, including working capital, expansion of our sales
and marketing activities 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 financial agreements that we may enter into in the
future.
24
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of December 31, 1999 (1) on an actual basis, (2) on a pro
forma basis to reflect (i) the sale on January 29, 2000 of 518,459 shares of
Series D preferred stock for $38.576 per share and (ii) the sale on February 2,
2000 of 259,229 shares of Series D preferred stock for $38.576 per share and
(3) on a pro forma as adjusted 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;
. 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; 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.
25
<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 December 31, 1999
----------------------------
Pro forma
as
Actual Pro forma adjusted
------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 3,924 $33,924 $
======= ======= ======
Long-term debt..................................... $ -- $ -- $ --
------- ------- ------
Mandatorily redeemable preferred stock:
Series B mandatorily redeemable convertible
preferred stock, par value $0.001: 1,738,910
shares authorized, 1,738,910 shares issued and
outstanding, actual and pro forma (no shares
issued and outstanding, pro forma as
adjusted)(1).................................... $ 2,370 $ 2,370 $ --
Series B-1 mandatorily redeemable convertible
preferred stock, par value $0.001: 338,295
shares authorized, 338,295 shares issued and
outstanding, actual and pro forma (no shares
issued and outstanding, pro forma as
adjusted)(1).................................... 461 461 --
Series C mandatorily redeemable convertible
preferred stock, par value $0.001: 1,479,507
shares authorized, 1,479,507 shares issued and
outstanding, actual and pro forma (no shares
issued and outstanding, pro forma as
adjusted)(2).................................... 7,376 7,376 --
Series D mandatorily redeemable convertible
preferred stock, par value $0.001: no shares
authorized, no shares issued and outstanding,
actual (777,688 shares authorized, 777,688
shares outstanding, pro forma, no shares issued
and outstanding, pro forma as adjusted)......... -- 30,000
------- ------- ------
Total mandatorily redeemable preferred stock... $10,207 $40,207 $ --
------- ------- ------
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 and pro
forma (no shares issued and outstanding, pro
forma as adjusted).............................. $ 1 $ 1 $ --
Common stock, par value $0.001: 11,500,000 shares
authorized, 3,621,410 shares issued and
outstanding, actual and pro forma ( shares
issued and outstanding, pro forma as
adjusted)(3).................................... 4 4
Additional paid-in capital......................... 389 389
Deferred compensation and other.................... (22) (22) (22)
Accumulated deficit................................ (5,414) (5,414) (5,414)
------- ------- ------
Total shareholders' equity (deficit)............. (5,042) (5,042)
------- ------- ------
Total capitalization............................ $ 5,165 $35,165 $
======= ======= ======
</TABLE>
- ---------------------
(1) Recorded at its issuance costs plus accretion. Series B and B-1 preferred
stock is being accreted to its estimated redemption value through
deductions from retained earnings; such deductions totaled $244 and $467
for the years ended December 31, 1998 and 1999, respectively.
(2) Recorded at its issuance costs plus accretion. Series C preferred stock is
being accreted to its estimated redemption value through deductions from
retained earnings; such deductions totaled $450 for the year ended December
31, 1999.
(3) Excludes, as of the completion of this offering, 457,043 shares reserved
for issuance pursuant to options we may issue in the future pursuant to our
stock option plans, 527,647 shares subject to outstanding options and
99,143 shares subject to outstanding warrants.
26
<PAGE>
DILUTION
As of December 31, 1999, our pro forma net tangible book value was
$35,165,000, or $3.43 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 (1) the sale on January 29, 2000 of 518,459
shares of Series D preferred stock for $38.576 per share, (2) the sale on
February 2, 2000 of 259,229 shares of Series D preferred stock for $38.576 per
share and (3) 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 December
31, 1999 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 is based on the
mid-point of the estimated price range per share of $ 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 December 31, 1999.. $3.43
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
January 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 January 31, 2000, there were stock options and
warrants outstanding to purchase an aggregate of 626,790 shares of our common
stock at a weighted average exercise price of $7.73 per share. If all these
options and warrants had been exercised on December 31, 1999, before giving
effect to this offering, our pro forma net tangible book value would have been
approximately $40,011,495, or $3.68 per share. After giving effect to this
offering, our pro forma net tangible book value on December 31, 1999 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 underwriters
fully exercise their over-allotment options.
27
<PAGE>
EXCHANGE RATE INFORMATION
China
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 January 31)................... 8.2777 8.2792 8.2799 8.2777
</TABLE>
- ---------------------
(1) Determined by averaging the rates on the last business day of each month
during the respective period.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from
our consolidated financial statements for the period from August 2, 1996
(inception) to December 31, 1996, and for the three-year period ended December
31, 1999 which have been audited by PricewaterhouseCoopers, independent
accountants, except for the pro forma balance sheet information as of December
31, 1999, which is unaudited. Those financial statements and the report of
PricewaterhouseCoopers on the audited financial statements are included in this
prospectus, and the information for those periods are qualified by reference to
their report. 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.
The following selected consolidated financial data should be read together
with, and are qualified by reference to, "Management's Discussion of Financial
Condition and Results of Operations" and our audited consolidated financial
statements included in this prospectus. Our consolidated financial statements
are prepared and presented in accordance with United States generally accepted
accounting principles.
<TABLE>
<CAPTION>
Period from
August 2, 1996
(inception) to Year ended December 31,
December 31, ----------------------------------
1996 1997 1998 1999
-------------- ---------- ---------- ----------
(in thousands, except for per share and share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 78 $ 472 $ 1,617
Costs and expenses:
Cost of revenues(1).... -- 19 215 1,576
Product
development(1)........ -- 50 208 427
Sales and
marketing(1).......... -- 94 351 1,758
General and
administrative(1)..... 18 75 308 1,270
Stock-based
compensation.......... 12 -- -- 46
---------- ---------- ---------- ----------
Total costs and
expenses........... 30 238 1,082 5,077
---------- ---------- ---------- ----------
Operating loss......... (30) (160) (610) (3,460)
Interest income........ 1 -- 23 25
Interest expense --
related party......... -- -- (28) (14)
---------- ---------- ---------- ----------
Net loss................ (29) (160) (615) (3,449)
Accretion on mandatorily
redeemable convertible
preferred stock........ -- -- (244) (917)
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (29) $ (160) $ (859) $ (4,366)
========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (0.01) $ (0.05) $ (0.24) $ (1.22)
Shares used in computing
basic and diluted net
loss per share......... 3,500,000 3,500,000 3,564,000 3,588,000
Basic and diluted pro
forma net loss per
share.................. $ (0.41)
Shares used in computing
basic and diluted pro
forma net loss per
share.................. 8,314,000
</TABLE>
- ---------------------
(1) Excluding stock-based compensation. See note 14 to our consolidated
financial statements.
29
<PAGE>
The pro forma balance sheet data as of December 31, 1999 give effect to the
sale of 518,459 shares of Series D preferred stock for $38.576 per share on
January 29, 2000 and the sale of 259,229 shares of Series D preferred stock for
$38.576 per share on February 2, 2000. The pro forma as adjusted balance sheet
data as of December 31, 1999 give effect to:
. the conversion of all outstanding Series A, B, B-1, C and D preferred
stock into common stock upon the consummation of this offering; 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 estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1999
Pro forma
1999 1999 as
1996 1997 1998 Actual Pro forma adjusted
---- ---- ------ ------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...... $87 $111 $1,232 $ 3,924 $33,924 $
Working capital................ 194 22 1,303 2,577 32,577
Total assets................... 217 179 1,778 7,076 37,076
Total liabilities.............. 18 115 204 1,911 1,911 1,911
Mandatorily redeemable
convertible preferred stock... -- -- 2,362 10,207 40,207 --
Total shareholders' equity
(deficit)..................... 199 64 (788) (5,042) (5,042)
</TABLE>
30
<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. This prospectus contains
forward-looking statements relating to future events and our future financial
performance. Actual results could be significantly different from those
discussed in this prospectus. Factors that could cause or contribute to such
differences include those summarized in "Risk Factors", as well as those
discussed below and in other sections of this prospectus.
Overview
Sohu is a leading Internet portal in China. 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, 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.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 Sohu, our wholly owned
PRC subsidiary, which was incorporated in 1997.
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;
. 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;
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. 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, and may have longer terms and certain performance obligations.
This is 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.
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 to the
content provider a portion of the advertising revenues derived from
advertisements placed on channels which include the related content. Amounts
due to content providers under these arrangements are included in cost of
revenues. To date, we have not recorded any revenues from barter transactions.
To date, we have not recorded any e-commerce revenues.
Costs and Expenses
Our cost of revenues is made up of Internet access and bandwidth leasing
charges, royalty payments to content providers, Web site maintenance costs,
amortization of purchased technology, depreciation of computer equipment and
other production costs.
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 sites 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, including direct costs related
to the development of our Web sites that increase functionality or add new
applications are capitalized as other assets once technological feasibility has
been established. Website development costs 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 cover not only sales
and marketing, but also content aggregation and development. 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
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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 132,000 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 expect to record deferred
stock compensation of approximately $1.3 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.
Based on options issued and outstanding as of January 31, 2000, we currently
expect to amortize and charge to expense the following amounts of stock-based
compensation:
. 2000 - $690,000;
. 2001 - $359,000;
. 2002 - $172,000;
. 2003 - $ 74,000; and
. 2004 - $ 5,000.
At December 31, 1999, we had incurred approximately $780,000 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 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 deductions from 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 will be accreted to its estimated redemption value through
deductions from retained earnings. For 1999, deductions with respect to the
Series B and B-1 preferred stock totaled $467,000, while deductions with
respect to the Series C preferred stock totaled $450,000.
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 December 31, 1999, we had an accumulated
deficit of $5.4 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.
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Dependence on a Limited Number of Advertisers
In 1999, two of our advertisers, Intel Corporation, 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".
Results of Operations
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.
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 in the number of personnel and related personnel costs, as well as
Internet access and bandwidth leasing charges due to our leasing of additional
bandwidth from the Beijing Telecom Administration, and an increase in hardware
and software amortization costs and royalty payments to content providers. Most
of these costs are fixed costs.
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 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.
Sales and Marketing Expenses. Our sales and marketing expenses increased
significantly to $1,758,000 in 1999 compared to $351,000 in 1998. This increase
was primarily due to the launch of our new advertising campaign, including
print, radio and billboard advertising, as well as an increase in our sales and
marketing staff to 30 persons in 1999 from 15 persons in 1998. Included in
sales and marketing expenses are advertising costs of $597,000 in 1999. Prior
to 1999, we did not incur any advertising costs.
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 the hiring of additional administrative personnel, increased
professional service fees 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.
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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.
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, content
licensing fees, personnel and other production costs.
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
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.
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 in our sales and marketing staff.
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 the hiring of additional personnel, increased professional
service fees and costs associated with the opening of our Shanghai office.
Stock-Based Compensation Expenses. We did not have any stock-based
compensation expenses in 1998 and 1997.
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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 December
31, 1999. 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
---------------------------------------------------------------------------
March 31, June 30, September December March 31, June 30, September December
1998 1998 30, 1998 31, 1998 1999 1999 30, 1999 31, 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 26 $ 75 $ 62 $ 309 $ 233 $ 434 $ 401 $ 549
Costs and expenses:
Cost of revenues(1).... 20 25 41 129 172 272 494 638
Product
development(1)........ 29 39 58 82 55 84 116 172
Sales and
marketing(1).......... 36 45 85 185 126 163 465 1,004
General and
administrative(1)..... 39 48 96 125 163 250 377 480
Stock-based
compensation.......... -- -- -- -- -- 36 6 4
----- ----- ----- ----- ----- ----- ------- -------
Total costs and
expenses............ 124 157 280 521 516 805 1,458 2,298
----- ----- ----- ----- ----- ----- ------- -------
Operating loss.......... (98) (82) (218) (212) (283) (371) (1,057) (1,749)
Interest income......... -- 2 6 15 7 5 6 7
Interest expense --
related party.......... (25) (3) -- -- -- -- (14) --
----- ----- ----- ----- ----- ----- ------- -------
Net loss................ (123) (83) (212) (197) (276) (366) (1,065) (1,742)
Accretion on mandatorily
redeemable preferred
stock.................. (11) (32) (87) (114) (114) (114) (118) (571)
----- ----- ----- ----- ----- ----- ------- -------
Net loss attributable to
common stockholders.... $(134) $(115) $(299) $(311) $(390) $(480) $(1,183) $(2,313)
===== ===== ===== ===== ===== ===== ======= =======
</TABLE>
- --------------------
(1) Excluding stock-based compensation. See note 14 to our consolidated
financial statements.
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Liquidity and Capital Resources
To date, we have primarily financed our operations through the sale of our
preferred stock and the 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. As of
December 31, 1999, we had approximately $3,924,000 in cash and cash
equivalents.
Net cash used in operating activities was $1,720,000 in 1999 compared to
$678,000 for the same period in 1998. To date, we have experienced significant
negative cash flows from operating activities. Significant uses of cash in
operations, including 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 $2,521,000 in 1999 compared to
$227,000 for the same period in 1998. Net cash used in investing activities
during this period primarily resulted from deferred offering costs and the
purchase of fixed assets and computer software from third party vendors.
Net cash provided by financing activities was $6,933,000 in 1999 compared to
$2,026,000 for the same period in 1998. 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 the
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.
We believe that our current cash and cash equivalents, cash flow from
operations, proceeds of approximately $30.0 million from the sale of 777,688
shares of Series D preferred stock in January and February 2000 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.
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Holding Company Structure
We are a holding company with no operating assets other than the shares of
Beijing Sohu, our wholly-owned subsidiary in the PRC that owns and conducts our
entire Internet business. As a result, we rely on dividends and other
distributions paid by Beijing Sohu, including the funds necessary to service
any debt we may incur. If Beijing Sohu incurs debt on its own behalf in the
future, the instruments governing the debt may restrict Beijing Sohu's ability
to pay dividends or make other distributions to us. In addition, PRC legal
restrictions permit payment of dividends to us by Beijing Sohu only out of
Beijing Sohu's net income, if any, determined in accordance with PRC accounting
standards and regulations. Under PRC law Beijing Sohu 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 Sohu, is subject to income tax in the PRC.
Beijing Sohu 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 Sohu 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 Sohu's income is generally not
taxable in the United States, dividends distributed from Beijing Sohu 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 Sohu on its earnings
are creditable against Sohu's tax liabilities in the United States.
Sohu and Beijing Sohu 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 Sohu 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 Beijing Sohu 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 Sohu 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 Sohu 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 Sohu is in a loss position, no appropriations have
been made.
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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.
Year 2000 Compliance
Many existing computer systems worldwide are programmed to process dates
using only two digits for the year of the date (e.g., "99" for 1999) rather
than four digits. Computer systems which process year 2000 transactions (and
beyond) with the year "00" may encounter significant processing inaccuracies
and potentially even system failure. We and third parties with whom we do
business rely on numerous computer programs for our day-to-day operations and
may be adversely affected by the year 2000 situation. Although some year 2000
problems may become evident on January 1, 2000, the year 2000 problem may
continue to be a risk after January 1, 2000.
At the date of this prospectus, our systems have not experienced any
material year 2000 problems. We presently believe that the year 2000 problem
will not pose significant operational problems for our business and operations
on a going forward basis. We cannot assure you that the year 2000 problem will
not pose significant operational problems or have a material adverse effect on
our business, financial condition and results of operations in the future. We
have not incurred any material expenses in connection with our compliance
efforts.
We are not aware of any material year 2000 problems encountered by our
suppliers or customers to date but have not yet obtained confirmations from our
suppliers or customers that they have not experienced year 2000 problems.
Accordingly, we cannot determine whether our suppliers or customers have
experienced year 2000 problems that may impact their ability to supply us with
equipment, content and services or to purchase our services. Further, we cannot
determine the state of their year 2000 readiness on a going forward basis. We
cannot assure you that our suppliers or customers will be successful in
ensuring that their systems have been and will continue to be or will be year
2000 compliant or that their failure to do so will not have an adverse effect
on our business, 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.
39
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BUSINESS
Overview
We are a leading Internet portal in China. During January 2000, we averaged
in excess of six 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, over 12 main content channels and seven special features,
Web-based communications tools and services and a platform for e-commerce
services. As of December 31, 1999, 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 70
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 between September 1998 and December 1998
and released in March 1999 by China Computerworld Research, Sohu was the most
commonly used search engine in China and was voted the best Chinese language
Web site.
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 January 31, 2000,
we had grown to approximately 880,000 registered e-mail users. 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 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.
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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 $220.0 million in
2003. 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.
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 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
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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 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 70 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.
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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 between September 1998 and December 1998 and released in March
1999 by China Computerworld Research, Sohu was the most commonly used search
engine in China and was voted the best Chinese language Web site. 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
December 31, 1999, our online directory contained over 250,000 Chinese language
Web listings, each reviewed and classified by our editorial staff. We currently
receive approximately 500 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 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.
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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;
. 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 enhance the functionality of MySohu, our personalization
service, and enable our users to better 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;
. 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
. 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 by expanding our sales force targeting large corporations,
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, rather than an actual online
merchant, 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
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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.
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.
Aggregated Content
Home Page and Navigational Context Main Channels:
Online Directory News
Search Engine Business and Finance
Sports
Information Technology
Communication Tools Women
E-Mail Entertainment
Instant Messaging Music
BBS Bulletin Boards Learning
Chat Rooms Career
Online Polling Real Estate
Games
Lifestyle
E-Commerce Services Special Features:
Online Shopping Horoscope
Online Auction TV Listings
Score Board
Computer Price
Match
Stock Price
Weather
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
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strengths. On average we add approximately 400 new listings (less deletions of
inactive Web links) to our directory per day. As of December 31, 1999, our
directory contained over 250,000 Chinese language Web listings under the
following 18 principal categories:
Arts Literature Reference
Business/Finance Living/Service Science/Technology
Computer/Internet Medicine/Health Social Sciences
Country/Region News/Media Society/Culture
Education Philosophy/Religion Sports/Exercise
Entertainment/Leisure Politics/Law Travel/Transportation
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 and 7 special features. Each main channel contains
numerous sub-channels and features news, commentaries and various utilities and
solutions relating to a specific topic. The special features do not belong to
any of the main channels, and often represent certain special utilities, such
as stock market and weather information. As of December 31, 1999, we had over
70 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
from left to right in the order 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.
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.
Entertainment Contains extensive coverage of the 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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Lifestyle Presents a comprehensive guide to life and leisure
for Chinese consumers. This channel offers listings
of restaurants, real estate, consumer product prices
as well as information on medical services and
schools and universities.
Special Features:
Horoscope Provides astrological readings and predictions.
TV Listings Contains weekly program listings for China Central
Television, Beijing Television and other major
television channels in more than twelve provinces and
cities.
Score Board Offers daily sport results and rankings.
Computer Price Lists computer and component retail prices and
analyses, updated daily.
Match Features details from the popular Beijing television
program -- "Tonight We Meet" -- and provides a
variety of communication tools, such as personal
advertisement postings and a related bulletin board.
Stock Price Lists real-time prices for stocks traded on the
Shanghai Stock Exchange, the Shenzhen Stock Exchange
and other stock exchanges.
Weather Offers weather information in a tabular format
covering major cities in China and abroad.
Communication Tools
We offer a variety of communication 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 January 31, 2000, we had
approximately 880,000 registered e-mail users. We
recently upgraded our e-mail technology.
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.
BBS Forum At our BBS Forum, users can post and exchange
information on 14 online bulletin boards covering
topics ranging from education and immigration to
fashion and sports. 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.
Chat Room We enable participants to interact in group or one-
on-one discussions in Chinese. Sohu.com currently has
chat rooms covering broad interest areas like sports,
romance and current events.
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.
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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.
Online Shopping We have entered into an e-commerce arrangement on a
trial basis with 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.
Online Auction 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.
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 one to twelve 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. 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
As of December 31, 1999, 117 companies advertised on our portal, up from 90
advertisers as of December 31, 1998 and 40 advertisers as of December 31, 1997.
As of December 31, 1999, our principal advertising customers included:
. Intel;
. Legend;
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. Motorola;
. Nokia; and
. 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.
Strategic Relationships
Intel Corporation. Intel Corporation, one of our shareholders, provided
capital for 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 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.
Wireless Telephone Manufacturers. We have begun working with leading
multinational wireless telephone manufacturers with respect to the
development of wireless Internet access devices. Under these arrangements,
we will provide utility functions and distribute content for these wireless
Internet access devices, which will provide us with an alternative
distribution channel for our content.
NBCi/Snap. We operate a co-branded Snap/Sohu search engine for all English
language searches requested by our users. Snap will be solely responsible
for the sale of advertising which appears on the Sohu/Snap site.
Pacific Century Cyberworks Limited. We have entered into a multi-year
advertising contract with an affiliate of Pacific Century Cyberworks
Limited. An affiliate of Pacific Century Cyberworks is one of our
shareholders and a Hong Kong Stock Exchange listed company that is
primarily involved in Internet technology-related businesses. Pacific
Century Cyberworks recently announced its intention to introduce broadband
satellite-based Internet services by the end of 2000.
Legend Holdings Limited. We have entered into a multi-year advertising
contract with an affiliate of Legend Holdings Limited. 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 multi-year advertising contract with Hikari
Tsushin.
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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 December 31, 1999, our direct sales organization
consisted of 18 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 December 31, 1999, we spent approximately
$2.2 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 December 31, 1999, our marketing department consisted
of 12 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.
We compete with other portals in China for advertising and e-commerce
revenues primarily on the following basis:
. volume of traffic and brand recognition;
. quality of web site and content;
. strategic relationships;
. quality of online advertising and e-commerce services;
. effectiveness of sales and marketing efforts; and
. price.
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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. Some of our established
competitors and potential new competitors may have better brand recognition,
especially globally, and significantly greater financial, technical and
marketing resources than us.
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! 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 "Sohu.com" with Network Solutions and the
domain name "Sohu.com.cn" with China National 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 Patent and
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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We also intend to continue licensing technology from third parties,
including technology relating to:
. ad serving (Netgravity);
. instant messaging (Lodesoft);
. e-mail (Microsoft);
. e-commerce (Microsoft);
. chat (Microsoft); and
. search (OMRON).
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 December 31, 1999, we had 163 full-time employees, of whom 18 worked
in sales, 66 in product and content, 13 in marketing, 28 in technology and
business development, and 28 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 Sohu, 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.
Facilities
Our principal executive offices are located in approximately 26,295 square
feet of office space in Beijing, China under a lease that expires on December
31, 2001. 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 Sohu. 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 -- We and our shareholders may be adversely affected by PRC government
regulation of internet companies."
Overview
At present, there is no legislation in the PRC directly addressing the
Internet businesses we are engaged in. However, 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. Some of these existing laws and regulations, which may impact
foreign investment in various Internet businesses in China, are promulgated by
various governmental authorities, such as the Ministry of Information Industry,
or MII (formerly the Ministry of Posts and Telecommunications, or MPT), the
State Administration of Industry and Commerce, or SAIC, or the Ministry of
Public Security.
The PRC legislature and regulatory authorities are currently in the process
of preparing new legislation that will govern or affect the PRC Internet
sector. In addition, in November 1999, China and the United States reached
agreement concerning the United States' support of China's entry into the World
Trade Organization, or WTO. China's potential entry into the WTO will likely
affect the adoption of any new legislation, and 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.
In the opinion of TransAsia Lawyers, our PRC counsel, the ownership
structure of Sohu and our wholly-owned PRC subsidiary, Beijing Sohu, both
currently and after giving effect to this offering, and the current and
proposed businesses and operations of Sohu and Beijing Sohu as described in
this prospectus, do not violate or breach any of the 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, businesses and operations of Sohu
and Beijing Sohu or this offering as described in this prospectus.
However, the opinion of TransAsia Lawyers contains the following
qualifications:
. Since September 1999, senior MII officials have made various statements
regarding the restrictions on foreign investment in the PRC Internet
sector and the positions set forth in such statements may ultimately be
adopted to varying degrees by the relevant PRC regulatory authorities as
the basis for subsequent legislation.
. In the event that new legislation restricting foreign investment in the
PRC Internet sector is enacted by the relevant PRC regulatory
authorities, such PRC regulatory authorities may request Beijing Sohu to
restructure its operations accordingly.
Foreign Investment in the Telecommunications Sector
There are currently no laws, rules or regulations addressing 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 Sohu,
from investing in, or operating or participating in the operation of, any
business that provides "value-added telecommunications services", which is
defined 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. In the opinion of TransAsia Lawyers, our business activities in China
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 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, Beijing Sohu is 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,
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.
In addition, the State Secrets Bureau has recently issued regulations
authorizing the blocking of 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 new services must
apply for the approval of the State Secrets Bureau. As the 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 without the permission of the state
encryption administration departments and foreign encryptions 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
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 and e-
commerce. 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.
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). However, 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.
There are no existing PRC laws, rules or regulations that 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, Beijing Sohu 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 are 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 Sohu is structured as a technology-oriented company engaged in the
development of Internet technologies and related software. 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 Sohu has satisfied all of the
aforementioned 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......................... 35 Chairman of the Board of Directors,
President
and Chief Executive Officer
Edward Roberts........................ 64 Director
James McGregor........................ 46 Director
George Chang.......................... 47 Director
Thomas Gurnee......................... 48 Chief Financial Officer and
Senior Vice President, Finance
Victor Koo............................ 33 Senior Vice President,
Corporate Business Development
Edwin Chan............................ 54 Senior Vice President, Marketing and Sales
Gary Zhao............................. 37 Vice President, Finance
</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. and helped establish its
China operations. Dr. Zhang studied experimental physics at Massachusetts
Institute of Technology from 1986 to 1993 and worked as M.I.T.'s liaison
officer with China after obtaining his doctorate degree in 1993. 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 capital venture capital funds,
Medical Information Technology, Advanced Magnetics, NET Silicon, Page Systems
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 a doctorate in 1962 from
M.I.T.
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.
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. 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.
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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 in 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.
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.
Gary Zhao joined Beijing Sohu in January 2000 and is Vice President,
Finance. Prior to joining Beijing 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.
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. We expect to appoint two additional independent directors to the
audit committee.
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. 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
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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.
Directors, Executive Officers and Key Employees of Beijing Sohu
The following table sets forth information regarding the directors,
executive officers and key employees of Beijing Sohu:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Directors and Executive Officers
Charles Zhang......................... 35 Chairman of the Board of Directors,
President and Chief Executive Officer
Thomas Gurnee......................... 48 Chief Financial Officer and
Senior Vice President, Finance
Victor Koo............................ 33 Senior Vice President, Corporate Business
Development
Edwin Chan............................ 54 Senior Vice President, Marketing and Sales
Gary Zhao............................. 37 Vice President, Finance
Key Employees
Min Yang.............................. 31 Financial Controller
Elaine Feng........................... 27 Business Development Director
Jinmei He............................. 29 Marketing Director
Peter Song............................ 32 Technology Director
Michael Ma............................ 33 Regional Sales Director
Jianjun Wang.......................... 30 Manager of Classification Group
Maggie Wu............................. 25 Content Development Manager
Tony Cheung........................... 28 Regional Sales Manager
</TABLE>
Min Yang joined Beijing Sohu 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.
Elaine Feng joined Beijing Sohu 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. She received a Bachelor of Arts degree from Beijing University.
Jinmei He joined Beijing Sohu 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 Sohu'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.
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Michael Ma joined Beijing Sohu in January 2000 and is the Regional Sales
Director. Prior to joining Beijing Sohu, 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.
Dr. Jianjun Wang has been the Manager of Beijing Sohu 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 Sohu in 1997 and held positions in marketing and
sales prior to becoming Content Development Manager in 1999. She received a
Bachelor of Arts degree from International Trade Shanghai Financial and
Economic University.
Tony Cheung joined Beijing Sohu 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 Sohu, 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 a one-
year vesting period, and an exercise price of $15.00.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for all services
rendered to us in all capacities during 1997, 1998 and 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 Of-
ficer
Thomas Gurnee(2)................... 1999 $ -- $ -- 70,000
Chief Financial Officer and
Senior Vice President, Finance
Victor Koo(3)...................... 1999 $ 75,000 $ -- 80,349
Senior Vice President,
Corporate Business Development
Edwin Chan(4)...................... 1999 $ 58,334 $ -- 30,000
Senior Vice President,
Marketing and Sales
Gary Zhao(5)....................... 1999 $ -- $ -- --
Vice President, Finance
</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. Koo joined Sohu in April 1999. His employment agreement provides for an
annual salary in 2000 of $120,000.
(4) Mr. Chan joined Sohu in September 1999. His employment agreement provides
for an annual salary in 2000 of $200,000.
(5) 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.
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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
Victor Koo.............. 80,349(4) 22% $ 4.70 Nov. 1, 2009 $ 145,327 $ 455,192
Edwin Chan.............. 30,000(5) 8% $10.00 Dec. 5, 2009 $ 27,994 $ 222,276
Gary Zhao............... -- -- -- -- -- --
</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 the 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, 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) Options granted vest ratably over three years on a quarterly basis
commencing from May 1, 1999.
(5) 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.
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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 $117,275 $351,825
Thomas Gurnee........... -- -- -- 70,000 -- $285,880
Victor Koo.............. -- -- 13,392 66,957 $125,639 $628,195
Edwin Chan.............. -- -- -- 30,000 -- 122,520
Gary Zhao(3)............ -- -- -- -- -- --
</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 on the basis of the fair market value of our common stock at
December 31, 1999 as determined by our board of directors, 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) Gary Zhao joined our company in January 2000.
In January 2000, our board of directors granted options for the purchase of
132,000 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, Victor Koo, Edwin Chan and Gary Zhao
have 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 Sohu, 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 objectives which will benefit our shareholders. The following groups
of people are eligible to receive options under the stock incentive plan:
. employees;
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<PAGE>
. 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. All 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 entitled to a
corresponding tax deduction.
The exercise price of an incentive option cannot be less than 100% of the
fair market value of our common stock on the grant date, provided that no
person who owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of our shares, referred to below as a "Ten-Percent
Shareholder," 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.
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. All
options issued under the stock incentive plan will have a term no longer than
ten years from the grant date.
At January 31, 2000, options to purchase 527,647 shares of common stock were
outstanding under the stock incentive plan and 457,043 shares remained
available for future option grants. The weighted average exercise price for
these outstanding options is $8.23 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.
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 February 3, 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)(13).... 3,444,423 33.6% % 12,500 37,500
Maxtech Enterprises
Limited(4)(13)......... 2,528,036 24.5 81,798 --
Intel
Corporation(5)(13)..... 1,288,750 12.6 -- --
Edward Roberts(6)(13)... 566,747 5.5 -- 4,000
James McGregor(7)(13)... -- -- -- --
George Chang(8)......... -- -- -- --
Thomas Gurnee(9)........ * * -- 70,000
Victor Koo(10).......... * * 20,087 60,262
Edwin Chan(11).......... * * -- 30,000
Gary Zhao(12)........... * * -- 30,000
All directors and
executive officers as a
group (5 persons)...... 4,031,257 38.9% 32,587 201,762
</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) Mr. 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
CyberVentures Investments Limited, 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. Pursuant to the trust agreement, the
trustee has sole power to vote and dispose of the shares. The address of
Maxtech Enterprises Limited is Suite 835A, Europort, Gilbraltar. The
address of Verrall Limited is c/o Dickinson, Cruickshank & Co., 33/37,
Althol Street, Douglas IM1 1LB, Isle of Man.
(5) Intel's address is 2200 Mission College Boulevard, Santa Clara, CA 95052,
U.S.A.
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<PAGE>
(6) Mr. 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, 22/F, 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
519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(10) Mr. Koo's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(11) Mr. Chan's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(12) Mr. Zhao's address is c/o Sohu.com Inc., 7 Jianguomen Nei Avenue, Suite
519, Tower 2, Bright China Chang An Building, Beijing 100005, People's
Republic of China.
(13) These shareholders and certain other shareholders are parties to a voting
agreement under which they have agreed to vote together in favor of their
nominees to our board of directors. See "Certain Transactions".
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<PAGE>
CERTAIN 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, 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
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 one registration
statement with the Securities and Exchange Commission during any six
month 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 six month 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.
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, an affiliate of Maxtech Enterprises extended a one-time
$1,500,000 loan to us. This loan was subsequently converted into shares of our
Series C preferred stock as part of our Series C preferred stock financing.
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<PAGE>
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 underwriters 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.
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<PAGE>
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;
. 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.
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<PAGE>
Through January 31, 2000, options to purchase 527,647 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.
72
<PAGE>
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 11,500,000 shares of common stock,
par value $0.001 per share, and 5,600,000 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 January 31, 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 626,790 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 one registration statement with the SEC during any six month period,
and no more than two over any period, 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
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<PAGE>
the registration. These parties, in the aggregate, have two demand registration
rights. Furthermore, if we become eligible to file registration statements on
Form S-3, any party to the agreement may 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. In addition, 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 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 it 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 fixed from time to time by a resolution of the board of directors. 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 of directors, the 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.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans.
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The existence of authorized but unissued shares of common stock and 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
We intend to appoint a transfer agent and registrar located in New York, 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-percent 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-percent 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 an 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, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation.........................
Donaldson, Lufkin & Jenrette Securities Corporation............
Warburg Dillon Read LLC........................................
----
Total........................................................
====
</TABLE>
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 of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted the underwriters a 30-day option to purchase 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 representative.
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 Credit Suisse First Boston Corporation
and its affiliates incurred in connection with this offering.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of our common stock being offered.
The underwriters for this offering have entered into an agreement in which
they agree to restrictions on where and to whom they and any dealer purchasing
from them may offer shares of common stock.
Each of the underwriters 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;
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. 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;
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.
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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 will reimburse certain of our expenses incurred in
connection with this offering.
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 respect thereof.
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 Credit Suisse First Boston Corporation, 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 lead
representative;
. 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.
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The representative 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.
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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.
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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, which opinion is summarized
in this prospectus, 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.
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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 Pro
forma December 31, 1999 (unaudited)...................................... F-3
Consolidated Statements of Operations for each of the three years ended
December 31, 1997, 1998 and 1999......................................... F-4
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1998 and 1999......................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for each of the
three years ended December 31, 1997, 1998 and 1999....................... 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, December 31,
1998 1999 1999
------------ ------------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $1,232 $3,924 $3,924
Accounts receivable, net............ 68 401 401
Accounts receivable-related
parties............................ 158 37 37
Prepaid and other current assets.... 49 126 126
------ ------ ------
Total current assets.............. 1,507 4,488 4,488
Fixed assets, net..................... 236 999 999
Other assets, net..................... 35 1,589 1,589
------ ------ ------
$1,778 $7,076 $7,076
====== ====== ======
LIABILITIES AND SHAREHOLDERS EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................... $ 72 $ 500 $ 500
Accrued liabilities................. 132 1,411 1,411
------ ------ ------
Total current liabilities......... 204 1,911 1,911
Commitments and contingencies (Note
10)
Series B Mandatorily Redeemable
Convertible Preferred Stock: $0.001
par value per share (2,077,205 shares
authorized; 2,074,790 and 2,077,205
shares issued and outstanding at
December 31, 1998 and 1999, no shares
issued and outstanding on a Pro Forma
basis at December 31, 1999).......... 2,362 2,831 --
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, no shares issued
and outstanding on a Pro Forma basis
at December 31, 1999)................ 7,376 --
------ ------ ------
Total Mandatorily Redeemable
Convertible Preferred Stock...... 2,362 10,207 --
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, no
shares issued and outstanding on a
Pro Forma basis at December 31,
1999).............................. 1 1 --
Common Stock: $0.001 par value per
share (11,500,000 shares
authorized; 3,563,595, 3,621,410
and shares issued and outstanding
at December 31, 1998 and 1999; and
9,462,395 shares issued and
outstanding on a Pro Forma basis at
December 31, 1999.................. 4 4 9
Additional paid-in capital............ 255 389 10,592
Deferred compensation and other....... -- (22) (22)
Accumulated deficit................... (1,048) (5,414) (5,414)
------ ------ ------
Total shareholders' equity
(deficit)........................ (788) (5,042) 5,165
------ ------ ------
$1,778 $7,076 $7,076
====== ====== ======
</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
--------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (including related party
amounts of $0, $175 and $178) $ 78 $ 472 $ 1,617
Costs and expenses:
Cost of revenues*..................... 19 215 1,576
Product development*.................. 50 208 427
Sales and marketing*.................. 94 351 1,758
General and administrative* (including
related party amounts of $60 in
1999)................................ 75 308 1,270
Stock-based compensation.............. -- -- 46
------ ------ -------
Total costs and expenses............ 238 1,082 5,077
------ ------ -------
Operating loss........................ (160) (610) (3,460)
Interest income....................... -- 23 25
Interest expense-related party........ -- (28) (14)
------ ------ -------
Net loss............................... (160) (615) (3,449)
Accretion on Series B and C mandatorily
redeemable convertible preferred
stock................................. -- (244) (917)
------ ------ -------
Net loss attributable to common
stockholders.......................... $ (160) $ (859) $(4,366)
====== ====== =======
Basic and diluted net loss per share
attributable to common stockholders... $(0.05) $(0.24) $ (1.22)
====== ====== =======
Shares used in computing basic and
diluted net loss per share............ 3,500 3,564 3,588
====== ====== =======
Basic and diluted pro forma net loss
per share (unaudited)................. $ (0.41)
=======
Shares used in computing basic and
diluted pro forma net loss per share
(unaudited)........................... 8,314
=======
</TABLE>
*Excluding 1999 stock-based compensation expense--see Note 14.
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
---------------------------------------
December 31, December 31, December 31,
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(160) $ (615) $(3,449)
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
Services rendered by
shareholder................... -- -- 60
Stock-based compensation
expense....................... -- -- 46
Amortization of discount on
convertible promissory notes.. -- 25 --
Changes in assets and
liabilities:
Accounts receivable............. (13) (55) (333)
Accounts receivable--related
parties........................ -- (158) 121
Prepaids and other current
assets......................... 111 (35) (77)
Other assets.................... (9) (26) (78)
Accounts payable................ 23 49 428
Accrued liabilities............. (1) 114 1,279
----- ------ -------
Net cash used in operating
activities................... (46) (678) (1,720)
Cash flows from investing
activities:
Acquisition of fixed assets..... (30) (227) (942)
Acquisition of other assets..... -- -- (1,580)
Disposal of fixed assets........ -- -- 1
----- ------ -------
Net cash used in investing
activities................... (30) (227) (2,521)
Cash flows from financing
activities:
Issuance/(repayment) of
Convertible Promissory Notes--
related party.................. 100 (100) 1,500
Issuance of Series C Mandatorily
Redeemable Convertible
Preferred Stock ............... -- -- 5,426
Issuance of Series B Mandatorily
Redeemable Convertible
Preferred Stock................ -- 2,118 --
Issuance of Common Stock........ -- 8 7
----- ------ -------
Net cash provided by financing
activities..................... 100 2,026 6,933
Net increase/(decrease) in
cash and cash equivalents.... 24 1,121 2,692
Cash and cash equivalents at
beginning of period............. 87 111 1,232
----- ------ -------
Cash and cash equivalents at end
of period....................... $ 111 $1,232 $ 3,924
===== ====== =======
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................... 1,125,000 $ 1 3,500,000 $ 4 $222 $ -- $ (29) $ 198
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)
========= === ========= === ==== ===== ======= =======
</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, the Company had incurred approximately $780 of
transaction expenses relating to the Company's proposed initial public offering
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-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)
(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 December 31, 1999.
(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, including direct 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 for the
year ended December 31, 1999. 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 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
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)
been placed on the Company's website. Revenue related to banner development
services is 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.
(k) 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.
(l) 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.
(m) 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.
(n) Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1999 is
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 and C Mandatorily Redeemable Convertible Preferred Stock
and Series
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)
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.
(o) 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.
(p) 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.
(q) 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 and C
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 December 31, 1999.
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 December 31, 1999, 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% and 34% of total revenues for the three years
ended December 31, 1997, 1998 and 1999, respectively. These same five customers
represent 93% and 43% of accounts receivable as of December 31, 1998 and 1999,
respectively.
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)
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 10).
4. Balance Sheet Components
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Accounts receivable, net
Accounts receivable.............................. $ 68 $ 427
Less: Allowance for doubtful accounts............ -- (26)
---- ------
$ 68 $ 401
==== ======
Fixed Assets
Computer equipment............................... $215 $1,029
Office furniture and equipment................... 48 170
---- ------
263 1,199
Accumulated depreciation......................... (27) (200)
---- ------
$236 $ 999
==== ======
Other Assets
Deferred offering costs.......................... $-- $ 780
Purchased computer software...................... -- 669
Website development costs........................ -- 131
Rental deposits and other........................ 35 113
---- ------
35 1,693
Accumulated amortization......................... -- (104)
---- ------
$ 35 $1,589
==== ======
Accrued liabilities
Compensation and benefits........................ $ 85 $ 581
Professional services............................ 25 657
Others........................................... 22 173
---- ------
$132 $1,411
==== ======
</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
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)
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.
6. Convertible Promissory Notes to Related Parties
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 December 31, 1999, warrants
to purchase 28,910 shares of Common Stock had been exercised and warrants to
purchase 17,345 shares of Common Stock remained outstanding.
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
========= ====== ======= ==== ========= ======
</TABLE>
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)
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.
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.
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)
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 deductions
from retained earnings; such deductions totalled $244, and $467 for the years
ended December 31, 1998 and 1999, respectively.
Warrants
In connection with the issuance of the Company's Series B Convertible
Preferred Stock financing in 1998, the Company granted warrants to purchase
2,415 shares of the Company's Series B Convertible Preferred Stock at an
exercise price of $1.035 per share. These warrants were exercised in 1999.
8. Series C Mandatorily Redeemable Convertible Preferred Stock
In October 1999, the Company entered into a Series C Preferred Stock
Purchase agreement, as amended, whereby the Company authorized 1,479,507 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
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)
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
deductions from retained earnings; such deductions totalled $450 for the year
ended December 31, 1999. The redemption rights of the Series C Preferred Stock
are subordinate to the Series B Preferred Stock.
9. 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-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)
10. Commitments and Contingencies
As of December 31, 1999, the Company had future minimum rental lease
payments under non-cancellable operating leases as follows:
<TABLE>
<S> <C>
2000.................................. $ 597
2001.................................. 506
------
$1,103
======
</TABLE>
The Company recognized $56, $157 and $205 of rent expense for the years
ended December 31, 1997, 1998 and 1999, 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.
11. 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 and $178 for the three years ended December 31, 1997,
1998 and 1999, respectively. As of December 31, 1998 and 1999, $158 and $37,
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 this warrant remains outstanding.
Since 1998, the Company has had an arrangement whereby the Company provides
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, the Company has recognized expense of $16 as a result
of this collaborative arrangement.
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)
12. 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 $2,915, respectively, available to
offset future federal and Chinese income tax liabilities, respectively. The
U.S. NOL will expire from 2012 to 2020 and the Chinese NOL will expire from
2002 to 2004.
13. Financial Instruments
The carrying amount of the Company's cash and cash equivalents approximates
their fair value due to the short maturity of those instruments. The carrying
value of receivables and payables approximated their market values based on
their short-term maturities. The fair value of related party receivables and
payables is not readily determinable due to the related party nature of the
accounts.
F-17
<PAGE>
SOHU.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Amounts in thousands of US dollars, except number of shares and per share
data)
14. Stock Options
The Company has adopted a share option plan, which provides for the issuance
of up to 900,000 shares of common stock. The share option plan allows for the
grant of incentive share options qualified within the meaning of Section 422 of
the U.S. Internal Revenue Code of 1986 and non-qualified share options, which
do not so qualify.
The Company has reserved 900,000 shares of Common Stock for issuance under
the Company's Stock Option Plan and, at December 31, 1999, 589,043 options were
available for grant under the plan.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price ($) Outstanding Price ($) Outstanding Price ($)
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of Period.............. 127,190 $0.10 127,190 $0.10 80,940 $0.10
Granted................ -- -- -- -- 366,299 6.46
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 $5.97
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
December 31, 1999 December 31, 1999
--------------------------------------------- ----------------------------
Weighted Average
Range of Remaining Weighted Average Weighted Average
Exercise Number Contractual Life Exercise Price Number Exercise Price
Prices Outstanding (years) ($) outstanding ($)
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10 34,690 6.32 $ 0.10 34,690 $ 0.10
$1.00 62,158 9.63 $ 1.00 28,935 $ 1.00
$4.70 130,349 9.87 $ 4.70 13,342 $ 4.70
$10.00 168,450 9.95 $10.00 -- $10.00
</TABLE>
Stock-based compensation. In connection with certain stock option grants
during the year ended December 31, 1999, the Company recognized deferred stock
compensation totalling $67 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 totalled $46 which
related to the following cost and expense categories:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Costs of revenues............................................. $13
Product development........................................... 11
Sales and marketing .......................................... 14
General and administrative.................................... 8
---
$46
===
</TABLE>
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)
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-$3.19
</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................................................... $(4,380)
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.
15. 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>
Year Ended December
31,
-----------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Numerator:
Net loss............................................ $ (160) $ (615) $(3,449)
Accretion of Series B and C Mandatorily Redeemable
Preferred Stocks to redemption value............... -- (244) (917)
------ ------ -------
Net loss attributable to common shareholders........ $ (160) $ (859) $(4,366)
====== ====== =======
Denominator:
Shares used in computing basic and diluted net loss
per share (in thousands)........................... 3,500 3,564 3,588
====== ====== =======
Basic and diluted net loss per share attributable to
common shareholders.................................. $(0.05) $(0.24) $ (1.22)
====== ====== =======
Antidilutive securities including options, warrants,
and preferred shares not included in net loss per
shares calculation (in thousands).................... 1,239 3,005 4,822
====== ====== =======
</TABLE>
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)
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 and C 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 (unaudited):
<TABLE>
<CAPTION>
Pro Forma
Year ended
December 31,
1999
------------
<S> <C>
Numerator:
Net loss....................................................... $(3,449)
=======
Denominator:
Shares used in computing basic and diluted net loss per share.. 3,588
Adjustment to reflect assumed conversion of all preferred stock
to common stock from date of issuance......................... 4,726
-------
Shares used in computing pro forma basic and diluted net loss
per share..................................................... 8,314
-------
Basic and diluted pro forma net loss per share................... $(0.41)
=======
Antidilutive securities including options and warrants not
included in pro forma net loss per share calculation............ 96
=======
</TABLE>
16. Subsequent Events
In January and February 2000, the Company entered into a Series D Preferred
Stock Purchase agreement whereby the Company issued 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. 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. No dividends, whether in cash, in property or in shares of the
capital 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 preferred stock are declared, dividends will be
allocated to preferred shares based on the equivalent number of common shares
into which such preferred shares could be converted. In the event of any
liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of Series D Preferred Shares 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 of the Company, an amount equal
to $38.576 per share, plus declared but unpaid dividends.
Each share of Series D Preferred Stock is convertible, at the option of the
holder, 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 with gross
proceeds
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)
to the Company in excess of $20,000. After January 25, 2005, holders of Series
C 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 will be accreted to its estimated
redemption value through deductions from retained earnings.
In January 2000, the Company also entered into long-term advertising
contracts with its Series D Preferred shareholders.
In January 2000, the Board of Directors granted options for the purchase of
132,000 shares of common stock to certain employees and a director of the
Company 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. In connection with
these option grants the Company expects to record deferred stock compensation
of approximately $1,300 which will be amortized and charged to expense over the
vesting periods of the underlying options.
F-21
<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 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
II-2
<PAGE>
(k) 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.
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) 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.
(q) 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.
(r) 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.
(s) 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.
(t) 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.
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.*
3.3 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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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 Sohu.
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.+
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, PRC counsel to the Registrant.
23.3 Consent of PricewaterhouseCooopers.
24.1 Powers of attorney are set forth under "Signatures" in this Part II
of the Registration Statement.
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment
+Contains portions for which confidential treatment has been requested.
(b) Financial Statement Schedules.
Not applicable.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the 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
II-4
<PAGE>
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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Beijing, China, on February 4, 2000.
Sohu.com Inc.
/s/ Charles Zhang
By: _________________________________
Name: Charles Zhang
Title: Chairman of the Board,
President and Chief Executive
Officer
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 this Registration Statement
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.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on February 4,
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
/s/ Edward Roberts Director
___________________________________________
Edward Roberts
/s/ James McGregor Director
___________________________________________
James McGregor
/s/ George Chang Director
___________________________________________
George Chang
/s/ Thomas Gurnee Chief Financial Officer
___________________________________________
Thomas Gurnee
/s/ Min Yang Controller
___________________________________________
Min Yang
</TABLE>
II-6
<PAGE>
EXHIBIT 10.3
EMPLOYEE NON-COMPETITION, CONFIDENTIAL INFORMATION
AND WORK PRODUCT AGREEMENT
In consideration of my employment and the compensation paid to me by Sohu.com
Inc., a Delaware corporation, or a subsidiary or other affiliate thereof
(Sohu.com Inc. or any such subsidiary or other affiliate referred to herein
individually and collectively as "SOHU"), and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, I
agree as follows:
Exclusive Services; Non-Competition:
- -----------------------------------
(a) I agree to perform diligently all tasks assigned to me in the course of
my employment, including, but not limited to, any seconding of my
services to Beijing Sohu Information Technology Co. Ltd. ("Beijing
Sohu"). I agree that during the period of my employment I shall devote my
full time, skill, energy and efforts to SOHU and shall not participate,
directly or indirectly, in any capacity, in any business or activity that
is in competition with SOHU.
(b) During my employment with SOHU and for a period of one year after the
termination of my employment with SOHU for any reason (but, in any event,
for a period of not less than two years from the date of this Agreement),
I shall not, on my own behalf, or as owner, manager, stockholder (other
than as stockholder of less than 2% of the outstanding stock of a company
that is publicly traded or listed on a stock exchange), consultant,
director, officer or employee of or in any other manner connected with
any business entity, participate or be involved in any business of the
type and character of business in which SOHU or Beijing Sohu engages or
proposes to engage without the prior written authorization of SOHU.
(c) During my employment with SOHU and for a period of one year after the
termination of my employment with SOHU for any reason, I shall not,
either on my account or for the account of any person other than Sohu:
(i) solicit, induce, attempt to hire, or hire any employee of SOHU or
Beijing Sohu (or any other person who may have been employed by SOHU or
Beijing Sohu during the term of my employment with SOHU); (ii) solicit
business or relationship in competition with Sohu from any of SOHU's or
Beijing Sohu's customers, suppliers or partners or any other entity with
which SOHU or Beijing Sohu does business; (iii) assist in such hiring or
solicitation by any other person or business entity or encourage any such
employee to terminate his or her employment with SOHU or Beijing Sohu; or
(iv) encourage any such customer, supplier or partner or any other entity
to terminate its relationship with SOHU or Beijing Sohu.
Confidential Information: While employed by SOHU and thereafter, I shall not,
- ------------------------
directly or indirectly, use any Confidential Information (as hereinafter
defined) other than pursuant to my employment by and for the benefit of SOHU, or
disclose any such Confidential Information to anyone outside of SOHU whether by
private communication,
-1-
<PAGE>
public address, publication or otherwise or to anyone within SOHU who has not
been authorized to receive such information, except as directed in writing by an
authorized representative of SOHU.
"Confidential Information" means all trade secrets, proprietary information, and
other data and information, in any form, belonging to SOHU, Beijing Sohu or any
of their respective clients, customers, consultants, licensees or affiliates,
that is held in confidence by SOHU or Beijing Sohu. Confidential Information
includes, but is not limited to computer software, the structure of SOHU's
online directories and search engines, business plans and arrangements, customer
lists, marketing materials, financial information, research, and any other
information identified or treated as confidential by SOHU, Beijing Sohu or any
of their respective clients, customer, consultants, licensees or affiliates.
Notwithstanding the foregoing, Confidential Information does not include
information which SOHU has voluntarily disclosed to the public without
restriction, or which is otherwise known to the public at large.
Rights in Work Product: I agree that all Work Product ( as hereinafter defined )
- ----------------------
shall be the sole property of SOHU. The term "Work Product" as used throughout
this Agreement shall mean any and all discoveries, inventions, ideas, concepts,
research, trademarks, service marks, slogans, logos and information, processes,
products, techniques, methods and improvements or parts thereof conceived,
developed, or otherwise made by me alone or jointly with others during the
period of my employment with SOHU or during the twelve-month period next
succeeding the termination of my employment with SOHU, and in any way relating
to the present or proposed products, programs or services of SOHU or Beijing
Sohu, or to tasks assigned to me during the course of my employment, whether or
not patentable or subject to copyright or trademark protection, whether or not
reduced to tangible form or reduced to practice, whether or not made during my
regular working hours, whether or not made on SOHU premise. I agree that all
Work Product shall constitute work made for hire with respect to any copyright,
patents, trade secrets, trademarks and other proprietary rights I may have in
any Work Product and, therefore, the property of SOHU. I agree to waive, and
hereby waive and irrevocably assign to SOHU, all rights I may have in or to any
Work Product and, to the extent that such rights may not be waived or assigned,
I agree not to assert such rights against SOHU or its licensees, successors or
assigns.
Employee's Obligation to Disclose Work Product: I agree to disclose all Work
- ----------------------------------------------
Product to the appropriate individuals in SOHU as such Work Product is created
in accordance with the requirements of my job and as directed by SOHU.
Employee's Prior Obligations: I hereby certify that, except as set forth in
- ----------------------------
Exhibit A to this Agreement, I have no continuing obligation to any previous
employer or other person or entity which requires me not to disclose any
information to SOHU.
Employee's Obligation to Cooperate: At any time during my employment with SOHU
- ----------------------------------
and thereafter upon the request or SOHU, I will execute all documents and
perform all
-2-
<PAGE>
lawful acts that SOHU considers necessary or advisable to secure its
rights hereunder and to carry out the intent of this Agreement. Without limiting
the generality of the foregoing, I agree to render to SOHU or its nominee all
reasonable assistance as may be required:
(a) In the prosecution or applications for letters patent, foreign and
domestic, or re-issues, extensions and continuations thereof;
(b) In the prosecution or defense of interferences which may be declared
involving any of said applications or patents;
(c) In any administrative proceeding or litigation in which SOHU may be
involved relating to any Work Product; and
(d) In the execution of documents and the taking of all other lawful acts
which SOHU considers necessary or advisable in creating and protecting
its copyright, patent, trademark, trade secret and other proprietary
right in any Work Products.
The reasonable out-of-pocket expenses incurred by me in rendering such
assistance at the request of SOHU will be reimbursed by SOHU. If I am no longer
an employee of SOHU at the time I render assistance at the request of SOHU, SOHU
will pay me a reasonable fee for my time.
Termination; Return of SOHU Property: Upon the termination of my employment with
- ------------------------------------
SOHU for any reason, or at any time upon SOHU's request, I will return to SOHU
all Work Product and Confidential Information and notes, memoranda, records,
customer lists, proposals, business plans and other documents, computer
software, materials, tools, equipment and other property in my possession or
under my control, relating to any work done for SOHU or Beijing Sohu, or
otherwise belonging to SOHU or Beijing Sohu, it being acknowledged that all such
items are the sole property of SOHU. Further, before obtaining my final
paycheck, I agree to sign a certificate stating the following:
"Termination Certificate
This is to certify that I do not have in my possession or custody, nor have I
failed to return, any Work Product or any notes, memoranda, records, customer
lists, proposals, business plans or other documents or any computer software,
materials, tools, equipment or other property (or copies of any of the
foregoing) belonging to SOHU or Beijing Sohu."
General Provisions:
- ------------------
(a) This Agreement contains the entire agreement between me and SOHU with
respect to its subject matter, and may not be modified except by written
agreement signed by us.
-3-
<PAGE>
(b) This Agreement shall by governed and construed and enforced in accordance
with, the laws of the State of Delaware without giving effect to its
conflicts of laws rules, and shall be deemed to be effective as of the
first day of my employment with SOHU.
(c) In the event that any provision of this Agreement shall be determined by
any court of competent jurisdiction to be unenforceable by reason of its
extending for too great a period of time or over too large a geographic
area or over too great a range of activities, it shall be interpreted to
extend only over the maximum period of time, geographic area or range of
activities as to which it may be enforceable.
(d) If, after application of paragraph (c) above, any provision of this
Agreement shall be determined to be invalid, illegal or otherwise
unenforceable by any court of competent jurisdiction, the validity,
legality and enforceability of the other provisions of this agreement
shall not be affected thereby. Any invalid, illegal or unenforceable
provision of this Agreement shall be severed, and after any such
severance, all other provisions hereof shall remain in full force and
effect.
(e) SOHU and I agree that either of us may overlook violations of any part of
this Agreement without waiving the right in the future to insist on
strict compliance with all or parts of this Agreement.
(f) My obligations under this Agreement shall survive the termination of my
employment with SOHU regardless of the manner of or reasons for such
termination, and regardless of whether such termination constitutes a
breach of any other agreement I may have with SOHU. My obligations under
this Agreement shall be binding upon my heirs, executors and
administrators, and the provisions of this Agreement shall inure to the
benefit of the successors and assigns of SOHU.
(g) I acknowledge and agree that violation of this Agreement by me would
cause irreparable harm to SOHU not adequately compensable by money
damages, and I therefore agree that, in addition to all other remedies
available to SOHU at law, in equity or otherwise, SOHU shall be entitled
to injunctive relief to prevent an actual or threatened violation of this
Agreement.
(h) I consent to jurisdiction and venue in any state or federal court in the
State of Delaware for the purposes of any action relation to or arising
out of this Agreement or any breach or alleged breach thereof, and to
service of process in any such action by certified or registered mail,
return receipt requested.
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned Employee and the Company have executed this
Agreement.
Date:
Signature of Employee: Sohu.com Inc.
___________________________ By: ________________________
Name:
Printed name of employee: Title:
- ----------------------------
-5-
<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 : ____________________________________________
<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 10.8
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series D Preferred Stock Purchase Agreement (the "Agreement") is entered
---------
into as of January 29, 2000 by and between Sohu.com Inc., a Delaware corporation
formerly known as Internet Technologies China Incorporated (the "Company"), and
-------
the persons and entities set forth on Exhibit A hereto (each an "Investor" and,
--------- --------
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
-----------
"Closing" 3.1
-------
"Code" 4.20
----
"Company" Preamble
-------
"Confidential Information" 9.13
------------------------
"Conversion Shares" 4.2(c)
-----------------
-1-
<PAGE>
"Disclosing Party" 9.13
----------------
"Disclosure Schedule" 4.0
-------------------
"Financial Statements" 4.16
--------------------
"Hazardous Materials" 4.22
-------------------
"Investors", "Investor" Preamble
--------- --------
"Investor Rights Agreement" 4.2(c)
-------------------------
"ITC China" 4.3
---------
"Non-Disclosing Party" 9.13
--------------------
"Right of First Refusal and Co-Sale Agreement" 7.8
--------------------------------------------
"Stockholders' Voting Agreement" 7.8
------------------------------
"SEC" 4.14
---
"Securities Act" 4.5(b)
--------------
"Series D Preferred Stock" 2.1
------------------------
"Shares" 2.2
------
2. AGREEMENT TO PURCHASE AND SELL STOCK
------------------------------------
2.1. Authorization. As of the Closing (as defined below), the Company
-------------
will have authorized the issuance, pursuant to the terms and conditions of this
Agreement and any one or more agreements entered into by the Company subsequent
to the date hereof on the same terms (provided that no such subsequent agreement
to sell Series D Preferred Stock may be entered into or closed more than 30 days
after the date hereof), of not less than 518,459 shares of the Company's Series
D Convertible Preferred Stock ("Series D Preferred Stock") having the rights,
preferences, privileges and restrictions set forth in the form of the Fourth
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 Closing. Subject to the
---------------------------------------------
terms and conditions hereof, on the Closing Date (as defined below), the Company
will issue and sell to each Investor and each Investor will purchase that number
of shares of Series D Preferred Stock (the "Shares") as is set forth opposite
------
that Investors name on Exhibit A hereto, at a price of $38.576 per share, for an
---------
aggregate purchase price paid by all Investors of $20,000,074. The purchase
price for the Shares being purchased by each Investor shall be paid by such
Investor 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 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 (the
-----------
"Closing") shall be held at the offices of Goulston & Storrs, P.C. on the date
-------
which is two business days after the date hereof or as soon thereafter as shall
be practicable, but in any event not later than February 3, 2000 (the
"Closing").
-------
-2-
<PAGE>
3.2. Delivery. At the 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.
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 E (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 Closing, the authorized
--------------
capital stock of the Company will consist of the following:
(a) Common Stock. A total of 11,500,000 authorized shares
------------
(11,000,000 shares as of the date hereof) of Common Stock ($0.001 par value) of
which 3,621,410 shares will be (and are as of the date hereof) issued and
outstanding.
(b) Preferred Stock. A total of 5,600,000 authorized shares
---------------
(5,100,000 shares as of the date hereof) of Preferred Stock ($0.001 par value),
of which 1,125,000 will be (and are as of the date hereof) designated as Series
A Convertible Preferred Stock ("Series A Preferred Stock"), all of which will be
outstanding; 1,738,910 will be (and are as of the date hereof) designated as
Series B Convertible Preferred Stock ("Series B Preferred Stock"), all of which
will be outstanding; 338,295 will be (and are as of the date hereof) designated
as Series B-1 Convertible Preferred Stock ("Series B-1 Preferred Stock"), all of
which will be outstanding; 1,479,507 will be (1,848,885 as of the date hereof)
designated as Series C Convertible Preferred Stock ("Series C Preferred Stock"),
all of which will be outstanding; and 777,688 will be designated as Series D
Preferred, none of which will be issued or outstanding.
(c) Options, Warrants, Reserved Shares. The Company will have
----------------------------------
reserved sufficient shares of its Common Stock to permit the conversion of all
outstanding shares of the Series D 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, the
Series B-1 Preferred and the Series C Preferred, (ii) the conversion privileges
of the Series D Preferred to be issued hereunder and one or more similar
agreements, (iii) the 807,500 shares of Common Stock reserved for issuance upon
the exercise of options granted or contemplated to be granted to employees,
directors, and consultants of the Company, under which options to purchase
381,149 shares of Common Stock 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 will be no options, warrants,
-3-
<PAGE>
conversion privileges or other rights, or agreements with respect to the
issuance thereof, 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, will be 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 Third Amended and Restated Investor Rights
Agreement dated as of the Closing Date (the "Investor Rights Agreement") to be
entered into on the Closing Date between the Company and the persons listed in
Exhibit A thereto.
(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
immediately prior to the date hereof.
4.3. Subsidiaries. The Company owns all of the issued and
------------
outstanding stock of Sohu ITC Information Technology (Beijing) Co., Ltd. ("ITC
China"), a company duly organized under the laws of the People's Republic of
China and in good standing under such laws. ITC China is a wholly foreign owned
enterprise (WFOE) authorized by the government of China and has all government
permits, approvals, authorizations and licenses necessary to engage in the
business currently conducted and currently proposed to be conducted by ITC
China. Various officials of the Ministry of Information Industry ("MII") of the
People's Republic of China (the "PRC") recently have stated publicly, however,
that foreign investment is prohibited in the PRC Internet sector, including in
Internet content providers. The Company's PRC counsel has indicated that it
does not believe, however, that the Company's operations violate or breach any
of the existing laws, rules, or regulations of the PRC.
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, the Investor Rights Agreement,
the Right of First Refusal and Co-Sale Agreement (as defined in Section 7.8
hereof) and any other agreements contemplated hereby to which the Company is or
is to be a party 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, the Investor Rights
Agreement, the Right of First Refusal and Co-Sale Agreement and any other
agreements contemplated hereby to which the Company is or is to be a party are
or will be when entered into valid and binding obligations of the Company
enforceable in accordance with their respective 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
-4-
<PAGE>
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 and will be free of restrictions on transfer other than
restrictions under in this Agreement, the Investor Rights Agreement, the Right
of First Refusal and Co-Sale Agreement, and applicable securities laws. 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, and will be free of restrictions
on transfer other than restrictions under in this Agreement, the Investor Rights
Agreement, the Right of First Refusal and Co-Sale Agreement, and applicable
securities laws
(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, pledge, lien (including without limitation any tax
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
-5-
<PAGE>
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. Except as set forth in Section
4.8(c) of the Disclosure Schedule, 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
-6-
<PAGE>
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 $50,000 per year.
4.10. Litigation. Except as set forth in Section 4.10 of the
----------
Disclosure Schedule, 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, including without limitation the
execution and delivery of this Agreement, the Investor Rights Agreement and the
Right of First Refusal and Co-Sale Agreement, the issuance and sale of the
Shares and the issuance of shares of Common Stock upon conversion of the Shares,
will have been obtained prior to and will be effective as of the 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 various officials of MII recently have
-7-
<PAGE>
stated publicly that foreign investment is prohibited in the PRC Internet
sector, including in Internet content providers. Further, a WFOE, such as ITC
China, is prohibited from engaging in the businesses of providing or
distributing advertisements as defined in the 1994 PRC Advertising Law. The
relevant law is silent as to whether online advertising is covered by the law.
The Company's PRC counsel has indicated that it does not believe, however, that
the Company's operations violate or breach any of the existing laws, rules, or
regulations of 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 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 September 30, 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.
-8-
<PAGE>
Other than as set forth in the Disclosure Schedule, neither the Company nor ITC
China has any material indebtedness or other material liability. Except as
disclosed in the Audited Financial Statements or the Interim Financial
Statements, the Company is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation. The Company maintains and will continue
to maintain a standard system of accounting established and administered in
accordance with US generally accepted accounting principles.
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 $50,000 or
in excess of $250,000 in the aggregate other than in the ordinary course of
business; (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, other than payments of compensation in the ordinary course of
business based solely on such individuals' status and functions as officers,
directors or employees.
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;
(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,
-9-
<PAGE>
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,
and (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
-10-
<PAGE>
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 recorded, stored,
processed, calculated and presented calendar dates on or before December 31,
1999, or calculated 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 affecting the right of Mr. Zhang to be employed by the
Company. No such relationship, term, judgment, decree, or order conflicts with
Mr. Zhang's 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
-11-
<PAGE>
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.
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
-12-
<PAGE>
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.
5.7 No Transfer to PRC Entities. No Investor will transfer any of
---------------------------
its Shares to any entity that is organized or domiciled in the PRC.
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 Initial Public Offering. The Company will use its reasonable
-----------------------
efforts to conduct a firm commitment underwritten public offering of its Common
Stock within twelve months after the date hereof.
6.3 Subsequent Sales. The Company will not sell or enter into any
---------------
agreements to sell shares of Series D Preferred Stock except on terms the same
as those set forth
-13-
<PAGE>
in this Agreement and any such sale must occur not later than thirty (30) days
after the date hereof.
7. CONDITIONS TO THE INVESTORS' OBLIGATIONS AT THE CLOSING. The
--------------------------------------------------------
obligations of each Investor to purchase the Shares at the Closing are subject
to the fulfillment, to the satisfaction each Investor, on or before 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 as
of the date of the Closing; and the Company shall have performed all obligations
and conditions herein required to be performed or observed by it on or before
the Closing, with respect to the issuance and sale of the 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 on or before
the Closing, with respect to the issuance and sale of the 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 Closing, the Company shall
----------------------
deliver to each 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 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 (a) the Investor Rights Agreement (as defined in Section 4.2(c)),
substantially in the form of Exhibit C hereto and (b) a Third Amended and
Restated Right of First Refusal and Co-Sale Agreement, substantially in the form
of Exhibit D hereto, dated as of the Closing 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") in
-14-
<PAGE>
each case by the parties whose participation is necessary to effectuate such
respective amendments.
7.9. Opinion of Company's Counsel. At the Closing each 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.
7.10 Due Diligence. Completion of due diligence to the reasonable
-------------
satisfaction of 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:
8.1. Representations and Warranties. The representations and
------------------------------
warranties of the Investors contained in Section 5 hereof shall be true as of
the 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 D therein and the
Investors as parties thereto or beneficiaries of rights equivalent to those set
forth in (a) the Investor Rights Agreement and (b) the Right of First Refusal
and Co-Sale 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 herein may not be
assigned by any Investor without the written consent of the Company except to a
parent
-15-
<PAGE>
corporation, a subsidiary or an affiliate. This Agreement and the rights and
obligations herein 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.
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) 574-6595
If to the Investors to the address of such Investors set forth on
Exhibit A hereto.
-16-
<PAGE>
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 D 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. 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, other than the name and address of each Investor
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,
-17-
<PAGE>
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.
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 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
any Investor is an investor in the Company to third parties without the
requirement of nondisclosure obligations. 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
-18-
<PAGE>
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]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year herein above first written.
SOHU.COM INC.
By: ____________________________
Printed Name: __________________
Title: _________________________
LEGEND NEW-TECH INVESTMENT LIMITED
By: ____________________________
Printed Name: __________________
Title: _________________________
INTERNET CREATIONS LIMITED
By: ____________________________
Printed Name: __________________
Title: _________________________
HIKARI TSUSHIN, INC.
By: ____________________________
Printed Name: __________________
Title: _________________________
SIGNATURE PAGES OF SERIES D PREFERRED STOCK PURCHASE AGREEMENT
-20-
<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 D PREFERRED STOCK PURCHASE AGREEMENT
-21-
<PAGE>
EXHIBIT 10.10
SOHU.COM INC.
THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
This Third Amended and Restated Investor Rights Agreement (this
"Agreement") is made and entered into as of February 1, 2000 by and among
---------
Sohu.com Inc., a Delaware corporation (the "Company") formerly known as Internet
-------
Technologies China Incorporated, and the persons and entities who are
signatories hereto and listed on Exhibit A hereto (individually, an "Investor"
--------
and, collectively, the "Investors").
---------
R E C I T A L S
---------------
A. The Investors have purchased from the Company, and the Company has sold
to the Investors, shares of the Company's Series B Convertible Preferred Stock
("Series B Preferred Stock"), the Company's Series B-1 Convertible Preferred
Stock ("Series B-1 Preferred Stock"), the Company's Series C Convertible
Preferred Stock ("Series C Preferred Stock") or the Company's Series D
Convertible Preferred Stock ("Series D Preferred Stock") (Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock together, "Preferred Stock") on the terms and conditions set
---------------
forth in (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, (c) a Series C Preferred Stock Purchase
Agreement (the "Series C Purchase Agreement") dated as of October 18, 1999
between the Company and the Investors named therein and (d) one or more Series D
Preferred Stock Purchase Agreements between the Company and the Investors named
therein (the "Series D Purchase Agreements", together with the Series B Purchase
Agreement, the Series B-1 Purchase Agreement and the Series C Purchase
Agreement, the "Purchase Agreements").
-------------------
B. The Company and the Investors which are parties to the Series B
Purchase Agreement, the Series B-1 Purchase Agreement and the Series C Purchase
Agreement (the "Initial Investors") are parties to a Second Amended and Restated
Investor Rights Agreement dated as of October 18, 1999 (the "Second Amended and
Restated Investor Rights Agreement");
C. Certain of the obligations of the Company and of the Investors which
are parties thereto under the Series D Purchase Agreements (the "Additional
Investors") are conditioned upon the amendment and restatement of the Second
Amended and Restated Investor Rights Agreement to add the Additional Investors
as parties and to make such additional changes as are set forth.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises hereinafter set forth, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
-1-
<PAGE>
1. INFORMATION RIGHTS.
------------------
1.1 Information and Inspection Rights. The Company covenants and agrees
---------------------------------
that for so long as an Investor holds any shares of Preferred Stock issued under
this Agreement or any of the Purchase Agreements, the Company will deliver to
such Investor: (a) audited annual financial statements within 90 days after the
end of each fiscal year; (b) unaudited quarterly financial statements within 45
days of the end of each fiscal quarter; (c) unaudited monthly financial
statements within 30 days of the end of each month; (d) an annual budget for the
following fiscal year within 30 days prior to the end of each fiscal year; and
(e) upon the written request by the Investor, such other information as the
Investor shall reasonably request, including without limitation tables of stock
ownership in the Company not less frequently than quarterly. The Company
further covenants and agrees that for so long as an Investor holds any shares of
Preferred Stock issued under this Agreement or the Purchase Agreements, such
Investor shall have standard inspection rights. These information and
inspection rights shall terminate upon consummation of an underwritten initial
public offering of shares of Common Stock of the Company (the "IPO"). Following
the IPO, the Company shall deliver to the Investor copies of the Company's 10-
K's, 10-Q's, 8-K's and Annual Reports to Shareholders promptly after such
documents are filed with the SEC.
1.2 Board Observer. So long as an Investor holds at least 190,000 shares
--------------
of Preferred Stock (such number to be proportionately adjusted for stock splits,
stock dividends, and similar events), the Company will permit a representative
of such Investor (the "Observer") to attend all meetings of the Company's Board
of Directors (the "Board") and all committees thereof (whether in person,
telephonic or other) in a non-voting, observer capacity and shall provide to the
Investor, concurrently with the members of the Board, and in the same manner,
notice of such meeting and a copy of all materials provided to such members;
provided, that if a representative of an Investor is a member of the Board, such
Investor shall not have the right to appoint an Observer.
The Company acknowledges that any Investor will likely have, from time to
time, information that may be of interest to the Company ("Information")
regarding a wide variety of matters including, by way of example only, (1)
Investor's technologies, plans and services, and plans and strategies relating
thereto, (2) current and future investments Investor has made, may make, may
consider or may become aware of with respect to other companies and other
technologies, products and services, including, without limitation,
technologies, products and services that may be competitive with the Company's,
and (3) developments with respect to the technologies, products and services,
and plans and strategies relating thereto, of other companies, including,
without limitation, companies that may be competitive with the Company. The
Company recognizes that a portion of such Information may be of interest to the
Company. Such Information may or may not be known by the Observer. The
Company, as a material part of the consideration for this Agreement, agrees that
each Investor and its Observer shall have no duty to disclose any Information to
the Company or permit the Company to participate in any projects or investments
based on any Information, or to otherwise take advantage of any opportunity that
may be of interest to the Company if it were aware of such Information, and
hereby waives, to the extent permitted by law, any claim based on the corporate
opportunity doctrine or otherwise that could limit such Investor's ability to
pursue opportunities based on such Information or that
-2-
<PAGE>
would require Investor or Observer to disclose any such Information to the
Company or offer any opportunity relating thereto to the Company.
1.3 GAAP Financial Statements. From and after the date hereof, all
-------------------------
audited and unaudited 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 Five" accounting firms.
2. REGISTRATION RIGHTS.
-------------------
2.1 Definitions. For purposes of this Section 2:
-----------
(a) Registration. The terms "register," "registered," and
------------ -------- ----------
"registration" refer to a registration effected by preparing and filing a
- -------------
registration statement in compliance with the Securities Act of 1933, as
amended, (the "Securities Act"), and the declaration or ordering of
--------------
effectiveness of such registration statement by the SEC.
(b) Registrable Securities. The term "Registrable Securities" means:
---------------------- ----------------------
(1) any Common Stock of the Company issued or to be issued pursuant to
conversion of any shares of Preferred Stock issued (A) under the Purchase
Agreements, and (B) pursuant to the Right of Participation (defined in Section 3
hereof), (2) any shares of Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, any shares of Preferred Stock described in clause (1) of
this subsection (b) and (3) any other Common Stock of the Company owned or
hereafter acquired by the Investor, provided, however, that shares of Common
Stock of the Company now owned or hereafter acquired by any of Edward B.
Roberts, Brant C. Binder or Nicholas Negroponte upon the exercise of options or
warrants or upon the conversion into Common Stock of shares of Series A
Convertible Preferred Stock of the Company owned by him shall not be Registrable
Securities. Notwithstanding the foregoing, "Registrable Securities" shall
exclude any Registrable Securities sold by a person in a transaction in which
rights under this Section 2 are not assigned in accordance with this Agreement
or any Registrable Securities sold in a public offering, whether sold pursuant
to Rule 144 promulgated under the Securities Act, or in a registered offering,
or otherwise.
(c) Registrable Securities Then Outstanding. The number of shares of
---------------------------------------
"Registrable Securities then outstanding" shall mean the number of shares of
---------------------------------------
Common Stock of the Company that are Registrable Securities and are then issued
and outstanding.
(d) Holder. For purposes of this Section 2, the term "Holder" means
------ ------
any person owning of record Registrable Securities that have not been sold to
the public or pursuant to Rule 144 promulgated under the Securities Act or any
permitted assignee of record of such Registrable Securities to whom rights under
this Section 2 have been duly assigned in accordance with this Agreement.
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<PAGE>
(e) Form S-3. The term "Form S-3" means such form under the
-------- --------
Securities Act as is in effect on the date hereof or any successor registration
form under the Securities Act subsequently adopted by the SEC which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
(f) SEC. The term "SEC" or "Commission" means the U.S. Securities
--- --- ----------
and Exchange Commission.
2.2 Demand Registration.
-------------------
(a) Request by Holders. If the Company shall at any time after the
------------------
Company's IPO receive a written request from the Holders of at least twenty
percent (20%) of the Registrable Securities then outstanding that the Company
file a registration statement under the Securities Act covering the registration
of Registrable Securities pursuant to this Section 2.2, then the Company shall,
within ten (10) business days of the receipt of such written request, give
written notice of such request ("Request Notice") to all Holders, and use its
--------------
best efforts to effect, as soon as practicable, the registration under the
Securities Act of all Registrable Securities that Holders request to be
registered and included in such registration by written notice given by such
Holders to the Company within twenty (20) days after receipt of the Request
Notice, subject only to the limitations of this Section 2.2; provided that the
--------
Registrable Securities requested by all Holders to be registered pursuant to
such request must be at least twelve percent (12%) of all Registrable Securities
then outstanding; and provided further that the Company shall not be obligated
-------- -------
to effect any such registration if the Company has, within the six (6) month
period preceding the date of such request, already effected a registration under
the Securities Act pursuant to this Section 2.2, or in which the Holders had an
opportunity to participate pursuant to the provisions of Section 2.3, other than
a registration from which the Registrable Securities of Holders have been
excluded (with respect to all or any portion of the Registrable Securities the
Holders requested be included in such registration) pursuant to the provisions
of Section 2.3(a).
(b) Underwriting. If the Holders initiating the registration request
------------
under this Section 2.2 ("Initiating Holders") intend to distribute the
------------------
Registrable Securities covered by their request by means of an underwriting,
then they shall so advise the Company as a part of their request made pursuant
to this Section 2.2 and the Company shall include such information in the
written notice referred to in subsection 2.2(a). In such event, the right of
any Holder to include his Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the managing underwriter or
underwriters selected for such underwriting by the Holders of a majority of the
Registrable Securities being registered and reasonably acceptable to the Company
(including a market stand-off agreement, as to any shares held by such Holders
which are not being registered, of up to 180 days if required by such
underwriter or underwriters). Notwithstanding any other provision of this
Section 2.2, if the underwriter(s) advise(s) the Company in writing that
marketing factors require a limitation of the number of securities to be
underwritten then the Company shall so advise all Holders of Registrable
-4-
<PAGE>
Securities which would otherwise be registered and underwritten pursuant hereto,
and the number of Registrable Securities that may be included in the
underwriting shall be reduced as required by the underwriter(s) and allocated
among the Holders of Registrable Securities on a pro rata basis according to the
number of Registrable Securities then outstanding held by each Holder requesting
registration (including the initiating Holders); provided, however, that the
-------- -------
number of shares of Registrable Securities to be included in such underwriting
and registration shall not be reduced unless all other securities of the Company
are first entirely excluded from the underwriting and registration. Any
Registrable Securities excluded and withdrawn from such underwriting shall be
withdrawn from the registration.
(c) Maximum Number of Demand Registrations. The Company shall be
--------------------------------------
obligated to effect only two (2) such registrations pursuant to this Section
2.2.
(d) Deferral. Notwithstanding the foregoing, if the Company shall
--------
furnish to Holders requesting the filing of a registration statement pursuant to
this Section 2.2, a certificate signed by the President or Chief Executive
Officer of the Company stating that in the good faith judgment of the Board, it
would be materially detrimental to the Company and its stockholders for such
registration statement to be filed, then the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the initiating Holders; provided, however, that the Company
-------- -------
may not utilize this right more than once in any twelve (12) month period.
(e) Expenses. All expenses incurred in connection with any
--------
registration pursuant to this Section 2.2, including without limitation all
federal and "blue sky" registration, filing and qualification fees, printer's
and accounting fees, and fees and disbursements of counsel for the Company (but
excluding underwriters' discounts and commissions relating to shares sold by the
Holders and legal fees of counsel for the Holders), shall be borne by the
Company. Each Holder participating in a registration pursuant to this Section
2.2 shall bear such Holder's proportionate share (based on the total number of
shares sold in such registration other than for the account of the Company) of
all discounts, commissions or other amounts payable to underwriter(s) or
brokers, and the Holders' legal fees, in connection with such offering by the
Holders. Notwithstanding the foregoing, the Company shall not be required to
pay for any expenses of any registration proceeding begun pursuant to this
Section 2.2 if the registration request is subsequently withdrawn at the request
of the Holders of a majority of the Registrable Securities to be registered,
unless the Holders of a majority of the Registrable Securities then outstanding
agree that such registration constitutes the use by the Holders of one (1)
demand registration pursuant to this Section 2.2 (in which case such
registration shall also constitute the use by all Holders of Registrable
Securities of one (1) such demand registration); provided, further, however,
-------- ------- -------
that if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business, or prospects of the Company not known
to the Holders at the time of their request for such registration and have
withdrawn their request for registration with reasonable promptness after
learning of such material adverse change, then the Holders shall not be required
to pay any of such expenses and such registration shall not constitute the use
of a demand registration pursuant to this Section 2.2.
-5-
<PAGE>
2.3 Piggyback Registrations. The Company shall notify all Holders of
-----------------------
Registrable Securities in writing at least thirty (30) days prior to filing any
registration statement, after the Company's IPO, under the Securities Act for
purposes of effecting a public offering of securities of the Company (including,
but not limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding registration statements relating to any
---------
registration under Section 2.2 or Section 2.4 of this Agreement or to any
employee benefit plan or a corporate reorganization) and will afford each such
Holder an opportunity to include in such registration statement all or any part
of the Registrable Securities then held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Securities held by such Holder shall within twenty (20) days after receipt of
the above-described notice from the Company, so notify the Company in writing,
and in such notice shall inform the Company of the number of Registrable
Securities such Holder wishes to include in such registration statement. If a
Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If a registration statement under which the Company
------------
gives notice under this Section 2.3 is for an underwritten offering, then the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriters selected for such underwriting
(including a market stand-off agreement of up to 180 days if required by such
underwriter or underwriters, but in no event more restrictive than any agreement
required to be signed by the officers, directors and other major stockholders of
the Company). Notwithstanding any other provision of this Agreement, if the
managing underwriter(s) determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude shares (including up to eighty percent (80%)
of the Registrable Securities) from the registration and the underwriting, and
the number of shares that may be included in the registration and the
underwriting shall be allocated, first to the Company, and second, to each of
----- ------
the Holders requesting inclusion of their Registrable Securities in such
registration statement on a pro rata basis based on the total number of
Registrable Securities then held by each such Holder; provided, however, that
-------- -------
the right of the underwriter(s) to exclude shares (including Registrable
Securities) from the registration and underwriting as described above shall be
restricted so that (i) the number of Registrable Securities included in any such
registration is not reduced below twenty-five percent (25%) of the aggregate
number of Registrable Securities for which inclusion has been requested; and
(ii) all shares that are not Registrable Securities and are held by any other
person, including, without limitation, any person who is an employee, officer or
director of the Company (or any subsidiary of the Company) shall first be
excluded from such registration and underwriting before any Registrable
Securities are so excluded. If any Holder disapproves of the terms of any such
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company and the underwriter(s), delivered at
-6-
<PAGE>
least ten (10) business days prior to the effective date of the registration
statement. Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration. For any
Holder that is a partnership, the Holder and the partners and retired partners
of such Holder, or the estates and family members of any such partners and
retired partners and any trusts for the benefit of any of the foregoing persons,
and for any Holder that is a corporation, the Holder and all corporations that
are affiliates of such Holder shall be deemed to be a single "Holder," and any
pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(b) Expenses. All expenses incurred in connection with a
--------
registration pursuant to this Section 2.3 (excluding underwriters' and brokers'
discounts and commissions relating to shares sold by the Holders and legal fees
of counsel for the Holders), including, without limitation all federal and "blue
sky" registration, filing and qualification fees, printers' and accounting fees,
and fees and disbursements of counsel for the Company, shall be borne by the
Company.
(c) Not Demand Registration. Registration pursuant to this Section
-----------------------
2.3 shall not be deemed to be a demand registration as described in Section 2.2
above. Except as otherwise provided herein, there shall be no limit on the
number of times the Holders may request registration of Registrable Securities
under this Section 2.3.
2.4 Form S-3 Registration. In case the Company shall at any time after
---------------------
the first anniversary of the date hereof receive from any Holder of Registrable
Securities a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, then the
Company will:
(a) Notice. Promptly give written notice of the proposed
------
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and
(b) Registration. As soon as practicable, effect such registration
------------
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within twenty (20) days after the Company provides the notice contemplated
by Section 2.4(a); provided, however, that the Company shall not be obligated to
-------- -------
effect any such registration, qualification or compliance pursuant to this
Section 2.4:
(1) if Form S-3 is not available for such offering by the
Holders;
(2) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) at an aggregate
price to the public of less than $500,000;
-7-
<PAGE>
(3) if the Company shall furnish to the Holders a certificate
signed by the President or Chief Executive Officer of the Company stating that
in the good faith judgment of the Board of Directors of the Company, it would be
materially detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company shall have
the right to defer the filing of the Form S-3 registration statement no more
than once during any twelve month period for a period of not more than ninety
(90) days after receipt of the request of the Holder or Holders under this
Section 2.4;
(4) if the Company has, within the six (6) month period
preceding the date of such request, already effected a registration under the
Securities Act other than a registration from which the Registrable Securities
of Holders have been excluded (with respect to all or any portion of the
Registrable Securities the Holders requested be included in such registration)
pursuant to the provisions of Section 2.3(a); or
(5) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
(c) Expenses. The Company shall pay all expenses incurred in
--------
connection with each registration requested pursuant to this Section 2.4,
(excluding underwriters' or brokers' discounts and commissions relating to
shares sold by the Holders and legal fees of counsel for the Holders), including
without limitation federal and "blue sky" registration, filing and qualification
fees, printers' and accounting fees, and fees and disbursements of counsel.
(d) Deferral. Notwithstanding the foregoing, if the Company shall
--------
furnish to Holders requesting the filing of a registration statement pursuant to
this Section 2.4, a certificate signed by the President or Chief Executive
Officer of the Company stating that in the good faith judgment of the Board, it
would be materially detrimental to the Company and its stockholders for such
registration statement to be filed, then the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the initiating Holders; provided, however, that the Company
-------- -------
may not utilize this right more than once in any twelve (12) month period.
(e) Not Demand Registration. Form S-3 registrations shall not be
-----------------------
deemed to be demand registrations as described in Section 2.2 above. Except as
otherwise provided herein, there shall be no limit on the number of times the
Holders may request registration of Registrable Securities under this Section
2.4.
2.5 Obligations of the Company. Whenever required to effect the
--------------------------
registration of any Registrable Securities under this Agreement the Company
shall, as expeditiously as reasonably possible:
(a) Registration Statement. Prepare and file with the SEC a
----------------------
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective, provided,
--------
however, that the Company shall not be required to keep any such registration
- -------
statement effective for more than one hundred eighty (180) days.
-8-
<PAGE>
(b) Amendments and Supplements. Prepare and file with the SEC such
--------------------------
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement.
(c) Prospectuses. Furnish to the Holders such number of copies of a
------------
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
(d) Blue Sky. Use its best efforts to register and qualify the
--------
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) Underwriting. In the event of any underwritten public offering,
------------
enter into and perform its obligations under an underwriting agreement in usual
and customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notification. Notify each Holder of Registrable Securities
------------
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening of
any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(g) Opinion and Comfort Letter. Furnish, at the request of any
--------------------------
Holder requesting registration of Registrable Securities, on the date that such
Registrable Securities are delivered to the underwriter(s) for sale, if such
securities are being sold through underwriters, or, if such securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective, (i) an opinion, dated as of
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering and reasonably satisfactory to a majority in
interest of the Holders requesting registration, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a "comfort" letter dated as of such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
(h) Exchange or Nasdaq National Market. Use reasonable efforts to
----------------------------------
list such Registrable Securities on any securities exchange or other self-
regulatory organization, such as
-9-
<PAGE>
the Nasdaq National Market, on which the Company's Common Stock is then listed,
and to comply with all applicable regulations of the SEC.
2.6 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or
2.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to timely effect
the Registration of their Registrable Securities.
2.7 Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) By the Company. To the extent permitted by law; the Company will
--------------
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as determined in the Securities Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the Securities Exchange Act of 1934, as
amended, (the "1934 Act"), against any losses, claims, damages, or liabilities
--------
(joint or several) to which they may become subject under the Securities Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"):
---------
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto;
(ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading; or
(iii) any violation or alleged violation by the Company of the
Securities Act, the 1934 Act, any federal or state securities law or
any rule or regulation promulgated under the Securities Act, the 1934
Act or any federal or state securities law in connection with the
offering covered by such registration statement;
and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
-------- -------
indemnity agreement contained in this subsection 2.7(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
-10-
<PAGE>
(b) By Selling Holders. To the extent permitted by law, each selling
------------------
Holder (if Registrable Securities held by such Holder are included in the
securities as to which such registration, qualification or compliance is being
effected) will indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the registration statement, each person, if
any, who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such other Holder within the meaning of the Securities Act
or the 1934 Act, against any losses, claims, damages or liabilities (joint or
several) to which the Company or any such director, officer, controlling person,
underwriter or such other Holder, partner or director, officer or controlling
person of such other Holder may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person,
underwriter or other Holder, partner, officer, director or controlling person of
such other Holder in connection with investigating or defending any such loss,
claim, damage, liability or action: provided, however, that the indemnity
-------- -------
agreement contained in this subsection 2.7(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; and provided, further, that the total amounts
-------- -------
payable in indemnity by a Holder under this Section 2.7(b) in respect of any
Violation shall not exceed the net proceeds received by such Holder in the
registered offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under this
------
Section 2.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
-------- -------
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of
liability to the indemnified party under this Section 2.7 to the extent the
indemnifying party is prejudiced as a result thereof, but the omission so to
deliver written notice to the indemnified party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 2.7.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity
-------------------------------------
agreements of the Company and Holders are subject to the condition that, insofar
as they relate to
-11-
<PAGE>
any Violation made in a preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration statement
in question becomes effective or the amended prospectus filed with the SEC
pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity agreement
----------------
shall not inure to the benefit of any person if a copy of the Final Prospectus
was timely furnished to the indemnified party and was not furnished to the
person asserting the loss, liability, claim or damage at or prior to the time
such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
------------
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 2.7 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 2.7 provides
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
2.7; then, and in each such case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such Holder
is responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all securities
offered by and sold under such registration statement, and the Company and other
selling Holders are responsible for the remaining portion; provided, however,
-------- -------
that, in any such case: (A) no such Holder will be required to contribute any
amount in excess of net proceeds of all such Registrable Securities offered and
sold by such Holder pursuant to such registration statement; and (B) no person
or entity guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any person or
entity who was not guilty of such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under this
--------
Section 2.7 shall survive until the sixth anniversary of the completion of any
offering of Registrable Securities in a registration statement, regardless of
the expiration of any statutes of limitation or extensions of such statutes.
2.8 Termination of the Company's Obligations. The Company shall have no
----------------------------------------
obligations pursuant to Sections 2.2 through 2.4 with respect to any Registrable
Securities proposed to be sold by a Holder in a registration pursuant to Section
2.2, 2.3 or 2.4 if, in the opinion of counsel to the Company, all such
Registrable Securities proposed to be sold by a Holder may then be sold under
Rule 144 in one transaction without exceeding the volume limitations thereunder.
2.9 No Registration Rights to Third Parties. Without the prior written
---------------------------------------
consent of the Holders of at least eighty percent (80%) of the Registrable
Securities then outstanding, the Company covenants and agrees that it shall not
grant, or cause or permit to be created, for the benefit of any person or entity
any registration rights of any kind (whether similar to the demand,
-12-
<PAGE>
"piggyback" or Form S-3 registration rights described in this Article 2, or
otherwise) relating to any other voting securities of the Company, other than
rights that are subordinate in right to the Investors as to cutbacks.
3. RIGHT OF PARTICIPATION.
----------------------
3.1 General. Each Investor and any permitted assign of an Investor (each,
-------
a "Participation Rights Holder") shall have the right of first refusal to
---------------------------
purchase such Participation Rights Holder's Pro Rata Share (as defined below),
of all (or any part) of any New Securities (as defined in Section 3.3) that the
Company may from time to time issue after the date of this Agreement (the "Right
-----
of Participation").
- ----------------
3.2 Pro Rata Share. A Participation Rights Holder's "Pro Rata Share" for
-------------- --------------
purposes of the Right of Participation is the ratio of (a) the number of
Registrable Securities held by such Participation Rights Holder, to (b) the
total number of outstanding shares of Common Stock of the Company on a fully-
diluted, as-converted basis. Each Holder shall have a right of over-
subscription such that if any Holder fails to exercise its right hereunder to
purchase its pro rata share of New Securities, the other Holders may purchase
the non-purchasing Holder's portion on a pro rata basis within ten (10) days
from the date such non-purchasing Holder fails to exercise its rights hereunder
to purchase its pro rata share of New Securities.
3.3 New Securities. "New Securities" shall mean any Preferred Stock,
-------------- --------------
other preferred stock of the Company, Common Stock or other voting capital stock
of the Company, whether now authorized or not, and rights, options or warrants
to purchase any such securities, and securities of any other type whatsoever
that are, or may become, convertible or exchangeable into such Preferred Stock,
other preferred stock, Common Stock or other capital stock, provided, however,
-------- -------
that the term "New Securities" shall not include:
(a) up to 830,625 shares of the Company's Common Stock (and/or options or
warrants therefor) issued to employees, officers, directors,
contractors, advisors or consultants of the Company pursuant to
incentive agreements or incentive plans approved by the Board;
(b) any shares of Preferred Stock issued under any of the Purchase
Agreements, as such agreement may be amended;
(c) any securities issued upon conversion of shares of Preferred Stock
issued under any of the Purchase Agreements;
(d) any securities issued in connection with any stock split stock,
dividend or other similar event in which all Participation Rights
Holders are entitled to participate on a pro rata basis;
(e) any securities issued upon the exercise, conversion or exchange of any
outstanding security if such outstanding security constituted a New
Security;
-13-
<PAGE>
(f) any securities issued pursuant to the acquisition of another
corporation or entity by the Company by consolidation, merger,
purchase of assets, or other reorganization in which the Company
acquires, in a single transaction or series of related transactions,
assets of such other corporation or entity or fifty percent (50%) or
more of the voting power of such other corporation or entity or fifty
percent (50%) or more of the equity ownership of such other entity; or
(g) any securities offered by the Company in a transaction registered
under the Securities Act.
3.4 Procedures. In the event that the Company proposes to undertake an
----------
issuance of New Securities (in a single transaction or a series of related
transactions), it shall give to each Participation Rights Holder written notice
of its intention to issue New Securities (the "Participation Notice"),
--------------------
describing the amount and the type of New Securities and the price and the
general terms upon which the Company proposes to issue such New Securities.
Each Participation Rights Holder shall have fifteen (15) business days from the
date of receipt of any such Participation Notice to agree in writing to purchase
such Participation Rights Holder's Pro Rata Share of such New Securities for the
price and upon the terms and conditions specified in the Participation Notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased (not to exceed such Participation Rights Holder's Pro
Rata Share). If any Participation Rights Holder fails to so agree in writing
within such fifteen (15) business day period to purchase such Participation
Rights Holder's full Pro Rata Share of an offering of New Securities, then such
Participation Rights Holder shall forfeit the right hereunder to purchase that
part of its Pro Rata Share of such New Securities that it did not so agree to
purchase. Such Participation Rights Holder shall purchase the portion elected
by such Participation Rights Holder concurrently with the closing of the
transaction triggering the Right of Participation.
3.5 Failure to Exercise. Upon the expiration of such ten (10) day period,
-------------------
the Company shall have 60 days thereafter to sell the New Securities described
in the Participation Notice (with respect to which the Participation Rights
Holders' rights of first refusal hereunder were not exercised) at the same or
higher price and upon non-price terms not materially more favorable to the
purchasers thereof than specified in the Participation Notice. In the event
that the Company has not issued and sold such New Securities within such 60 day
period, then the Company shall not thereafter issue or sell any New Securities
without again first offering such New Securities to the Participation Rights
Holders pursuant to this Section 3.
3.6 Termination. The Right of Participation for the Holders shall
-----------
terminate upon the first date that Investors and their Affiliates (as defined in
Rule 144 under the Securities Act) collectively hold neither (i) more than
250,000 shares of Series B Preferred Stock of the Company (such number to be
proportionately adjusted for stock splits, stock dividends and similar events),
(ii) more than 200,000 shares of Series C Preferred Stock of the Company (such
number to be proportionately adjusted for stock splits, stock dividends and
similar events) nor (iii) more than 100,000 shares of Series D Preferred Stock
of the Company (such number to be proportionately adjusted for stock splits,
stock dividends and similar events).
-14-
<PAGE>
4. ASSIGNMENT AND AMENDMENT.
------------------------
4.1 Assignment. Notwithstanding anything herein to the contrary:
----------
(a) Information Rights. The rights of the Investor under Section 1.1
------------------
are transferable to any Holder (including the parent, affiliate or subsidiary of
the Investor); provided, however, that no party may be assigned any of the
-------- --------
foregoing rights unless the Company is given written notice by the assigning
party at the time of such assignment stating the name and address of the
assignee and identifying the securities of the Company as to which the rights in
question are being assigned; provided further that any such assignee shall
-------- -------
receive such assigned rights subject to all the terms and conditions of this
Agreement, including without limitation the provisions of this Section 4; and
provided further that no party may assign any of the foregoing rights to any
- -------- -------
entity that is organized or domiciled in the PRC.
(b) Registration Rights. The registration rights of the Investor
-------------------
under Section 2 hereof may be assigned or transferred to any Holder (including
the parent, affiliate or subsidiary of the Investor); provided, however, that no
-------- -------
party may be assigned any of the foregoing rights unless the Company is given
written notice by the assigning party at the time of such assignment stating the
name and address of the assignee and identifying the securities of the Company
as to which the rights in question are being assigned; provided further that any
----------------
such assignee shall receive such assigned rights subject to all the terms and
conditions of this Agreement, including without limitation the provisions of
this Section 4; and provided further that no party may assign any of the
-------- -------
foregoing rights to any entity that is organized or domiciled in the PRC.
(c) Rights of Participation. The rights of the Investor under
-----------------------
Sections 3 hereof are fully assignable and transferable to any Holder (including
the parent, affiliate or subsidiary of the Investor); provided, however, that no
-------- -------
party may be assigned any of the foregoing rights unless the Company is given
written notice by the Investor at the time of such assignment stating the name
and address of the assignee and identifying the securities of the Company as to
which the rights in question are being assigned; provided further that any such
----------------
assignee shall receive such assigned rights subject to all the terms and
conditions of this Agreement; and provided further that no party may assign any
-------- -------
of the foregoing rights to any entity that is organized or domiciled in the PRC.
4.2 Amendment of Rights. Any provision of this Agreement may be amended
-------------------
and the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Holders of eighty percent (80%) of the
Registrable Securities then outstanding and entitled to the registration rights
set forth in Section 2 hereof; provided, however, that, subject to compliance
with the provisions of the Series D Purchase Agreement dated as of January 29,
2000, this Agreement may be amended with the written consent of the Company to
add as "Additional Investors" parties hereto any subsequent purchasers of Series
D Preferred Stock that is authorized but unissued as of the date hereof. Any
amendment or waiver effected in accordance with this Section 4.2 shall be
binding upon all of the Investors, each Holder, each permitted transferee,
successor or assignee of such Investor or Holder and the Company.
-15-
<PAGE>
5. GENERAL PROVISIONS.
------------------
5.1. 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.
To an Investor: To the Company:
At the Address Listed on Exhibit A 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
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 above, or designate additional
addresses, for purposes of this Section 5.1 by giving the other party written
notice of the new address in the manner set forth above.
5.2 Entire Agreement. This Agreement, together with all the Exhibits
----------------
hereto, constitutes and contains the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof.
5.3 Market Standoff. In connection with the initial underwritten public
---------------
offering of the Company's Common Stock, no Investor which has signed this
Amended and Restated Investor
-16-
<PAGE>
Rights Agreement will, 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, her, or its economic risk with respect to any shares
of capital stock, or securities exercisable for or convertible into shares of
capital stock, of the Company for a period of 180 days after the date of the
final prospectus used in connection with such offering. This provision shall be
enforceable only to the extent that all directors and executive officers of the
Company and of any subsidiary of the Company and all stockholders of the
Company, other than stockholders who hold less than 1% of the outstanding
capital stock of the Company on a fully-diluted basis (as shown on a certain pro
forma capitalization table as of January 25, 2000 made available to each
Investor who has signed this Agreement) as of the date hereof after giving
effect to the sale of the Shares, Harrison Enterprises, Inc., Brant Binder,
Nicholas Negroponte, or any transferee of any of the foregoing, have agreed in
writing to a similar provision prior to the effectiveness of the registration
statement filed with the SEC in connection with such offering.
5.3A Governing Law. This Agreement shall be governed by and construed
-------------
exclusively in accordance with the internal laws of the State of Delaware as
applied to agreements among Delaware residents entered into and to be performed
entirely within Delaware, excluding that body of law relating to conflict of
laws and choice of law.
5.4 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, then such provision(s) shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision(s) were so excluded and shall be enforceable in accordance with
its terms.
5.5 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any person, other than the parties hereto and their
permitted successors and assigns, any rights or remedies under or by reason of
this Agreement.
5.6 Successors and Assigns. Subject to the provisions of Section 4.1, the
----------------------
provisions of this Agreement shall inure to the benefit of, and shall be binding
upon, the successors and permitted assigns of the parties hereto.
5.7 Captions. The captions to sections of this Agreement have been
--------
inserted for identification and reference purposes only and shall not be used to
construe or interpret this Agreement.
5.8 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
5.9 Adjustments for Stock Splits, Etc. Wherever in this Agreement there
---------------------------------
is a reference to a specific number of shares of Preferred Stock, then, upon the
occurrence of any subdivision, combination or stock dividend of Preferred Stock,
the specific number of shares so referenced in this Agreement shall
automatically be proportionally adjusted to reflect the affect on the
outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.
-17-
<PAGE>
5.10 Termination of Second Amended and Restated Investor Rights Agreement.
--------------------------------------------------------------------
The Second Amended and Restated Investor Rights Agreement is hereby terminated
in its entirety and replaced by this Agreement.
[SIGNATURE PAGE FOLLOWS]
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
INVESTOR
SOHU.COM INC.
_____________________________________
(Name of Investor)
By: _________________________________ By: _________________________________
Name: Name:
Title: Title:
[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]
-19-
<PAGE>
EXHIBIT 10.11
Execution Copy
____________________________
Technical Services Agreement
____________________________
by and between
Sohu ITC Information Technology (Beijing) Co. Ltd.
and
Hikari Tsushin, Inc.
28 January 2000
<PAGE>
THIS TECHNICAL SERVICES AGREEMENT ("Agreement") is made on this 28th day of
January 2000 in Beijing, People's Republic of China ("PRC")
BY AND BETWEEN
Sohu ITC Information Technology (Beijing) Co. Ltd., with its registered address
at Suite 519, Tower 2, Bright China Chang An Building, 7 Jianguomennei Avenue,
Beijing 100005, PRC ("Party A")
AND
Hikari Tsushin, Inc., with its registered address at 23F Ohtemachi Nomura
Building, 2-1-1 Ohtemachi, Chiyoda-ku, Tokyo 100, Japan ("Party B")
(Individually a "Party" and collectively the "Parties").
1. DEFINITIONS
-----------
Unless otherwise stipulated, the following terms mentioned in this
Agreement shall have the meanings set forth below:
"Force Majeure" Those events that are unforeseen, or, if
foreseen, reasonably unavoidable, and that
arise due to the special nature of network
technology and network media, effecting
adversely the normal operation of networks.
Force Majeure includes the result of attacks by
hackers, of technical adjustments made by the
Beijing Telecommunications Administration, the
temporary shutting down of networks due to
government control (with written verification
issued by the relevant authority), in addition
to natural and human-caused disasters.
"Impression" The technical effect that results from a user
viewing an information banner posted on a web
site.
"Information Banner" A message banner or similar type of placard
which is designed and displayed on Sohu's web
site in accordance with this Agreement, and
which is linked to
<PAGE>
Party B's designated web address and contains
information relating to Party B or its affiliates.
"Number of Impressions" A figure describing the number of views, within a
given period of time, of Party B's Information
Banners, as provided by the advertisement tracking
statistics report system maintained by Party A.
"Party B's Web Address" The IP address or internal network address owned
by Party B or its affiliates to which a given
Information Banner is linked.
"RMB" Renminbi, the official currency of the PRC.
"Sohu Web Site" A Chinese language web site that operates with the
approval of the post and telecommunications
administrative department of China under the
domain name "www.sohu.com".
"USD" United States Dollar, the official currency of the
United States of America.
2. SCOPE OF SERVICES
-----------------
2.1 Party A shall provide to Party B technical services relating to its
promotional activities on the Sohu Web Site in the following areas:
(a) Information Banners;
(b) Sponsorship of channels;
(c) Directories; and
(d) E-commerce platform.
2.2 The technical services provided by Party A to Party B shall include
but not be limited to the design, animation, production and posting of
Information Banners for display on the Sohu Web Site, as well as the
establishment of links between those Information Banners and Party B's
Web Address.
<PAGE>
2.3 Party A shall post Party B's Information Banners on the appropriate
pages of the Sohu Web Site, in accordance with Party B's requirements
and the terms set out in this Agreement.
2.4 In providing the services described in Article 2.2 above, Party A
shall, on Party B's request and in accordance with this Agreement,
design and produce the necessary software, install and maintain such
software and provide Party B with related technical consulting.
2.5 Party A must obtain Party B's written acceptance of the design for any
Information Banner produced by Party A before posting it on Sohu's Web
Site. Should Party B provide its own design for an Information
Banner, Party A's written acceptance of such must be obtained before
the Information Banner in question may be posted on Sohu's Web Site.
2.6 The Parties shall negotiate and determine separately details such as
the position of an Information Banner and the minimum Number of
Impressions, all of which shall be recorded in a form such as that
provided in the Appendix hereto.
2.7 If, due to operational requirements, Party A needs to amend the home
page, catalogue pages or channels on the Sohu Web Site, and such
amendment will result in changes to the Number of Impressions, or the
position and size of an Information Banner, then it shall notify Party
B in writing of its intended amendments fifteen (15) days in advance,
specifying the revised Number of Impressions, position and size of the
Information Banner. Party B shall, within ten (10) days of receiving
the aforementioned notice, indicate its approval or disapproval of
such in writing to Party A. If Party B fails to reply to Party A's
notice within the stipulated period, it shall be deemed to have
accepted the changes.
2.8 In addition to the services described in Article 2.2 above, Party A
may, upon Party B's request, assist Party B to collect information
about network users or to conduct market surveys, including collecting
information on potential customers and carrying out online surveys.
The fees for such assistance shall be determined separately by the
Parties.
<PAGE>
3. TERM OF SERVICE
---------------
The term of this Agreement shall be three years: 1 January 2000 to 31
December 2002. Any negotiations to extend this Agreement shall be
completed sixty (60) days before its expiry.
4. FEES
----
4.1 As consideration for the services described in Article 2.2 above,
Party B shall pay to Party A total service fees in RMB of an amount
equivalent to USD [*] as set forth in the payment schedule below and
at the median rate of exchange set by the People's Bank of China on
the day of payment. These service fees are to be paid into a RMB
account designated by Party A.
Year Amount
----- --------
(USD)
(1 January 2000 - 31 December 2000) [*]
(1 January 2001 - 31 December 2001) [*]
(1 January 2002 - 31 December 2002) [*]
The Parties agree to negotiate for a possible downward adjustment of
fees in the event Party A fails to meet the minimum Number of
Impressions.
4.2 Party B shall, during the term of this Agreement, pay the RMB
equivalent of USD [*] by wire transfer to a bank account designated by
Party A within five (5) working days following each December 1, March
1, June 1 and September 1; provided, however, that Party A shall
deliver an invoice to Party B requesting payment of such quarterly
amount not less than fifteen (15) business days prior to the date on
which payment is due; and provided further that Party B shall make an
initial quarterly payment of the RMB equivalent of USD [*] within
fifteen (15) days following date of this Agreement. Party A shall
issue to Party B a receipt within five (5) days after receiving each
payment from Party B. If Party B fails to effect payment of any
installment of service fees in accordance with this Article 4.2, a
penalty of 0.05 percent
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
(0.05%) simple interest per day will be charged on the overdue amount.
4.3 Party A shall offer to Party B fees for the services described under
Articles 2.2 and 2.8 that are [*] to Party A's most preferred
customers.
4.4 Party A shall, during each year of the term of service, provide to
Party B an amount of services corresponding to the fee of RMB
equivalent of USD [*] ("Annual Service Quota"). Party B may, within
the scope of the Annual Service Quota, give instructions to Party A
from time to time requesting Party A to provide services described
under Articles 2.1 to 2.7 above.
4.5 If, during all but the final year of this Agreement, Party B cannot or
does not exhaust the Annual Service Quota for that year, then the
remaining amount may be carried forward to the next year, provided
that such amount does not exceed 10% of the total Annual Service Quota
in question.
4.6 Party B shall use all available amount of each Annual Service Quota
within the term of this Agreement. If any amount of Annual Service
Quota remains unused upon the expiry of this Agreement, then Party B
shall be deemed to have forfeited its right to such, and Party A shall
have no obligation to reimburse Party B for the same.
5. INFORMATION SECURITY AND CONFIDENTIALITY
----------------------------------------
5.1 The ultimate responsibility for the content provided by Party B for
its Information Banners shall rest with Party B, which shall also bear
all corresponding legal liabilities.
5.2 If Party A believes in its sole discretion that the content provided
by Party B for an Information Banner violates PRC law or is otherwise
inappropriate, then it reserves the right to refuse to provide
services for that portion of the content or to request Party B to
revise the Information Banner in question.
5.3 Party A shall not be liable for any disputes, controversies or claims
arising from or in connection with any content provided by Party B.
Party B warrants that it shall indemnify Party A for all actual losses
caused by any such disputes, controversies or claims.
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
5.4 Party A shall maintain as confidential all information relating to
Party B's business activities with which it is provided by Party B
for purposes of producing Information Banners, where such information
is not already in the public domain. Similarly, Party B shall be
responsible for maintaining as confidential any technical or
commercial information relating to the Sohu Web Site that is not in
the public domain.
5.5 Notwithstanding the provisions of Article 5.4 above, neither Party
shall be deemed to have breached this Agreement if it releases
confidential information pursuant to a written agreement between the
Parties, at the request of a government authority or where it is
legally obliged to do so; provided that the receiving Party takes
reasonable and lawful actions to avoid and/or minimise such
disclosure and provides the other Party with prompt written notice of
such request or requirement so that the other Party may seek a
protective order or other appropriate remedy.
5.6 Party A warrants that the Sohu Web Site will comply with all
applicable laws and regulations and will not infringe third-party
intellectual property rights, and will agree to indemnify Party B
against any direct losses incurred as a consequence of any breach of
this warranty.
6. COPYRIGHT
---------
6.1 Party B owns all rights to the information it provides to Party A and
which is displayed on Sohu's Web Site on its behalf, as well as the
copyright to the Information Banners.
6.2 Party B hereby grants to Party A a non-exclusive, non-transferable,
royalty-free right to use any of Party B's trade marks or logos that
may be displayed in the Information Banners, solely as authorised and
approved by Party B for the purpose of performing Party A's
obligations hereunder. Party A acknowledges that Party B retains all
rights, title and interest in and to such trademarks and logos.
Except as expressly granted in this Agreement, Party A shall have no
rights with respect to such trade marks and logos. Any and all uses
of such trade marks and logos by Party A shall insure to the benefit
of and be on behalf of Party B.
<PAGE>
7. RIGHTS AND OBLIGATIONS OF PARTY A
---------------------------------
7.1 Party A shall complete the design, production or posting of an
Information Banner, as described in Article 2.2 above, within thirty
(30) days after receiving all the relevant materials, characters,
graphics and other necessary information from Party B, and according
to a specific schedule for the Information Banner in question to be
determined by both Parties through consultation.
7.2 Party A shall maintain a complimentary advertisement tracking report
system, so as to enable Party B to check free of charge the Number of
Impressions of its Information Banners on a daily, weekly and monthly
basis.
7.3 Party A shall not be liable for any delays associated with the
production and design of any Information Banner due to Party B's
failure to pay Party A's service fees or to provide to Party A all
necessary materials for the production and design of the Information
Banner.
8. RIGHTS AND OBLIGATIONS OF PARTY B
---------------------------------
In accordance with Section 4 above, Party B shall pay to Party A on time
and in full the service fees, and shall use its best efforts to exhaust the
Annual Service Quota.
9. LIABILITIES FOR BREACH OF THIS AGREEMENT
----------------------------------------
9.1 If, at any time during the term of this Agreement, either Party
breaches any material provisions hereof, then the other Party may
request in writing that such breach be rectified. The Party in breach
shall rectify such breach accordingly within fifteen (15) days of
receipt of such written request.
9.2 Where the Party in breach is unable to effect rectification within
fifteen (15) days of receiving the other Party's written request to
do so, then the other Party may terminate this Agreement immediately
and request from the Party in breach compensation for all actual
losses incurred as a result of that breach.
9.3 If the Party not in breach terminates this Agreement pursuant to
Article 9.2 above, the Party in breach shall pay to the Party not in
breach a penalty amount equivalent to the standard quarterly
<PAGE>
service fee referred to in Article 4.2 above for the year in
question
10. FORCE MAJEURE
-------------
10.1 If Party A is unable to perform all or part of this Agreement due
to the occurrence of Force Majeure, then Party A shall notify Party
B of such in writing. The performance of those provisions of this
Agreement that are affected shall be suspended during the term and
to the extent of the Force Majeure, including Party B's payment
obligations to Party A.
10.2 If Party B is unable to perform all or part of this Agreement due
to the occurrence of Force Majeure, then Party B shall notify Party
A of such in writing. The performance of those provisions of this
Agreement that are affected shall be suspended during the term and
to the extent of the Force Majeure, including Party A's payment
obligations to Party B.
11. NOTICES
-------
11.1 Any notices and communications between the Parties shall be made in
writing in the English language and delivered by facsimile, e-mail,
courier (including express courier service) or registered airmail
letter.
11.2 Unless changed by written notice, all notices and communications
shall be sent to the appropriate correspondence addresses set forth
below:
If to Party A:
Responsible Person: Victor Koo
Address: 7 Jianguomennei Avenue
Suite 519, Tower 2
Bright China Chang An Building
Beijing 100005, China
Department: Corporate Development
Telephone: 6510-2160
Facsimile: 6510-2159
E-mail: [email protected]
<PAGE>
If to Party B:
Responsible Person:
Address:
Department:
Telephone:
Facsimile:
E-mail:
11.3 For notices or communications sent by facsimile, the time of
receipt shall be deemed to be the exact time displayed in the
corresponding transmission record, unless such facsimile is sent
after 5:00 PM or on a non-business day in the place of receipt, in
which case the date of receipt shall be deemed to be the following
business day. For those sent by e-mail, the time of receipt shall
be deemed to be as recorded in the e-mail message in question
evidencing the receipt of the relevant message. For those sent by
courier, the time of receipt shall be deemed to be the date that
the receiving party signs for the document; For those sent by
registered airmail, the date of receipt shall be deemed to be seven
(7) days after the recorded date of dispatch.
12. DISPUTE RESOLUTION AND GOVERNING LAW
------------------------------------
12.1 The execution, performance and interpretation of this Agreement as
well as the settlement of any related disputes shall be governed by
the laws of the PRC. If there is no published and publicly
available law in the PRC governing a particular matter relating to
this Agreement, reference shall be made to common international
commercial and/or industrial practice.
12.2 All disputes arising out of or in connection with this Agreement
shall be finally settled in Beijing conducted in the English
language under the Rules of Arbitration of the International
Chamber of Commerce by a panel of three (3) arbitrators appointed
in accordance with the said Rules.
12.3 All arbitration proceedings shall be conducted in English and a
daily transcript of such proceedings shall be prepared in English.
<PAGE>
12.4 During arbitration, the Parties shall, to the extent possible,
continue to perform the parts of this Agreement not under
arbitration.
13. MISCELLANEOUS
-------------
13.1 The headings contained herein are inserted for reference purposes
only and shall not affect the meaning interpretation of any part of
this Agreement.
13.2 This Agreement may only be amended by a written instrument signed
by the Parties.
13.3 This Agreement shall be binding on the Parties and their successors
and assignees. Neither Party may assign this Agreement without the
prior written consent of the other Party.
13.4 Failure or delay on the part of either Party to exercise any right,
authority or privilege under this Agreement, or under any other
agreement relating hereto, shall not be deemed as a waiver thereof;
nor shall any single or partial exercise of any right, authority or
privilege preclude any other future exercise thereof.
13.5 A reference to a day herein refers to a calendar day. A reference
to a business day herein refers to a day on which commercial banks
are open for business in the PRC.
13.6 This Agreement and the Appendix constitute the entire agreement
between the Parties and supersede all prior discussions,
negotiations and agreements between them. The Appendix forms an
integral part of this Agreement and has the same legal effect as
this Agreement. If there is any inconsistency between the
provisions of this Agreement and the Appendix, the provisions of
this Agreement shall prevail to the extent of the inconsistency.
13.7 This Agreement is executed in two (2) original versions, in the
English language, one (1) original version shall be retained by
each Party.
<PAGE>
This Agreement is hereby concluded by both Parties on the date first set forth
above.
For and on behalf of:
Party A: Sohu ITC Information Technology (Beijing) Co. Ltd.
Signature:
Name: Charles Zhang
Position: Chairman and General Manager
Party B:
Signature:
Name: Masahide Saito
Position: Executive Managing Director
<PAGE>
EXHIBIT 10.12
------------------------------
Technical Services Agreement
------------------------------
by and between
Sohu ITC Information Technology (Beijing) Co. Ltd.
and
Legend (Beijing) Limited
Dated as of 26/th/ January, 2000
<PAGE>
THIS TECHNICAL SERVICES AGREEMENT ("Agreement") is dated as of 26/th/ day of
January 2000 in Beijing, People's Republic of China ("PRC")
BY AND BETWEEN
Sohu ITC Information Technology (Beijing) Co. Ltd., with its registered address
at Suite 519, Tower 2, Bright China Chang An Building, 7 Jianguomennei Avenue,
Beijing 100005, PRC ("Party A")
AND
Legend (Beijing) Limited, with its registered address at No.10, Ke Xue Yuan
Nanlu, Zhong Guan Cun, Haidian District, Beijing 100080, PRC ("Party B")
(Individually a "Party" and collectively the "Parties").
1. DEFINITIONS
-----------
Unless otherwise stipulated, the following terms mentioned in this
Agreement shall have the meanings set forth below:
"Force Majeure" Those events that are unforeseen, or, if
foreseen, reasonably unavoidable, and that
arise due to the special nature of network
technology and network media, effecting
adversely the normal operation of
networks. Force majeure includes the
result of attacks by hackers, of technical
adjustments made by the relevant
telecommunications departments, the
temporary shutting down of networks due to
government control (with written
verification issued by the relevant
authority), in addition to natural and
human-caused disasters.
"Impression" The technical effect that results from a
user viewing an information banner posted
on a web site.
"Information Banner" A message banner or similar type of
placard which is designed and displayed on
Sohu's web site in accordance with
<PAGE>
this Agreement, and which is linked to
Party B's designated web address and
contains information relating to Party B
or its affiliates.
"Number of Impressions" A figure describing the number of views,
within a given period of time, of Party
B's Information Banners, as provided by
the advertisement tracking statistics
report system of Party A, which system
uses software designed by an independent
third party.
"Party B's Web Address" The IP address or internal network address
owned by Party B or its affiliates to
which a given Information Banner is
linked.
"RMB" Renminbi, the official currency of the
PRC.
"Sohu Web Site" A Chinese language web site that operates
with the approval of the post and
telecommunications administrative
department of China under the domain name
"www.sohu.com".
"USD" United States Dollar, the official
currency of the United States of America.
2. SCOPE OF SERVICES
-----------------
2.1 Party A shall provide to Party B technical services relating to its
promotional activities on the Sohu Web Site in the following areas:
(a) Information Banners;
(b) Sponsorship of channels;
(c) Directories; and
(d) E-commerce platform.
<PAGE>
2.2 The technical services provided by Party A to Party B shall include
but not be limited to the design, animation, production and posting of
Information Banners for display on the Sohu Web Site, as well as the
establishment of links between those Information Banners and Party B's
Web Address, all of which shall be recorded in a form such as that
provided in the Appendix hereto.
2.3 Party A shall post Party B's Information Banners on the appropriate
pages of the Sohu Web Site, in accordance with Party B's requirements
and the terms set out in this Agreement.
2.4 In providing the services described in Article 2.2 above, Party A
shall, on Party B's request and in accordance with this Agreement,
design and produce the necessary software, install and maintain such
software and provide Party B with related technical consulting.
2.5 Party A must obtain Party B's written acceptance of the design for any
Information Banner produced by Party A before posting it on Sohu's Web
Site. Should Party B provide its own design for an Information
Banner, Party A's written acceptance of such must be obtained before
the Information Banner in question may be posted on Sohu's Web Site.
2.6 The Parties shall negotiate and determine separately details such as
the position of an Information Banner and the minimum Number of
Impressions, all of which shall be recorded in a form such as that
provided in the Appendix hereto.
2.7 If, due to operational requirements, Party A needs to amend the home
page, catalogue pages or channels on the Sohu Web Site, and such
amendment will result in changes to the Number of Impressions, or the
position and size of an Information Banner, then it shall notify Party
B in writing of its intended amendments fifteen (15) days in advance,
specifying the revised Number of Impressions, position and size of the
Information Banner. Party B shall, within ten (10) days of receiving
the aforementioned notice, confirm its understanding of such in
writing to Party A. If Party B fails to reply to Party A's notice
within the stipulated period, it shall be deemed to have accepted the
changes.
2.8 In addition to the services described in Article 2.2 above, Party A
may, upon Party B's request, assist Party B to collect information
about network users or to conduct market surveys, including collecting
information on potential customers and carrying out
<PAGE>
online surveys. The fees for such assistance shall be determined
separately by the Parties.
3. TERM OF SERVICE
---------------
The term of this Agreement shall be thirty-six (36) months: 1 January 2000
to 31 December 2002. Any negotiations to extend this Agreement shall be
completed sixty (60) days before its expiry.
4. FEES
----
4.1 As consideration for the services described in Article 2.2 above,
Party B shall pay to Party A total service fees in RMB of an amount
equivalent to USD [*] as set forth in the payment schedule below and
at the median rate of exchange set by the People's Bank of China on
the day of payment. These service fees are to be paid into a RMB
account designated by Party A.
Amount
------
Year (USD)
---- -----
(1 January 2000 - 31 December 2000) [*]
(1 January 2001 - 31 December 2001) [*]
(1 January 2002 - 31 December 2002) [*]
Each of the amounts of USD [*] shall be referred to in this Agreement
as the Annual Service Fee. Notwithstanding any other provision herein
to the contrary, Party B shall have the right to assign any or all of
the services it receives hereunder to any of its operating companies
or affiliates (each, an "Assigned Company" and collectively, the
"Assigned Companies"). Party B shall notify Party A in writing at
least twenty (20) days in advance of each such assignment. Party A and
the Assigned Company shall, prior to the expiration of the twenty-day
period, enter into a contract that specifies the services to be
rendered by Party A and the services fees to be paid by the Assigned
Company. Such services fees shall be paid by the Assigned Company into
a RMB account designated by Party A within thirty (30) days after the
date of such contract, and the Annual Service Fee payable by Party B
to Party A shall be reduced by the aggregate amount of all services
fees (the
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
"Assigned Company Fees") due to Party A from the Assigned Companies
pursuant to contracts contemplated in this Article 4.1.
4.2 Party B shall, during the term of this Agreement, pay to Party A on
each December 31st the relevant [ * ] paid by the Assigned
Companies to Party A during such year. Such Annual Service Fee shall
be payable in RMB equivalent of USD by wire transfer to a bank account
designated by Party A. Party A shall issue to Party B a receipt within
five (5) days after receiving such payment. If, in any year during the
term of this Agreement, Party B fails to effect payment of the Annual
Service Fee within thirty (30) days after such payment is due as
specified herein, a penalty of 0.05 percent (0.05%) simple interest
per day will be charged on the overdue amount.
4.3 Party A shall charge Party B and/or the Assigned Companies fees for
the services described under Articles 2.2 and 2.8 that are [*] to
Party A's most preferred customers.
4.4 Party A shall, during each year of the term of this Agreement, provide
to Party B and/or the Assigned Companies an amount of services
corresponding to the relevant [*] ("Annual Service Quota"). Party B
and/or the Assigned Companies may, within the scope of the Annual
Service Quota, give instructions to Party A from time to time
requesting Party A to provide services described under Articles 2.1 to
2.7 above.
4.5 If, during all but the final year of this Agreement, Party B and/or
the Assigned Companies cannot or does not exhaust the Annual Service
Quota for that year, then the remaining amount may be carried forward
to the next year for the use of Party B and/or the Assigned Companies,
provided that such amount does not exceed ten percent (10%) of the
total Annual Service Quota in question.
4.6 Party B and/or the Assigned Companies shall use all available amount
of each Annual Service Quota within the term of this Agreement. If any
amount of Annual Service Quota remains unused upon the expiry of this
Agreement, then Party B and the Assigned Companies shall be deemed to
have forfeited its right to such, and Party A shall have no obligation
to reimburse Party B or the Assigned Companies for the same.
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
5. INFORMATION SECURITY AND CONFIDENTIALITY
----------------------------------------
5.1 The ultimate responsibility for the content of all Party B's
Information Banners shall rest with Party B, which shall also bear all
corresponding legal liabilities.
5.2 If Party A reasonably believes in its sole discretion that the content
provided by Party B for an Information Banner violates PRC law or is
otherwise inappropriate, then it reserves the right to refuse to
provide services for that portion of the content or to request Party B
to revise the Information Banner in question.
5.3 Party A shall not be liable for any disputes, controversies or claims
arising from or in connection with any content provided by Party B.
Party B warrants that it shall indemnify Party A for all actual and
non-speculative losses caused by any such disputes, controversies or
claims.
5.4 Party A shall maintain as confidential all information relating to
Party B's business activities with which it is provided by Party B for
purposes of producing Information Banners, where such information is
not already in the public domain. Similarly, Party B shall be
responsible for maintaining as confidential any technical or
commercial information relating to the Sohu Web Site that is not in
the public domain.
5.5 Notwithstanding the provisions of Article 5.4 above, neither Party
shall be deemed to have breached this Agreement if it releases
confidential information pursuant to a written agreement between the
Parties, at the request of a government authority or where it is
legally obliged to do so.
6. COPYRIGHT
---------
6.1 Party B owns all rights to the information it provides to Party A and
which is displayed on Sohu's Web Site on its behalf, as well as the
copyright to the Information Banners.
6.2 With reference to Articles 5.1 and 5.3 above, Party B warrants that no
disputes relating to copyright arising from the contents of its
Information Banners shall involve or otherwise implicate Party A, that
all corresponding legal liabilities shall be assumed by Party B, and
that it shall reimburse Party A for any actual and non-speculative
losses suffered by Party A as a direct result of such a
<PAGE>
copyright dispute.
7. RIGHTS AND OBLIGATIONS OF PARTY A
---------------------------------
7.1 Party A shall complete the design, production or posting of an
Information Banner, as described in Article 2.2 above, within thirty
(30) days after receiving all the relevant materials, characters,
graphics and other necessary information from Party B, and according
to a specific schedule for the Information Banner in question to be
determined by both Parties through consultation.
7.2 Party A shall maintain a complementary advertisement tracking report
system using software designed by an independent third party, so as to
enable Party B to check free of charge the Number of Impressions of
its Information Banners on a daily, weekly and monthly basis.
7.3 Party A shall not be liable for any delays associated with the
production and design of any Information Banner due to Party B's
failure to pay Party A's service fees or to provide to Party A all
necessary materials for the production and design of the Information
Banner.
7.4 Party A agrees to prevent or to withdraw the posting of any content or
advertisements, including Information Banner, on the Sohu Web Site,
that either contain incorrect information regarding Party B or reflect
negatively, in the reasonable judgment of Party B, on the image of
Party B.
8. RIGHTS AND OBLIGATIONS OF PARTY B
---------------------------------
8.1 In accordance with Section 4 above, Party B shall pay to Party A on
time and in full the service fees, and shall use its best efforts to
exhaust the Annual Service Quota.
8.2 Notwithstanding Article 9.1 below, Party B shall continue to pay the
total service fees then due for services rendered prior to the date of
termination pursuant to Article 9.1, if any.
8.3 Notwithstanding anything to the contrary and in addition to any other
right of termination and remedy by Party B of this Agreement, (i) in
the event that the Sohu Web Site either does not rank among the top
five websites, in terms of Number of Impressions, in the
<PAGE>
PRC on an average monthly basis at any time during the second and
third year of the term of this Agreement, or (ii) in the event that
Party A breaches its obligations under Article 7.4 hereof at any time
during the term of this Agreement, Party B shall have the right to
terminate this Agreement without any further obligations and
liabilities, including but not limited to the obligations to pay any
unpaid portion of the Annual Service Fees, provided, however, that if
Party A rectifies or cures the breach mentioned in clause (ii) above
within two (2) days of receipt of notice given by Party B of such
breach, Party B shall not have the right to terminate this Agreement.
For purposes of this Article 8.3, Party A and Party B agree to use an
internationally recognized independent third party mutually agreeable
to both parties that utilizes statistical sampling method to conduct
the ranking mentioned in clause (i) of this Article 8.3, to provide
information as to such ranking.
9. LIABILITIES FOR BREACH OF THIS AGREEMENT
----------------------------------------
9.1 Subject to Article 8.3 hereof, if at any time during the term of this
Agreement either Party breaches any material provisions hereof, then
the other Party may request in writing that such breach be rectified.
The Party in breach shall rectify such breach accordingly within
fifteen (15) days of receipt of such written request.
9.2 Where the Party in breach is unable to effect rectification within
fifteen (15) days of receiving the other Party's written request to do
so, then the other Party may terminate this Agreement immediately and
request from the Party in breach compensation for all actual and non-
speculative losses incurred as a result of that breach.
9.3 If Party A terminates this Agreement pursuant to Article 9.2 above,
Party B shall pay to Party A a penalty amount equivalent to the
standard quarterly service fee referred to in Article 4.2 above for
the year in question.
9.4 If Party B terminates this Agreement pursuant to Article 9.2 above,
the total amount of any compensation payable by Party A to Party B
shall be limited to the total amount of the service fees already paid
by Party B to Party A.
<PAGE>
10. FORCE MAJEURE
-------------
10.1 If Party A is unable to perform all or part of this Agreement due to
the occurrence of Force Majeure, then Party A shall notify Party B of
such in writing. The performance of those provisions of this Agreement
that are affected shall be suspended during the term and to the extent
of the Force Majeure, including Party B's payment obligations to Party
A.
10.2 If Party B is unable to perform all or part of this Agreement due to
the occurrence of Force Majeure, then Party B shall notify Party A of
such in writing. The performance of those provisions of this Agreement
that are affected shall be suspended during the term and to the extent
of the Force Majeure, including Party A's payment obligations to Party
B.
11. NOTICES
-------
11.1 Any notices and communications between the Parties shall be made in
writing in the English language and delivered by facsimile, e-mail,
courier (including express courier service) or registered airmail
letter.
11.2 Unless changed by written notice, all notices and communications
shall be sent to the appropriate correspondence addresses set forth
below:
If to Party A:
Responsible Person: Victor Koo
Address: 7 Jianguomennei Avenue
Suite 519, Tower 2
Bright China Chang An Building
Beijing 100005, China
Department: Corporate Business Development
Telephone: 6510-2160
Facsimile: 6510-2159
E-mail: [email protected]
If to Party B:
Responsible Person: Michael Loo
Address: No. 10, Ke Xue Yuan Nanlu, Zhong
Guan Cun Haidian District, Beijing
<PAGE>
100080, PRC
Department: Business Development
Telephone: 6257-2159
Facsimile: 6264-9505
E-mail: [email protected]
11.3 For notices or communications sent by facsimile, the time of receipt
shall be deemed to be the exact time displayed in the corresponding
transmission record, unless such facsimile is sent after 5:00 PM or on
a non-business day in the place of receipt, in which case the date of
receipt shall be deemed to be the following business day. For those
sent by e-mail, the time of receipt shall be deemed to be as recorded
in the e-mail message in question evidencing the receipt of the
relevant message. For those sent by courier, the time of receipt shall
be deemed to be the date that the receiving party signs for the
document; For those sent by registered airmail, the date of receipt
shall be deemed to be seven (7) days after the recorded date of
dispatch.
12. DISPUTE RESOLUTION AND GOVERNING LAW
------------------------------------
12.1 The execution, performance and interpretation of this Agreement as
well as the settlement of any related disputes shall be governed by
the laws of the PRC. If there is no published and publicly available
law in the PRC governing a particular matter relating to this
Agreement, reference shall be made to common international commercial
and/or industrial practice.
12.2 All disputes arising out of or in connection with this Agreement
shall be finally settled in Beijing conducted in the English language
under the Rules of Arbitration of the International Chamber of
Commerce by a sole arbitrator appointed in accordance with the said
Rules.
12.3 All arbitration proceedings shall be conducted in English and a daily
transcript of such proceedings shall be prepared in English.
12.4 During arbitration, the Parties shall, to the extent possible,
continue to perform the parts of this Agreement not under arbitration.
<PAGE>
13. MISCELLANEOUS
-------------
13.1 The headings contained herein are inserted for reference purposes only
and shall not affect the meaning interpretation of any part of this
Agreement.
13.2 This Agreement may only be amended by a written instrument signed by
the Parties.
13.3 This Agreement shall be binding on the Parties and their successors
and assignees.
13.4 Failure or delay on the part of either Party to exercise any right,
authority or privilege under this Agreement, or under any other
agreement relating hereto, shall not be deemed as a waiver thereof;
nor shall any single or partial exercise of any right, authority or
privilege preclude any other future exercise thereof.
13.5 A reference to a day herein refers to a calendar day. A reference to a
business day herein refers to a day on which commercial banks are open
for business in the PRC.
13.6 This Agreement and the Appendix constitute the entire agreement
between the Parties and supersede all prior discussions, negotiations
and agreements between them. The Appendix forms an integral part of
this Agreement and has the same legal effect as this Agreement. If
there is any inconsistency between the provisions of this Agreement
and the Appendix, the provisions of this Agreement shall prevail to
the extent of the inconsistency.
13.7 This Agreement is executed in two (2) original versions, in the
English language, one (1) original version shall be retained by each
Party.
<PAGE>
This Agreement is hereby concluded by both Parties on the date first set forth
above:
For and on behalf of:
Party A: Sohu ITC Information Technology (Beijing) Co. Ltd.
Signature:
Name: Charles Zhang
Position: Chairman and CEO
Party B: Legend (Beijing) Limited
Signature:
Name:
Position:
<PAGE>
EXHIBIT 10.13
_______________________________
Technical Services Agreement
_______________________________
by and between
Sohu ITC Information Technology (Beijing) Co. Ltd.
and
PCCW International Marketing Limited
Dated as of 26/th/ January, 2000
<PAGE>
THIS TECHNICAL SERVICES AGREEMENT ("Agreement") is made on this 26/th/ day of
January 2000 in Beijing, People's Republic of China ("PRC")
BY AND BETWEEN
Sohu ITC Information Technology (Beijing) Co. Ltd., with its registered address
at Suite 519, Tower 2, Bright China Chang An Building, 7 Jianguomennei Avenue,
Beijing 100005, PRC ("Party A")
AND
PCCW International Marketing Limited, with its registered address at P.O. Box
957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands
("Party B")
(Individually a "Party" and collectively the "Parties").
1. DEFINITIONS
-----------
Unless otherwise stipulated, the following terms mentioned in this
Agreement shall have the meanings set forth below:
"Force Majeure" Those events that are unforeseen, or, if
foreseen, reasonably unavoidable, and that
arise due to the special nature of network
technology and network media, effecting
adversely the normal operation of networks.
Force majeure includes the result of attacks
by hackers, of technical adjustments made by
the relevant telecommunications departments,
the temporary shutting down of networks due
to government control (with written
verification issued by the relevant
authority), in addition to natural and human-
caused disasters.
"Impression" The technical effect that results from a user
viewing an information banner posted on a web
site.
"Information Banner" A message banner or similar type of placard
which is designed and displayed
<PAGE>
on Sohu's web site in accordance with this
Agreement, and which is linked to Party B's
designated web address and contains
information relating to Party B or its
affiliates.
"Number of Impressions" A figure describing the number of views,
within a given period of time, of Party B's
Information Banners, as provided by the
advertisement tracking statistics report
system of Party A, which system uses software
designed by an independent third party.
"Party B's Web Address" The IP address or internal network address
owned by Party B or its affiliates to which a
given Information Banner is linked.
"RMB" Renminbi, the official currency of the PRC.
"Sohu Web Site" A Chinese language web site that operates
with the approval of the post and
telecommunications administrative department
of China under the domain name
"www.sohu.com".
"USD" United States Dollar, the official currency
of the United States of America.
2. SCOPE OF SERVICES
-----------------
2.1 Party A shall provide to Party B technical services relating to its
promotional activities on the Sohu Web Site in the following areas:
(a) Information Banners;
(b) Sponsorship of channels;
(c) Directories; and
(d) E-commerce platform.
2.2 The technical services provided by Party A to Party B shall include
but not be limited to the design, animation, production and posting of
Information Banners for display on the Sohu Web Site, as well as
<PAGE>
the establishment of links between those Information Banners and Party
B's Web Address, all of which shall be recorded in a form such as that
provided in the Appendix hereto.
2.3 Party A shall post Party B's Information Banners on the appropriate
pages of the Sohu Web Site, in accordance with Party B's requirements
and the terms set out in this Agreement.
2.4 In providing the services described in Article 2.2 above, Party A
shall, on Party B's request and in accordance with this Agreement,
design and produce the necessary software, install and maintain such
software and provide Party B with related technical consulting.
2.5 Party A must obtain Party B's written acceptance of the design for any
Information Banner produced by Party A before posting it on Sohu's Web
Site. Should Party B provide its own design for an Information
Banner, Party A's written acceptance of such must be obtained before
the Information Banner in question may be posted on Sohu's Web Site.
2.6 The Parties shall negotiate and determine separately details such as
the position of an Information Banner and the minimum Number of
Impressions, all of which shall be recorded in a form such as that
provided in the Appendix hereto.
2.7 If, due to operational requirements, Party A needs to amend the home
page, catalogue pages or channels on the Sohu Web Site, and such
amendment will result in changes to the Number of Impressions, or the
position and size of an Information Banner, then it shall notify Party
B in writing of its intended amendments fifteen (15) days in advance,
specifying the revised Number of Impressions, position and size of the
Information Banner. Party B shall, within ten (10) days of receiving
the aforementioned notice, confirm its understanding of such in
writing to Party A. If Party B fails to reply to Party A's notice
within the stipulated period, it shall be deemed to have accepted the
changes.
2.8 In addition to the services described in Article 2.2 above, Party A
may, upon Party B's request, assist Party B to collect information
about network users or to conduct market surveys, including collecting
information on potential customers and carrying out online surveys.
The fees for such assistance shall be determined separately by the
Parties.
<PAGE>
3. TERM OF SERVICE
---------------
The term of this Agreement shall be thirty (30) months: 1 July 2000 to 31
December 2002. Any negotiations to extend this Agreement shall be
completed sixty (60) days before its expiry.
4. FEES
----
4.1 As consideration for the services described in Article 2.2 above,
Party B shall pay to Party A total service fees in RMB of an amount
equivalent to USD [*] as set forth in the payment schedule below and
at the median rate of exchange set by the People's Bank of China on
the day of payment. These service fees are to be paid into a RMB
account designated by Party A.
Year Amount
---- ------
(USD)
-----
(1 July 2000 - 31 December 2000) [*]
(1 January 2001 - 31 December 2001) [*]
(1 January 2002 - 31 December 2002) [*]
Each of the amounts of USD [*], [*] and [*] shall be referred to in
this Agreement as the Annual Service Fee.
4.2 Party B shall, during the term of this Agreement, pay the relevant
Annual Service Fee in equal quarterly installments in RMB equivalent
of USD by wire transfer to a bank account designated by Party A within
five (5) working days following each December 1, March 1, June 1 and
September 1; provided, however, that Party A shall deliver an invoice
to Party B requesting payment of such quarterly amount not less than
fifteen (15) business days prior to the date on which payment is due;
and provided further that Party B shall make an initial quarterly
payment of the RMB equivalent of USD [*] on or before 15 July 2000.
Party A shall issue to Party B a receipt within five (5) days after
receiving such payment. If Party B fails to effect payment of the
service fees in a timely manner, a penalty of 0.05 percent (0.05%)
simple interest per day will be charged on the overdue amount.
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
4.3 Party A shall charge Party B fees for the services described under
Articles 2.2 and 2.8 that are [*] to Party A's most preferred
customers.
4.4 Party A shall, during each year of the term of this Agreement, provide
to Party B a total amount of services corresponding to the relevant
[*] ("Annual Service Quota"). Party B may, within the scope of the
Annual Service Quota, give instructions to Party A from time to time
requesting Party A to provide services described under Articles 2.1 to
2.7 above.
4.5 If, during all but the final year of this Agreement, Party B cannot or
does not exhaust the Annual Service Quota for that year, then the
remaining amount may be carried forward to the next year, provided
that such amount does not exceed ten percent (10%) of the total Annual
Service Quota in question.
4.6 Party B shall use all available amount of each Annual Service Quota
within the term of this Agreement. If any amount of Annual Service
Quota remains unused upon the expiry of this Agreement, then Party B
shall be deemed to have forfeited its right to such, and Party A shall
have no obligation to reimburse Party B for the same.
5. INFORMATION SECURITY AND CONFIDENTIALITY
----------------------------------------
5.1 The ultimate responsibility for the content of all Party B's
Information Banners shall rest with Party B, which shall also bear all
corresponding legal liabilities.
5.2 If Party A reasonably believes in its sole discretion that the content
provided by Party B for an Information Banner violates PRC law or is
otherwise inappropriate, then it reserves the right to refuse to
provide services for that portion of the content or to request Party B
to revise the Information Banner in question.
5.3 Party A shall not be liable for any disputes, controversies or claims
arising from or in connection with any content provided by Party B.
Party B warrants that it shall indemnify Party A for all actual and
non-speculative losses caused by any such disputes, controversies or
claims.
5.4 Party A shall maintain as confidential all information relating to
Party B's business activities with which it is provided by Party B for
purposes of producing Information Banners, where such information
* REDACTED INFORMATION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT.
<PAGE>
is not already in the public domain. Similarly, Party B shall be
responsible for maintaining as confidential any technical or
commercial information relating to the Sohu Web Site that is not in
the public domain.
5.5 Notwithstanding the provisions of Article 5.4 above, neither Party
shall be deemed to have breached this Agreement if it releases
confidential information pursuant to a written agreement between the
Parties, at the request of a government authority or where it is
legally obliged to do so.
6. COPYRIGHT
---------
6.1 Party B owns all rights to the information it provides to Party A and
which is displayed on Sohu's Web Site on its behalf, as well as the
copyright to the Information Banners.
6.2 With reference to Articles 5.1 and 5.3 above, Party B warrants that no
disputes relating to copyright arising from the contents of its
Information Banners shall involve or otherwise implicate Party A, that
all corresponding legal liabilities shall be assumed by Party B, and
that it shall reimburse Party A for any actual and non-speculative
losses suffered by Party A as a direct result of such a copyright
dispute.
7. RIGHTS AND OBLIGATIONS OF PARTY A
---------------------------------
7.1 Party A shall complete the design, production or posting of an
Information Banner, as described in Article 2.2 above, within thirty
(30) days after receiving all the relevant materials, characters,
graphics and other necessary information from Party B, and according
to a specific schedule for the Information Banner in question to be
determined by both Parties through consultation.
7.2 Party A shall maintain a complementary advertisement tracking report
system using software designed by an independent third party, so as to
enable Party B to check free of charge the Number of Impressions of
its Information Banners on a daily, weekly and monthly basis.
7.3 Party A shall not be liable for any delays associated with the
production and design of any Information Banner due to Party B's
failure to pay Party A's service fees or to provide to Party A all
<PAGE>
necessary materials for the production and design of the Information
Banner.
8. RIGHTS AND OBLIGATIONS OF PARTY B
---------------------------------
8.1 In accordance with Section 4 above, Party B shall pay to Party A on
time and in full the service fees, and shall use its best efforts to
exhaust the Annual Service Quota.
8.2 Notwithstanding Article 9.1 below, Party B shall continue to pay the
total service fees then due for services rendered prior to the date of
termination pursuant to Article 9.1, if any.
9. LIABILITIES FOR BREACH OF THIS AGREEMENT
----------------------------------------
9.1 If at any time during the term of this Agreement either Party breaches
any material provisions hereof, then the other Party may request in
writing that such breach be rectified. The Party in breach shall
rectify such breach accordingly within fifteen (15) days of receipt of
such written request.
9.2 Where the Party in breach is unable to effect rectification within
fifteen (15) days of receiving the other Party's written request to do
so, then the other Party may terminate this Agreement immediately and
request from the Party in breach compensation for all actual and non-
speculative losses incurred as a result of that breach.
9.3 If Party A terminates this Agreement pursuant to Article 9.2 above,
Party B shall pay to Party A a penalty amount equivalent to the
standard quarterly service fee referred to in Article 4.2 above for
the year in question.
9.4 If Party B terminates this Agreement pursuant to Article 9.2 above,
the total amount of any compensation payable by Party A to Party B
shall be limited to the total amount of the service fees already paid
by Party B to Party A.
10. FORCE MAJEURE
-------------
10.1 If Party A is unable to perform all or part of this Agreement due to
the occurrence of Force Majeure, then Party A shall notify Party B
<PAGE>
of such in writing. The performance of those provisions of this
Agreement that are affected shall be suspended during the term and to
the extent of the Force Majeure, including Party B's payment
obligations to Party A.
10.2 If Party B is unable to perform all or part of this Agreement due to
the occurrence of Force Majeure, then Party B shall notify Party A of
such in writing. The performance of those provisions of this
Agreement that are affected shall be suspended during the term and to
the extent of the Force Majeure, including Party A's payment
obligations to Party B.
11. NOTICES
-------
11.1 Any notices and communications between the Parties shall be made in
writing in the English language and delivered by facsimile, e-mail,
courier (including express courier service) or registered airmail
letter.
11.2 Unless changed by written notice, all notices and communications
shall be sent to the appropriate correspondence addresses set forth
below:
If to Party A:
Responsible Person: Victor Koo
Address: 7 Jianguomennei Avenue
Suite 519, Tower 2
Bright China Chang An Building
Beijing 100005, China
Department: Corporate Business Development
Telephone: 86-10-6510-2160
Facsimile: 86-10-6510-2159
E-mail: [email protected]
If to Party B:
Responsible Person: Aley Chang
Address: 38/th/ Floor, Citibank Tower,
Citibank Plaza
3 Garden Road, Central, Hong Kong
Department:
Telephone: 852-2514-8657
Facsimile: 852-2514-8651
<PAGE>
E-mail: [email protected]
11.3 For notices or communications sent by facsimile, the time of receipt
shall be deemed to be the exact time displayed in the corresponding
transmission record, unless such facsimile is sent after 5:00 PM or
on a non-business day in the place of receipt, in which case the date
of receipt shall be deemed to be the following business day. For
those sent by e-mail, the time of receipt shall be deemed to be as
recorded in the e-mail message in question evidencing the receipt of
the relevant message. For those sent by courier, the time of receipt
shall be deemed to be the date that the receiving party signs for the
document; for those sent by registered airmail, the date of receipt
shall be deemed to be seven (7) days after the recorded date of
dispatch.
12. DISPUTE RESOLUTION AND GOVERNING LAW
------------------------------------
12.1 The execution, performance and interpretation of this Agreement shall
be governed by the laws of the State of Delaware, United States of
America. If there is no published and publicly available law in the
State of Delaware governing a particular matter relating to this
Agreement, reference shall be made to common international commercial
and/or industrial practice.
12.2 All disputes arising out of or in connection with this Agreement
shall be finally settled in Hong Kong conducted in the English
language under the Rules of Arbitration of the International Chamber
of Commerce by a sole arbitrator appointed in accordance with the
said Rules.
12.3 All arbitration proceedings shall be conducted in English and a daily
transcript of such proceedings shall be prepared in English.
12.4 During arbitration, the Parties shall, to the extent possible,
continue to perform the parts of this Agreement not under
arbitration.
13. MISCELLANEOUS
-------------
13.1 The headings contained herein are inserted for reference purposes
only and shall not affect the meaning interpretation of any part of
this Agreement.
<PAGE>
13.2 This Agreement may only be amended by a written instrument signed by
the Parties.
13.3 This Agreement shall be binding on the Parties and their successors
and assignees. No Party's rights, duties or responsibilities under
this Agreement may be assigned, delegated or otherwise transferred in
any manner, without the prior written consent of the other Party.
Notwithstanding the foregoing, no such consent shall be required in
connection with the assignment, delegation or other transfer of any
such rights, duties or responsibilities by Party B to any of its
affiliate or subsidiary provided that Party B unconditionally
guarantees in writing to Party A the due and punctual performance by
such affiliate or subsidiary of Party B's obligations under this
Agreement.
13.4 Failure or delay on the part of either Party to exercise any right,
authority or privilege under this Agreement, or under any other
agreement relating hereto, shall not be deemed as a waiver thereof;
nor shall any single or partial exercise of any right, authority or
privilege preclude any other future exercise thereof.
13.5 A reference to a day herein refers to a calendar day. A reference to
a business day herein refers to a day on which commercial banks are
open for business in the PRC.
13.6 This Agreement and the Appendix constitute the entire agreement
between the Parties and supersede all prior discussions, negotiations
and agreements between them. The Appendix forms an integral part of
this Agreement and has the same legal effect as this Agreement. If
there is any inconsistency between the provisions of this Agreement
and the Appendix, the provisions of this Agreement shall prevail to
the extent of the inconsistency.
13.7 This Agreement is executed in two (2) original versions, in the
English language, one (1) original version shall be retained by each
Party.
<PAGE>
This Agreement is hereby concluded by both Parties on the date first set forth
above:
For and on behalf of:
Party A: Sohu ITC Information Technology (Beijing) Co. Ltd.
Signature:
Name: Charles Zhang
Position: Chairman and CEO
Party B: PCCW International Marketing Limited
Signature:
Name: Mico Chung
Position: Director
<PAGE>
EXHIBIT 11.1
Statement Regarding Computation of Per Share Earnings
- --------------------------------------------------------------------------------
Sohu.com Inc.
EPS Exhibit
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1998 1999
---- ---- ----
Computation of basic net loss per share
Numerator:
<S> <C> <C> <C>
Net loss -$160 -$615 -$3,449
Accretion of Series B and C Mandatorily Redeemable
Preferred Stocks to redemption value 0 -244 -917
- ---- ----
Net loss attributable to common shareholders -160 -859 -4,366
==== ==== ======
Denominator:
Shares used in computing basic net loss per
(in thousands) 3,500 3,564 3,588
===== ===== =====
Basic net loss per share attributable to
common shareholders -$0.05 -$0.24 -$1.22
====== ====== ======
Computation of diluted net loss per share
Net loss -$160 -$615 -$3,449
Accretion of Series B and C Mandatorily Redeemable
Preferred Stocks to redemption value 0 -244 -917
- ---- ----
Net loss attributable to common shareholders -160 -859 -4,366
==== ==== ======
Denominator:
Shares used in computing basic net loss per share
(in thousands) 3,500 3,564 3,588
Antidilutive securities including options, warrants
and preferred shares not included in basic net
loss per share calculation (in thousands)(1) 1,239 3,005 4,822
----- ----- -----
Shares used in computing diluted net loss per share
(in thousands) 4,739 6,569 8,410
===== ===== =====
Diluted net loss per share attributable to
common shareholders -$0.03 -$0.13 -$0.52
====== ====== ======
</TABLE>
(1) Antidilutive Securities are included herein pursuant to Securities and
Exchange Commission rule even though such presentation is not required under
SFAS 128 as the effect is to reduce the Company's loss per share.
<PAGE>
Exhibit 21.1
List of Subsidiaries
Juridiction of
Organization Ownership
Subsidiary -------------- ---------
----------
Sohu ITC Information People's Republic 100%
Technology (Beijing) Co., Ltd. of China
<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>
Exhibit 23.2
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: February 4, 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: February 4, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 1,232 3,924
<SECURITIES> 0 0
<RECEIVABLES> 226 438
<ALLOWANCES> 0 (26)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,507 4,488
<PP&E> 263 1,199
<DEPRECIATION> (27) (200)
<TOTAL-ASSETS> 1,778 7,076
<CURRENT-LIABILITIES> 204 1,911
<BONDS> 0 0
2,362 10,207
1 1
<COMMON> 4 4
<OTHER-SE> (793) (5,047)
<TOTAL-LIABILITY-AND-EQUITY> 1,778 7,076
<SALES> 472 1,617
<TOTAL-REVENUES> 472 1,617
<CGS> 215 1,576
<TOTAL-COSTS> 1,082 5,077
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (28) (14)
<INCOME-PRETAX> (615) (3,449)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (615) (3,449)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (859) (4,366)
<EPS-BASIC> (0.24) (1.22)
<EPS-DILUTED> (0.24) (1.22)
</TABLE>
