<PAGE>
As filed with the Securities and Exchange Commission on November 3, 2000
Registration Statement No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM F-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
[NAME IN CHINESE OF JITONG NETWORK COMMUNICATIONS COMPANY LIMITED]
(Exact name of registrant as specified in its charter)
Jitong Network Communications Company Limited
(Translation of Registrant's name into English)
The People's Republic of 4813 Not Applicable
China (I.R.S. Employer
(State or other (Primary Standard Identification No.)
jurisdiction of Industrial
incorporation or Classification Code
organization) Number)
East Wing, 9th Floor
Beijing Capital Times Square
No. 88 West Chang An Avenue, 100031
Beijing
The People's Republic of China
(86)(10) 8391-3115
(Address and telephone number of registrant's principal executive offices)
--------------
CT Corporation System
111 Eighth Avenue, 13th
Floor
New York, NY 10011
(Name, address and telephone number of agent for service)
--------------
Copies to:
Venantius Tan, Esq. Clark T. Randt, Jr., Esq.
Coudert Brothers Shearman & Sterling
39th Floor, Gloucester Tower 12th Floor, Gloucester Tower
The Landmark, 11 Pedder Street The Landmark, 11 Pedder Street
The Hong Kong Special Administrative The Hong Kong Special Administrative
Region Region
The People's Republic of China The People's Republic of China
Telephone: (852) 2218-9100 Telephone: (852) 2978-8000
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed maximum
Title of each class of maximum aggregate Amount of
securities to be Amount to be offering price offering registration
registered registered(1) per unit(2) price(2) fee
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class H shares, par
value RMB1 per
share(3)............. 38,516,900 3.72 143,282,868 $37,826.68
-------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
(1) Includes 5,399,500 of the 10,799,000 H shares which the underwriters may
require the Issuer to sell to cover over-allotments, if any, and 4,322,502
H shares initially offered and sold outside the United States, including
any H shares sold pursuant to the over-allotment option, but that may be
resold from time to time in the United States either as part of the
distribution or within 40 days after the later of the effective date of
this Registration Statement and the date the securities are first bona
fide offered to the public. Offers and sales of H shares outside the
United States are not covered by this Registration Statement.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(3) American depositary shares evidenced by American depositary receipts
deliverable on deposit of the H shares registered hereby are being
registered pursuant to a separate Registration Statement on Form F-6. Each
American depositary share represents 4 H shares.
--------------
The registrant hereby amends the 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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated November 3, 2000
PRELIMINARY PROSPECTUS
Jitong Network Communications Company Limited
16,198,750 American depositary shares representing 64,795,000 H shares
This is our initial public offering of shares. No public market currently
exists for our shares. This prospectus relates to a global offering of our
ADSs, including within the United States. Each ADS represents 4 H shares, a
class of shares for investors outside of China, but otherwise with the same
voting and dividend rights as our other common shares. We anticipate that the
initial public offering price will be between US$11.28 and US$14.88 per ADS.
We propose to list the ADSs on the Nasdaq National Market under the symbol
"CNJT" and the H shares on the Growth Enterprise Market of The Stock Exchange
of Hong Kong Limited under the code "8126".
Investing in the ADSs involves risks. Risk Factors begin on page 12.
<TABLE>
<CAPTION>
Per H Share Per ADS Total
----------- ------- -------
<S> <C> <C> <C>
Public Offering Price............................... US$ US$ US$
Underwriting Discounts and Commissions.............. US$ US$ US$
Proceeds to Jitong.................................. US$ US$ US$
</TABLE>
The information in the table above does not include 7,199,000 H shares
offered in Hong Kong with aggregate proceeds to us before expenses of HK$
(US$ ).
We have granted the underwriters a 30-day option to purchase up to 10,799,000
additional H shares or 2,699,750 additional ADSs on the same terms and
conditions as set forth above solely to cover over-allotments, if any.
The underwriters expect to deliver the ADSs on or about . The
ADSs are expected to commence trading on the Nasdaq National Market three Hong
Kong business days after the date of this prospectus. You may not be able to
sell or otherwise deal in these securities prior to the commencement of
trading.
Neither the U.S. Securities and Exchange Commission nor any state securities
commission in the U.S. has approved or disapproved of these securities or
determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offence.
--------------------------------------------------------
Dresdner Kleinwort Benson Lehman Brothers
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
Cautionary Statement Regarding Forward-looking Statements................ 24
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Currency Translations.................................................... 26
Dilution................................................................. 27
Exchange Rate Information................................................ 28
Capitalization........................................................... 29
Selected Combined Financial Data......................................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 34
Our Corporate Structure.................................................. 50
Industry Overview........................................................ 55
Business................................................................. 60
Regulation............................................................... 81
Management............................................................... 88
Principal Shareholders................................................... 97
Related Party Transactions............................................... 99
Description of Share Capital............................................. 103
Description of American Depositary Shares................................ 113
Taxation................................................................. 120
Underwriting............................................................. 124
Legal Matters............................................................ 130
Experts.................................................................. 130
Enforceability of Civil Liabilities...................................... 130
Where You Can Find More Information...................................... 131
Additional Information Disclosed in the Hong Kong Offering............... 133
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Until (25 days after the date of this prospectus), 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 underwriters and
with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights key aspects of the offering of our ADSs and H shares
contained elsewhere in this prospectus. This summary is not a substitute for
the more detailed information contained in the rest of this prospectus. For a
more comprehensive description of the offering of our ADSs and H shares, you
should read the entire prospectus, including the financial data and related
notes, before making an investment decision.
Jitong
We are a network service provider in China using Internet communications
standards. We are one of the five companies licensed by the Chinese government
to offer commercial data communications services and voice communications
services nationwide using these standards. We currently offer data
communications services in over 60 Chinese cities and voice communications
services in over 35 Chinese cities. Data communications means connections to
the Internet, data transmission and other data-related services for businesses.
Our voice communications services allow customers to make telephone calls that
we transmit over our network. We transmit them using our own network and not
the Internet.
We offer a range of communications services to corporations, governmental
institutions and individuals. These services consist of:
. Internet access through dial-up and permanent connections via fiber optic
lines, microwave and satellite transmissions;
. Transmission of data using advanced transmission technologies;
. Voice communications services; and
. Value-added services, which include:
- web hosting and co-location, in which we keep a customer's Internet
website and computers on our premises where they can receive service and
technical support;
- virtual private networks, which link our customers' branch offices using
the Internet without expensive dedicated transmission capacity;
- e-commerce network services, which are customized network services
designed to enable customers to participate in e-commerce, commercial
activities over the Internet; and
- Internet global roaming, which allows customers of overseas Internet
service providers to access to their Internet accounts using our network
without first setting up a customer account with us.
We were among the first licensed commercial data communications services
providers in China and have accumulated over four years of operational
experience. Our operating revenues were approximately RMB176.4 million (US$21.3
million) for the five months ended May 31, 2000. Our
1
<PAGE>
operating revenues were RMB194.4 million (US$23.5 million) in 1999. We incurred
losses of RMB49.1 million (US$5.9 million) and RMB63.4 million (US$7.7 million)
for the five months ended May 31, 2000 and the full year of 1999, respectively.
As of July 31, 2000, our customers could connect to our network in over 60
cities in China and we plan to expand this to approximately 180 cities
throughout China by the end of 2002, focusing initially on expanding in the
more economically developed southern and eastern parts of China. We can also
connect customers at other sites by satellite or microwave connections. Also as
of July 31, 2000, we provided our data communications services, which include
Internet access, data transmission and value-added services, to over 700
corporations and governmental institutions and had over 70,000 registered dial-
up Internet access account holders.
Our network transmits data at high capacities generally referred to as
broadband. Our network combines transmission technologies that together allow
us to offer both data and voice transmission services. Our customers can access
our network using fiber optic lines, satellite and microwave transmission. We
believe our network gives us the ability to diversify and change our services
as our customers' businesses grow and their needs change. Our data
communications services are mainly marketed to our customers through our sales
personnel, while our voice communications services are primarily marketed and
sold in the form of prepaid phone cards through our distribution agents
throughout China. We lease all of our transmission lines and capacity from
third parties but own the satellite stations, microwave transmitters and most
of the network equipment that make up our network.
Our parent was founded in 1994 to build, own and operate the Golden Bridge
Network (also known as ChinaGBNet), a national public communications network
formed as part of a government initiative to establish the necessary
infrastructure for Internet access and data communication in China. We were
established in March 2000 as a result of the reorganization of our parent to
hold its telecommunications assets and conduct the related business. Our parent
will continue to hold or control at least 55.5% of our shares immediately after
the global offering.
Our Strategy
We believe that China's communications industry has entered a phase of high
growth. International Data Corporation estimates that China's Internet economy
and e-commerce markets will grow rapidly in the near term and we are
positioning ourselves to take advantage of this growth. The key elements of our
strategy are summarized as follows:
. Rapidly expand our network coverage to provide reliable service
throughout China.
. Provide integrated and customized communications services.
. Focus on high-margin value-added services for corporate customers in
targeted markets.
. Build customer loyalty through superior network quality and customer
service.
. Establish strategic alliances with international technology leaders.
2
<PAGE>
Contact Information
Our principal executive offices are located at East Wing, 9th Floor, Beijing
Capital Times Square, No. 88 West Chang An Avenue, 100031, Beijing, the
People's Republic of China. Our telephone number there is (86) (10) 8391-3115.
Our website is www.jitong.com. However, information contained in our website is
not a part of this prospectus.
3
<PAGE>
The Global Offering
<TABLE>
<C> <S>
Global Offering:............... The international offering and the Hong Kong
offering collectively constitute the global
offering.
International Offering:........ We are offering 16,198,750 ADSs representing
64,795,000 H shares through the underwriters
of the international offering, including a
public offering in the United States. H
shares may be delivered instead of ADSs at
the option of purchasers of the ADSs upon
making a request to the U.S. underwriters.
Hong Kong Offering:............ We are offering 7,199,000 H shares to the
public in Hong Kong in an offer for
subscription. The underwriters may allocate
more H shares to the Hong Kong offering if
the Hong Kong offering is oversubscribed and
may allocate unsold H shares from the Hong
Kong offering to the international offering.
American Depositary Shares:.... Each ADS represents 4 H shares that will be
held by The Bank of New York, as depositary.
The ADSs are evidenced by American depositary
receipts, or ADRs.
H shares:...................... Overseas-listed foreign investment shares in
our capital, par value of RMB1.00 per share.
While H shares are subscribed for and traded
in Hong Kong dollars exclusively by and
between investors from Hong Kong, Macau,
Taiwan and any country other than China, we
also have domestic shares which are
subscribed for in Renminbi by Chinese
investors.
Over-allotment Option:......... An option to purchase up to 10,799,000
additional H shares, exercisable for up to 30
days after the date of this prospectus.
Price per ADS in the
International Offering:....... US$
Price per H share in the Hong
Kong Offering:................ The price per H share in the Hong Kong
offering is HK$ (US$ ), including a 1%
brokerage fee and a 0.01% transaction levy
payable by purchasers in the Hong Kong
offering, and is effectively equivalent to
the price per H share in the U.S. offering
and the international offering.
Number of H shares Outstanding
After the Global Offering:.... 71,994,000 H shares
</TABLE>
4
<PAGE>
<TABLE>
<C> <S>
Timing of the Global The following is a tentative timetable of
Offering:..................... various events in the global offering (Hong
Kong time):
.Hong Kong prospectus registered.... November
29, 2000
.Hong Kong offering commenced... November 30,
2000
.Hong Kong offering closed.. December 6, 2000
.Pricing of global offering...... December 7,
2000
.Final allocation of H shares made.. December
8, 2000
. Trading of ADSs commences on
the Nasdaq National Market.... December 12,
2000
. Trading of H shares commences on
the Growth Enterprise Market in
Hong Kong................ December 13, 2000
Four-day Gap Between Pricing
and Trading of H Shares:...... The H shares offered in the global offering
will not commence trading on the Growth
Enterprise Market until all of the conditions
contained in the underwriting agreement for
the Hong Kong offering have been satisfied,
which is expected to be four business days
after the date of pricing of the H shares.
The ADSs offered in the global offering are
expected to commence trading on the Nasdaq
National Market on the business day in New
York immediately preceeding the day when
trading of the shares commences on the Growth
Enterprise Market. You may not be able to
sell or otherwise deal in the H shares or
ADSs prior to the commencement of trading on
the Growth Enterprise Market or the Nasdaq
National Market.
Use of Proceeds:............... We estimate that the net proceeds to us from
the global offering will be about
US$220,721,715. We intend to use the net
proceeds to expand our network coverage and
upgrade our network technology. We also plan
to use a portion of the net proceeds to
upgrade our management information system,
repay bank borrowings, establish customer
service centers in major Chinese cities and
build Internet data centers, sites with
Internet servers and network connections
intended to be secure from technical
failures.
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
The following tables present a summary of our historical combined financial
information for the periods indicated. They should be read in conjunction with
our combined financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The statements of income set forth for
the years ended December 31, 1997, 1998 and 1999 and the five months ended May
31, 2000, and the balance sheet data as of December 31, 1997, 1998 and 1999 and
May 31, 2000, are derived from our audited combined financial statements
included elsewhere in this prospectus, which have been audited by
PricewaterhouseCoopers, independent accountants. The summary financial data for
the years ended December 31, 1995 and 1996 and the five months ended May 31,
1999 are derived from our combined financial statements for the years ended
December 31, 1995 and 1996 and the five months ended May 31, 1999, which are
unaudited. Our combined financial statements are prepared in accordance with
International Accounting Standards, or IAS, which differ in material respects
from accounting principles generally accepted in the United States, or US GAAP.
For a discussion of these material differences, see note 33 to the financial
statements presented in this prospectus beginning on page F-1. The financial
statements for the period ended and as of May 31, 2000 are not necessarily
indicative of the results that may be expected for the full year.
6
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue:
Data communications.... -- 191 13,360 44,961 89,133 10,768
Internet protocol
telephony service..... -- -- -- -- 102,862 12,427
Other operating
revenue............... 2,177 -- 4,928 4,211 2,397 290
----------- ----------- ----------- ----------- ----------- -----------
2,177 191 18,288 49,172 194,392 23,485
Operating expenses:
Transmission costs..... (1,383) (11,592) (21,786) (41,146) (107,697) (13,011)
Staff costs............ (1,194) (2,628) (6,191) (9,583) (16,126) (1,948)
Depreciation and
amortization.......... (315) (2,244) (13,125) (19,672) (38,792) (4,687)
General administrative
and other expenses.... (9,875) (17,503) (25,915) (27,142) (78,882) (9,530)
----------- ----------- ----------- ----------- ----------- -----------
(12,767) (33,967) (67,017) (97,543) (241,497) (29,176)
----------- ----------- ----------- ----------- ----------- -----------
Loss from operation..... (10,590) (33,776) (48,729) (48,371) (47,105) (5,691)
Finance expenses, net... (5,676) (4,207) (5,592) (7,904) (12,697) (1,534)
Other income /
(expenses), net........ 289 (4,078) 579 (563) (618) (75)
----------- ----------- ----------- ----------- ----------- -----------
Operating loss.......... (15,977) (42,061) (53,742) (56,838) (60,420) (7,300)
Income tax (charge)/
credit................. (217) (457) -- -- (2,958) (357)
----------- ----------- ----------- ----------- ----------- -----------
Net loss................ (16,194) (42,518) (53,742) (56,838) (63,378) (7,657)
=========== =========== =========== =========== =========== ===========
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Number of shares
outstanding............ 183,874,200 183,874,200 183,874,200 183,874,200 183,874,200 183,874,200
=========== =========== =========== =========== =========== ===========
Basic loss per ordinary
shares (1)............. RMB 0.088 RMB 0.231 RMB 0.292 RMB 0.309 RMB 0.345 US$0.042
=========== =========== =========== =========== =========== ===========
Basic loss per ADS (2).. RMB 0.352 RMB 0.924 RMB 1.168 RMB 1.236 RMB 1.380 US$0.168
=========== =========== =========== =========== =========== ===========
US GAAP
Operating revenue....... 2,177 191 18,288 49,172 194,392 23,485
Loss from operations.... (10,590) (33,776) (48,729) (48,371) (47,105) (5,691)
Net loss................ (16,194) (42,518) (53,742) (56,838) (63,378) (7,657)
Basic loss per H share.. RMB 0.088 RMB 0.231 RMB 0.292 RMB 0.309 RMB 0.345 US$0.042
Basic loss per ADS
equivalent............. RMB 0.352 RMB 0.924 RMB 1.168 RMB 1.236 RMB 1.380 US$0.168
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Five months ended May 31,
-------------------------------------
1999 2000 2000
----------- ----------- -----------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Operating revenue:
Data communications..................... 32,463 46,424 5,609
Internet protocol telephony service..... -- 129,055 15,591
Other operating revenue................. 489 932 113
----------- ----------- -----------
32,952 176,411 21,313
Operating expenses:
Transmission costs...................... (24,476) (97,212) (11,745)
Staff costs............................. (5,827) (13,973) (1,688)
Depreciation and amortization........... (12,858) (29,832) (3,604)
General administrative
and other expenses..................... (15,123) (76,576) (9,251)
----------- ----------- -----------
(58,284) (217,593) (26,288)
----------- ----------- -----------
Loss from operation...................... (25,332) (41,182) (4,975)
Finance expenses, net.................... (4,237) (8,058) (974)
Other income / (expenses), net........... (652) (539) (65)
----------- ----------- -----------
Operating loss........................... (30,221) (49,779) (6,014)
Income tax (charge)/ credit.............. -- 668 81
----------- ----------- -----------
Net loss................................. (30,221) (49,111) (5,933)
=========== =========== ===========
<CAPTION>
Five months ended May 31,
-------------------------------------
1999 2000 2000
----------- ----------- -----------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Number of shares outstanding............. 183,874,200 212,731,074 212,731,074
=========== =========== ===========
Basic loss per ordinary
share (1)............................... RMB 0.164 RMB 0.231 US$0.028
=========== =========== ===========
Basic loss per ADS (2)................... RMB 0.656 RMB 0.924 US$0.112
=========== =========== ===========
US GAAP
Operating revenue........................ 32,952 176,411 21,313
Loss from operations..................... (25,332) (40,773) (4,925)
Net loss................................. (30,221) (48,702) (5,883)
Basic loss per H share................... RMB 0.164 RMB 0.229 US$0.028
Basic loss per ADS equivalent............ RMB 0.656 RMB 0.916 US$0.112
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ---------- ------- ------- ------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
IAS
Cash and cash
equivalents............ 11,723 90,577 31,991 67,402 257,127 31,064
Working capital......... 69,711 96,401 37,458 (97,420) 27,668 3,343
Total assets............ 198,032 294,870 283,704 328,072 799,256 96,560
Long term debt,
excluding current
portion................ 119,387 224,747 234,446 183,129 315,600 38,129
Total shareholders'
equity................. 35,802 (6,716) (16,618) (73,456) 157,886 19,075
US GAAP
Total assets............ 198,032 294,870 283,704 328,072 799,256 96,560
Total shareholders'
equity................. 35,802 (6,716) (16,618) (73,456) 157,886 19,075
</TABLE>
<TABLE>
<CAPTION>
As of May 31,
---------------------------
1999 2000 2000
----------- ------- -------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
IAS
Cash and cash equivalents........................... 46,832 203,337 24,566
Working capital..................................... (124,803) 42,173 5,095
Total assets........................................ 391,995 789,290 95,356
Long term debt, excluding current portion........... 202,396 362,186 43,756
Total shareholders' equity.......................... (44,317) 204,682 24,728
US GAAP
Total assets........................................ 391,995 758,296 91,612
Total shareholders' equity.......................... (44,317) 173,688 20,984
</TABLE>
--------
Notes:--
(1) Basic loss per H share for the years ended December 31, 1995, 1996, 1997,
1998 and 1999 and the five months ended May 31, 1999 has been computed by
dividing the net loss in the respective years by 183,874,200 domestic
shares issued to our parent and outstanding upon our establishment on March
24, 2000 as if the shares had been outstanding for all relevant periods.
On March 24, 2000, a further 64,503,600 domestic shares were issued to five
investors at par for cash. Basic loss per share for the five-month period
ended May 31, 2000 has been computed by dividing the net loss by the
weighted average number of 212,731,074 (1999: 183,874,200) shares we issued
to our parent and five other shareholders.
(2) Basic loss per ADS equivalent for those periods has been computed by
multiplying basic loss per share by 4, which is the number of shares
represented by each ADS.
9
<PAGE>
Summary pro forma combined financial information
We have made pro forma adjustments to reflect arrangements that became
effective as of the reorganization of our parent on March 24, 2000, as well as
other changes in connection with our reorganization. These arrangements and
changes are described in our unaudited pro forma financial information included
elsewhere in this prospectus and include the exclusion of some assets and
liabilities from our core operations.
We derived the following summary pro forma combined income statement data
for the year ended December 31, 1999 from the unaudited pro forma statements of
income included in this prospectus. Although our pro forma financial
information is unaudited, we believe that this information reflects the
significant adjustments necessary to show the effects of the changes as if they
had been implemented on January 1, 1999.
<TABLE>
<CAPTION>
Year ended December 31, 1999
-----------------------------------------
Pro forma Unaudited pro
Historical adjustments forma
---------- ----------- ------------------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
IAS
Operating revenues
Data communications................ 89,133 89,133 10,768
Internet protocol telephone
services.......................... 102,862 102,862 12,427
Other revenue...................... 2,397 (2,397) -- --
-------- ------- -------- --------
Total operating revenue........... 194,392 (2,397) 191,995 23,195
Operating expenses
Transmission costs................. 107,697 107,697 13,011
Depreciation and amortization...... 38,792 (2,367) 36,425 4,401
Staff costs........................ 16,126 (395) 15,731 1,900
General administrative and other
expenses.......................... 78,882 626 79,508 9,606
-------- ------- -------- --------
Total operating expenses.......... 241,497 (2,136) 239,361 28,918
-------- ------- -------- --------
Operating loss...................... (47,105) (261) (47,366) (5,723)
Net interest expenses............... (12,697) 8,739 (3,958) (478)
Other non operating
income/(expenses).................. (618) 1,451 833 101
Income tax.......................... (2,958) -- (2,958) (357)
-------- ------- -------- --------
Net loss............................ (63,378) 9,929 (53,449) (6,457)
======== ======= ======== ========
Net loss per share.................. RMB0.345 RMB0.291 US$0.035
======== ======== ========
Net loss per ADS equivalent......... RMB1.380 RMB1.164 US$0.140
======== ======== ========
US GAAP
Operating revenues.................. 194,392 (2,397) 191,995 23,195
Operating expenses.................. 241,497 (2,136) 239,361 28,918
-------- ------- -------- --------
Operating loss...................... (47,105) (261) (47,366) (5,723)
Net interest expenses............... (12,697) 8,739 (3,958) (478)
Other non operating
income/(expenses).................. (618) 1,451 833 101
Income tax.......................... (2,958) -- (2,958) (357)
-------- ------- -------- --------
Net loss............................ (63,378) 9,929 (53,449) (6,457)
======== ======= ======== ========
Net loss per share.................. RMB0.345 RMB0.291 US$0.035
======== ======== ========
Net loss per ADS.................... RMB1.380 RMB1.164 US$0.140
======== ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Five months ended May 31, 2000
-----------------------------------------
Pro forma Unaudited pro
Historical adjustments forma
---------- ----------- ------------------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
IAS
Operating revenues
Data communications................ 46,424 46,424 5,609
Internet protocol telephone
services.......................... 129,055 129,055 15,591
Other revenue...................... 932 (932) -- --
-------- ------ -------- --------
Total operating revenue........... 176,411 (932) 175,479 21,200
Operating expenses
Transmission costs................. 97,212 97,212 11,744
Depreciation and amortization...... 29,832 (583) 29,249 3,534
Staff costs........................ 13,973 (299) 13,674 1,652
General administrative and other
expenses.......................... 76,576 (791) 75,785 9,156
-------- ------ -------- --------
Total operating expenses.......... 217,593 (1,673) 215,920 26,086
-------- ------ -------- --------
Operating loss...................... (41,182) 741 (40,441) (4,886)
Net interest expenses............... (8,058) 4,023 (4,035) (487)
Other non operating
income/(expenses).................. (539) 274 (265) (32)
Income tax.......................... 668 -- 668 81
-------- ------ -------- --------
Net loss............................ (49,111) 5,038 (44,073) (5,324)
======== ====== ======== ========
Net loss per share.................. RMB0.231 RMB0.207 US$0.025
======== ======== ========
Net loss per ADS equivalent......... RMB0.924 RMB0.828 US$0.100
======== ======== ========
US GAAP
Operating revenues.................. 176,411 (932) 175,479 21,200
Operating expenses.................. 217,184 (1,673) 215,511 26,036
-------- ------ -------- --------
Operating loss...................... (40,773) 741 (40,032) (4,836)
Net interest expenses............... (8,058) 4,023 (4,035) (487)
Other non operating
income/(expenses).................. (539) 274 (265) (32)
Income tax.......................... 668 -- 668 81
-------- ------ -------- --------
Net loss............................ (48,702) 5,038 (43,664) (5,274)
======== ====== ======== ========
Net loss per share.................. RMB0.229 RMB0.205 US$0.025
======== ======== ========
Net loss per ADS.................... RMB0.916 RMB0.820 US$0.100
======== ======== ========
</TABLE>
11
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all information set out in
this prospectus and, in particular, the following risk factors in connection
with an investment in us.
RISKS RELATING TO JITONG
Our limited operating history makes it difficult to predict our future
earnings or whether we will compete successfully
We were established on March 24, 2000 when our parent's telecommunications-
related assets and business were transferred to us. We are therefore a new
company. Although our parent began operations in 1996, we have a limited track
record and limited historical financial data upon which to base projections
for revenues or to budget operating expenses. Our limited operating history
also makes it difficult to predict our future earnings and whether we can
compete successfully in China's highly regulated telecommunications market. In
particular, our month-to-month earnings and earnings growth exhibit no
identifiable pattern and have varied and may continue to vary considerably.
For example, while our total operating revenue for the five months ended May
31, 2000 amounted to RMB176.4 million (US$21.3 million), reflecting an average
monthly revenue of RMB35.3 million (US$4.3 million), our unaudited management
accounts show total operating revenue for the two months ended July 31, 2000
of RMB80.9 million (US$9.8 million), reflecting an average monthly revenue of
RMB36.8 million (US$4.4 million) for the first seven months of 2000.
Our future growth depends on new businesses in which we may have limited or no
experience
Our business plan contemplates growth, among other things, by entering
newly emerging businesses such as Internet protocol-based applications and
operation of Internet data centers, sites with Internet servers and network
connections intended to be secure from technical failures. Each of these
businesses is new in China and we currently have little or no experience
operating these businesses. We cannot be sure if our projections for growth in
these businesses will prove to be accurate or that technical difficulties will
not cause data loss, delays in the transmission of data and inferior sound
quality for our Internet protocol telephony service. If these factors or other
factors cause the market for Internet protocol-based applications and Internet
data centers to fail to develop or to develop more slowly than we anticipate,
we could fail to achieve our plan.
We have a history of losses and anticipate substantial future losses
Our business (conducted by our parent until March 24 of this year)
generated losses of RMB49.1 million (US$5.9 million) for the first five months
of 2000, RMB63.4 million (US$7.7 million) in 1999, RMB56.8 million (US$6.9
million) in 1998 and RMB53.7 million (US$6.5 million) in 1997. According to
our unaudited management accounts, we made a net loss of RMB31.2 million
(US$3.8 million) for the two months ended July 31, 2000. Our limited operating
history makes it difficult to budget or predict future results. However, we
expect that we will continue to incur substantial net losses over the short to
medium term due to the high level of planned operating and capital
expenditures and increased sales and marketing costs. It is therefore possible
that our losses may continue to increase for the foreseeable future and our
business may never achieve or sustain profitability.
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<PAGE>
We will not be able to declare dividends so your investment will not generate
cash unless you can sell your ADSs
As of May 31, 2000, we had no distributable reserves. In addition, we
expect that we will continue to incur net losses over the short to medium
term. As such, it is highly likely that we will not be able to declare
dividends in the short to medium term. Accordingly, your investment will not
generate cash unless you can sell your ADSs.
We do not have all the communications licenses and approvals that we need to
operate, but instead rely on sublicenses from our parent. Because these are
contractual rights and not directly granted by the Chinese government, they
could be held invalid at a later date, thereby preventing us from operating
We operate under authority from our parent pursuant to the approval of the
Ministry of Information Industry and a licensing agreement with our parent.
Under the Ministry of Information Industry's approval and the licensing
agreement, our parent has licensed us to conduct nationwide commercial
communications operations under its communications licenses and approvals from
the Ministry of Information Industry and agreed to renew or obtain
replacements for its licenses and approvals that will expire. Our parent's
right to interconnect with China Telecom's network and thereby access
international Internet and telecommunications networks cannot be sublicensed
by its terms. Our parent has agreed to obtain this international access and
direct network traffic to and from international networks on our behalf. If
the sublicenses contained in the licensing agreement were held invalid, we
would not be able to offer essential services until we could obtain
replacement operational authority.
We may not be able to match the development and marketing efforts of our
competitors
We believe our two principal competitors, China Telecom and China United
Telecommunications Corporation, known as Unicom, are each significantly
larger, are better financed and have better economies of scale. Some of our
competitors have well-developed cooperative relationships with foreign
partners. We may not be able to match their development or marketing efforts
or offer the same level of services at comparable costs.
If the Chinese government eases price regulation, we will face increased price
competition and may not be able to compete with our larger competitors
Because many of our services are fungible with the same or similar services
provided by our competitors, we think that price would be a determining factor
in many customers' decisions to choose our or a competitor's services.
However, our prices and the prices our competitors charge are currently
regulated by the Chinese government. As a result, we do not face the level of
price competition that we think would otherwise occur. If the Chinese
government permits market forces to play a greater role in setting prices, we
would face increased price competition and could have difficulty matching the
prices charged by our larger competitors.
We rely on transmission capacity and network interconnections provided by our
largest competitor and unrelated parties who could disrupt our services if
they refuse to cooperate or provide service to us
We lease substantially all of our transmission capacity from third parties,
principally Heng Tong International Leasing Co., Ltd., Zhong Tie
Communications Center and China Telecom, our largest competitor. Chinese
regulations require China Telecom to provide us with interconnection to its
public
13
<PAGE>
switched telephone network, but lengthy restrictions and delays in negotiating
leases could arise and China Telecom can make unilateral modifications to
lease terms after lease agreements have been signed or otherwise restrict our
interconnection with its network. For example, we experienced temporary
capacity constraints in June and July 2000 due to difficulties in obtaining
leased lines to meet projected customer demand. Neither Heng Tong
International Leasing Co., Ltd. nor Zhong Tie Communications Center is under a
similar regulatory obligation to provide capacity to us. We do not have enough
back-up capability to replace our lease arrangements if those entities
interrupt or suspend services, or force us to renegotiate the terms of our
existing leases upon their expiration on less favorable terms or refuse to
renew the leases upon their expiration. We also rely on the telephone lines
maintained by China Telecom to link our network to households and businesses.
We rely on China Telecom and others to maintain the quality of service and to
repair connection problems that may cause disruptions in our services. Our
inability to address these problems directly and quickly could cause customers
to abandon our service in favor of our competitors.
We are connected to international communications operators through China
Telecom. If China Telecom suspended services or forced our parent to
renegotiate the terms of its service lease upon its expiration on less
favorable terms or refused to renew the lease upon its expiration, we would
not be able to send or receive data outside China and many of our customers
would be forced to leave us.
Our operations could become inefficient and waste resources if we cannot
manage our expansion and anticipated growth effectively
As with most companies, our internal procedures determine how quickly and
how efficiently we can provide services and satisfy our customers. Our recent
rapid growth means that new personnel are being hired and trained and new
procedures are being established at a rapid pace. During 1999 we added 318
employees, more than doubling our work force from 1998. Because we expect
rapid growth to continue in the near future, it is especially important that
we:
. expand and enhance our sales, operating, administrative and financial
procedures and controls;
. replace and upgrade our operational, administrative and financial
management information systems; and
. improve coordination and communication among our engineering,
administrative, finance, sales and operations personnel.
If we cannot do these things, our operations may become inefficient, our
management may need to devote substantial amounts of time to correct these
inefficiencies and we may waste our resources, thereby hindering our ability
to continue rapid growth and our future success in satisfying our customers
generally.
We will not grow as planned if we cannot hire and retain our employees
Our recent rapid growth and our plans for the future place a significant
strain on our human resources. Intense competition in China for skilled
technical employees makes it difficult to retain them and find replacement or
additional employees of equal ability. If we cannot find the necessary staff
for expansion, our plans for growth will not be met, and our service quality
and ability to meet our expansion plans will suffer.
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<PAGE>
We will not grow as planned if we cannot raise money, and your shares could be
diluted by future sales of our securities
Our planned network expansion will require constant sources of capital. We
estimate that our cash and other available sources of funds (including the
estimated net proceeds from the global offering) will be sufficient to fund
our operation and expansion needs through December 31, 2001. After that, we
will need to raise additional funds, but we cannot predict whether we will be
able to do so on satisfactory terms or at all. Our ability to raise funds by
issuing shares or convertible debt may need regulatory approval and, in any
event, your percentage ownership interest would be diluted. In addition, we
may have to grant future investors rights, preferences or privileges more
favorable than yours.
Because our strategy includes alliances with foreign partners, our inability
to enter into joint ventures with them could slow our growth
Our strategy includes cooperation and strategic alliances with foreign
partners in order to accelerate our introduction of new services and benefit
from their technical expertise. However, the Ministry of Information Industry
is currently preparing a draft of the administrative telecommunication
regulations for foreign invested telecommunications enterprises that will be
subject to approval by the State Council. The regulations, which have been
circulated in draft form, impose requirements on the Chinese party to any
joint venture involving businesses within our current scope of operations. The
draft regulations require the Chinese party to meet registered capital
requirements and annual revenue requirements that we cannot meet based upon
our current revenues. Accordingly, if the draft regulations are adopted in
their current form and do not permit foreign partners to enter into strategic
alliances with us other than through joint ventures, we would be prohibited
from entering into joint ventures and strategic alliances with foreign parties
and our growth could be slowed.
Our income tax rate could increase substantially
All of our offices are separate, independent entities for tax reporting and
filing purposes. Some of them enjoyed preferential tax rates of 15% before the
reorganization of our parent pursuant to which we were formed. We believe that
after the reorganization the same offices qualify for, and our Beijing office
has been granted, the same preferential treatment. However, we do not know if
all of our applications to the relevant tax authorities will be granted. Even
if they are granted, as more offices that do not qualify for preferential tax
treatment become profitable and begin incurring income tax, our effective tax
rate will increase. Additionally, if the preferential rates granted to some
offices are discontinued because of a change in regulations or failure to
remain qualified as a high-technology company, our income tax rates for these
offices could increase to the normal rate of 33%.
We do not have insurance coverage and are exposed to uninsured losses
Consistent with what we believe is customary practice among Chinese
telecommunications network service providers, we do not currently carry any
third party insurance covering our business or our major fixed assets. We
cannot assure you that any uninsured losses we incur will not have a material
adverse effect on our business.
We may be unable to protect our intellectual property rights
Our parent owns registered trademarks for GBnet and its logo, which it has
agreed to transfer to us. Pending registration of these transfers, our parent
has granted us the free and exclusive right to use these trademarks. Our
parent has the registered rights to the domain names of www.jitong.com,
15
<PAGE>
www.gb.com.cn and www.chinagb.net and has also granted us the free and
exclusive right to use them until Chinese law permits a transfer to us, at
which time our parent will do so at no charge to us. We intend to apply for
additional trademarks and service marks in China, Hong Kong and the United
States. However, we may not be able to procure the registration of these marks
in all of these jurisdictions. We do not currently have any issued patents or
registered copyrights.
Despite the precautions we take to protect our technology and other
proprietary information, it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization, or to develop
similar technology independently. Policing unauthorized use of proprietary
technology is difficult and we cannot provide any assurance that the steps
taken will effectively prevent misappropriation or infringement of our
intellectual property rights. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, protect our trade secrets
or determine the validity and scope of the proprietary rights of others, all
of which could result in substantial costs and diversion of our resources and
management's time.
We are controlled by a single shareholder whose interests may not be aligned
with yours
Our parent owns 74% of our shares immediately before the global offering.
Upon completion of the global offering, we expect that these shares will
account for 57.4% of our shares or 55.52% of our shares if the underwriters
exercise the over-allotment option. Accordingly, our parent has voting and
management control over us, and its interests may be different from your
interests and the interests of our other shareholders.
Our parent's controlling shareholder, IRICO Group Corporation, has agreed
to transfer a 40% interest in our parent to Shanghai Hua Hong (Group) Company
Limited, reducing its 84.91% interest in our parent to 44.91%. By virtue of
its current 84.91% interest, IRICO Group Corporation may be deemed to control
our parent and to indirectly control us. After IRICO Group Corporation
completes the transfer to Shanghai Hua Hong (Group) Company Limited, either or
both of them may be deemed to control our parent and to indirectly control us.
Their interests may also be different from your interests and the interests of
our other shareholders.
RISKS RELATING TO THE CHINESE TELECOMMUNICATIONS INDUSTRY
China's regulatory environment is uncertain and changing and could place
unpredictable restrictions on our activities
China does not have a national telecommunications law. The
telecommunications industry is governed by regulations issued or implemented
by various government bodies, including the State Council, the State Economic
and Trade Commission, the State Development Planning Commission and the
Ministry of Information Industry. These governmental bodies decide the
permitted scope of our business and have the power to grant, withhold or
rescind the operating licenses and approvals that we need. Until a national
telecommunications law is enacted, we are subject to this uncertain regulatory
environment and possible unpredictable restrictions on our activities.
We do not know if the new telecommunications law will have a positive or
negative effect on us
The Ministry of Information Industry, under the direction of the State
Council, is currently preparing a draft of a telecommunications law. The draft
law, when formulated, will be submitted to the National People's Congress or
its standing committee for review and adoption. It is unclear if and when the
telecommunications law will be adopted. If the telecommunications law is
adopted, it will become the basic telecommunications statute and the source of
telecommunications regulations in China. In addition, the Ministry of
Information Industry is currently preparing a draft of the
16
<PAGE>
administrative telecommunications regulations for foreign invested
telecommunications enterprises, which will be subject to approval by the State
Council. Although we expect that the telecommunications law and the
regulations would have a positive effect on the overall development of the
telecommunications industry in China, we do not know the final nature and
scope of regulation that it would create. Accordingly, we cannot predict
whether the telecommunications law and the regulations would have a positive
or negative effect on us or on some or all aspects of our business.
Extensive government regulation constrains our business planning and our
pricing and could limit demand for our services
The communications industry in China is highly regulated by the Chinese
government. China currently prohibits foreign investment enterprises in China
and foreign entities (including individuals) from investing in, operating and
participating in the operation of telecommunications services without special
approval from the government. Telecommunications regulators have very wide
discretion to formulate and apply their own standards in deciding types of
equipment that may be connected to the national telecommunications systems,
the forms and types of services that may be offered to the public, and the
content of materials that may be made available in China over the Internet.
This regulatory environment restricts the scope and manner of our operations
and constrains our business planning and development.
Regulations governing the provision of Internet services and the
distribution of information and other content over the Internet could inhibit
the growth of the Internet if they are implemented in a restrictive fashion.
Overly harsh restrictions as to Internet access or content could limit the
growth of China's Internet market and the overall demand for our services.
The pricing of Internet protocol telephony service is determined by the
government. Prices for Internet services are determined based on a combination
of rates set by the government and market forces. As a result, it is difficult
for us to compete or differentiate ourselves by charging less for these
services. The government has been reducing the prices for Internet services
and we believe it plans to continue to do so. Our revenue would be adversely
affected if the addition of new customers attracted by the price cut does not
offset the resultant reduction in revenue per customer.
Government regulation limits our ability to consolidate with other companies
and could force changes in the industry that hurt us
Because the communications industry is highly regulated in China,
consolidation among competitors, even strategic or operational alliances, is
more difficult to achieve than in less regulated jurisdictions. Similarly, the
government could reorganise the industry, force consolidation or create new
competitors based upon market factors or upon political or administrative
factors that we cannot control or predict. Any restructuring could make it
more difficult for us to compete and could harm our business.
Rapid changes in the Internet industry could make our plans and equipment
obsolete
The Internet industry changes rapidly. Our business model and our
operations may need to respond quickly and significantly in order to keep up
with changes in the Internet industry, including changes in equipment and
communications standards, and to avoid technical obsolescence. If we were not
able to make these changes on a cost-effective basis or rapidly enough to
remain competitive, our business would not be competitive.
17
<PAGE>
If the Internet and e-commerce industries do not continue to grow, our
business will not grow as planned
To grow our business, we depend on market acceptance and use of the
Internet as a source of information, entertainment and trade of goods and
services. If the Internet grows more slowly than expected, or does not grow at
all, our business will not grow as planned. Likewise, if access to the
Internet is significantly restricted, our business will also not grow as
planned.
The Internet has grown very rapidly in recent years, but we cannot assure
you that it will continue to be accepted and widely used. In particular, we
cannot assure you that consumers in China will use the Internet for purchasing
or selling goods and services on a regular basis or that a base of users large
enough to support our business will develop. Significant structural problems
remain in using the Internet and conducting e-commerce in China, including:
. high access fees;
. a limited number of Chinese language websites;
. lack of an adequate credit and payment infrastructure in China;
. security of communications for credit card numbers and other sensitive
information required for e-commerce;
. inadequate network infrastructure to support increased use; and
. slow access speed and reliability of Internet service.
These problems may inhibit the growth of Internet use. In addition, the use
of the Internet could be reduced due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
activity or as the result of changes in government regulation.
If consumers lose faith in or experience lapses in the reliability, privacy
and security of our systems, or in the Internet and online transactions
generally, we could experience a loss of customers and the growth of the
Internet and e-commerce generally could also be restricted. Our business,
which depends upon this growth, may not grow as planned as a result.
System failures, hacking or e-commerce liabilities might cause us financial
losses
Our ability to provide service is subject to failures due to causes such as
human error, power outages and natural disasters, whether they affect us
directly or indirectly through failures of local telephone lines or defaults
of the parties from whom we lease lines. We have only a partial back-up
alternative to mitigate the effects of a temporary failure of the fibre optic
lines that we lease, and few back-up alternatives that could mitigate the
effects of a power failure or a failure of local telephone lines. Any failures
could impair our business growth or even cause existing customers to abandon
our service.
Despite our efforts, we cannot be certain that we will be able to prevent
intruders from breaking into our systems, stealing information or interrupting
service. We store and transmit confidential information, such as computer
software, credit card numbers and other information that may be critical to
our customers' businesses. If information is lost or stolen or if service is
disrupted, we could be sued by the owners of the lost or stolen data, by
others who rely on the data or by customers who suffer consequential damages.
Material or repeated security breaches or interruptions could have an
18
<PAGE>
adverse effect on our business. Our agreements with customers do not contain
terms that explicitly limit our liability for these risks, nor do we have
insurance covering us against these security risks or business interruption.
Upon China's entry to the WTO, competition could increase and hurt our
revenues
China recently concluded negotiations of the major terms for its entry into
the World Trade Organization with a number of countries including the United
States and the European Union. As a result, we expect the Chinese government
to gradually reduce current restrictions on foreign ownership in the
telecommunications industry. This could lead to the eventual opening of the
Chinese telecommunications market to foreign investors and operators and could
result in or accelerate the issue of new telecommunications service licenses.
Increased competition from our existing competitors and the introduction of
additional competition through new entrants in our lines of business could
adversely affect our results of operations through, among other factors,
decline in the rate of subscriber growth, decrease in tariff rates and
increase in selling and promotional expenses.
RISKS RELATING TO CHINA IN GENERAL
Currently, substantially all of our assets are located in China and our
revenue is primarily derived from our operations in China. Accordingly, our
financial condition and results of operations are subject to a significant
degree to economic, political and legal developments in China.
Political and economic policies in China could affect our business in
unpredictable ways
The economy of China differs from the economies of most countries belonging
to the Organisation for Economic Co-operation and Development in a number of
respects, including:
. structure;
. level of government involvement;
. level of development;
. level of capital reinvestment;
. control of foreign exchange; and
. allocation of resources.
Before its adoption of reform and open-door policies beginning in 1978,
China was primarily a planned economy. Since that time, the Chinese government
has been reforming the Chinese economic system, and has also begun reforming
the government structure. These reforms have resulted in significant economic
growth and social progress. Although the Chinese government still owns a
significant portion of the productive assets in China, economic reform
policies since the late 1970s have emphasised autonomous enterprises and the
utilization of market mechanisms. We currently expect that the Chinese
government will continue these reforms, further reduce government intervention
with enterprises and rely more heavily on market mechanisms to allocate
resources. Although we believe these reforms will have a positive effect on
our overall and long-term development, we cannot predict whether changes to
China's political, economic and social conditions, laws, regulations and
policies will have any adverse effect on our current or future business or
results of operations.
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<PAGE>
If the Chinese government changed the current regulations that allow us to
make payments in foreign currencies, we could have trouble making our foreign
exchange payments
The Renminbi currently is not a freely convertible currency. We receive
most of our revenue in Renminbi. A portion of our Renminbi revenue must be
converted into other currencies to meet our foreign currency obligations. We
have substantial requirements for foreign currency, including:
. service fees paid to international communications operators estimated to
be approximately RMB51 million (US$6.2 million) from May 31, 2000 through
May 31, 2001;
. debt service costs on foreign currency-denominated debt estimated to be
approximately RMB3 million (US$0.4 million) from May 31, 2000 through May
31, 2001;
. payments for leases of equipment and property estimated to be
approximately RMB43 million (US$5.2 million) from May 31, 2000 through
May 31, 2001; and
. payment of any dividends declared in respect of the H shares.
Under the existing foreign exchange regulations in China, we may undertake
current account foreign exchange transactions, including the payment of
dividends, following the completion of the global offering, without prior
approval from the State Administration of Foreign Exchange by producing
commercial documents evidencing the foreign exchange transactions, provided
that they are processed through Chinese banks licensed to engage in foreign
exchange transactions. The Chinese government has stated publicly that it
intends to make the Renminbi freely convertible in the future. However,
uncertainty exists as to whether the Chinese government may restrict access to
foreign currency for current account transactions if foreign currency becomes
scarce in China.
Foreign exchange transactions under the capital account (international
revenues and expenditures that increase or decrease debt or equity, including
principal payments in respect of foreign currency-denominated obligations)
continue to be subject to limitations and require the prior approval of the
State Administration of Foreign Exchange. These limitations could affect our
ability to obtain foreign exchange through debt financing, or to make capital
expenditures in foreign currency.
If the Chinese government restricts our ability to make payments in foreign
exchange, we could have trouble making our foreign exchange payments and could
even default on our obligations.
Fluctuation of the Renminbi could reduce our profits or our dividends
Although the official exchange rate for the conversion of Renminbi to U.S.
dollars has been stable, with the Renminbi appreciating slightly against the
U.S. dollar in recent years, the exchange rate of the Renminbi may become
volatile against the U.S. dollar or other currencies in the future.
Substantially all of our revenues and operating expenses are denominated in
Renminbi, while some of our equipment purchases and leases, debt repayment and
operational expenses are denominated in foreign currencies. Any future
Renminbi devaluations could increase our equipment acquisition costs. This
could in turn raise our costs of operations and harm our profitability. Any
devaluation of the Renminbi may adversely affect the value of any dividends
payable on our H shares and ADSs in foreign currency terms.
Interpretation and enforcement of Chinese laws and regulations is uncertain
The Chinese legal system is based on statutory law. Under this system,
prior court decisions may be cited as persuasive authority, but do not have
the binding effect of precedents. Since 1979, the Chinese government has been
developing a comprehensive system of commercial laws and
20
<PAGE>
considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters, such as corporate organization and
governance, foreign investment, commerce, taxation and trade. As these laws,
regulations and legal requirements are relatively new, and because of the
limited volume of published case law and judicial interpretations and the non-
binding nature of prior court decisions, the interpretation and enforcement of
these laws, regulations and legal requirements involve some uncertainty.
You may not enjoy shareholders' protections that you would be entitled to in
other jurisdictions
As substantially all of our business is conducted in China, our operations
are governed principally by the laws of China. Chinese law provisions for the
protection of shareholders' rights and access to information, in particular,
are different and less developed than those applicable to companies formed in
the United States, Hong Kong, the United Kingdom and other developed countries
or regions. You may not enjoy shareholders' protections under Chinese law that
you would be entitled to in other jurisdictions.
Chinese securities laws and regulations are still at an early stage of
development and may not provide the legal protections you would be entitled to
in other countries
At present, the regulatory framework for the securities market in China is
at an early stage of development. The China Securities Regulatory Commission
is responsible for drafting regulations for, administering and regulating the
national securities markets. The Chinese company law, the rules and
regulations recently promulgated thereunder and laws relating to Chinese
companies whose shares are offered overseas provide, to a limited extent, a
legal framework governing the corporate behavior of companies such as ours,
and their directors and shareholders. The Chinese securities law, which became
effective on July 1, 1999, is the fundamental law comprehensively regulating
the securities markets in China and applies to the issuance and trading of
shares, company bonds and other securities in China designated by the State
Council. However, these laws, rules, regulations and measures are still at an
early stage of development and may not provide investors with the same extent
of protection they may expect in developed countries and regions.
You may have to pay Chinese tax on dividends and capital gains tax in the
future
Under current Chinese tax laws, regulations and rulings, dividends we pay
to holders of H shares who are foreign individuals but not residents in China
or which are foreign enterprises with no permanent establishment in China are
not currently subject to Chinese withholding tax. In addition, gains realized
by individuals or enterprises upon the sale or other disposition of H shares
are not currently subject to Chinese capital gains tax. There can be no
assurance, however, that withholding or capital gains taxes will not become
applicable to those dividends or gains in the future. Holders of H shares
could, in the future, become subject to a withholding tax on dividends, which
is currently imposed at the rate of 20% unless reduced or eliminated by an
applicable taxation treaty between China and the country in which the foreign
individual or enterprise resides.
Our articles of association require you to submit your disputes with us and
other persons to arbitration. You will have no legal right to a court
proceeding
Our articles of association require a holder of H shares and ADSs having a
claim against, or a dispute with, us, our directors, supervisors, executive
officers or a holder of our domestic shares relating to any rights or
obligations conferred or imposed by our articles of association, the Chinese
21
<PAGE>
company law or any other Chinese laws or regulations and relating to our
affairs, to submit the dispute or claim to the China International Economic
and Trade Arbitration Commission or to the Hong Kong International Arbitration
Centre for arbitration. Our articles of association further provide that the
arbitrator's award shall be final and binding on all parties.
It may be difficult to effect service of process upon us or our directors,
supervisors or executive officers who live in China or to enforce against them
inside China any judgments obtained from non-Chinese courts
We are a joint stock company incorporated in China with limited liability.
All of our directors, supervisors and executive officers reside in China, and
our assets and the assets of those persons are located inside China.
Therefore, it may not be possible for you to effect service of process upon us
or those persons outside China or to enforce against them outside China any
judgments obtained from non-Chinese courts. China does not have treaties or
arrangements providing for the recognition and enforcement of judgments of the
courts of the United States, the United Kingdom or most other Western
countries or Hong Kong, and therefore recognition and enforcement in China of
judgments obtained in those jurisdictions may be impossible.
RISKS RELATING TO THE GLOBAL OFFERING
Stock prices of telecommunications and Internet-related companies have
fluctuated widely in recent months, and the trading prices of our H shares and
ADSs are likely to be volatile, which could result in substantial losses to
investors
The trading prices of our H shares and ADSs are likely to be volatile and
could fluctuate widely in response to factors beyond our control. In
particular, the market prices for shares of Internet and technology-related
companies often reach levels that bear no established relationship to the
operating performance of these companies. The market prices of the securities
of Internet-related companies have been especially volatile. These broad
market and industry factors may significantly harm the market prices of our H
shares and ADSs, regardless of our actual operating performance.
There has been no prior public market for our H shares or ADSs; the market
prices of our H shares and ADSs following the global offering may be volatile
Before the global offering, there was no public market for our H shares or
ADSs. The initial public offering prices for our H shares and ADSs were the
result of negotiations between us and the underwriters and may differ
significantly from the market prices for the H shares or ADSs following the
global offering. We have applied to list and deal in our H shares on the
Growth Enterprise Market of the Stock Exchange of Hong Kong Limited, commonly
known as the Growth Enterprise Market, and to list our ADSs on the Nasdaq
National Market. However, being listed on the Growth Enterprise Market and the
Nasdaq National Market does not guarantee that an active trading market for
our H shares or ADSs will develop following the global offering.
The price and trading volumes for our H shares and ADSs may be highly
volatile. Factors such as variations in our revenue, earnings and cash flow
and announcements of new investments, strategic alliances and/or acquisitions,
or fluctuations in market prices for our services could cause the market
prices for our H shares and ADSs to change substantially. Any of these factors
may result in large and sudden changes in the volume and price at which our H
shares and ADSs will trade. We can give no assurance that these factors will
not occur in the future.
22
<PAGE>
Because there will be a three- and four-day time gap between pricing and
trading of the ADSs and H shares offered in this offering, shareholders and
ADS holders are subject to the risk that the opening price of our H shares and
ADSs when trading begins could be below the price you pay
The initial price to the public of the H shares and ADSs sold in this
offering will be determined on the date of pricing. However, the H shares will
not commence trading on the Growth Enterprise Market until they are delivered,
which is expected to be four Hong Kong business days after the pricing date.
Trading of ADSs on the Nasdaq National Market will not commence until one day
prior to commencement of trading of the H shares on the Growth Enterprise
Market. As a result, investors may not be able to sell or otherwise deal in
the H shares or ADSs during this period. Accordingly, shareholders and ADS
holders are subject to the risk that the opening prices of our H shares and
ADSs could fall below the issue price before trading begins.
The Growth Enterprise Market is designed to accommodate high-risk companies
and resulting price volatility among other stocks listed there could affect
our stock price
The Growth Enterprise Market has been established as a market designed to
accommodate companies to which a high investment risk may be attached. In
particular, companies may list on the Growth Enterprise Market with neither a
track record of profitability nor any obligation to forecast future
profitability. Given the emerging nature of companies listed on the Growth
Enterprise Market, there is a risk that securities traded on the Growth
Enterprise Market may be more susceptible to high market volatility than
securities traded elsewhere.
23
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements can
be identified by the use of forward-looking terminology such as, but not
limited to, "may," "will," "expect," "target," "anticipate," "estimate,"
"continue", "believe" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. When considering
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors and other factors
noted throughout this prospectus could cause our actual actions or results to
differ materially from those contained in any forward-looking statement.
24
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the global offering will be
approximately US$220,721,715 million, after payment of all underwriting
discounts and commissions and our expenses for the global offering, assuming
an offering price of HK$25.50 per H share, or US$13.08 per ADS, the mid-point
of the estimated price range.
We intend to use the net proceeds as follows:
. approximately RMB1,277 million (US$154.3 million) to roll out our
network infrastructure and to increase the overall transmission capacity
of our network;
. approximately RMB242.5 million (US$29.3 million) to establish Internet
data centers in Beijing, Shanghai and Guangzhou to expand our existing
capabilities for web hosting, co-location and other value-added
services;
. approximately RMB93 million (US$11.3 million) to upgrade our network
control centers in Beijing and Shanghai to support the expansion of our
network coverage and transmission capacity;
. approximately RMB10 million (US$1.2 million) to upgrade our management
information and accounting system to support the growth of our business
operations;
. approximately RMB50 million (US$6.0 million) to establish customer
service centers in major cities in China and branch offices abroad;
. approximately RMB150 million (US$18.1 million) to repay bank borrowings;
and
. approximately RMB4.5 million (US$0.5 million) for working capital
purposes.
Should the over-allotment option be exercised in full, we will receive an
additional RMB293.0 million (US$35.4 million) which we will use as additional
working capital. To the extent that the net proceeds of the global offering
are not immediately required for the above purposes, we will place the net
proceeds in short-term deposits with financial institutions.
A Chinese enterprise such as us must deposit all proceeds from sales of
securities overseas in a foreign exchange bank account in China. Dividends
payable to our overseas shareholders may, upon the submission of appropriate
documentation to the relevant bank, be remitted freely from our foreign
exchange bank account.
DIVIDEND POLICY
We have not paid any dividends on our shares and do not plan to pay any
dividends in the foreseeable future. Instead, we plan to retain any earnings
for the operation and expansion of our business.
25
<PAGE>
CURRENCY TRANSLATIONS
Our financial statements are presented in Renminbi yuan, the lawful
currency of the People's Republic of China. In this prospectus, references to
"Renminbi" or "RMB" are to the Renminbi yuan.
We provide translations of amounts from RMB to U.S. dollars for your
convenience, but these translations are for your reference only. We do not
mean to say that RMB could actually have been or could now or in the future be
converted into U.S. dollars at these rates or at any other rates mentioned in
this prospectus. Unless we specifically state otherwise, translations of
amounts from RMB to U.S. dollars have been made in this prospectus at the noon
buying rate in New York City for cable transfers in foreign currencies of
US$1.00 = RMB8.2773 on October 31, 2000, as certified for customs purposes by
the Federal Reserve Bank of New York.
26
<PAGE>
DILUTION
As of May 31, 2000, our net tangible book value per ADS was US$0.4. Net
tangible book value per ADS represents total tangible assets minus total
liabilities divided by the total number of ADS equivalents outstanding. After
giving effect to the sale of the ADSs and H shares offered in the global
offering and after deducting underwriting discounts and commissions and other
estimated expenses of the global offering, but without taking into account any
other changes in tangible book value after May 31, 2000, the net tangible book
value per ADS would increase to US$3.2 per ADS, or US$3.6 per ADS if the
underwriters' over-allotment option is exercised in full. This represents an
immediate increase in net tangible book value of US$2.8 per ADS to our current
shareholders and an immediate dilution of US$10.0 per ADS to purchasers of
ADSs or H shares at the initial public offering price (or US$9.6 per ADS if
the underwriters' over-allotment option is exercised in full).
The following table illustrates this dilution on the basis of International
Accounting Standards:
<TABLE>
<S> <C>
Assumed initial public offering price per ADS...................... US$13.2
Net tangible book value per ADS equivalent as of May 31, 2000...... US$ 0.4
Increase per ADS equivalent attributable to the sale of the ADSs
and H shares...................................................... US$ 2.8
Pro forma net tangible book value per ADS after the global
offering.......................................................... US$ 3.2
Dilution per ADS to purchasers of ADSs or H shares................. US$10.0
</TABLE>
The following table sets forth for our current shareholders, and for
purchasers of ADSs or H shares in the global offering, the number and
percentage of total outstanding shares purchased, assuming the over-allotment
option is not exercised, the total consideration and the average price per
share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- --------------------- Price per
Number Percent Amount Percent Share
----------- ------- ------------- ------- ---------
(RMB) (RMB)
<S> <C> <C> <C> <C> <C>
Current shareholders.... 248,377,800 78% 248,790,000 11% 1.00
Purchasers of ADSs or H
shares in this
offering............... 71,994,000 22% 1,964,716,260 89% 27.3
----------- --- ------------- --- ----
Total................. 320,371,800 100% 2,213,506,260 100% 6.9
=========== === ============= === ====
</TABLE>
27
<PAGE>
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods indicated, information
concerning the currency exchange rate as expressed in U.S. dollar per
Renminbi. The People's Bank of China sets and publishes the base exchange rate
daily with reference primarily to the supply and demand of Renminbi against
the U.S. dollar in the market during the prior day. It also takes into account
other factors such as general conditions existing in the international foreign
exchange markets. Although Chinese governmental policies were introduced in
1996 to allow the convertibility of Renminbi into foreign currency for current
account items, conversion of Renminbi into foreign currency for capital items,
such as foreign direct investment, loans or security, requires the approval of
the State Administration of Foreign Exchange, which is under the authority of
the People's Bank of China.
<TABLE>
<CAPTION>
Noon buying rate
---------------------------------
Period Period end Average(1) High Low
------ ---------- ---------- ----- -----
(US$ per RMB)
<S> <C> <C> <C> <C>
1994.......................................... .1157 .1159 .1133 .1183
1995.......................................... .1199 .1195 .1176 .1206
1996.......................................... .1200 .1199 .1176 .1205
1997.......................................... .1203 .1202 .1201 .1206
1998.......................................... .1208 .1205 .1202 .1208
1999.......................................... .1208 .1208 .1208 .1208
2000 (through October 31, 2000)............... .1208 .1208 .1208 .1208
</TABLE>
--------
Source: The Noon Buying Rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
Notes:--
(1) The average rate means the average of the exchange rates on the last day
of each month during the respective period.
28
<PAGE>
CAPITALIZATION
The following table sets forth our combined cash and cash equivalents and
capitalization as of May 31, 2000, as restated to give effect to our
reorganization in March 2000. As adjusted figures give effect to the issuance
of 71,994,000 shares in this global offering (assuming consummation of this
global offering on December 12, 2000 and no exercise of the underwriters'
over-allotment option). You should read this table together with our financial
statements, including the notes thereto, appearing elsewhere in this
prospectus. The adjustments are based on an assumed initial offering price of
HK$25.5 per share, or US$3.3 per ADS, the mid-point of the estimated price
range. The adjustments also include the deduction of estimated underwriters'
discounts and commissions and other estimated expenses of the global offering.
The following table illustrates the changes in combined cash and cash
equivalents and capitalization on the basis of International Accounting
Standards:
<TABLE>
<CAPTION>
As of May 31, 2000
--------------------------------------------
Actual As adjusted
--------------------- ----------------------
RMB'000(1) US$'000(3) RMB'000(2) US$'000(3)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... 203,337 24,566 2,041,044 246,587
======= ====== ========= =======
Short-term debt
Current portion of long-term
borrowings...................... 34,649 4,186 34,649 4,186
Amount portion of other long-term
liabilities..................... 2,286 276 2,286 276
------- ------ --------- -------
Total short term debt.......... 36,935 4,462 36,935 4,462
======= ====== ========= =======
Long-term debt (excluding current
portion):
Amount due to parent............. 57,436 6,939 57,436 6,939
Long-term borrowings, net of
current portion................. 288,034 34,798 288,034 34,798
Long-term liabilities............ 16,716 2,019 16,716 2,019
------- ------ --------- -------
Total long-term debt........... 362,186 43,756 362,186 43,756
------- ------ --------- -------
Shareholders' equity(2)
Ordinary shares, RMB1.00 per
value per shares; 248,377,800 as
actual, 320,371,800 as adjusted
and 71,994,000 shares issues for
the global offering ............ 248,378 30,007 320,372 38,705
Share premium.................... -- -- 1,765,713 213,323
Accumulated losses and other
reserves........................ (43,696) (5,279) (43,696) (5,279)
------- ------ --------- -------
Total owners'
equity/stockholders' equity... 204,682 24,728 2,042,389 246,749
------- ------ --------- -------
Total capitalization........... 566,868 68,484 2,404,575 290,505
======= ====== ========= =======
</TABLE>
--------
Notes:--
(1) Actual amounts are derived from the historical combined balance sheet data
as of May 31, 2000. These balances are derived from the combined financial
statements included elsewhere in this prospectus.
(2) Shareholders' equity reflects the effects of our establishment including
the issuance of 320,371,800 shares of RMB1.00 each and the creation of the
share premium in exchange for our net assets.
(3) Translations of amounts from Renminbi into U.S. dollars for the
convenience of the reader have been made at the noon buying rate in New
York for cable transfers payable in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York on October 31,
2000 of US$1.00 = RMB8.2773.
29
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data for the three years ended December 31,
1997, 1998 and 1999 and the five months ended May 31, 2000 are derived from
and should be read together with our audited combined financial statements
included in this prospectus. The selected combined financial data for the two
years ended December 31, 1995 and 1996 and the five months ended May 31, 1999
are derived from our unaudited combined financial statements that were
prepared in accordance with IAS. Our combined financial statements were
prepared in accordance with IAS, which differ in material respects from US
GAAP. For a discussion of material differences between IAS and US GAAP, see
note 33 to our audited combined financial statements presented in this
prospectus beginning on page F-1.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ---------- ------- ------- -------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue:
Data communications.... -- 191 13,360 44,961 89,133 10,768
Internet protocol
telephony service..... -- -- -- -- 102,862 12,427
Other operating
revenue............... 2,177 -- 4,928 4,211 2,397 290
-------- ------- ------- ------- -------- -------
2,177 191 18,288 49,172 194,392 23,485
Operating expenses:
Transmission costs..... (1,383) (11,592) (21,786) (41,146) (107,697) (13,011)
Staff costs............ (1,194) (2,628) (6,191) (9,583) (16,126) (1,948)
Depreciation and
amortization.......... (315) (2,244) (13,125) (19,672) (38,792) (4,687)
General administrative
and other expenses.... (9,875) (17,503) (25,915) (27,142) (78,882) (9,530)
-------- ------- ------- ------- -------- -------
(12,767) (33,967) (67,017) (97,543) (241,497) (29,176)
-------- ------- ------- ------- -------- -------
Loss from operation..... (10,590) (33,776) (48,729) (48,371) (47,105) (5,691)
Finance expenses, net... (5,676) (4,207) (5,592) (7,904) (12,697) (1,534)
Other income /
(expenses), net........ 289 (4,078) 579 (563) (618) (75)
-------- ------- ------- ------- -------- -------
Operating loss.......... (15,977) (42,061) (53,742) (56,838) (60,420) (7,300)
Income tax (charge)/
credit................. (217) (457) -- -- (2,958) (357)
-------- ------- ------- ------- -------- -------
Net loss................ (16,194) (42,518) (53,742) (56,838) (63,378) (7,657)
======== ======= ======= ======= ======== =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Five months ended May 31,
-----------------------------
1999 2000 2000
---------- -------- -------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Operating revenue:
Data communications............................. 32,463 46,424 5,609
Internet protocol telephony service............. -- 129,055 15,591
Other operating revenue......................... 489 932 113
------- -------- -------
32,952 176,411 21,313
Operating expenses:
Transmission costs.............................. (24,476) (97,212) (11,745)
Staff costs..................................... (5,827) (13,973) (1,688)
Depreciation and amortization................... (12,858) (29,832) (3,604)
General administrative
and other expenses............................. (15,123) (76,576) (9,251)
------- -------- -------
(58,284) (217,593) (26,288)
------- -------- -------
Loss from operation.............................. (25,332) (41,182) (4,975)
Finance expenses, net............................ (4,237) (8,058) (974)
Other income / (expenses), net................... (652) (539) (65)
------- -------- -------
Operating loss................................... (30,221) (49,779) (6,014)
Income tax (charge)/ credit...................... -- 668 81
------- -------- -------
Net loss......................................... (30,221) (49,111) (5,933)
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Number of shares
outstanding............ 183,874,200 183,874,200 183,874,200 183,874,200 183,874,200 183,874,200
=========== =========== =========== =========== =========== ===========
Basic loss per ordinary
share (1).............. RMB 0.088 RMB 0.231 RMB 0.292 RMB 0.309 RMB 0.345 US$0.042
=========== =========== =========== =========== =========== ===========
Basic loss per ADS
equivalent (2)......... RMB 0.352 RMB 0.924 RMB 1.168 RMB 1.236 RMB 1.380 US$0.168
=========== =========== =========== =========== =========== ===========
US GAAP
Operating revenue....... 2,177 191 18,288 49,172 194,392 23,485
Loss from operation .... (10,590) (33,776) (48,729) (48,371) (47,105) (5,691)
Net loss................ (16,194) (42,518) (53,742) (56,838) (63,378) (7,657)
Basic loss per ordinary
share.................. RMB0.088 RMB 0.231 RMB 0.292 RMB 0.309 RMB 0.345 US$0.042
Basic loss per ADS
equivalent............. RMB 0.352 RMB 0.924 RMB 1.168 RMB 1.236 RMB 1.380 US$0.168
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Five months ended May 31,
-------------------------------------
1999 2000 2000
----------- ----------- -----------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Number of shares outstanding............. 183,874,200 212,731,074 212,731,074
=========== =========== ===========
Basic loss per ordinary share (1)........ RMB 0.164 RMB 0.231 US$0.028
=========== =========== ===========
Basic loss per ADS equivalent (2)........ RMB 0.656 RMB 0.924 US$0.112
=========== =========== ===========
US GAAP
Operating revenue........................ 32,952 176,411 21,313
Loss from operation ..................... (25,332) (40,773) (4,925)
Net loss................................. (30,221) (48,702) (5,883)
Basic loss per ordinary share............ RMB 0.164 RMB 0.229 US$0.028
Basic loss per ADS equivalent............ RMB 0.656 RMB 0.916 US$0.112
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ---------- ------- ------- ------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
IAS
Cash and cash equiva-
lents.................. 11,723 90,577 31,991 67,402 257,127 31,064
Working capital......... 69,711 96,401 37,458 (97,420) 27,668 3,343
Total assets............ 198,032 294,870 283,704 328,072 799,256 96,560
Long term debt, exclud-
ing current portion.... 119,387 224,747 234,446 183,129 315,600 38,129
Total shareholders'
equity/(deficit) ...... 35,802 (6,716) (16,618) (73,456) 157,886 19,075
US GAAP
Total assets............ 198,032 294,870 283,704 328,072 799,256 96,560
Total shareholders'
equity/(deficit)....... 35,802 (6,716) (16,618) (73,456) 157,886 19,075
</TABLE>
<TABLE>
<CAPTION>
Five months ended May 31
---------------------------------------
1999 2000 2000
----------- ------- -------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flow Data:
Capital expenditures.................. 42,180 117,047 14,141
Net cash (used for)/ provided by oper-
ating activities..................... 11,610 7,164 866
Net cash used for investing activi-
ties................................. -- 2,226 269
Net cash provided by financing activi-
ties................................. 10,000 58,319 7,046
Cash and cash equivalents............. 46,832 203,337 24,566
</TABLE>
--------
Notes:--
(1) Basic loss per ordinary share for the years ended December 31, 1995, 1996,
1997, 1998 and 1999 has been computed by dividing the net loss in the
respective year by the 183,874,200 domestic shares we issued to our parent
and that were outstanding upon our establishment on March 24, 2000 as if
such shares had been outstanding for all relevant periods.
On March 24, 2000, a further 64,503,600 domestic shares were issued to five
investors at par for cash. Basic loss per share for the five-month period
ended May 31, 2000 has been computed by dividing net loss by weighted
average number of 212,731,074 (1999: 183,874,200) shares we issued to our
parent and five other shareholders.
(2) Basic loss per ADS equivalent for those periods has been computed by
multiplying basic loss per share by 4, which is the number of shares
represented by each ADS.
32
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ------- ------- ------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 US$'000
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash Flow Data:
Capital expenditures.... 3,796 15,453 48,496 30,680 160,885 19,437
Net cash (used for)/
provided by operating
activities............. (12,536) (25,381) (29,333) (11,181) 37,823 4,569
Net cash used for in-
vesting activities..... -- -- -- -- -- --
Net cash provided by fi-
nancing activities..... 8,742 119,687 19,243 77,272 312,787 37,789
Cash and cash equiva-
lents.................. 11,723 90,577 31,991 67,402 257,127 31,064
</TABLE>
<TABLE>
<CAPTION>
As of May 31
---------------------------
1999 2000 2000
---------- ------- -------
RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
IAS
Cash and cash equivalents........................... 46,832 203,337 24,566
Working capital..................................... (124,803) 42,173 5,095
Total assets........................................ 391,995 789,290 95,356
Long term debt, excluding current portion........... 202,396 362,186 43,756
Total shareholders' equity/(deficit) ............... (44,317) 204,682 24,728
US GAAP
Total assets........................................ 391,995 758,296 91,612
Total shareholders' equity/(deficit)................ (44,317) 173,688 20,984
</TABLE>
--------
Notes:--
(1) Basic loss per ordinary share for the years ended December 31, 1995, 1996,
1997, 1998 and 1999 has been computed by dividing the net loss in the
respective year by the 183,874,200 domestic shares we issued to our parent
and that were outstanding upon our establishment on March 24, 2000 as if
such shares had been outstanding for all relevant periods.
On March 24, 2000, a further 64,503,600 domestic shares were issued to five
investors at par for cash. Basic loss per share for the five-month period
ended May 31, 2000 has been computed by dividing net loss by weighted
average number of 212,731,074 (1999: 183,874,200) shares we issued to our
parent and five other shareholders.
(2) Basic loss per ADS equivalent for those periods has been computed by
multiplying basic loss per share by 4, which is the number of shares
represented by each ADS.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our combined
financial statements and the related notes contained elsewhere in this
prospectus.
OVERVIEW OF OUR OPERATIONS
We are an Internet protocol network service provider in China. We offer a
range of data and voice communication services based on a combination of
Internet protocol, asynchronous transfer mode and frame relay transmission
technologies. Our services include Internet access, leased lines, frame relay,
virtual private networks, web hosting, co-location, e-commerce network
services, Internet global roaming and Internet protocol telephony. Because our
business was conducted by our parent before March 24, 2000, in this prospectus
we include our parent when referring to ourselves and our business in periods
before that date.
Data communications revenue
We first introduced our data communications services to the market in 1996
when we began offering Internet access services. Since then, we have evolved
to provide an integrated range of data communications services targeted to
corporate, institutional and governmental customers, including Internet
access, leased lines, web hosting, co-location, virtual private networks and
Internet global roaming.
For the year ended December 31, 1999, data communications services
accounted for approximately 45.9% of our total operating revenues, of which
approximately 73.2% was generated from our data transmission services and
Internet access for corporate and institutional Internet account holders,
including Internet service providers, Internet content providers and
individuals. The remaining 26.8% was generated from value-added services such
as Internet global roaming, virtual private networks and web hosting. For
customers accessing our network through leased lines, our fees consist of a
one-time set-up fee and a flat monthly rental fee that varies with the
bandwidth provided, plus an additional charge based upon the volume of data we
transmit for the customer. Our dial-up Internet access customers not using our
Internet prepaid cards typically pay a one-time fee to open an account while
those customers using our Internet prepaid cards to pay for their service
charges are not required to pay the one-time fee. Our service fee comprises a
flat monthly charge up to a fixed number of hours, followed by an hourly
charge for additional time.
Being a member of the international global roaming organizations, GRIC and
iPass, we provide Internet connectivity services to the subscribers of other
organization members who come to China occasionally and use our network.
Internet global roaming services, first launched in 1998, allow subscribers of
other Internet access providers to access the Internet by logging on to our
network. We receive a fee from these other Internet access providers for this
service based on the amount of traffic. In 1999, 12.4% of our total data
communications revenue was derived from these arrangements.
We also provide data communications services to enterprises doing business
in China. The satellite transmission services we provide to these enterprises
are not limited by the capacity and connectivity of ground lines. For 1999,
10.5% of our total data communications revenue was derived from transmission
through satellite channels.
34
<PAGE>
The remainder of our revenue related to other value-added services,
including web hosting and co-location services, which contributed 3.9% of our
total data communications revenue in 1999.
The results of operations of our data communications services are
substantially dependent on a number of factors, including:
. number of subscribers;
. level of subscriber usage;
. level and structure of tariffs; and
. network capacity.
We recognize the importance of corporate and institutional customers and
intend to focus on expanding this customer base through the bundling of
customized corporate and institutional data and voice communications services
and technical support and customer services.
We do not intend to commit significant resources to compete in the retail
Internet service provider market in China as we believe it would involve
substantial up-front customer acquisition costs and because of the unstable
traffic volume and high churn rate in that market. Nevertheless, the number of
our registered Internet access dial-up customers increased and our revenues
from this source increased by 38% during 1999.
Our sales personnel review the creditworthiness of new data communications
customers including their business, bank accounts and financial statements.
New account acceptance requires the approval of our sales managers. We
generally grant one to two months' credit to our corporate and institutional
customers depending on their credit standing. Designated sales personnel are
assigned to monitor each account as part of our ongoing credit review
procedure and to ensure timeliness of our collections. We do not extend credit
to other customers.
Internet protocol telephony revenue
Internet protocol telephony allows customers to make telephone calls using
our Internet protocol network. However, our network transmits the phone
conversation in smaller bunches of data called packets. Because these packets
are smaller than the entire conversation, they can be transmitted separately
whenever even a small amount of network capacity is available and reassembled
when they reach their destination. Because we use our own network, and avoid
the public Internet, we can generally maintain voice quality while the use of
packets lets us use our network more efficiently than traditional telephone
networks.
We launched our Internet protocol telephony services in June 1999 and, as a
result of our marketing efforts and high market demand, revenue generated from
this service has grown significantly. For the year ended December 31, 1999,
revenue generated from our Internet protocol telephony services accounted for
approximately 52.9% of our total operating revenues.
We provide our Internet protocol telephony service to customers through:
.prepaid calling cards in fixed Renminbi denominations;
.an express dialer that is either attached to or built into the telephone
set;
.a phone number designated to us; or
.dedicated leased lines.
We market our phone cards as "Internet protocol telephony" cards--they
operate essentially the same way as debit calling cards. The cards each have
an account and identification code corresponding
35
<PAGE>
to a Renminbi credit account that is debited as the customer makes calls. The
credit is a cash credit that is debited against our normal Internet protocol
telephony tariffs and not a credit for a fixed number of minutes of telephone
usage. The credit account is valid for a fixed period of time, with any unused
amounts remaining at the end of the period non-refundable.
We currently generate the majority of our Internet protocol telephony
revenues from the sale of prepaid cards to distributors. Our distributors buy
the cards from us at a discount negotiated to the retail price and resell the
cards to end users at retail prices. Although all Internet protocol telephony
cards are prepaid, we recognize calling card revenues on a per minute basis as
end users use the balance in their prepaid cards by placing calls. We account
for all unused balances in end users' accounts as revenue received in advance
of service.
Customers using an express dialer or designated telephone line are required
to place a deposit with us or a designated bank. Under this method, our
customers settle their charges in arrears on a monthly basis. Our billing
system is capable of keeping track on a real time basis of credits and charges
on both prepaid cards and in customer accounts.
The results of our Internet protocol telephony services are substantially
dependent on a number of factors, including:
. tariff levels and structure, which are both currently regulated by the
Ministry of Information Industry;
.demand for international and domestic long-distance telecommunications
services in China;
.network capacity constraints;
.costs of interconnection arrangements with other telecommunications
operators; and
. the price difference between Internet protocol telephony and traditional
circuit switched long-distance services.
The introduction of Internet protocol telephony services in 1999 has
provided us with the opportunity to better utilize our network. We expect to
further improve the utilization of our network as the demand for communication
services of our corporate customers increases and as we expand the
geographical coverage of our Internet protocol telephony services.
We receive most of our Internet protocol telephony revenues through sales
of prepaid Internet protocol telephony cards. However, when our business
grows, we anticipate there will be an increasing number of customers who will
use express dialers or leased lines and pay their bills after receiving our
services. We will implement credit control procedures similar to those for
data communications customers. Our new customers who wish to pay their bills
after receiving services will be required to pay a security deposit to us or
to a bank for our benefit, and/or allow direct debit arrangement with their
banks.
Operating expenses and taxation
Our operating expenses include primarily costs of providing our customers
with access to our Internet protocol network and costs associated with the
transmission and termination of traffic over our network. We pay fees to lease
fiber optic lines, satellite transponders, access to international gateways
and for the termination of traffic transmitted by other international
operators. For a more detailed description of these leases, see "Business--
Licenses, Approvals and Agreements--Network-related Agreements".
36
<PAGE>
We own a variety of network equipment, such as switching equipment and
routers, which are subject to annual depreciation. We have also entered into
operating leases for the use of network equipment and premises.
In general, because leased line costs are fixed, our effective cost per
minute remains high until we achieve significant volumes of traffic. As our
business grows, we expect to achieve greater economies of scale that will
drive down per minute network and bandwidth costs.
All of our branch offices are separate, independent entities for tax
reporting and filing purposes. For those offices that qualify as high-
technology enterprises, the applicable Chinese income tax rate is 15%. Five of
our branch offices enjoy preferential tax rates while our head office in
Beijing is qualified as a high-technology company and enjoys a preferential
income tax rate of 15% under the Regulation on Tax Policy in the State High-
Technology Industrial Development Zones issued by the State Administration of
Taxation. Income from our head office was fully exempted from income tax for
three consecutive years and halved for another three consecutive years
beginning from 1994, our parent's first year of operation. This preferential
treatment ended in 1999. All of our other branch offices and subsidiaries will
be subject to income tax at a rate of 33%. As more offices that do not receive
preferential tax treatment become profitable and begin incurring income tax,
our effective tax rate will increase. Additionally, if the preferential rates
that some offices enjoy were discontinued because of a change in regulations
or failure to remain qualified as a high-technology company, our income tax
rate could increase to the normal rate of 33%.
RESULTS OF OPERATIONS
The following table sets forth our selected statement of income data,
expressed as percentages of total revenue, for the periods indicated.
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------- Five months ended
1997 1998 1999 May 31, 2000
------ ------ ----- -----------------
<S> <C> <C> <C> <C>
Operating revenues:
Data communications.............. 73.1 % 91.4 % 45.9 % 26.3 %
Internet protocol telephony...... 0.0 % 0.0 % 52.9 % 73.2 %
Other revenue.................... 26.9 % 8.6 % 1.2 % 0.5 %
------ ------ ----- -----
100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Transmission costs............... 119.1 % 83.7 % 55.4 % 55.1 %
Agency fee and commission........ 0.6 % 1.2 % 8.8 % 12.0 %
Cost of Internet protocol cards
and dialers..................... 0.0 % 0.0 % 3.9 % 1.0 %
Employee compensation costs...... 33.9 % 19.5 % 8.3 % 7.9 %
Depreciation & amortization...... 71.8 % 40.0 % 20.0 % 16.9 %
Other operating expenses......... 141.1 % 54.0 % 27.9 % 30.4 %
------ ------ ----- -----
366.5 % 198.4 % 124.3 % 123.3 %
------ ------ ----- -----
Operating loss.................... (266.5)% (98.4)% (24.3)% (23.3)%
Other income/(expenses)........... 3.2 % (1.1)% (0.3)% (0.3)%
Finance expenses.................. (30.6)% (16.1)% (6.5)% (4.6)%
------ ------ ----- -----
Loss before tax................... (293.9)% (115.6)% (31.1)% (28.2)%
Taxation.......................... 0.0 % 0.0 % (1.5)% 0.4%
------ ------ ----- -----
Loss for the year................. (293.9)% (115.6)% (32.6)% (27.8)%
====== ====== ===== =====
</TABLE>
37
<PAGE>
Five months ended May 31, 2000 compared with five months ended May 31, 1999
Operating revenues
Our operating revenues for the five months ended May 31, 2000 increased by
434.5% to RMB176.4 million (US$21.3 million) from RMB33.0 million (US$4.0
million) for the five months ended May 31, 1999. The substantial increase is
due to the introduction of our Internet protocol telephony services in June
1999. For the five months ended May 31, 2000, revenue generated from our
Internet protocol telephony services amounted to approximately RMB129.1
million (US$15.6 million), representing approximately 73.2% of total operating
revenues for the period. From June 1999 through May 2000, our monthly Internet
protocol telephony revenue has been increasing at a compound monthly growth
rate of 15.9%. The following table shows the monthly unaudited revenue
generated, before deduction of relevant sales tax, by our Internet protocol
telephony services from June 1999 to July 2000:
<TABLE>
<CAPTION>
Unaudited
Internet
protocol
telephony Month-on-
revenue month growth Minutes
(RMB million) (%) (Million)
------------- ------------ --------
<S> <C> <C> <C>
1999
June....................................... 4.2 N/A 0.9
July....................................... 7.0 66.7 1.9
August..................................... 12.2 74.3 3.7
September.................................. 14.4 18.0 5.4
October.................................... 19.0 31.9 9.0
November................................... 22.6 18.9 11.9
December................................... 26.2 15.9 15.7
2000
January.................................... 23.7 (9.5) 14.7
February................................... 20.4 (13.9) 12.2
March...................................... 29.6 45.1 19.3
April ..................................... 29.4 (0.7) 20.2
May ....................................... 28.6 (2.7) 20.1
June....................................... 29.0 1.4 22.6
July....................................... 28.4 (2.0) 24.5
----- -----
Total.................................... 294.7 182.1
===== =====
</TABLE>
We charge fixed, per minute fees for both our domestic and international
long-distance Internet protocol telephony services. We anticipate the
proportion of revenue generated from domestic long-distance calls to increase
as we introduce our Internet protocol telephony services throughout other
parts of China. For a list of our Internet protocol telephony per minute
charges, see "Industry Overview".
We recorded a reduction of Internet protocol telephony revenues in January
2000 of 9.5% and in February 2000 of 13.9%, followed by resumed growth. We
attribute this to the effect of the Chinese New Year holiday, when business
and commercial operations in China generally cease for about two weeks. Many
expatriates living in China also return home during this period resulting in a
further reduction in minutes and revenue. We expect a similar trend to appear
each year.
38
<PAGE>
Although we were granted a license to offer Internet protocol telephony
services in China nationwide in April 2000, we did not immediately begin to
offer our Internet protocol telephony services to all the cities our network
covered due to constraints in our international gateway capacity. We
subsequently increased our international gateway capacity from 22Mbps in the
second half of 1999 to a total of 71Mbps in May 2000, and our Internet
protocol telephony services were offered in over 35 cities as of the date of
this prospectus.
For the five months ended May 31, 2000, data communications services
revenue also increased by 42.8% to RMB46.4 million (US$5.6 million) from
RMB32.5 million (US$3.9 million) for the five months ended May 31, 1999. The
increase is the result of a combination of increasing customer numbers and
their bandwidth demand. During the five months ended May 31, 2000, the number
of corporate and institutional accounts increased by 155 from 517 to 672.
For the five months ended May 31, 2000, revenue from web hosting and co-
location services was RMB0.8 million (US$0.1 million) and represented
approximately 1.8% of data communications services revenue. This represents an
increase of approximately 29.4% compared to the five months ended May 31,
1999.
According to our unaudited management accounts, for the two months ended
July 31, 2000, we recorded operating revenue of RMB80.9 million (US$9.8
million), of which approximately 33.3% was derived from our data
communications business and 66.7% was derived from our Internet protocol
telephony service. For the five months ended May 31, 2000, our audited
operating revenue was RMB176.4 million (US$21.3 million), reflecting an
average monthly revenue of RMB35.3 million (US$4.3) million. Considering the
unaudited operating revenue for the two months ended July 31, 2000, average
monthly revenue for the first seven months of 2000 was approximately RMB36.8
million (US$4.4 million). We attribute this to network capacity constraints.
Operating expenses
We have six major categories of operating expenses:
. Transmission costs--costs of transmitting data and voice, including costs
of leasing fiber optic lines, international gateways, transponder
capacity and domestic lines, and rates payable to global clearing houses
of international telecommunications operators;
. Agency fees and commissions--fees payable to distribution agents for the
distribution of Internet protocol telephony cards and commissions payable
for the collection of accounts receivable;
. Cost of Internet protocol telephony cards and express dialers--fees
payable for the manufacture of Internet protocol telephony cards and
express dialers;
. Employee compensation costs--staff salaries, sales commissions payable to
staff and other benefits;
. Depreciation and amortization--annual depreciation of machinery and other
fixed assets, and annual amortization of land use rights; and
. Other operating expenses--operating leases, advertising and other office
administrative expenses.
For the five months ended May 31, 2000, transmission costs were RMB97.2
million (US$11.7 million), which accounted for approximately 44.7% of total
operating expenses. This represents an increase of 297.2% compared to the five
months ended May 31, 1999. The large increase in transmission costs is due to
the increase in the coverage and transmission capacity of our network. By May
31, 2000, we had network hubs or nodes in more than 50 cities and had an
international gateway capacity of 71Mbps.
39
<PAGE>
Agency fees and commissions accounted for approximately 9.7% of total
operating expenses for the five months ended May 31, 2000. For the five months
ended May 31, 1999, agency fees and commissions were only incurred for data
communications services while most agency fees and commissions for the five
months ended May 31, 2000 were incurred as a result of the introduction of our
Internet protocol telephony services. A significant portion of our Internet
protocol telephony services is sold in the form of prepaid cards through
distribution agents who charge an agency fee. For the five months ended May
31, 2000, agency fees and commissions represented approximately 16.4% of our
Internet protocol telephony revenue.
Cost of Internet protocol cards and express dialers accounted for only 1.0%
of total operating expenses. There was no such expense for the five months
ended May 31, 1999 as our Internet protocol telephony services were only
launched in June 1999.
Employee compensation accounted for approximately 6.4% of total operating
expenses for the five months ended May 31, 2000 and increased by approximately
139.8% compared to the five months ended May 31, 1999. The increase was
primarily due to an increase in the number of staff as our business operations
expanded. As part of our strategy is to focus on serving corporate and
institutional customers, we continued to strengthen our direct sales force and
technical support.
Depreciation and amortization expenses accounted for approximately 13.7% of
total operating expenses for the five months ended May 31, 2000 and
represented an increase of approximately 131.3% compared to the five months
ended May 31, 1999. The significant increase is due to the increase in fixed
assets, particularly telecommunications equipment. For the five months ended
May 31, 2000, we invested approximately RMB149.4 million (US$18.0 million) in
telecommunications equipment as we expanded and upgraded our network.
The provision for bad and doubtful debt increased to RMB13.7 million
(US$1.7 million) for the five months ended May 31, 2000 from Nil for the five
months ended May 31, 1999, mainly due to a payment default by one independent
distributor of our Internet protocol telephony express dialers. We have ceased
business with this distributor and have made a one-off provision against the
full outstanding balance receivable from this distributor. No general
provision was made during the same period in 1999.
Other operating expenses accounted for approximately 24.6% of total
operating expenses for the five months ended May 31, 2000, representing an
increase of approximately 262.6% compared to the five months ended May 31,
1999. The large increase is in line with the expansion of our business
operations and our branch offices. As we launched our Internet protocol
telephony services in June 1999, we also increased spending on advertising.
Loss from operations
Our loss from operations for the five months ended May 31, 2000 was RMB41.2
million (US$5.0 million). As we were granted one of the five licenses to
provide Internet protocol telephony services in China nationwide in April
2000, we expanded our network so that we had network hubs or nodes in more
than 50 cities from 34 cities at the end of 1999. While we leased additional
bandwidth as we expanded our network coverage and continued to roll out our
branch network, revenue generated from the newly connected cities had not been
realized by the end of May 2000. Nevertheless, we believe the expansion of our
network coverage, transmission capacity and our branch office network will be
beneficial in the long term. According to our unaudited management accounts,
we had a net loss of RMB28.6 million (US$3.5 million) for the two months ended
July 31, 2000.
40
<PAGE>
Finance expenses
Net finance expenses for the five months ended May 31, 2000 amounted to
approximately RMB8.1 million (US$1.0 million), representing an increase of
approximately 90.2% compared to the five months ended May 31, 1999. The
increase is primarily due to the inception of loans of RMB86.7 million
(US$10.5 million) and RMB200 million (US$24.1 million) from the China
Construction Bank and China International Trust and Investment Company in mid
and late 1999, respectively. During the period, we also purchased
telecommunications equipment under finance leases, which served to further
increase the amount of finance expenses.
Taxation
We received a tax credit of RMB0.7 million (US$80,000) for the five months
ended May 31, 2000 mainly due to reductions in the income tax rates paid by
some of our branches from 33% to 15%. These branches had applied to their
local tax bureau for tax relief during 1999 but were unable to obtain
clearance and approvals until 2000. Hence, they had paid their income taxes in
1999 at a normal rate of 33% and received a tax refund in 2000. We had no
taxation expense for the five months ended May 31, 1999 as we were at tax loss
positions in all branch offices during that period. During the five months
ended May 31, 2000, we were subject to tax rates ranging from 15% to 33%.
Year ended December 31, 1999 compared with the year ended December 31, 1998
Operating Revenues
Our operating revenues for the year ended December 31, 1999 increased by
295.3% to RMB194.4 million (US$23.4 million) from RMB49.2 million (US$5.9
million) for the year ended December 31, 1998 due to the launch of our
Internet protocol telephony service and significant increases in revenue
generated from data communications services. Our Internet protocol telephony
services were launched in June 1999 and, during the seven months ended
December 31, 1999, generated revenue of RMB102.9 million (US$12.4 million), or
52.9% of total revenue. Our monthly Internet protocol telephony revenue
increased from RMB4.2 million (US$0.5 million) in June 1999 to RMB26.2 million
(US$3.2 million) in December 1999, representing a monthly compound average
growth rate of 35.7%.
For the seven months ended December 31, 1999, international long-distance
calls, including calls made from China to Hong Kong, Macau and Taiwan,
contributed approximately 93.9% of our Internet protocol telephony revenue due
to their relatively higher charges per minute as compared with domestic long-
distance calls. The number of minutes sold for international long-distance
increased steadily at a monthly compound average growth rate of approximately
40.2% from June to December 1999.
Domestic long-distance minutes sold has also grown rapidly since the launch
of this service in August 1999. Our domestic long-distance minutes sold
increased at a monthly compound average growth rate of approximately 107.6%
from August to December 1999.
During the seven months from June 1999 to December 1999, our Internet
protocol telephony services were offered in 12 major cities in China, as
allowed under the trial license granted to our parent by the Ministry of
Information Industry. Effective as of April 1, 2000, our parent was granted a
license to provide Internet protocol telephony services nationwide, under
which we operate.
41
<PAGE>
Revenue attributable to our data communications services increased 98.2% to
RMB89.1 million (US$10.8 million) in the year ended December 31, 1999 from
RMB45.0 million (US$5.4 million) in 1998 due to increases in both the number
of customers and usage per customer. Revenue received from leased line
customers contributed approximately 64.0% of total data communications revenue
for 1999. At the same time, revenue received from leased line customers
increased by approximately 135.7% as compared to 1998, primarily due to the
increase in both number of corporate and institutional customers and average
revenue per customer. Average leased line revenue per account increased from
approximately RMB90,600 (US$10,943) in 1998 to approximately RMB110,300
(US$13,322) in 1999, indicating the increasing usage of Internet access by
corporate and institutional customers. We also offer a range of value-added
services, including Internet global roaming, web hosting and server co-
location. Revenue received from the provision of Internet global roaming
services contributed approximately 12.4% of total data communications revenue
for 1999.
Revenue from web hosting and co-location services also increased by
approximately 76.0% to approximately RMB1.83 million (US$0.2 million) from
RMB1.04 million (US$0.1 million) in 1998 as a result of the increase in the
number of our corporate customers and their demand for server space.
Operating expenses
For 1999, transmission costs were RMB107.7 million (US$13.0 million), which
accounted for approximately 44.6% of total operating expenses, and represented
an increase of 161.7% as compared to 1998. This increase was mainly
attributable to our starting to pay fees to international telecommunications
operators for Internet protocol telephony calls transmitted through their
global clearing houses after the introduction of our Internet protocol
telephony service. Gateway leases and interconnection fees also increased
significantly due to a significant increase in Internet access and the launch
of our Internet protocol telephony service. During 1999, our international
gateway capacity increased to 61.7 Mbps from 21.7 Mbps at the beginning of the
year. We also rolled out our Internet protocol network to our top 12 cities
during the year, which required us to lease additional lines.
Agency fees and commissions accounted for approximately 7.1% of total
operating expenses for 1999. The significant increase from 1998 was due to the
fact that our Internet protocol telephony services were only introduced in
June 1999. Agency fees paid to distribution agents of our Internet protocol
telephony products ranged from 10% to 17% of gross sales. For the year ended
December 31, 1999, agency fees and commissions represented, on average,
approximately 16.6% of our Internet protocol telephony revenue.
Cost of Internet protocol telephony cards and express dialers accounted for
approximately 3.1% of total operating expenses for 1999. This was a new
expense item for 1999 as Internet protocol telephony services were first
launched in June 1999.
Employee compensation accounted for approximately 6.7% of total operating
expenses for 1999, and represented an increase of approximately 68.3% from
1998. This increase is attributable to the increase in number of staff. During
1999, the total number of staff increased to 628. In particular, we increased
the size of our sales team and network department. In general, the number of
our staff increased as we increased the number of our branch offices.
Depreciation and amortization expenses accounted for approximately 16.1% of
total operating expenses for 1999 and increased by 97.2% as compared to 1998
due to the increase in fixed assets, particularly in telecommunications
equipment, which increased by 165.6% as compared to the
42
<PAGE>
previous year, for the continuing rollout of our network infrastructure.
Leasehold improvements, furniture and fixtures also increased as we increased
the number of branch offices.
Other operating expenses accounted for approximately 22.5% of total
operating expenses for 1999, representing an increase of approximately 104.2%
as compared to the prior year. This increase was due to the general expansion
of operations and the increase in the number of branch offices during 1999.
Operating loss
Our operating loss for the year ended December 31, 1999 decreased by 2.6%
to RMB47.1 million (US$5.7 million) from RMB48.4 million (US$5.8 million) for
the year ended December 31, 1998. This was due primarily to the increase in
turnover from our Internet protocol telephony services and data communications
services. While a major proportion of the costs of maintaining our network are
fixed in nature, our profitability depends highly on the level of demand and
the pricing of the services we provide using this network.
Finance expenses
Our net finance expenses for the year ended December 31, 1999 rose 60.6% to
RMB12.7 million (US$1.5 million) from RMB7.9 million (US$1.0 million) for the
year ended December 31, 1998. During 1999, we were granted a loan of RMB200
million (US$24.2 million) from the China International Trust and Investment
Company for the development of network infrastructure at a fixed interest rate
of 5.68% per year, and a maturity of 10 years. We were also granted a U.S.
dollar-denominated bank loan of approximately RMB86.7 million (US$10.5
million) from the China Construction Bank for investment in Internet protocol
telephony and network equipment at an annual interest rate of 3.35% and a
maturity of 10 years.
Taxation
Taxation for the year ended December 31, 1999 was approximately RMB3.0
million (US$0.4 million) compared with no taxation expenses for the year ended
December 31, 1998. During 1999, although we generated losses as a company,
some of our branches generated profits that we were not able to consolidate
with losses made in other branches. Accordingly, these branches' profits were
subject to income tax at rates ranging from 15% to 33%.
Year ended December 31, 1998 compared with the year ended December 31, 1997
Operating revenues
Our operating revenues for the year ended December 31, 1998 rose to RMB49.2
million (US$5.9 million) from RMB18.3 million (US$2.2 million) for the year
ended December 31, 1997, representing an increase of approximately 168.9%.
Operating revenues for 1998 were mainly derived from our data communications
services, as our Internet protocol telephony service had not yet been
introduced. Revenue received from leased line customers accounted for
approximately 53.8% of total data communications revenue for 1998,
representing an increase of 482.8% from 1997. The number of corporate accounts
increased from 87 in 1997 to 261 by the end of 1998. Average annual revenue
received from each corporate account also increased by 77.0%, from
approximately RMB51,200 (US$6,184) for 1997 to approximately RMB90,600
(US$10,943) for 1998.
43
<PAGE>
Revenue received from dial-up accounts also increased by 142.3% as compared
to 1997, and represented approximately 13.2% of total data communications
revenue for 1998. The increase was mainly due to the overall increase in
computer penetration and Internet usage in China. The number of our dial-up
customers also increased significantly as we rolled out new branch offices.
Other corporate and institutional data communications revenue accounted for
approximately 26.2% of total data communications revenue for 1998,
representing an increase of approximately 98.1% from 1997.
Operating expenses
Transmission costs increased by approximately 88.9% overall as compared to
1997. The increase was primarily attributable to the increase in leases of
international gateways to satisfy the increase of data traffic. During 1998,
our international gateway capacity increased from 2.5Mbps to 21.7Mbps. Our
satellite transponder capacity also increased from 36MB to 54MB.
Agency fees and commissions increased by approximately 450.5% as compared
with 1997 primarily due to additional effort being put into exploring the
market opportunity for our data communications business in 1998.
Employee compensation increased by approximately 54.8% as compared to 1997,
primarily due to the increase in number of staff as our business expanded.
During 1998, the total number of staff increased to 310 from 194 as of
December 31, 1997.
Depreciation and amortization expenses increased by approximately 49.9% due
to the increase in fixed assets during 1998, particularly the acquisition of
telecommunications equipment for the rollout of network infrastructure and the
build-out of branch offices.
Other operating expenses increased by approximately 2.9% as compared to
1997 as we expanded our operations.
Loss from operations
Our loss from operations for the year ended December 31, 1998 decreased
0.7% to RMB48.4 million (US$5.8 million) from RMB48.7 million (US$5.9 million)
for the year ended December 31, 1997. This was primarily due to increases in
data communications revenue as a result of the expansion of our network and
the increase in the number of our branch offices. In 1997 and 1998 we
concentrated our resources in the configuration and rollout of our Internet
protocol network infrastructure and the establishment of our branch office
network.
Finance expenses
Our finance expenses for the year ended December 31, 1998 amounted to
RMB7.9 million (US$1.0 million), an increase of 41.3% as compared to the year
ended December 31, 1997. The majority of finance expenses for both 1997 and
1998 were incurred for a loan received from a related company for the
development of our network, and the increase in net finance expense was due to
the fact that higher interest income was generated in 1997. We had
approximately RMB90.6 million (US$10.9 million) in cash at the beginning of
1997 that generated interest income during the year. Our cash balance was
depleted as we invested approximately RMB48.5 million (US$5.9 million) in
fixed assets during 1997. During 1998, our cash balance continued to drop as
we continued to invest in fixed assets and interest income generated during
1998 was significantly less than that of 1997.
44
<PAGE>
Taxation
We incurred no taxation for the year ended December 31, 1998 or the year
ended December 31, 1997 mainly due to utilization of available tax losses
accumulated in prior years and continuation of increasing losses in most of
the business units.
Government grants received
In 1997, we were successful in applying to the Ministry of Electronics for
funding of RMB10 million (US$1.2 million) to develop our network. We received
this grant in 1997 and 1998 and recorded it as a liability due to the
government. Subject to annual examination on the use of the funding, approved
expenditures can be used to set off the balance due to the government.
Approximately RMB6.8 million (US$0.8 million) of the grant was applied to
set off research and development costs incurred from 1997 through 1999.
In 1998, we used RMB3.2 million (US$0.4 million) to purchase network
equipment. We have been depreciating the cost of the assets and amortizing the
remaining balance of the government grant over the same period so that the
depreciation charged on the related asset and amortization of the government
grant will offset each other.
Liquidity and capital resources
Our principal sources of capital have been equity capital from our
shareholders, bank and other loans and cash from operations. Our principal
uses of capital have been the acquisition of equipment necessary for the
establishment and rollout of our network and the expansion of services
provided through our network. As we have experienced losses from operations in
the five months ended May 31, 2000 and in each of the three years ended
December 31, 1997, 1998 and 1999, we have historically relied on equity
capital and bank and other loans to provide for most of our capital needs.
The global offering will include the offer of H shares or ADSs in the U.S.,
Hong Kong and other jurisdictions. We expect that the net proceeds we will
receive from the global offering will be approximately US$220,721,715 million
(assuming an offering price of HK$25.50 per H share, or US$13.08 per ADS, the
mid-point of the estimated price range). We intend to use the net proceeds to
roll out our network infrastructure, to increase the transmission capacity of
our network in general, to construct three Internet data centers, to upgrade
our network control centers and our management information, accounting and
billing system, and to establish customer service centers in major cities in
China. We intend to use the remainder to repay some of our bank borrowings,
for working capital and other general corporate purposes. We may use part of
the proceeds for future acquisitions of and investments in businesses that are
complementary to our business but no acquisitions or investments are currently
pending. In the event that the over-allotment option is exercised in full, we
will receive an additional US$ million which will be used for working
capital purposes. Upon completion of the global offering, we estimate that our
cash and other available sources of funds (including the estimated net
proceeds from the global offering) will be sufficient to fund our operation
and expansion needs through December 31, 2001. After that, we will need to
raise additional funds.
Our net cash flow from operations is generally significantly higher than
our operating results due to depreciation expense related to the equipment
purchased for our network and unused Internet protocol telephony minutes being
recorded as receipts in advance on the balance sheet. For the year
45
<PAGE>
ended December 31, 1999, our net cash provided by operating activities was
RMB37.8 million (US$4.6 million) compared with our net cash used for operating
activities of RMB11.2 million (US$1.4 million) for the year ended December 31,
1998.
At the same time, net cash from operating activities increased due to the
increase in cash received from sales of Internet protocol telephony cards and
growth in our data communications business. Receipts in advance increased from
approximately RMB0.8 million (US$0.1 million) to RMB82.4 million (US$9.9
million), principally due to the unused minutes on our prepaid Internet
protocol telephony cards being recorded as revenue received in advance of
service. The increase in interest paid is attributable to the increase in
loans of RMB200 million (US$24.2 million) during 1999, details of which were
described above.
Our net cash used by operating activities for 1998 decreased as compared
with 1997 mainly because of an increase in payables and accrued liabilities
resulting from the increase in transmission costs that had not yet been
settled at the end of 1998.
For the five months ended May 31, 2000, net cash flow from operations
continued to be positive and amounted to RMB7.2 million (US$0.9 million) even
though payments for bandwidth leases and operating expenses continued to
increase during the period.
Our cash used for investing activities in the year ended December 31, 1999
was RMB160.9 million (US$19.4 million) compared with RMB30.7 million (US$3.7
million) in the year ended December 31, 1998. During 1999, we invested heavily
in communications equipment and set up 29 new branch offices in China. During
the year, we increased the capacity of our network in order to provide
dedicated bandwidth for our Internet protocol telephony services and upgraded
our network control functions to ensure that our service quality is
maintained. For the five months ended May 31, 2000, net cash used for
investing activities amounted to RMB119.2 million (US$14.4 million) as we
continued to invest in telecommunications equipment for the expansion of our
network. During the period, cash outlays for purchases of fixed assets
amounted to RMB117.0 million (US$14.1 million).
We have budgeted approximately RMB billion (US$ million) for capital
expenditures in 2001 and a total of approximately RMB billion (US$
million) for capital expenditures for 2002 and 2003. These will mainly include
the deployment of our network infrastructure, investment in Internet data
centers, and the upgrade of our network control centers and supporting
systems. Our future cash requirements, however, will principally depend on:
. the rate at which we expand our operations;
. the rate at which we invest in expanding and upgrading our network
infrastructure and related network support systems;
. the level of marketing required to build our brand and to acquire and
maintain customers;
. the timing of new services and products offered;
. our success at marketing our services and products;
. our ability to lease or purchase bandwidth at competitive rates; and
. price competition in our markets.
46
<PAGE>
We expect to fund our future capital expenditures primarily with internally
generated funds and additional external financings. We will consider
additional debt and equity financing, depending on market conditions, our
business needs and our financial performance.
For the five months ended May 31, 2000, net cash generated from financing
activities amounted to RMB58.3 million (US$7.0 million). During the period, we
repaid long-term borrowings of RMB6.2 million (US$0.7 million). As part of the
reorganization of our parent, all of our shareholders except our parent
contributed aggregate cash of RMB64.5 million (US$7.8 million) to us. Net cash
provided by financing activities in the year ended December 31, 1999 was
RMB312.8 million (US$37.8 million) compared with RMB77.3 million (US$9.3
million) in the year ended December 31, 1998. During 1999, additional
contribution from our shareholders amounted to approximately RMB213.5 million
(US$25.7 million). We also increased long-term borrowings of RMB200 million
(US$24.1 million) in 1999 to support the expansion of our business operations
and to fund our offering of new services such as Internet protocol telephony.
Furthermore, we received a bank loan of RMB86.7 million (US$10.4 million) for
the purchase of network equipment. The amount was paid directly by the bank to
our suppliers.
According to our unaudited management accounts, our accounts receivable
amounted to RMB24 million (US$2.9 million) as of July 31, 2000, compared to
RMB16.7 million (US$2.0 million) as of May 31, 2000. According to our
unaudited management accounts, other receivables, deposits and prepayments
amounted to RMB116.1 million (US$14.0 million) as of July 31, 2000, compared
to RMB44.5 million (US$54.0 million) as of May 31, 2000. This was mainly due
to increased deposits we made for equipment purchases.
Significant differences between IAS and US GAAP
We prepared our combined financial statements in accordance with
International Accounting Standards. This basis of accounting differs from US
GAAP. The differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by US GAAP.
Recognition of revenue
We charge customers accessing our network a one-time set-up fee which we
recognize in full as revenue when billed. For purposes of the reconciliation
of our financial statements to US GAAP, the effect of deferring these revenues
and recognizing the income over the estimated life of the customers is not
material and no adjustment is made.
Revaluation of property, plant and equipment
As described in Note 17(b) to our financial statements, the property, plant
and equipment that our parent transferred to us were appraised as of September
30, 1999, as required by the relevant Chinese regulations, by a firm of
independent valuers. The property, plant and equipment were further appraised
as of May 31, 2000. This appraisal indicated the value of our property, plant
and equipment had not changed materially since September 30, 1999. The
revaluation surplus on the property, plant and equipment transferred in excess
of their prior carrying values, based on the second appraisal, has been
reflected in our combined financial statements for the five months ended May
31, 2000 as the restructuring of our parent was effective on March 24, 2000.
Depreciation charge on the revaluation surplus has been included in our
combined financial statements.
For the purpose of reconciling to the US GAAP financial data, the effect of
the revaluation and the related depreciation charges are reversed.
47
<PAGE>
Quantitative and qualitative disclosures about market risks
Foreign currency risk
We maintain our accounts in Renminbi and substantially all of our revenue
and expenses are denominated in Renminbi. Some of our operating expenses
related to international network access are denominated in U.S. dollars or
other foreign currencies. While we are generally able to obtain foreign
currency in sufficient amounts to satisfy our requirements, we are unable to
effectively hedge against the risk of significant changes in the value of the
Renminbi against foreign currencies. We are also exposed to foreign currency
risk as a result of our communications equipment being sourced substantially
from overseas. Specifically, our foreign currency exposure relates primarily
to our foreign currency-denominated short-term and long-term debt.
Fluctuations in exchange rates may lead to significant fluctuations in the
exposures of our foreign currency denominated liabilities. We have not engaged
in any foreign currency hedging activities.
The outstanding amounts of our short-term and long-term foreign currency
commitments as of May 31, 2000 were as follows:
. approximately US$3.0 million of payables to equipment suppliers were
denominated in U.S. dollars;
. approximately US$10.6 million of borrowings were denominated in U.S.
dollars;
. approximately US$2.0 million of other long-term liabilities were
denominated in U.S. dollars; and
. approximately US$20.3 million of capital commitments were outstanding.
Interest rate risk
We are subject to market risks due to fluctuations in interest rates. The
majority of our debts are in the form of long-term, fixed-rate bank loans with
original maturities ranging one to ten years. We do not conduct hedging and
interest rate swaps in connection with long-term debts.
The following table provides information regarding our interest rate
sensitive financial instruments, which are long term debt obligations, as of
May 31, 2000:
<TABLE>
<CAPTION>
Nature of indebtedness Interest rate and final maturity Outstanding balances
---------------------- -------------------------------- --------------------
RMB'000 US$'000
<S> <C> <C> <C>
Renminbi-denominated long-term Fixed annual interest rate at 193,815 23,410
loans 5.68% with maturity through 2009
US dollar-denominated long-term Fixed annual interest rate at 88,087 10,640
loans 3.35% with maturity through 2009
</TABLE>
Year 2000 Compliance
The year 2000 problem affects computer programs and hardware timers using
two digits (rather than four) to define the applicable year. Programs that
have time-sensitive functions may recognize a date using "00" as the year 1900
rather than 2000, which could result in miscalculations or system failures. To
date, we have not experienced any problems related to year 2000 compliance. It
is possible, however, that other dates in the year 2000 may further affect
computer software and systems. Some
48
<PAGE>
computer programs that were date-sensitive to the year 2000 may not have been
programmed to process the year 2000 as a leap year. While we believe that all
of our systems are year 2000 compliant, we may discover problems during 2000
that require expenditure in order for our computer and software systems to be
upgraded, modified or replaced.
We believe that our largest year 2000 risk is that third parties upon whom
we rely, including outside suppliers, telecommunications providers whose
networks interconnect with our network and external utilities providers, could
have failed to adequately address their year 2000 issues. It is possible that
some of the internal systems of these parties have already been or will be
negatively affected by the year 2000 date change. After identifying third-
party vendors who played critical, primary or secondary roles in our business
and operations, we requested and received certificates and representations
from all such vendors indicating that their systems and products were year
2000 compliant. We conducted interconnection and inter-carrier tests and
received confirmations that all systems were year 2000 compliant. We also
received certificates and representations from our Internet global roaming
partners as to year 2000 compliance. We have not independently verified any of
these certifications and cannot be certain that these parties are indeed year
2000 compliant.
We continue to assess year 2000 issues including issues related to outside
parties. Nevertheless, our review and upgrading procedures may have been
inadequate. Furthermore, we cannot assess the effectiveness of the year 2000
measures taken by outside parties. There can be no assurance that the failure
of any material vendor, utility provider, or other third party with whom we
conduct business to ensure year 2000 compliance will not have a material
adverse effect on our business, financial condition or results of operations.
49
<PAGE>
OUR CORPORATE STRUCTURE
Our establishment
We were established on March 24, 2000 when, pursuant to the reorganization
agreement with our parent, Jitong Communications Co., Ltd., most of the assets
and liabilities relating to the telecommunications business of our parent were
transferred to us. Any assets, licenses, approvals or contracts necessary for
our operations which could not be transferred to us, because of either
regulatory or contractual prohibitions, were maintained by our parent for our
benefit pursuant to the reorganization agreement. In consideration of the
transfer of assets under the reorganization agreement, we issued to our parent
183,874,200 domestic shares, representing approximately 74.03% of our
registered share capital immediately before the global offering.
In addition to the issuance of domestic shares to our parent, Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone, SDIC
Electronics Company, Beijing Economic Development and Investment Company,
Tianjin Communication and Broadcasting (Group) Company Limited and the Seventh
Electronics Research Institute of the Ministry of Information Industry made an
aggregate cash investment in us at our establishment of RMB64,503,600
(US$7,790,760), in consideration for issuance to them of 64,503,600 domestic
shares, representing 25.97% of our registered share capital before the global
offering.
Our parent
Our parent was founded in 1994 to build, own and operate the Golden Bridge
Network (also known as ChinaGBNet), a national public communications network
conceived as part of a government initiative to establish necessary backbone
infrastructure for Internet access and data communications in China. The
Golden Bridge Network was approved by the State Council for inclusion as a key
information superhighway project in China's Ninth Five Year Plan, which runs
from 1996 to 2000. After the reorganization, our parent's principal business
became the leasing of international gateways on our behalf. In the future, we
expect that our parent may enter into telecommunications-related business that
does not compete with ours.
Our controlling shareholders
As a result of the transfer of assets by our parent and the cash investment
by other investors, IRICO Group Corporation, immediately following the
reorganization, held a 96.22% interest in our ordinary shares through our
parent and Cai Zhu Industrial General Corporation of Zhuhai Special Economic
Zone, a wholly-owned subsidiary of IRICO Group Corporation.
IRICO Group Corporation was established on March 16, 1989 as a state-owned
enterprise. Its main business is the manufacturing of electronic equipment. It
was supervised by the Ministry of Information Industry until January 25, 2000,
after which IRICO Group Corporation became subject to supervision by the State
Council, the highest executive body of China.
Three of our directors are also directors or officers of IRICO Group
Corporation or Cai Zhu Industrial General Corporation of Zhuhai Special
Economic Zone. However, we are managed by our own management team. We intend
that our day-to-day operation and management will be independent from IRICO
Group Corporation. Our parent has agreed that it will not engage in or
interfere with our
50
<PAGE>
day-to-day management. Our parent will only exercise its rights and be
responsible for its obligations as a controlling shareholder subject to our
articles of association.
Transfer by IRICO Group Corporation
On October 23, 2000, IRICO Group Corporation agreed to transfer a 40%
interest in our parent to Shanghai Hua Hong (Group) Company Limited,
thereafter reducing its interest in our parent to 44.91% immediately before
the global offering. As part of the transfer, Shanghai Hua Hong (Group)
Company Limited has agreed that, until 2003, it will not cause our parent to
change or propose to change the composition of our board of directors or
attempt to influence our policies or management during that period. The
transfer is subject to payment of the purchase price and has not yet been
completed. By virtue of its current 84.91% interest, IRICO Group Corporation
may be deemed to control our parent and to indirectly control us. After IRICO
Group Corporation completes the transfer to Shanghai Hua Hong (Group) Company
Limited, either or both of them may be deemed to control our parent and to
indirectly control us.
Shanghai Hua Hong (Group) Company Limited is a state-owned enterprise
incorporated in China as a limited liability company and is part of the Hua
Hong Group. The primary business of the Hua Hong Group is the design and
manufacture of semiconductors and semiconductor equipment and diversified
investments in technology-related businesses. Shanghai Hua Hong (Group)
Company Limited and the Hua Hong Group are controlled by the State Council and
the Shanghai Municipal Government.
All of our and our parent's shareholders are state-owned enterprises or
institutions directly or indirectly supervised by China's State Council. In
some cases, supervisory authority has been delegated to other governmental
institutions. To our best knowledge, direct supervisory authority is exercised
by the following institutions:
<TABLE>
<CAPTION>
Shareholder Supervisory Institution
<S> <C>
IRICO Group Corporation State Council
Shanghai Hua Hong (Group) Company Limited State Council and Shanghai Municipal
Government
SDIC Electronics Company State Development and Investment Company
(controlled by the State Council)
Beijing Economic Development and Shou Chuang Group (controlled by the
Investment Company Beijing Municipal Government)
Changzhou Guoguang Electronics Company Changzhou Municipal Government
Tianjin Communication and Broadcasting Tianjin Municipal Government
(Group) Company Limited
The Seventh Electronics Research Institute The Ministry of Information Industry and
of the Ministry of Information Industry Guangdong Provincial Government
</TABLE>
Accordingly, immediately before the global offering, the Chinese government
indirectly controls 100% of our shares. Immediately after the global offering,
and assuming no exercise of the over-allotment option, the Chinese government
will indirectly control 77.53% of our shares.
51
<PAGE>
The reorganization
Pursuant to the terms of the reorganization, most of the assets and
liabilities related to our parent's telecommunications business were
transferred to us. Our parent has provided an indemnity to us in respect of
all claims and liabilities in connection with the assets and liabilities
transferred to us pursuant to the reorganization, which were not otherwise
disclosed and accounted for in the financial statements of our parent as at
September 30, 1999. In addition, our parent has provided an indemnity to us in
respect of any claims and losses that we may suffer arising from our parent's
fraud, negligence or misconduct, if any, in the management or operation of the
telecommunications business prior to the date of our incorporation. As part of
the reorganization, our current board of directors was constituted under an
agreement among our shareholders to vote their shares at our initial
shareholders' meeting to elect up to two directors nominated by Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone and one
director nominated by SDIC Electronics Company.
Our parent has agreed not to compete or to form any Chinese entity that may
compete with us for any services, products or business conducted or provided
by us inside and outside China. Our parent has agreed to indemnify us for any
losses arising from any breach of this agreement.
Our parent also entered into a licensing agreement with us pursuant to an
approval from the Ministry of Information Industry, authorizing us to conduct
the telecommunications business which had been previously conducted by our
parent in accordance with the various licenses and approvals granted by the
Ministry of Information Industry. We also lease the premises housing our
network control center from our parent. The trademarks we use are under an
exclusive licensing arrangement with our parent and will be transferred to us
when the registration of transfer is completed.
52
<PAGE>
The following charts set out our simplified shareholding structure
immediately before completion of the global offering and immediately following
the completion of the global offering but before any exercise of the over-
allotment option and assuming that the transfer of our parent's shares to
Shanghai Hua Hong (Group) Company Limited has been completed:
Our shareholding structure immediately before the global offering
[GRAPH]
--------
Notes:--
(1) The other shareholders comprise four state-owned enterprises, SDIC
Electronics Company (2.49%), Beijing Economic Development and Investment
Company (1.23%), Tianjin Communication and Broadcasting (Group) Company
Limited (0.03%) and the Seventh Electronics Research Institute of the
Ministry of Information Industry (0.03%). These companies also hold an
interest in our parent (see above).
53
<PAGE>
Our shareholding structure after the global offering
(assuming no exercise of the over-allotment option)
[GRAPH]
--------
Notes:--
(1) The other shareholders comprise four state-owned enterprises, SDIC
Electronics Company (1.93%), Beijing Economic Development and Investment
Company (0.95%), Tianjin Communication and Broadcasting (Group) Company
Limited (0.02%) and the Seventh Electronics Research Institute of the
Ministry of Information Industry (0.02%). These companies also hold an
interest in our parent (see above).
54
<PAGE>
INDUSTRY OVERVIEW
Neither we or any of our affiliates or advisors, nor the underwriters or
any of their affiliates or advisors, have prepared or independently verified
the information identified in this section as having been extracted from
publicly available sources. These include research reports prepared by
International Data Corporation, the China Internet Network Information Center,
the Ministry of Posts and Telecommunications and the Ministry of Information
Industry.
Growth in demand for communications services
China's economy has experienced significant growth in recent years, with
real GDP growth averaging 8.7% per annum from 1995 to 1999. During the same
period, the demand for both data and voice communications in China has also
experienced significant growth. The Chinese telecommunications market is
currently one of the fastest-growing in the Asia-Pacific region in terms of
revenue from services, yet penetration rates are relatively low compared to
the penetration rates in more developed markets, indicating significant growth
potential. As of December 31, 1999, fixed-line and mobile penetration rates in
China were 8.6% and 3.4%, respectively, according to the Ministry of
Information Industry. According to IDC, the number of Internet users in China
as of December 31, 1999 was 4.46 million--implying a penetration rate of
0.35%. The discussion below provides statistics related to the type of
communications services that is relevant to our business operations, and
therefore represents only a subset of the entire communications industry in
China.
China's data communications industry
China's data communications market is regulated by the Ministry of
Information Industry and other relevant authorities, and licenses are required
for the provision of Internet access services. In China, Internet service
providers are classified into three separate classes, as defined by the scope
of their business. The three classes are network service provider, Internet
service provider and Internet content provider. There are currently only five
commercial network service providers in China, all of which require approvals
from the State Council. In addition, only network service providers are
allowed to build, operate and manage their own data network infrastructure and
directly connect to the Internet outside of China.
Demand for data communications services in China is expected to experience
significant growth. According to IDC, revenue from the Internet economy in
China (including access fees, web hosting fees and e-commerce revenue) is
expected to reach US$114 billion in 2004, a compound annual growth rate of
171% from 1999. This growth is contributed to by a number of factors including
a robust economy; increasing acceptance in the use of the Internet; and the
growth and further development of domestic and foreign companies in China.
Significant growth in China's Internet market is expected to continue as a
result of the following:
. The increase in China-focused content;
. Growth in e-commerce activities;
. Downward trends in personal computer prices and Internet connection fees;
. China's current low penetration rate and large population; and
. Chinese government support.
55
<PAGE>
IDC estimated that the number of Internet users reached 4.46 million in
1999 and would reach over 36.83 million by 2003, a compound annual growth rate
of over 73% from 1998 to 2003.
Internet users (1998-2003)
[GRAPH]
Source: IDC, June 2000
According to IDC, the number of Internet service providers in China
increased from approximately 180 at the end of 1998 to approximately 250 by
the end of the first half of 1999. Content provision is also a growing area in
China. IDC estimated that there are approximately 300 major content providers
throughout China. We believe the increasing number of Internet service and
content providers will lead to an increase in Internet access revenues.
China's Internet access revenues for the period of 1998 to 2003 are estimated
to grow at a compound annual growth rate of 40% to reach US$4.4 billion by
2003.
The following table sets forth estimated Internet access revenues in China
by access method.
<TABLE>
<CAPTION>
Compound
Annual Growth
Rate (1998-
1998 1999 2000 2001 2002 2003 2003)*
----- ------- ------- ------- ------- ------- -------------
US$ million
<S> <C> <C> <C> <C> <C> <C> <C>
Home dial-up............ 327.9 583.7 774.1 1,043.3 1,481.8 1,748.9 40%
Business dial-up........ 491.9 875.5 1,202.7 1,536.8 1,811.0 2,054.7 33%
Leased line............. 3.6 5.9 11.5 18.4 25.4 26.4 49%
Cable................... -- 2.0 19.2 91.2 216.0 324.0 257%
Digital subscriber
line................... -- 5.1 24.0 72.0 136.8 218.9 156%
----- ------- ------- ------- ------- -------
Total................. 823.4 1,472.2 2,031.5 2,761.7 3,671.0 4,372.9
===== ======= ======= ======= ======= =======
</TABLE>
--------
* Except cable and digital subscriber line, for which compound annual growth
rate is calculated from 1999 to 2003
Source: IDC, December 1999
56
<PAGE>
In addition to Internet access, we believe corporate and governmental
institutions will demand frame relay, asynchronous transfer mode and virtual
private network services for a higher level of transmission speed, reliability
and security. IDC estimated that:
. Telecommunication services revenues generated from frame relay networks
in China will increase from US$50.9 million in 1998 to US$1,044 million
in 2003, representing a compound annual growth rate of 83%;
. Telecommunication services revenues generated from asynchronous transfer
mode networks in China will increase from US$15.3 million in 1998 to
US$380 million in 2003, representing a compound annual growth rate of
90%; and
. Intranet users in China will grow at a compound annual growth rate of
102% from 1998 to 2003.
As the Internet becomes more widely accepted and used in China, Chinese
businesses are beginning to offer their products and services over the
Internet. Currently the number of transactions conducted over the Internet is
still very small but significant growth is expected. IDC estimates that
China's e-commerce market will reach US$14.9 billion by 2003, a compound
annual growth rate of over 346% from 1998 to 2003. This is likely to be driven
by the business to business segment where revenues from medium to large
corporations are estimated to exceed 73% of the total market in 2003.
E-commerce revenue by segment
The following table sets forth estimated e-commerce revenue in China by
consumer segment. We benefit from projected growth indirectly because we
provide data transmission and value-added services to e-commerce participants.
<TABLE>
<CAPTION>
Compound
Annual
Growth
Rate
(1998-
1998 1999 2000 2001 2002 2003 2003)
---- ---- ----- ------- ------- -------- --------
US$ million
<S> <C> <C> <C> <C> <C> <C> <C>
Medium/large business...... 5.1 59.0 387.3 1,701.3 4,900.7 10,905.2 363%
Government................. 0.7 4.4 27.7 113.2 351.5 995.1 327%
Home....................... 0.8 5.8 39.0 182.6 660.3 1,990.9 378%
Small business............. 1.0 3.4 11.4 51.6 196.3 605.7 260%
Education.................. 0.9 4.1 13.8 37.8 42.5 435.1 244%
--- ---- ----- ------- ------- --------
Total.................... 8.5 76.7 479.2 2,086.5 6,151.3 14,932.0 346%
=== ==== ===== ======= ======= ========
</TABLE>
--------
Source: IDC, June 2000
As China's Internet market further develops, we expect demand for value-
added services such as web hosting and applications hosting to increase.
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China's long-distance telecommunications industry
According to statistics published by the Ministry of Posts and
Telecommunications, the size of China's telecommunications market was
approximately US$37.5 billion in 1999, representing a 33.0% increase from
1998. According to the Ministry of Information Industry, China's fixed line
international and domestic long-distance voice traffic for 1999 reached 60.2
billion minutes, representing an increase of 13.9% from 1998.
In 1999, we entered the Internet protocol telephony market, a part of the
long-distance telephony market. Our parent and three other operators, China
Telecom, Unicom and China Network Communications Corporation, known as Netcom,
began offering Internet protocol telephony service on a trial basis. In 2000,
the Ministry of Information Industry granted all four operators formal
licenses to offer Internet protocol telephony services. According to the
Ministry of Information Industry, there were over 545 million minutes of IP
telephony calls transmitted in China for the first half of 2000.
Internet protocol telephony rates charged by all Internet protocol
telephony service providers as of October 31, 1999 (not including local access
charges paid by all customers, or leased line charges paid by customers who
elect to use leased lines) are listed in the chart below. The chart also shows
the corresponding rates charged by China Telecom for traditional long-distance
service expressed as a range from the lowest charge for non-peak time service
to the highest charge for peak time service, except for domestic long-distance
calls where charges also depend upon the distance covered by the call.
<TABLE>
<CAPTION>
Internet
Protocol Traditional
Telephony Telephony
Charges Charges
(RMB/ (RMB/
Call Types Minute) Minute)
---------- --------- -----------
<S> <C> <C>
Domestic long-distance within China...................... 0.3 0.25 to 1
From China to other countries............................ 4.8 3.18-15
From China (except Shenzhen) to Hong Kong; from China
(except Zhongshan and Zhuhai) to Macau; from China to
Taiwan.................................................. 2.5 2.76-5
From Shenzhen to Hong Kong; from Zhongshan or Zhuhai to
Macau................................................... 1.5 1.32-2.25
</TABLE>
The increasing significance of Internet protocol communications
Historically, there have been two different types of communications
networks--voice and data. Traditional carriers have typically built voice
networks based on circuit-switching technology, which establishes and
maintains a dedicated path for each telephone call until the call is
terminated. Although a circuit-switched system reliably transmits voice
communications, circuit switching does not efficiently use transmission
capacity, as this system requires circuits to remain dedicated for the entire
call regardless of how much information is transmitted over the circuit.
Unlike circuit-switched networks, data networks use Internet protocol packet-
switching technology, dividing the signals into
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packets, frames or cells that are simultaneously routed over different
channels to a final destination where the signals are reassembled in the
original order that they were transmitted. Traditionally, packet-switched
networks have carried data traffic while circuit-switched networks have
carried voice and fax traffic. Technologies have since evolved so that voice
and fax can now be transmitted over packet-switched networks using a regular
phone or fax machine. As a result, emerging operators tend to build Internet
protocol networks to provide both data and voice transmission services.
Benefits of Internet protocol over traditional telephony
Compared to a circuit-switched network, an Internet protocol network
requires lower expenditures for equipment and easier maintenance, since one
network can be used for both voice and data. Packet-switching technology
provides for more efficient use of network capacity because the network does
not establish dedicated circuits and does not require a fixed amount of
bandwidth to be reserved for each transmission.
In addition, Internet protocol technology allows for enhanced services,
such as PC-to-PC and PC-to-phone telephony, instant and unified messaging, web
conferencing and the ability to transmit data and voice simultaneously over a
single application. The advanced functionality of Internet protocol
communications can also provide e-commerce shoppers with the ability to speak
directly with customer service representatives of on-line retailers, thereby
giving the retailer the ability to offer responsive, real-time customer
support and service. Internet protocol networks also provide connectivity to
digital cellular and other wireless devices. Given their wider set of
applications and connection devices, Internet protocol networks have larger
potential markets and offer a more complete communications solution to
customers than traditional telephony.
Global Internet protocol-based communications services are expected to grow
rapidly
The communications services industry, encompassing voice, fax and data
transmission, is undergoing significant growth globally. IDC estimated that
worldwide Internet protocol telephony minutes will grow from approximately 2.7
billion minutes in 1999 to approximately 135 billion minutes in 2004,
representing a compound annual growth rate of 119%. IDC further estimated that
revenues generated from Internet protocol telephony services and voice-enabled
e-commerce and enhanced services such as unified messaging will grow from
approximately US$0.5 billion in 1999 to approximately US$18.7 billion in 2004,
which is equal to a compound annual growth rate of approximately 106%.
Large potential for Internet protocol communications services in China
We believe that the Internet protocol communications market in China will
grow rapidly because of three primary factors. First, China has only a few
pre-existing telephone networks, and therefore newly established operators
will tend to construct new Internet protocol networks rather than continuing
to upgrade pre-existing networks. As new communications networks are
constructed in China, and Internet penetration increases, we believe there is
a significant opportunity to introduce managed Internet protocol network
services. Second, public telephone networks are highly regulated, which has
led to a near monopoly for China Telecom. This lack of competition has led to
relatively high international and domestic long-distance direct dial prices,
providing a significant opportunity for Internet protocol telephony networks
to compete in this market based on price. Third, China's growing need for
communications is driven in part by high demand from the corporate and
institutional sectors for reliable nationwide communications services and
growing economic activities in China.
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BUSINESS
OVERVIEW
We are a network service provider in China using advanced network
communications standards known as Internet protocol.
We are:
. one of the five companies licensed by the Chinese government to offer
commercial data communications services and Internet protocol telephony
services nationwide; and
. among the first licensed commercial data communications services
providers in China.
We offer a range of communications services to corporations, governmental
institutions and individuals using packet-switched technology. These services
consist of:
. Internet access through dial-up and dedicated connections via fiber optic
lines, microwave and satellite transmissions;
. Transmission of data using various transmission technologies such as
frame relay and asynchronous transfer mode;
. Internet protocol telephony; and
. Value-added services such as web hosting, co-location, virtual private
networks, e-commerce network services and Internet global roaming.
Our managed broadband network combines Internet protocol with asynchronous
transfer mode and frame relay technologies. This combination allows us to
offer a range of voice and data services. Because our business was conducted
by our parent before March 24, 2000, in this prospectus we include our parent
when referring to ourselves and our business in periods before that date.
THE OPPORTUNITY
Internet access, Internet protocol telephony and value-added data
communications services are among the fastest growing segments of the
telecommunications services market in China. The availability of Internet
access and the proliferation of local Chinese content have attracted a rapidly
growing number of Internet users in China.
In order to cope with the transformation brought on by the Internet,
businesses are increasingly turning to Internet access and setting up their
own Internet website. Internet access provides a company with the
telecommunications circuits necessary to connect to the Internet, communicate
with employees, customers, suppliers, and other Internet users, transfer
electronic mail, and access the wealth of information available on the
Internet. A website provides a company with a corporate presence on the
Internet and allows it to post information that is accessible to all Internet
users. Businesses are increasingly adding a variety of value-added services
and applications to their basic Internet access and website platforms in order
to more fully capitalize on the versatility of the Internet. These services
and applications are intended to allow them to more efficiently communicate
company
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information, expand and enhance their distribution channels, increase
productivity and reduce costs. We expect this trend to continue as high
capacity Internet data transmission and enhanced Internet applications
continue to be developed and as Internet usage continues to expand.
We believe that recent trends in the data communications industries in
China provide us with excellent growth opportunities. IDC estimates that:
. China's Internet economy (including access fees, web hosting fees and e-
commerce revenues) could surpass US$114 billion in 2004, a compound
annual growth rate of 171% from 1999;
. China's Internet users will increase from 4.46 million in 1999 to 36.83
million in 2004, a compound annual growth rate of 70%; and
. China's Internet e-commerce revenues will increase from US$8.5 million in
1998 to more than US$14.9 billion in 2003, a compound annual growth rate
of 346%.
OUR STRATEGY
Our objective is to build an efficient and versatile broadband network
platform with which to become the preferred provider of integrated and multi-
media services as voice and data networks continue to converge. We intend to
leverage our corporate customer base and strengths in data communications and
aggressively expand our service offerings to meet our customers' evolving
needs as the Internet transforms how businesses conduct their daily
activities. We are committed to expanding our offering of integrated
communications services and e-commerce network services to corporate and
institutional customers in China. As we provide an increasing breadth and
depth of services to a growing customer base, we believe that we will be
ideally positioned to capitalize on the general rapid growth of data
communications and e-commerce in China. Our strategy has the following key
elements:
. Rapidly expand our network coverage to provide reliable service
throughout China. We believe that network control, coverage and capacity
are critical competitive factors in China. This is particularly the case
in the web hosting and co-location markets because, unlike in the U.S.
and Europe, web hosting and co-location providers without their own
networks in China have limited control over their data once it leaves
their site and few network alternatives from which to choose if they and
their customers are dissatisfied with service quality. We believe that
our network control and coverage gives us a significant competitive
advantage in ensuring that our customers' data is delivered quickly and
reliably throughout China. Control of our network is also a critical
advantage in offering rapid service to meet the needs of corporate
customers.
Accordingly, we intend to rapidly expand the geographic scope of our
business to provide our customers with far-reaching network reliability
and additional access and termination points. In addition, we intend to
increase the proportion of owned transmission lines. We believe that this
approach will allow us to simultaneously better serve our current
customers and capitalize on the growing demand for communications
services in all our target markets. As of July 31, 2000, our customers
could connect to our network in 60 cities in China and we plan to expand
this to approximately 180 cities throughout China by the end of 2002,
focusing initially on expanding in the more economically developed
southern and eastern parts of China. We can also connect customers at
other sites by satellite or microwave connections.
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. Employ advanced technologies to support integrated services. We aim to
continually improve upon the configuration of our network to provide a
platform for integrated data communications and high bandwidth services.
Toward this end, we have configured our network using a number of
complementary technologies from leading manufacturers such as Cisco,
Clarent, ECI, Lucent, Nortel and Siemens. Our strategy is to adopt
broadband Internet protocol and asynchronous transfer mode technologies
in our backbone network and to use Internet protocol and frame relay
technologies in our local networks. We have designed our network to
maintain a high level of flexibility and scalability for the future. We
believe this will permit us to cost-effectively meet our customers'
growing demand for high speed and high volume data transmission.
Additionally, we believe that because our network is newer than some of
our competitors' networks in China and hence not burdened by having older
technologies in place, we can enjoy higher network reliability and
control than our competitors.
. Aggressively expand our portfolio of value-added, high-margin services.
We are experiencing a significant increase in demand for value-added,
high-margin services. We believe this trend will continue and demand for
value-added services will grow at an even faster pace as China's data
communications market further develops. Chinese and foreign companies
alike are increasingly adopting value-added services that allow them to
generate more sales, increase productivity, and reduce costs through the
use of the Internet. According to China Internet Network Information
Center, the number of Internet domain names registered in China increased
from approximately 9,400 as of June 30, 1998 to approximately 99,700 as
of June 30, 2000. During the same period, the number of websites in China
increased from approximately 3,700 to approximately 27,000. We expect
corporations with domain names and websites to demand value-added
services such as web hosting and co-location services.
Furthermore, we believe the Internet will become an integral part of
most companies' business activities and e-commerce activity will likewise
increase. As such, we also expect a significant increase in demand for
value-added services. We believe that the combination of our network and
wide range of services will position us as the best choice to meet the
evolving data communications needs of customers. Additionally, we expect
that, through our independent efforts and through partnerships, we will
be able to offer a breadth and depth of services to satisfy the needs of
customers in our target markets.
. Provide integrated and customized communications services. We offer an
integrated range of services to assist businesses to improve their
efficiency and productivity. We believe our experience in offering these
services allows us to provide services to customers with different
requirements.
It is our aim to develop new kinds of services and a number of bundled
service package options for our customers, with after-sales services, to
meet their changing needs. We believe that our flexible bundled packages
and comprehensive after-sales services will decrease our sales and
marketing costs and costs of maintaining existing customers, as well as
increase sales and promote customer loyalty. This bundled service
approach should also appeal to businesses with limited experience in
using the Internet who may therefore prefer to choose from our
recommended service packages. We are also planning to partner with other
service providers to offer customized services for our most demanding and
high-margin customers.
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. Focus on high-margin corporate customers in targeted markets. Unlike
China Telecom, we do not have the obligation to provide universal service
to customers and in areas outside our target markets. We believe that
customers in the following three targeted markets will be especially
receptive to our services:
- Large Chinese corporations and foreign multinational corporations doing
business in China. We believe there will be a rapid increase in demand
among large Chinese and foreign corporations for high-quality data
communications services. We plan to capture a substantial share of this
burgeoning market by providing the world-class service levels that
these companies have come to expect outside China but which have
previously been unavailable within China.
- Telecommunications-intensive small and medium enterprises. Companies in
the professional services, financial services, and international trade
industries tend to purchase a disproportionate amount of transmission
capacity and value-added services. These customers are also appealing
targets for us because they are very sensitive to quality of service
issues.
- Internet service providers, Internet content providers and
applications service providers. Internet service providers, Internet
content providers and application service providers are important
elements of our customer base. They typically demand a large amount of
transmission capacity, computer storage space and value-added
services. More importantly, we believe that Internet service providers
and Internet content providers act as Internet traffic aggregators who
will indirectly bring us new customers for our data centers and other
services.
. Leverage our first mover advantage in China. As one of the first
providers of Internet protocol-based communications services in China, we
have been able to establish our network and gain management experience
over the last four years. We have fostered close relationships with our
equipment and software suppliers, international telecommunications
operators and our customers. We believe that our established customer
base and over four years of operational experience give us a competitive
advantage. Our strategy is to build upon this by accelerating the
expansion of our network and the introduction of value-added services.
. Offer superior quality of service. We anticipate that one of our most
critical competitive advantages will be the ability to offer consistently
high-quality service to our customers. We believe that we are well-
positioned to do so primarily because of the reliability resulting from
our ability to control traffic on our network, our focus on data
communications for corporate customers, and our expanded hiring of
qualified engineers. To demonstrate our commitment to high standards of
service, we intend to offer service level agreements with our customers.
. Build customer loyalty through enhanced customer service, technical
support and branding. We plan to continue to improve our direct marketing
strategy and the quality of our after-sales customer services and
technical support as a way to build loyalty and to attract new corporate
and institutional customers. We believe we have one of the leading brand
names in Internet protocol telephony in China. We plan to sustain our
market position and to continue to attract new customers through
traditional and direct media marketing.
. Establish strategic alliances with international technology leaders. We
will develop strategic alliances with foreign corporations in order to
accelerate our introduction of value-added services and to take advantage
of technical expertise available outside China. For example, we have
entered into memoranda of understanding or letters of intent with Cisco,
Ericsson, Teleglobe International, Compuserve and Telstra International
(Hong Kong) Limited to promote future
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technical and business cooperation. These are generally nonbinding, do not
provide for definite commitments from either party and have not generated
revenue or business to date. We nevertheless intend to pursue the intended
cooperation in order to develop meaningful strategic alliances with these
and other partners. We also anticipate that significant cross-marketing
opportunities will emerge as multinational corporations enter China in
increasing numbers. Additionally, we will continue to consider strategic
alliances on a highly selective basis where we may acquire new
technologies or otherwise improve our ability to offer services.
SERVICES
We provide our customers with a range of data communications services and
Internet protocol telephony.
Data communications services
Our data communications services consist of:
. Internet access through telephone dial-up connections and dedicated
connections via fiber optic lines, microwave and satellite transmissions;
. data transmission using various technologies such as frame relay and
asynchronous transfer mode; and
. value-added services such as web hosting, co-location, virtual private
networks, e-commerce network services and Internet global roaming.
These services are typically tailored to our customers' specific
requirements, including technical support and advice. We intend to continue to
develop enhanced services both on our own and with strategic partners.
Our data communications services are primarily targeted to institutional
and corporate customers. Currently, our customers include government entities
and commercial corporations such as Beijing PriceSmart Membership Shopping,
Capital On-line, CNOOC, China Central Television, China International Trust
and Investment Company, Shanghai Auto Industry Sales Company and KPMG
Shanghai, each of whom accounts for less than 5% of our revenues.
Internet access. Customers can connect to the Internet through our network
using dedicated leased lines or by modem over the public telephone network.
Leased lines are any kind of data transmission capacity on our network that is
allocated for use by a single customer. The capacity may be provided through
fiber optic lines, satellite or microwave transmission. Customers may own the
transmission and receiving facilities at their site. We believe that customers
generally prefer to connect through fiber optic lines, which are usually
faster and more reliable. We charge for leased lines based upon the capacity
reserved for the customer and the actual amount of data the customer
transmits. For customers that demand higher data transmission efficiency, we
offer frame relay services, a more advanced form of packet-switching
technology. As of July 31, 2000, we had deployed our frame relay network in 16
cities in China.
For our leased line customers, our standard pricing arrangement includes a
one-time set-up fee to cover our cost of connection and a flat monthly rental
fee that varies with the capacity provided, plus an additional charge based
upon the volume of data we transmit for the customer. For the five months
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ended May 31, 2000 and the year ended December 31, 1999, Internet access
revenue received from leased line customers accounted for approximately 53.4%
and 64% of our total data communications revenue, respectively.
Our dial-up customers can access our network through a standard telephone
line using a modem. Our dial-up customers can purchase our services through
prepaid Internet access cards that are similar to our Internet protocol
telephony cards. Each Internet access card has an account and identification
code corresponding to a credit account that is debited as the customer
connects to the Internet. Unlike our Internet protocol telephony cards, the
credit is for a fixed number of minutes of Internet access. The credit account
is valid for a fixed period, and any credit remaining at the end of the period
is non-refundable.
Our dial-up Internet access customers not using our prepaid Internet access
cards are required to pay a one-time fee to open an account while those
customers using our Internet access cards to pay for their service charges are
not required to pay the one-time fee. Our service fee comprises a flat monthly
charge up to a fixed number of hours, followed by an hourly charge for
additional time. Dial-up customers can also purchase service packages
providing unlimited access time and designated access numbers for a set-up fee
and a flat monthly charge. For the five months ended May 31, 2000 and the year
ended December 31, 1999, Internet access revenue received from dial-up
customers accounted for approximately 11.7% and 9.2% of our total data
communications revenue, respectively.
We had approximately 780 corporate and governmental institution data
communications customers and over 70,000 registered dial-up Internet access
accounts as of July 31, 2000 compared with approximately 540 corporate and
governmental institution data communications customers and approximately
31,510 registered dial-up Internet access accounts as of December 31, 1998. We
believe that it is common for a number of users to share a single Internet
access account in China. However, we are not aware of any statistics that we
consider reliable on the average number of actual users sharing Internet
access accounts in China.
Value-added services. We believe that our corporate customers will continue
to increase their use of the Internet as a business tool and, as a result,
will require an expanding range of value-added services. We currently offer
the following value-added services:
. Web hosting and co-location. Web hosting refers to our keeping a
customer's Internet website on our computers while co-location refers to
our keeping a customer's computer server on our premises where it can
receive service monitoring and technical support. We charge a fixed
monthly fee plus an additional fee for the amount of bandwidth used by
the customer for these services. As of July 31, 2000, we had 414 web
hosting customers and 146 co-location customers. We anticipate the number
of these customers will increase substantially once we introduce
additional capacity through the establishment of our Internet data
centers.
. Virtual Private Networks (VPN). As a lower cost alternative to wide area
networks that are built using leased lines, virtual private networks are
generally used by businesses and institutions to connect the internal
computer networks maintained at their different offices using the public
Internet. We provide virtual private networks for our clients in China
and have entered into an agreement with Compuserve to allow Compuserve's
customers in China to connect to their virtual private networks outside
China. As of July 31, 2000, we had 9 virtual private network customers.
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. Internet global roaming. We are a member of the global roaming
organizations GRIC and iPass. We permit customers of Internet service
providers that are also members of these organizations to dial into our
network to access the Internet without first setting up an account with
us. In return, we receive fees through GRIC or iPass from the customer's
local Internet service providers. This allows them to avoid the high cost
that they would pay in long-distance telephone charges if they had to
connect through their regular Internet service provider. We are
negotiating with GRIC and iPass for their members to provide reciprocal
services for our customers.
. E-commerce network services. We provide our customers with customized
services that enable them to conduct business activities over the
Internet and to outsource their Internet infrastructure requirements in a
cost-effective and reliable manner. Subject to individual requirements,
these services generally include recommendations for:
- computer network configuration;
- our basic and value-added services to be included;
- technical support;
- how the customer could best access our network;
- maintenance; and
- after-sales service support.
Internet protocol telephony services
We introduced our Internet protocol telephony services in June 1999. Our
Internet protocol telephony service allows customers to make telephone calls
using our network while generally enjoying cost savings over traditional long-
distance telephone service. Unlike Internet telephony, where voice is
transmitted over the public Internet, our Internet protocol telephony service
is provided through our managed network using dedicated capacity. Because we
use our own network, we can generally maintain better control of voice traffic
and offer a higher voice quality. Internet protocol telephony generally has
been approved by the Ministry of Information Industry for acceptable voice
quality. As of March 2000, we provided Internet protocol telephony service for
domestic long-distance calls between 12 cities and international long-distance
calls originating from the same 12 cities to more than 130 countries. The 12
cities were Beijing, Shanghai, Guangzhou, Shenzhen, Wuhan, Dalian, Qingdao,
Dongguan, Xiamen, Tianjin, Ningbo and Hangzhou. As of the date of this
prospectus, we offered Internet protocol telephony services in more than 35
cities in China. From June 1999 through May 2000, the number of Internet
protocol telephony minutes transmitted over our network grew at a compound
monthly growth rate of approximately 33%. According to the Ministry of
Information Industry, our share of the international and domestic long-
distance Internet protocol telephony service markets was approximately 45.2%
and 8.0% by number of minutes sold, respectively, in the first half of 2000.
We provide our Internet protocol telephony service to customers through
prepaid calling cards, through a telephone set with an attached or built-in
express dialer or through a phone line that the customer designates. We market
our phone cards as "Internet protocol telephony" cards and they operate
essentially the same way as debit calling cards. The cards each have an
account and identification code corresponding to a Renminbi credit account
that is debited as the customer makes
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calls. The credit is a cash credit that is debited against our normal Internet
protocol telephony tariffs and not a credit for a fixed number of minutes of
telephone usage. The credit account is valid for a fixed period, and any
unused amounts remaining at the end of the period are non-refundable.
The express dialer and designated telephone access permit customers to make
Internet protocol telephone calls without the need to manually input all of
the account numbers and personal identification code that are required for
those using prepaid Internet protocol telephony cards. The express dialer is a
small electronic box attached or built-in to the telephone that transmits the
account and personal identification code automatically. A customer choosing
designated phone line access registers a local telephone number with us.
Afterwards, the customer can make Internet protocol telephony calls from that
telephone number by dialing an access code without the need to enter the
account and identification code. Customers using an express dialer or
designated telephone line are required to place a deposit with us or a
designated bank that will pay us in arrears on a monthly basis.
Future products and services
Internet data centers. We provide our web hosting and co-location services
from several non-dedicated facilities. We plan to enhance our capability to
provide secure and reliable web hosting and co-location services and to
provide application hosting services, which enable customers to use
accounting, customer relationship management, and other software maintained on
our servers. To do this, we intend to establish Internet data centers in
Beijing, Shanghai and Guangzhou. An Internet data center is a site with
Internet servers and network connections that is intended to be secure from
technical failures. In addition to experienced technical support staff, our
plan for the data centers includes direct connection to our backbone network
and international gateways, high speed servers, separate, redundant fiber and
power connections, cooling systems, electric generators designed to provide
on-site power during any interruptions in power distribution over public power
lines and an automated security system as well as on-site security personnel
24 hours a day, 7 days a week.
We will locate the data centers in the cities that are best served by our
network and where we believe the strongest initial demand for our Internet
data center services would come. The first phase of the plan will involve
establishing an Internet data center in Beijing with a floor space of
approximately 2,000 square meters, construction of which is expected to begin
by the end of 2000. The second phase will involve expanding the Beijing
facility by an additional 12,000 square meters of floor space and establishing
an Internet data center in Shanghai and Guangzhou, each with a floor space of
approximately 2,000 square meters by the end of 2001. We plan to complete the
first phase by the first quarter of 2001 and the second phase by the first
quarter of 2002, with operations commencing by the second quarter of 2001 and
the first quarter of 2002, respectively. Subject to market demand, we intend
to continue to expand the capacity of our Internet data centers.
Virtual Private Dial-up Network (VPDN). Many companies in China require
that their employees have remote access to their private networks from home or
while travelling within China. To this end, we are developing virtual private
dial-up network services for our corporate customers. Virtual private dial-up
networking would allow our customers' employees to dial a local access number
to connect to their internal computer network and communicate with their
office and colleagues through a private channel when they travel to cities in
which our services are provided. We are testing this service and plan to
launch this service during the first quarter of 2001.
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Unified messaging services. A unified message system permits users to
retrieve voice-mail, faxes and e-mail messages from a single source. Users can
retrieve messages by either logging on to a website or through a standard
telephone, fax machine or pager. We intend to develop the services with our
equipment and software suppliers in accordance with the needs of our
customers. We plan to commence testing this service by June 2001 and to launch
this service in the second half of 2001.
COMPETITION
The market for providing data communications services in China is
competitive and we expect it to become more competitive. As a result of recent
agreements between China and the U.S. and between China and the European Union
regarding China's entry into the World Trade Organization and a perceived
policy to increase competition generally, we expect that the Chinese
government will gradually increase the number of licenses it grants and reduce
current restrictions on foreign investment within the telecommunications
industry. Increased numbers of licenses and increased access to foreign
capital, together with the tremendous projected growth and potential market
size of the Internet access and data communications market may attract new
entrants.
We believe that companies in the Chinese data communications market compete
primarily on transmission quality and reliability, range of services, customer
service and marketing efforts. China Telecom, the incumbent operator in China,
is our major competitor in both data communications and Internet protocol
telephony while China Unicom is also a key competitor in Internet protocol
telephony.
Main competitors
Recent developments in China's communications market indicate that the
Chinese government intends to improve the level of communications services in
China by the gradual introduction of competition into the market. In 1993,
Unicom was established to introduce competition to the voice communications
sector previously occupied solely by China Telecom. Our parent was established
in 1994, Netcom was established in August 1999 and China Mobile was
established as an independent entity in July 1999. These four competitors have
the same licenses and approvals that we operate under, except for the domestic
and international frame relay licenses, which were granted only to China
Telecom and to our parent, whose license we operate under.
. China Telecom. China Telecom, the incumbent operator in China, provides
communications services through the China Telecom system, and is
currently the dominant provider of voice telephony and data
communications services in China. As a result of the restructuring of the
Chinese telecommunications industry, China Telecom now operates only
public switched telephone networks and provides only fixed-line telephone
and data communications services. Although China Telecom is authorized by
the Ministry of Information Industry to provide Internet protocol
telephony services, we believe China Telecom has not yet offered Internet
protocol telephony on a large-scale basis. China Telecom also provides
data communications services through ChinaNet, which currently has the
largest subscriber base in China.
We compete with China Telecom in both long-distance telephony and data
communications services mainly on the basis of access speed, range of
services and service quality. Unlike China Telecom, which has an existing
nationwide network, we are not required to provide network coverage in
areas we do not believe to be cost-efficient.
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. Unicom. Unicom has the same licenses and approvals that we operate under,
except for domestic and international frame relay licenses, and is also
licensed to provide mobile, fixed-line and long-distance telephony
services. Unicom is currently constructing a fixed-line telephone network
serving the cities of Tianjin, Chengdu and Chongqing and is also
constructing a nationwide Internet protocol-based network.
We compete with Unicom in Internet protocol telephony services mainly on
the basis of network coverage and service quality. China Unicom Limited,
Unicom's listed vehicle and indirect subsidiary, reported in its
prospectus issued in Hong Kong on June 13, 2000 that 99.5% of its 1999
operating revenues were derived from its paging and mobile businesses.
. Netcom. In August 1999, another competitor, Netcom, was established.
Netcom has received approval from the Ministry of Information Industry to
build and operate an Internet protocol-based network and to offer similar
services to ours. Netcom launched its Internet protocol telephony
services in October 1999 and recently opened an Internet data center in
Shanghai.
We compete with Netcom in Internet protocol telephony services on the
basis of network coverage and service quality. We expect to compete with
Netcom in data communications services in the future when they launch
their services.
. China Mobile. China Mobile was established in July 1999 to hold the
mobile communications assets resulting from a restructuring of China
Telecom and to operate mobile communications nationwide. It also received
approval from the Ministry of Information Industry to construct an
Internet protocol-based network in China and to provide Internet protocol
telephony service. We expect that it will begin to offer Internet
protocol telephony and high speed wireless data and Internet services in
early 2001.
We expect to compete with China Mobile in Internet protocol telephony
and data communications services mainly on the basis of network coverage
and service quality. While we believe high speed wireless access has great
potential in more developed countries, we believe only a small percentage
of the population in China will be able to afford this service in the near
future. In addition, China Mobile focuses on different services and a
different customer base than we do. While China Mobile is currently
providing its services primarily to the retail market, our data
communications services are primarily targeted at corporate and
institutional customers.
Segment competitors
In addition to the national competitors referred to above, we compete with
other companies in smaller market segments that we operate in. Our leased line
services compete with leased line resellers such as Capital Network in
Beijing. Our web hosting and co-location services compete with established
companies such as iAsiaWorks, iAdvantage, and Capital Online. We estimate that
there are approximately 77 Internet service and value-added services licenses
issued and additional competitors may be providing these or other services
that compete with ours without proper licensing.
OUR NETWORK
We have configured our network to provide a wide range of data and voice
communications services. We look at our network as a platform to deliver
information solutions to our customers. We break our network into three
layers:
. transmission layer;
. switch and routing layer; and
. application and service layer.
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[CHART entitled "Our Network Layers"]
Transmission layer
As of July 31, 2000, the transmission layer consisted of our backbone
network, regional hubs and access points called nodes in 60 cities in China.
These are linked by various forms of data transmission, controlled by our
network control center in Beijing, with partial back-up control center
capabilities in Shanghai.
Our strategy has been to rollout our network rapidly by leasing
transmission lines or capacity rather than laying fiber optic lines ourselves.
We think this is time and cost-efficient and allows us to avoid the increased
risks of higher capital commitments. As our business operations continue to
grow, we intend to gradually increase the proportion of owned transmission
lines in the geographic areas that we identify as strategically important in
the long term. We currently lease all of the transmission lines and own the
satellite stations, microwave transmitters and most of the network equipment
that make up our network. We also lease access rights to satellite transponder
segments for satellite transmission.
. Backbone network. Our main hubs are located in Beijing, Shanghai,
Guangzhou, Shenzhen and Wuhan. We have linked them with high-capacity
leased fiber optic lines capable of transmitting at a speed of 155Mbps.
This high capacity is generally referred to as broadband capacity in the
industry. Our backbone network measured approximately 8,500 kilometers in
total.
. Regional hubs. As of July 31, 2000, we had regional hubs in 35 cities
throughout China. Our regional hubs are connected to our backbone network
by fiber optic lines and satellite transmission channels.
. Nodes. As of July 31, 2000, we had network access points called nodes in
20 cities throughout China. Our nodes are connected to our regional hubs
or our backbone.
. Transmission lines. We lease all of our transmission lines and capacity
from third parties. Our 10-year lease with Heng Tong International
Leasing Co., Ltd. gives us the right to use Heng Tong's synchronous
digital hierarchy network covering 20 major cities in China with
bandwidths of 2Mbps, 155Mbps and 622Mbps, and its regional network
covering 8 cities in
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Guangdong Province. Our agreement with Zhong Tie Communications Center
permits us to lease a minimum of 18,000 to 30,000 kilometers of two-duct
fiber optic lines from Zhong Tie's network at our request. We currently
lease over 5,000 kilometers of fiber optic lines from Zhong Tie connecting
Beijing, Shanghai, Guangzhou and cities along those lines. We also lease
capacity from China Telecom with bandwidths ranging from 128Kbps to 2Mbps.
Details about our transmission line leases are contained under "Network-
related agreements" in this section.
. Network control center. We monitor and control our entire network 24
hours a day, 7 days a week, from our national network control center in
Beijing with partial back-up control center capabilities in Shanghai. Our
network control center uses an integrated network control system provided
by Sun Microsystems, Cisco, 3Com and Hewlett-Packard capable of
monitoring and controlling our entire network in real time. We require
that the entire process from the interruption of our network, to the
detection of an interruption by our system, to the commencement of fixing
the interruption should occur within three minutes. We also monitor the
traffic of leased line customers and alert customers in case of suspected
unauthorized use or equipment failure at end user locations.
Our national network control center in Beijing also houses a satellite
station to manage and monitor our satellite connections, to provide
backup for regional hub connections and to provide a central network
connection for customers who use satellite access. Our hub in Shanghai is
capable of providing partial back up of data network control, satellite
and Internet services operations to the Beijing network control center.
. International access. Our hubs in Beijing, Shanghai and Guangzhou are
connected through international gateways operated by China Telecom to
international networks operated by China Telecom, AT&T Global
Communications Services, Inc., MCI Global Resources, Inc., Global One
Communications LLC, Rapid Link Communications, ITXC Corporation, PCCW
(formerly Hong Kong Telecom) and Korea Telecom and KDD. We are able to
provide our customers access to the global telecommunications network
through these international gateways with a transmission capacity of
71Mbps. We also have interconnection or call termination agreements with
AT&T, RSL COM, Eaccomm, Singapore Telecom, First International Telecom
and HK NET.
. Customer connection. Customers can connect to our network using dedicated
lines, the public telephone network or directly via satellite or
microwave transmission. Our dial-up customers can access our servers at
speeds of up to 56Kbps. We lease the lines that connect the public local
exchange network to our network. Customers who connect to our network via
satellite transmission generally operate their own on-site satellite
equipment although we provide technical support.
. Expansion plan. We plan to add hubs and nodes to cover 100 cities
throughout China by the end of 2000 and up to 180 cities by the end of
2002. The level of infrastructure and human resources investment in our
target cities will be dependent on the range of services we decide will
be offered in each of the cities and the intended network capacity. We
plan to focus on expanding our network coverage in the southern and
eastern coastal areas of China in the first phase and then gradually
expand into the western region of China. We also plan to increase the
transmission capacity of our backbone network. In order to cope with the
increasing international Internet protocol traffic, we also plan to
increase our international access capacity in Beijing, Shanghai and
Guangzhou.
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Switch and routing layer
The switch and routing layer of the network is comprised of servers,
switches, routers, gateways and other related software and hardware designed
to turn data applications and services into packets of information and route
these data packets between points on the network. Our network is configured
using the following network technologies and components.
. Synchronous digital hierarchy architecture (SDH). Our network is
constructed based on a self-healing synchronous digital hierarchy
architecture. This means that transmissions are automatically re-routed
through another connection if one connection is disrupted. This allows us
to fix any transmission problems without interrupting service to our
customers.
. Dense wavelength division multiplexing technology (DWDM). Dense
wavelength division multiplexing technology increases transmission
capacity by permitting multiple transmissions through a single fiber
optic line using different wavelengths. The effect of this technology is
to increase the capacity of our existing fiber optic lines.
. Internet protocol (IP). Internet protocol is the data transmission
standard used by the Internet. It is based on packet-switching technology
in which data, voice and image, are broken up into packets, transmitted
over the network and re-assembled at the destination. Compared to
traditional circuit-switched networks, Internet protocol-based networks
are less expensive and quicker to deploy, and allow more efficient use of
transmission capacity.
. Asynchronous transfer mode switching (ATM). Asynchronous transfer mode
switching technology controls the way in which data is broken up into
smaller packets of information, transmitted over our network and re-
assembled at the destination. It uses fixed length packets of
information.
. Frame relay technology (FR). Frame relay technology is similar to
asynchronous transfer mode switching. It breaks up data into different
sized packets of information for transmission and re-assembly. Because it
can accommodate variable sized packets, it is more versatile and
generally even more efficient than asynchronous transfer mode switching.
. Network components. We have built our network using equipment from
leading suppliers selected after extensive analysis. The equipment
includes remote access servers from 3Com and Ascend, synchronous digital
hierarchy equipment from ECI, routers from Cisco, gateways from Cisco and
Clarent, frame relay and asynchronous transfer mode switches from ECI,
workstations from Sun Microsystems, servers from Hewlett-Packard and
modems from EF Data and Hughes. Our network management system is a fully
integrated system covering our entire network. The system was developed
using Hewlett-Packard's Openview architecture.
Application and service layer
The applications and services that we offer depend upon the capabilities of
the transmission and switch and routing layers. We believe that by using
advanced technologies we will be in position to quickly expand and modify our
service offerings to meet changing customer demand. Our current service
offerings are described under, "Business--Services" above.
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SALES AND MARKETING
We adopt different sales and marketing strategies for our different
services and for network rollouts in new areas. Our headquarters coordinates
nationwide publicity and marketing campaigns while our local offices conduct
focused regional campaigns and sales efforts. As we focus on providing an
integrated range of communications services to corporate and institutional
customers, we have worked in the past, and intend to continue, to strengthen
our direct sales capability. We market our Internet protocol telephony service
to retail consumers through distributors. This strategy allowed us to rapidly
expand the reach of our products without having to make heavy investment in a
retail distribution network. We also promote our products and services through
our websites, www.jitong.com and www.gb.com.cn, print media, radio and
television.
Data communications services
Most of our data communications customers are corporations and
institutions, which include Internet service providers and Internet content
providers. In most cases they are leased line customers. The remaining
customers are individual dial-up Internet users.
Corporate and Institutional Customers
We market our data communications services to corporate and institutional
customers through our own sales staff except for our dial-up Internet access
cards of which approximately 10% of sales are made through distributors. As of
September 19, 2000, we had approximately 325 sales staff. Some of them receive
commissions based on sales. We adopt an integrated "total solutions" approach
to our customers' needs and stress our sensitivity to their needs and
commitment to reliability and customer service. We target industries and
entities that we believe will have a comparatively high demand for data
communications services. We believe that our ability to tailor our services,
provide them in a consistent and reliable manner and offer prompt after-sales
services will continue to achieve high customer satisfaction and loyalty.
We provide training to our sales personnel on a regular basis so that they
are equipped with up-to-date technical knowledge of the services we offer. Our
sales personnel analyze the business needs of each customer with our engineers
to ensure that our integrated services are technically feasible and
maintainable. Our sales personnel also maintain contact with customers after
sales are made to ensure that the customers are satisfied.
Individual dial-up customers
We mainly market our Internet access services to the retail market through
our branch offices, of which there were 45 as of May 31, 2000. In March 2000,
we began the use of on-line sales of our Internet access services and plan to
increase the use of this sales medium. Holders of specific types of accounts
with the China Merchants Bank in China can purchase Internet access time
through the Internet and payment can be deducted from their respective bank
accounts on-line. Dial-up customers have the option of establishing an account
or purchasing one of our prepaid access cards. These cards are marketed to the
public through various agency and retail arrangements similar to those
employed for our prepaid Internet protocol telephony cards. We also place
advertisements in local publications to solicit customers to use our dial-up
Internet access services. We intend to expand our distribution network to
include other major banks and distribution outlets.
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Internet protocol telephony services
Our Internet protocol telephony cards are marketed and sold through
approximately 1,000 distributors in conjunction with branding campaigns and
print advertising. Our distributors purchase the cards at a discount to their
face value and may in turn sell their cards to secondary distributors. We
select our distributors based on their credit worthiness and access to retail
distribution channels such as retail banks and post offices.
In addition, we are continuously seeking further co-branding opportunities
that will enhance our sales and brand name. For example, we have co-operation
arrangements with major banks in China, including China Construction Bank, for
the provision of our Internet protocol telephony services to their customers.
We believe that our Internet protocol telephony cards are mainly purchased
by individuals and that corporations and governmental institutions typically
purchase our Internet protocol telephony services using express dialers or by
registering specific telephone numbers with us. We aim to focus our marketing
activities on corporations and institutions since we believe this market
segment generates higher volumes and a more regular pattern of usage of
Internet protocol telephony services. We plan to further increase our share in
this market segment by bundling our data and voice communications services.
We make direct sales to large corporate and institutional customers. Our
strategy is to help them design service packages that meet their specific
needs, assist them to determine the most suitable format and features to meet
their Internet protocol telephony service requirements and, where appropriate,
suggest a bundling of our Internet protocol telephony service with other
services they might need.
Network rollouts
We aim to rollout our network services in new areas with focused marketing
campaigns tailored to the new area being entered. These local campaigns are
planned by local sales and marketing staff, coordinated with national
publicity put out by our headquarters.
CUSTOMER SERVICE
We believe that high quality customer service is particularly important to
corporate and institutional customers. We provide customer service through a
national customer service center in Beijing and through customer service
personnel in 11 cities. As of July 31, 2000, we employed over 100 full-time
customer service officers. Through the customer service centers, we also
collect customers' feedback in order for us to improve the quality of our
services. We additionally provide technical support to our customers through
service technicians located in our larger branch offices.
FIVE LARGEST CUSTOMERS AND SUPPLIERS
Most of our customers are located in China and most of our revenues are
received in Renminbi. Generally, settlements are made within one to two months
from the billing date.
Revenues generated from our five largest customers accounted for
approximately 16.8%, 17.2%, 12.3% and 3.1% of our total operating revenue for
the three years ended December 31, 1999 and the five months ended May 31,
2000, respectively. Revenues generated from our largest customer accounted for
approximately 5.4%, 8.4%, 3.8% and 1.2% of our total operating revenue for the
three
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years ended December 31, 1999 and the five months ended May 31, 2000,
respectively. All these customers are independent third parties and have
maintained relationships with us ranging from one to four years.
Our suppliers are third party suppliers of network resources and
telecommunications equipment both within China and abroad. We currently lease
a large proportion of our network capacity from China Telecom, Heng Tong
International Leasing Co., and Zhong Tie Communications Center but actively
seek other sources of capacity to reduce our reliance on China Telecom.
Payments for the use of network resources in China are payable in Renminbi on
a monthly basis while fees payable to overseas network operators are settled
in U.S. dollars on a quarterly basis.
Our five largest suppliers accounted for about 32.7%, 41.7%, 43.5% and
30.7% of our operating expenses for the three years ended December 31, 1999
and the five months ended May 31, 2000, respectively. Of the amounts we paid
to these five largest suppliers, 73.4%, 65.4%, 60.9% and 59.0% were payable in
U.S. dollars for the three years ended December 31, 1999 and the five months
ended May 31, 2000, respectively. Payments to the single largest supplier
accounted for about 21.4%, 20.0%, 17.0% and 12.6% of our operating expenses
and additions in property, plant and equipment for the three years ended
December 31, 1999 and the five months ended May 31, 2000, respectively.
None of our directors, their respective associates and shareholders who own
more than 5% of our issued share capital had any interest in any of our five
largest customers and suppliers for any of the three years ended December 31,
1999 or the five months ended May 31, 2000.
RESEARCH AND DEVELOPMENT
Our research and development activities focus on network security
technology and the development of new services. We conduct on-going evaluation
and research with respect to new technologies and their applications in order
to supplement existing services and provide additional services for our
customers. Total expenditures for research and development in 1999, 1998 and
1997 were RMB1,341,000 (US$162,000), RMB125,000 (US$15,000) and RMB5,924,000
(US$716,000), respectively. Some of our research activities were covered by
government subsidies while others were paid as incurred. Total research and
development expenditures covered by these government subsidies in 1999, 1998
and 1997 were RMB731,000 (US$88,000), RMB125,000 (US$15,000) and RMB5,924,000
(US$716,000), which represented 54.5%, 100% and 100% of our total research and
development costs in the respective years.
LICENSES, APPROVALS AND AGREEMENTS
Licenses and Approvals
We operate pursuant to sublicenses and agreements contained in the
licensing agreement with our parent and pursuant to the Ministry of
Information Industry's approval. These arrangements permit us to conduct
nationwide commercial communications operations under our parent's
communications licenses and approvals from the Ministry of Information
Industry. Our parent's licenses and approvals, and our authority under them,
define the scope of telecommunications services we may provide. They permit us
to provide Internet protocol telephony, data communications and related
services. Although we expect that the Chinese government will gradually
increase the number of licenses it grants, the licensing requirement, as a
barrier to entry into China's highly regulated telecommunications market,
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limits the amount of competition we face. Our parent currently holds, and we
operate under, seven major types of licenses and approvals, as set out below:
. Internet protocol telephony service license. Our parent obtained an
Internet protocol telephony license issued by the Ministry of Information
Industry that permits it to provide Internet protocol telephony and fax
services nationwide from April 1, 2000. The Ministry of Information
Industry also allocated a nationwide unified access number for dial-up
users. The license will expire on April 2, 2005.
There are currently no regulations governing the renewal of Internet
protocol telephony licenses. We believe that the license renewal
procedure would require our parent to apply for a renewal 60 days before
expiration. The license could be revoked if our parent's business license
were suspended. This would generally occur only if our parent:
-committed serious legal violations;
-ceased to do business;
-refused to submit to examination by government authorities; or
- committed serious violations involving activities beyond the scope
of its business license or in forging, altering or assigning its
business license.
. International gateway approvals. Our parent obtained international
gateway approvals granted by the Ministry of Posts and
Telecommunications, the Ministry of Information Industry's predecessor,
and China Telecom between June 23, 1997 and February 28, 2000. They
permit our parent to use China Telecom's international gateways in
Beijing, Shanghai, Guangzhou and Shenzhen to contract with international
network operators and obtain international network access. The approvals
have no stated expiration date. There are currently no regulations
specifying the conditions under which the international gateway approvals
can be revoked. However, we believe that they would be revoked if the
State Council revoked its approval for operation of our network.
. Internet services license. Our parent obtained an Internet services
license issued by the Ministry of Information Industry on October 30,
1998. It permits our parent to provide nationwide Internet access and
other Internet-related service. The license has a term of five years and
will expire on October 31, 2003. The license renewal procedure would
require application 60 days before expiration. It could also be revoked
before its expiration if we or our parent fail to remedy any faults found
in our annual examination within the time specified by the Ministry of
Information Industry or if our parent's business license were suspended.
Another approval directed China Telecom to allocate a nationwide unified
access number for dial-up users.
. VSAT license. Our parent obtained a license issued by the Ministry of
Posts and Telecommunications on June 8, 1998. It permits our parent to
provide domestic satellite communications services nationwide using the
very small aperture terminal communications standard. The license will
expire on September 18, 2001. As with the Internet services license, the
satellite license renewal procedure would require application 60 days
before expiration. It could also be revoked before its expiration if we
or our parent do not remedy any faults found in our annual examination
within the time specified by the Ministry of Information Industry or if
our parent's business license were suspended.
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. VSAT frequency band approvals. The former State Radio Regulatory
Commission (currently under the authority of the Ministry of Information
Industry) and the Ministry of Information Industry issued the frequency
band approvals for our satellite transmissions to our parent on September
6, 1995 and March 20, 1995, which permit our parent to establish a
satellite communications network using a specific frequency band. The
approvals have no stated expiration but can be revoked if we use any
radio stations without approval, violate relevant regulations, disturb
radio traffic, fail to comply with general radio frequency regulations,
change the approved satellite projects without authorization or send or
receive signals not related to our business.
. Microwave approvals and radio station licenses. Our parent obtained
microwave frequency band approvals and radio station licenses issued by
the former State Radio Regulatory Commission and the Ministry of
Information Industry that permit our parent to construct and operate
microwave radio stations using specific frequency bands in Beijing on
April 2, 1998 and October 20, 1999. Microwave transmission is an
alternative means of providing customer access to our network. The
approval has no stated expiration, but can be revoked if we use any radio
stations without approval, violate relevant regulations, disturb radio
traffic, fail to comply with general radio frequency regulations, change
the approved microwave projects without authorization or send or receive
signals not related to our business. The license expires on October 20,
2002. We will need to renew the license in order to continue operating
microwave radio stations after October 20, 2002. The license renewal
procedure would require application 30 days before expiration. The
license could also be revoked before its expiration if we or our parent
do not remedy any faults found in our annual examination within the time
specified by the Ministry of Information Industry or if our parent's
business license were suspended. We have also been granted a license by
the Ministry of Information Industry to test Local Multipoint
Distribution Services, a wireless broadband technology, in Dalian and
Qingdao from September 2000 to March 2001.
. Domestic and international frame relay license. Our parent obtained
domestic and international frame relay licenses issued by the Ministry of
Information Industry on August 25, 1999 and September 29, 1999. They
permit our parent to install frame relay and asynchronous transfer mode
switching equipment to provide domestic and international frame relay
transmission services in 16 cities. The licenses expire on August 26,
2004 and September 30, 2004, respectively. The license renewal procedure
would require application 60 days before expiration.
Pursuant to the Ministry of Information Industry's approval and the
licensing agreement, our parent has granted us a perpetual, exclusive,
royalty-free sublicense to operate under the authority granted by the above
licenses and approvals (including any renewals, expansions or replacements),
with the exception of the international gateway approvals, the VSAT frequency
band approvals and the microwave approvals and radio station licenses, none of
which can be sublicensed. However, the Ministry of Information Industry has
approved our and our parent's joint application to amend all of our parent's
radio station licenses so that we will become the licensee. Our Chinese
counsel has advised us that both microwave and satellite stations fall within
the category of "radio stations". We have also applied for VSAT frequency band
approvals, microwave frequency band approvals and radio station licenses to
replace those held by our parent and to cover additional satellite and
microwave stations. All of these new licenses, if and when approved, will be
issued directly to us. Our parent has agreed to lease international gateways
on our behalf at our instruction so that we can direct traffic through them to
and from our network. Our parent has also agreed to assist us in obtaining
corresponding licenses and approvals when permissible and, pending the grant
of these licenses and approvals, to renew or obtain replacements for any that
will expire and to use its best efforts to obtain
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any additional licenses and approvals that we require in the conduct of our
business, which would also be sublicensed to us under the licensing agreement
subject to the Ministry of Information Industry's approval. We pay only our
parent's lease costs and other reasonable expenses with respect to the
international gateway leases.
Network-related agreements
Transmission line leases
We lease substantially all of our transmission capacity from third parties,
principally Heng Tong International Leasing Co., Ltd., Zhong Tie
Communications Center and China Telecom.
. In November 1999, our parent entered into a 10-year lease agreement with
Heng Tong International Leasing Co., Ltd. for the right to use its
synchronous digital hierarchy network, which covers 20 major cities in
China with bandwidths of 2Mbps, 155Mbps and 622Mbps, and its regional
network, which covers 8 cities in Guangdong Province. This lease was
transferred to us pursuant to the reorganization agreement with our
parent. Under the lease, we pay a monthly fee ranging from RMB8,000
(US$966) to RMB500,000 (US$60,390) depending on the length and the
bandwidth of the line leased. We are entitled to discounts of 10% to 22%
if we lease more than a specified number of lines with bandwidths of
155Mbps or 622Mbps. We also become entitled to preferential pricing if we
and Heng Tong International Leasing Co., Ltd. agree to extend this lease
for more than 10 years. Each party has a right to renegotiate the lease
fee if the price we pay for leasing China Telecom's lines increases or
decreases by more than 20% or to terminate the agreement on six months'
notice.
. In February 2000, our parent entered into a master leasing agreement with
Zhong Tie Communications Center for the lease of fiber optic lines from
its network. This lease has been transferred to us pursuant to the
reorganization agreement with our parent. The master leasing agreement
permits us to lease a minimum of 18,000 to 30,000 kilometers of two-duct
fiber optic lines on Zhong Tie's network, at our request. Under the
agreement, Zhong Tie has also agreed to improve the capacity of the
leased lines as technology evolves, provide technical support for the
operation and maintenance of the lines and, jointly with us, construct
additional lines at our request. The master agreement provides that for
15 years the specified lines will be leased pursuant to separate
agreements of varying duration, each of which we may terminate on 90
days' notice once we have laid our own lines, subject to our making the
remaining lease payments under the applicable separate lease agreement.
It also provides that, for each line leased under a subsidiary agreement,
we must pay a monthly fee ranging from RMB174 (US$21) per kilometer per
duct in the first year of the lease term to RMB278 (US$34) per kilometer
per duct from the sixth year and thereafter. The first subsidiary
agreement under the master agreement provides for the lease of 5,686
kilometers of fiber optic lines connecting Beijing, Shanghai, Wuhan,
Guangzhou and cities along the lines. We have to separately pay for the
use and maintenance of equipment related to the leased lines. This
subsidiary agreement will expire on February 25, 2015.
. We are party, as transferee of our parent under the terms of the
reorganization agreement, to a number of leases originally entered into
between our parent and China Telecom for use of its fiber optic lines
with bandwidths ranging from 128Kbps to 2Mbps. These leases all follow a
standard lease form used by China Telecom based on Ministry of
Information Industry regulations. These regulations obligate China
Telecom, among other things, to lease its lines at prices set by the
Ministry of Information Industry, to maintain the lines we lease in good
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condition, and to provide us with additional lines within one to three
months of our request. These leases are of indefinite duration and we may
terminate any lease on one to four weeks notice, while China Telecom has
the right to modify the contract unilaterally. The scope of this right is
unclear. We need China Telecom's consent to change our equipment or the
type of services we offer over the leased lines.
Satellite transponder leases
As of March 31, 2000, we leased 27MHz of bandwidth from PanAmSat
International Systems, Inc. at a fixed monthly charge regardless of capacity
used. Beginning May 1, 1999, our parent began leasing bandwidth from Xin Nuo
Satellite Communications Co., Ltd.. This lease was transferred to us under the
terms of the reorganization agreement. The lease provides for 27MHz of
bandwidth, but we have only used 13 MHz. We pay a fixed monthly charge
regardless of the transmission capacity we actually use. The total lease
payments represented 9.1% and 5.4% of our revenues for the year ended December
31, 1999 and the five months ended May 31, 2000, respectively. Our lease with
PanAmSat expires on November 1, 2007, while our lease with Xin Nuo will expire
on May 1, 2001.
International gateways
Pursuant to a licensing agreement, our parent has agreed to lease
international gateways on our behalf at our instruction so that we can direct
traffic through them to and from our network. We pay only our parent's lease
costs and expenses with respect to the international gateway leases. Under
this arrangement, our parent leases access to China Telecom's international
gateway and access to international telecommunications operators. As a result,
we are able to connect to the international gateways of China Telecom, AT&T
Global Communications Services, Inc., MCI Global Resources, Inc., Global One
Communications LLC, and PCCW (formerly Hong Kong Telecom), Korea Telecom and
KDD which provide bandwidths of 45Mbps, 12Mbps, 2Mbps, 2Mbps, 6Mbps, 2Mbps and
2Mbps, respectively.
INTELLECTUAL PROPERTY
Our parent owns registered trademarks for GBNet and its logo. Our parent
has the registered rights to the domain names of www.jitong.com, www.gb.com.cn
and www.chinagb.net. Pursuant to a trademark transfer agreement, our parent
has agreed to transfer its rights to these trademarks to us. Pending the
registration of the transfer of these rights, our parent has granted us the
free and exclusive right to use these trademarks. Our parent has granted us
the free and exclusive right to use www.jitong.com, www.gb.com.cn and
www.chinagb.net until Chinese law permits their transfer to us, at which time
our parent will do so at no charge to us. We intend to apply for additional
trademarks and service marks in China, Hong Kong and the United States.
However, we may not be able to procure the registration of these marks in all
of these jurisdictions. We do not currently have any issued patents or
registered copyrights. See "Risk Factors--Risks relating to us--We may be
unable to protect our intellectual property rights."
INSURANCE
Consistent with what we believe is customary practice among Chinese
telecommunications network operators, we do not currently carry any third
party insurance covering our major fixed assets or our business. We cannot
assure you that any uninsured losses we incur will not have a material adverse
effect on our business.
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FACILITIES
Our principal offices are located in Beijing where we lease 3,563 square
meters of office space for a term expiring on May 14, 2004. We lease 1,492
square meters of office space in Beijing from our parent for a term expiring
on March 24, 2003. We also lease the premises occupied by our network control
center in Beijing from our parent, occupying 1,000 square meters for a term
expiring on March 24, 2003. Our parent does not have the relevant title
certificates for these premises.
We own office space in three major Chinese cities, including the premises
occupied by our backup network control center in Shanghai, with an aggregate
area of approximately 911 square meters. As of August 31, 2000, we leased
office space in 102 cities in China, including Beijing, with an aggregate area
of approximately 21,616 square meters under leases that expire from August 31,
2000 to December 31, 2005. We use office spaces for administrative offices, as
our hubs, regional hubs and nodes and to house routers, gateways and other
network equipment. We believe that our facilities are adequate for our
existing business and that we will be able to obtain additional leases to
accommodate our expansion plan at market rates for the near future.
We own staff quarters in Beijing of approximately 1,157 square meters for
qualified employees who are not local residents of Beijing. However, we have
not transferred, nor do we plan to transfer our ownership of these quarters to
our employees.
LEGAL PROCEEDINGS
From time to time we expect to be subject to legal proceedings and claims
in the ordinary course of our business. These legal proceedings or claims,
even if they are without merit, could result in the expenditure of significant
financial and managerial resources. We are currently not aware of any actual
or threatened legal proceedings or claims that we believe will have,
individually or in the aggregate, a materially adverse effect on our business,
financial condition or results of operations.
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REGULATION
China's telecommunications industry is highly regulated by the government.
Since China has not yet adopted a national telecommunications law, the
telecommunications industry is governed by regulations issued by the State
Council, the Ministry of Information Industry and various government
authorities. Regulations issued or implemented by the State Council, the
Ministry of Information Industry and other relevant government authorities,
including the Ministry of Foreign Trade and Economic Cooperation and the State
Development Planning Commission, encompass virtually every aspect of network
operations, including entry into the telecommunications service industry,
scope of permissible business, tariff policy and foreign investment. In
particular, current regulations in China prohibit foreign-invested enterprises
and foreign entities (including individuals) from investing in, operating or
participating in the operation of telecommunications services in China without
approval from the State Council.
We have been granted approval from the China Securities Regulatory
Commission and the Ministry of Information Industry to effect the global
offering. The licenses, approvals and contracts necessary for our operations
which our parent could not transfer to us pursuant to its reorganization,
because of either regulatory or contractual prohibitions, were maintained by
our parent for our benefit pursuant to our reorganization agreement with it.
In consideration of the transfer of assets under the reorganization agreement,
we issued to our parent 183,874,200 domestic shares, representing
approximately 74.03% of our registered share capital immediately before the
global offering. In the opinion of Jingtian & Gongcheng, our Chinese counsel,
our ownership, licensing and approval structure are, and immediately following
the global offering will be, in compliance with existing Chinese laws and
regulations, and no further Chinese governmental approvals are required for
the global offering or to conduct our existing and proposed business in
accordance with our business license. For a description of our reorganization,
see, "Our Corporate Structure."
Regulatory framework
The Ministry of Information Industry was created in March 1998 to assume,
among other things, the regulatory, administrative and other governmental
duties of, and rights previously exercised by, the former Ministry of Posts
and Telecommunications and the former Ministry of Electronics Industry. The
Ministry of Information Industry has broad authority to regulate all aspects
of the telecommunication and information technology industries in China, which
includes the power to:
. formulate and enforce industry policy, standards and regulations;
. grant licenses to provide telecommunications and Internet access
services;
. formulate tariff and service charge policies for telecommunications and
Internet access services;
. supervise the operations of telecommunications and Internet access
service providers;
. maintain fair and orderly market competition among operators; and
. manage the day-to-day administration of the national telecommunications
sector.
In order to provide a uniform regulatory framework to encourage the orderly
development of the telecommunications industry, the Chinese government is
currently preparing a draft telecommunications law. If and when the
telecommunications law is adopted by the National People's
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Congress, it is expected to become the basic telecommunications statute and
the legal source of telecommunications regulations in China. In addition, the
Ministry of Information Industry is currently preparing a draft of the
administrative telecommunications regulations for foreign invested
telecommunications enterprises, which will be subject to approval by the State
Council. Although we expect that the telecommunications law and the
regulations would have a positive effect on the overall development of the
telecommunications industry in China, we do not know the final nature and
scope of what the telecommunications law and the regulations will be.
In February 1999, the State Council approved a restructuring plan for the
telecommunications industry in China. According to the plan, the
telecommunications operations of the China Telecom system controlled by the
Ministry of Information Industry are being separated along four business
lines: fixed-line communications, mobile communications, paging and satellite
communications services. China Mobile was established in July 1999 as a state-
owned company to hold the mobile communications assets resulting from this
separation and to operate mobile communications nationwide. A separate company
will be responsible for satellite networks following the restructuring, while
the paging operations have been merged into Unicom. As a result of the
restructuring, the China Telecom system now operates only fixed-line networks
and provides only fixed-line telephone and data communications services. China
Telecom Group Corporation was established in April 2000 as a state-owned
enterprise controlled by the Ministry of Information Industry. It is expected
to become the holding company of the China Telecom system.
Entry into the industry. Until 1993, telecommunications regulations and
policies in China did not permit entities outside of the China Telecom system
to engage in public telecommunications operations in China. In August 1993,
the government opened some non-basic sectors of the telecommunications
industry, such as paging and satellite communications, to Chinese entities not
affiliated with the Ministry of Information Industry. Cellular network
operators, providers of basic telecommunications services, such as local and
long-distance fixed-line telephone services and network service providers must
receive specific approval from the State Council in order to provide services.
Internet protocol telephony operators, Internet service providers and
providers of other data communications or value-added service must obtain
operating licenses or approvals from the Ministry of Information Industry in
order to provide services.
Current regulations in China prohibit foreign-invested enterprises and
foreign entities (including individuals) from investing in, operating or
participating in the operation of telecommunications services in China without
government approval. We have been granted approval from the China Securities
Regulatory Commission and the Ministry of Information Industry to effect the
global offering.
Tariff setting. Our tariffs are subject to regulations by various
government authorities, including the Ministry of Information Industry, the
State Development Planning Commission, the relevant provincial
telecommunications administrations and the relevant provincial price
regulatory authorities. Our rates for Internet protocol telephony services are
set by the Ministry of Information Industry. Our rates for dial-up Internet
access are required by the Ministry of Information Industry to be set by
reference to China Telecom's rates, which are in turn set by the Ministry of
Information Industry in consultation with the State Development Planning
Commission. The Ministry of Information Industry also requires other service
providers to use those rates as a reference in formulating their own rates. In
each case, we have discretion to charge higher or lower rates than China
Telecom within a narrow, unspecified range.
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Rates for other data communications services provided by all service
providers are set by the Ministry of Information Industry in consultation with
the State Development Planning Commission. Satellite transponder lease costs
are determined by negotiation between the contracting parties while our
international charges are set pursuant to agreements between our parent and
the relevant international network operator.
Interconnection and leased line arrangements. Network service providers'
networks must interconnect with other network service providers, the China
Telecom system's fixed-line network and international gateways to enable
subscribers to a network service provider's network to communicate with fixed-
line subscribers, make and receive domestic and international long-distance
calls and to send and receive international data traffic. The Ministry of
Information Industry is responsible for approving applications for and
regulating interconnection with the fixed-line network, while China Telecom
and other authorized network service providers are responsible for designing
and implementing technical plans. The applicable regulations provide that
switching, transmission and other equipment must conform with the technical
standards approved by the Ministry of Information Industry. The Ministry of
Information Industry also determines the amounts of lease payments to be
collected by the provincial telecommunications administrations, which operate
the fixed-line network, with respect to leasing of transmission lines that
facilitate interconnection between network service providers' networks and the
fixed-line network. Each provincial telecommunications administration and the
city and country telecommunications bureau under its control are responsible
for the maintenance of the transmission lines and related equipment within
their respective jurisdiction.
Technical standards. The Ministry of Information Industry sets technical
standards and controls the type of telecommunications equipment used in public
networks by requiring all network operators under its control to purchase
their equipment from suppliers who have obtained prior certification from the
Ministry of Information Industry.
Capital investment. The State Development Planning Commission is empowered
by the State Council to exercise responsibility over the approval of all major
investment projects, including network service providers' network development
projects, involving total capital investment between RMB50 million (US$6.0
million) and RMB500 million (US$60.4 million). Any investment projects with
total capital investment in excess of RMB500 million (US$60.4 million) must
obtain approval from the State Council. Project proposals and feasibility
study reports for projects less than RMB50 million (US$6.0 million) can be
approved by the Ministry of Information Industry and the approval is required
to be submitted for recording to the State Development Planning Commission.
Internet regulation. The Internet industry is regulated by the Ministry of
Information Industry in the same manner that it regulates the
telecommunications industry generally. The State Council periodically
promulgates regulations relating to the Internet to address public policy
considerations. Approval from the State Council is required to establish a
network service provider, which, as differentiated from Internet service
providers and Internet content providers, is allowed to connect directly to
international networks, including the Internet. Our parent has been approved
by the State Council to serve as a network service provider. Pursuant to the
Ministry of Information Industry's approval and a licensing agreement with our
parent, we have been authorized to conduct the Internet access services,
Internet protocol telephony services, domestic satellite telecommunications
services and domestic and international frame relay services of our parent.
Existing regulations require all Chinese commercial Internet service providers
to interconnect their computer networks with one of the five licensed
commercial network service providers, China Telecom, us (pursuant to a
sublicense from our parent), Unicom, Netcom and China Mobile, in order to
provide Internet access. Internet
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service providers must obtain operating licenses from the Ministry of
Information Industry in order to provide Internet access service.
Internet service providers and Internet content providers must register
their users with the Ministry of Public Security and block websites (including
those maintained outside China) that the ministry identifies as publishing
information damaging to public security. Periodically, the ministry has
stopped the distribution over the Internet of information that it believes to
be socially destabilizing, or to violate Chinese laws and regulations. In
addition, the State Secrets Bureau has recently issued regulations authorizing
the blocking of any website it deems to be disclosing 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 news 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 network
service providers should comply with the regulations remain to be clarified.
Regulation of 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, it is prohibited to manufacture or
sell encryption products without the permission of the State Encryption
Administration Commission. Use of unauthorized encryption products is
prohibited. 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 network service providers should comply with these regulations.
Administrative telecommunications regulations
The Ministry of Information Industry has prepared administrative
telecommunications regulations that were promulgated effective September 25,
2000. The regulations provide and clarify the regulatory rules and guidelines
for the telecommunications industry in the interim period prior to the
adoption of the telecommunications law. The material changes that the
regulations make to the regulatory environment described above are summarized
below. However, the regulations give wide discretionary authority to the
Ministry of Information Industry and have been so recently promulgated that we
do not yet know how they will be administered or interpreted by the Ministry
of Information Industry or whether they are intended to supplant or merely
supplement current regulatory practice. Accordingly, the regulations and their
administration and interpretation may have unexpected consequences upon our
business.
Regulatory authority. The regulations confirm that the Ministry of
Information Industry will continue to be the regulatory body responsible for
the Chinese telecommunications industry, extending this authority to
broadcasting and television transmission networks. This authority is to be
administered based upon the principles of the separation of the government and
enterprises, abolishment of monopoly, encouragement of competition and the
promotion of development, openness and fairness.
Service providers. The regulations divide service providers into those who
provide basic telecommunication services and those who provide value-added
telecommunication services. Basic telecommunication providers are those who
provide:
. domestic long-distance and local telephone services through fixed
networks;
. Internet protocol telephony;
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. mobile network telephone and data services;
. satellite communications and mobile satellite communication services;
. Internet and other public data transmission services;
. leasing and sales of transmission capacity (which may be bandwidth,
wavelengths or fiber optic capacity), fiber optic cable, pipelines and
other network elements;
. network access, and outsourcing;
. international telecommunications infrastructure and services;
. wireless paging services; or
. resale of basic telecommunications services.
Value-added telecommunication providers are those who provide:
. web hosting and co-location;
. virtual private networks;
. e-mail;
. voice messaging;
. online information data base storage and retrieval;
. electronic data exchange;
. on-line data processing and transaction processing;
. value-added facsimile services;
. Internet access services;
. Internet information services; or
. video conference telephone services.
Based upon our current business, we believe that we fall into both
categories. Basic telecommunications providers must receive operational
licenses from the Ministry of Information Industry while value-added
telecommunications providers must receive licenses from either the Ministry of
Information Industry or, if they operate in only a single province, the local
telecommunications office under the Ministry of Information Industry.
Entry into the industry. The regulations specify the threshold requirements
for applicants for basic telecommunications and value-added telecommunications
licenses. Applicants for basic telecommunications licenses must:
. be duly established companies in the basic telecommunications business,
and have majority state ownership;
. have a feasibility study and technical network plan;
. possess the requisite funding and personnel to carry out operations;
. possess the requisite sites and other resources to carry out operations;
. have the reputation or ability to provide long-term services to customers;
and
. meet other conditions imposed by the Chinese government.
Applicants for value-added telecommunication licenses must:
. be duly established companies under Chinese law;
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. possess the requisite funding and personnel to carry out operations;
. have the reputation or ability to provide long-term services to customers;
and
. meet other conditions imposed by the Chinese government.
The regulations do not specify the criteria that will be used by regulatory
authorities in awarding licenses. Licenses for basic telecommunications may be
awarded by bidding.
Tariff setting. The regulations provide that all charges will be based on
costs, but also considering national economic development and social
development, the development of the telecommunication industry, and
telecommunications customers. Detailed tariff catalogs will be set by the
Ministry of Information Industry after consulting with other relevant
authorities. Charges for value-added telecommunications services and for
wireless paging and resale of basic telecommunications services will be set
either by market forces or by market forces within a range set by the
government. Charges for other telecommunications services may either be set by
the Chinese government, set by market forces or set by market forces within a
range set by the Chinese government.
Interconnection. Interconnection among telecommunication networks must be
made according to agreements reached by network operators under the
regulations issued by the Ministry of Information Industry and cannot be
terminated without the ministry's approval. Where parties cannot reach
agreement on interconnections, whether as to pricing, technical standards or
otherwise, either party may apply for coordination by the Ministry of
Information Industry or offices under the Ministry of Information Industry.
Content and security. The regulations provide that telecommunications users
will be responsible for telecommunications content and for the results caused
by the content. Users are also required to abide by existing security
regulations when transmitting information affecting national security. In
particular, the regulations prohibit the production, copying, publishing or
distribution of information that is restricted by any form of regulation and
prohibits any act that harms the security of information or the
telecommunications network.
Penalties. Violations of the regulations subject the violator to
confiscation of resulting profits, fines up to five times the resulting
profits or RMB100,000 (US$12,080), termination of business or reorganization
in severe cases, or even criminal liabilities.
China's entry into the WTO
China's telecommunications regulatory framework could change dramatically
upon China's entry into the WTO and competition in our business lines could
increase dramatically. China has already reached agreement with the United
States and the European Union regarding the terms of its entry into the WTO.
Although the parties have not disclosed the substance of all their
negotiations, China could accede to the WTO rapidly.
Under the agreement with the United States, China would allow up to 30%
foreign ownership in all value-added telecommunications services, including
electronic mail, on-line information, database retrieval and data processing,
immediately upon its entry into the WTO, up to 49% no later than January 1,
2001 and up to 50% no later than January 1, 2002.
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In addition, the agreement with the U.S. liberalized foreign equity
ownership in domestic and international voice, circuit-switching and packet-
switching data transmission services. The schedule states that foreign equity
ownership will be allowed up to 25% no later than January 1, 2003, up to 35%
no later than January 1, 2005 and up to 49% no later than January 1, 2006.
The agreement with the European Union would add additional market openings.
In particular, foreign investment would be allowed in China's mobile telephone
sector at 25% upon China's accession, 35% after one year and 49% after three
years. China would also permit foreign firms to rent data transmission
capacity from Chinese companies for resale inside and outside China.
The State Council is expected to promulgate new regulations in late 2000
that will provide clarification on the exact scope of the telecommunications
services to be further opened for foreign investment and other economic
reforms related to our business if China joins the WTO. Until the new
regulations are enacted, we cannot be sure what the regulatory or competitive
environment will be after China's entry into the WTO.
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MANAGEMENT
The following table provides information about our directors, supervisors
and executive officers as of the date of this prospectus. All of the directors
serve terms of three years or until their respective successors are elected
and each has a business address at our headquarters.
Directors, Supervisors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<C> <C> <S>
Qi Mingqiu..................... 46 Chairman of the Board of Directors and
President
Xue Baoming.................... 61 Director
Liu Jinping.................... 48 Director
Wang Xianlao................... 50 Director
Wu Weiren...................... 52 Director
Yu Weixing..................... 45 Director and Vice President, Network
Ning Xianfu.................... 32 Director, Vice President and General
Manager of Business Operations
Hu Qiheng...................... 66 Independent Non-executive Director
Wang Tong...................... 38 Independent Non-executive Director
Zhang Jie...................... 43 Chairman of the Board of Supervisors,
Associate President and Head of Network
Operations and Management
Zhang Minqing.................. 40 Supervisor and Head of Corporate Planning
Song Baoyin.................... 37 Supervisor
Chen Jihua..................... 32 Chief Financial Officer
Wang Xia....................... 35 Treasurer and Joint Company Secretary
</TABLE>
Mr. Qi Mingqiu is our chairman and president. Mr. Qi joined us in May 1994.
He is in charge of our overall business and operations strategy and
management. He formerly served as a deputy director of the China Bidding
Center for Machinery and Electronics, as vice president of China Electronics
Import and Export Company, responsible for management of its subsidiaries, as
secretary general of the State Planning Commission, and as deputy head of the
supervisory office at the State Economic and Trade Commission. Mr. Qi holds a
master's degree from Harbin Industrial University. He has over 18 years of
experience in management and has been the President of our parent and us since
their respective dates of establishment.
Ms. Xue Baoming is our vice chairman and is also the chairman of IRICO
Display Device Co. Ltd. Ms. Xue joined the Board in March 2000. She graduated
from China Northwestern University in 1963. She has over 30 years of
experience in general management.
Mr. Liu Jinping is a director and is also the deputy general manager of
SDIC Electronics Company. Mr. Liu joined the Board in March 2000. He graduated
from the Wireless Engineering Department of the Beijing Institute of
Technology in 1980, with a specialization in radar. Mr. Liu has over 20 years
of experience in engineering.
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Mr. Wang Xianlao is a director and is also the general manager of Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone. Mr. Wang
joined the Board in March 2000. He was previously the financial controller of
Cai Zhu Industrial General Corporation of Zhuhai Special Economic Zone. He has
over 10 years of experience in corporate financial planning and reporting.
Mr. Wu Weiren is a director and is also the chairman and the president of
IRICO Group Corporation. Mr. Wu joined the Board in March 2000. He graduated
from Hangzhou Electronic Industrial College in 1968 and has over 30 years of
experience in management and financial planning.
Mr. Yu Weixing is a director and is also our vice president, responsible
for our network design and construction. Mr. Yu joined us in 1994. He was
previously an engineer at Beijing No.1 Broadcasting Equipment Research
Institute, responsible for product design and development. Mr. Yu graduated
from Beijing Post and Telecommunications University in 1978, with a
specialization in microwave technology. He has over 20 years of experience in
engineering and general management.
Mr. Ning Xianfu is a director and is also our vice president and general
manager of business operations responsible for the business operation and
management of our branch offices. Mr. Ning joined us in 1994. Before he joined
us, he was an engineer in the research department at China Electronic
Information Group. He graduated from Harbin Industrial University in 1988,
with a specialization in communications system engineering, and received a
master's degree in signal and information processing in 1991. Mr. Ning has
over 10 years of experience in the information technology industry.
Ms. Hu Qiheng is an independent non-executive director and is also a member
of the China Academy of Engineering, the Director of the Working Committee of
the China Internet Information Center and a vice chairwoman of the Chinese
Association of Science and Technology. Ms. Hu joined the Board in March 2000.
She was previously the president of the Chinese Association of Automation and
the Chinese Association of Computer Science, the vice president of the China
Academy of Science and the director of the Automation Research Institute of
the China Academy of Science. Ms. Hu graduated from Moscow Chemical Machinery
College in 1954, with a specialization in Industrial Automation, and obtained
an Associate Doctoral Degree in 1963 from the same. She has over 40 years
experience in research of automatic control and mode identification.
Mr. Wang Tong is an Independent non-executive director and is also the vice
president of the Beijing Post and Telecommunications Design Center of the
Ministry of Information Industry. Mr. Wang joined the Board in March 2000. He
was previously the director of No. 3 Design Department and its predecessor,
the Interconnection Department, of the Beijing Post and Telecommunications
Design Center. Mr. Wang graduated with a bachelor's degree from the Beijing
Post and Telecommunications University in 1984, with a specialization in
Telecommunications Engineering. He has over 15 years experience in data and
multimedia communications and international interconnection.
Mr. Zhang Jie is a supervisor and is also our assistant president and head
of our Network Operation and Maintenance Department. Mr. Zhang joined us in
July 1995. He previously served as an engineer at China Computer Technology
Services Company. Mr. Zhang graduated with a bachelor's degree from Qing Hua
University in Beijing in 1983, with a specialization in electronics
engineering. He has over 17 years of experience in engineering.
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Mr. Zhang Minqing is a supervisor and is also head of our Corporate
Planning Department. Mr. Zhang joined us in December 1998. He was previously a
business manager of Infotron Computer Systems, Inc. (Beijing) and the
assistant manager of the Planning Department at China Electronics Import and
Export Company. Mr. Zhang graduated with a bachelor's degree in engineering
with a specialization in wireless technology and information systems from Qing
Hua University in Beijing. He has over 15 years of experience in corporate
investment and planning.
Mr. Song Baoyin is a supervisor and is also working in IRICO Group
Corporation. Mr. Song joined the Board in March 2000. He graduated with a
bachelor's degree from Hangzhou Electronics Industrial College in 1986 and has
over 14 years of experience in financial control and management.
Mr. Chen Jihua is our chief financial officer and is in charge of financial
planning and reporting. Mr. Chen joined us in January 2000. Previously, he was
the chief financial officer at ALJ Group, responsible for operations in China.
Mr. Chen graduated from Anhui University in 1987, with a specialization in
Accounting, and received a master's degree in 1994 from the State Financial
College in China. He also received an International Business Certificate from
Delter International Business School in Canada. He has over 12 years of
experience in accounting and financial management.
Ms. Wang Xia is the head of our Treasury Department, responsible for
treasury management and planning and is also the joint secretary to the board.
Ms. Wang joined us in July 1999. She was previously a deputy general manager
of the Business Operations Department at the Financial Company of China
National Chemical Import and Export Company and deputy head of the
International Business and Treasury Department of China Investment and Trust
Company for Foreign Economy and Trade. Ms. Wang graduated with a master's
degree in international finance from Nankai University in 1989. She has over
10 years of experience in treasury management and corporate finance.
Compensation of Directors, Supervisors and Executive Officers
The aggregate amount of cash remuneration we paid to our directors,
supervisors and executive officers during the year ended December 31, 1999 and
the five months ended May 31, 2000 was approximately RMB445,000 (US$53,756)
and RMB746,000 (US$90,117), respectively. During 1999 and the first five
months of 2000, we set aside RMB10,000 (US$1,208) and RMB20,000 (US$2,416),
respectively as non-cash remuneration (consisting solely of pension and
retirement benefits) with respect to them.
Employee Share Option Plan. We have adopted an employee share option plan.
This plan provides for the grant of options to our employees and those of our
subsidiaries, including our executive directors and those of our subsidiaries.
Under the employee share option plan, our compensation committee, consisting
of our independent non-executive directors and other persons appointed by our
board of directors and, if any holding company of ours is listed on the main
board of the Hong Kong stock exchange or the Growth Enterprise Market, the
independent non-executive directors of that company, has absolute discretion
to offer options to employees that it selects for a number of H shares that it
also determines. Each option will become exercisable for up to 60% of the
total number of H shares it covers beginning on the third anniversary from the
grant date. It will become exercisable for an additional 20% on each of the
fourth and fifth anniversaries. Each option will have a maximum term of 10
years from the grant date. Because Chinese individuals are not permitted to
purchase H shares under current laws, the exercise of such options is subject
to approval from the Chinese government or a change of law that would permit
the option holder to purchase H shares. The employee share option plan
provides for issuance (together with any other plans, including the pre-global
offering share option plan) of options exercisable for H shares equal to up to
30% of the total number of our issued H share capital from time to time.
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The price for an H share payable by a participant upon the exercise of an
option will be determined by our compensation committee in its discretion at
the grant date, but may not be less than a specified minimum. The minimum
price is the highest of:
. the nominal value of an H share;
. the average of the closing prices of any H shares on the Growth Enterprise
Market on the five business days immediately preceding the date of grant of
the option on which there were dealings in H shares on the Growth
Enterprise Market; and
. the closing price of H shares on the date of grant on the Growth Enterprise
Market.
Pre-Global Offering Share Option Plan. We have also adopted a pre-global
offering share option plan. The purpose of the pre-global offering share
option plan is to recognize the contribution of individuals (including
directors, senior management and our full time, part time and temporary
employees) to our growth and to the global offering. The principal terms of
the pre-global offering share option plan are the same as the share option
plan in all material respects except that:
. the maximum number of H shares available under the pre-global offering
share option plan is 7,199,400, equivalent to 10% of our issued H share
capital immediately after the global offering (assuming the over-allotment
option is not exercised), and no further options will be granted under this
plan after the global offering. We have conditionally awarded options under
the pre-global offering share option plan to 131 grantees to subscribe for
a total of 3,953,450 H shares, representing 5.49% of our issued H share
capital (assuming that the over-allotment option is not exercised.
. the subscription price of an H share in respect of any particular option
granted under the pre-global offering share option plan is the issue price
for an H share in the global offering, excluding brokerage fees and
transaction levy.
. the grantees eligible for options include any individual who is identified
by the board of directors as having made a contribution to us.
. the pre-global offering share option plan is administered by our board of
directors.
To the extent not exercised, options granted under either share option plan
will lapse automatically on:
. the expiration of the ten-year term of the option;
. the date of our winding-up;
. the date the grantee purports to assign or create any interest in favor of
a third party over his option; or
. the cessation of the grantee as a qualifying participant of the applicable
plan by reason of serious misconduct, criminal offence or bankruptcy. In
the event that a grantee ceases to be a qualifying participant for other
reasons, including death, or if we are voluntarily wound-up, or a takeover
offer for our H shares, a scheme of arrangement or a compromise with
creditors is made, the grantee may exercise an option during a period
specified in the respective plan document or by notice to the grantee,
after which period the option held by the grantee will lapse.
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Based on a legal opinion issued by Jingtian & Gongcheng, our Chinese
counsel, the share option plans are partially valid under Chinese laws as no
Chinese law prohibits Chinese companies from adopting employee share option
schemes or granting options. We are therefore entitled to grant options to our
employees and/or other employees under the plans. However, under currently
applicable Chinese laws, Chinese nationals must not hold or trade any H shares
of a Chinese company unless special approval has been obtained from the
relevant regulatory authorities. Therefore, our Chinese counsel is of the view
that until the relevant laws have been modified or a special approval has been
granted, our employees and other grantees who are Chinese nationals to whom
options have been granted under either share option plan cannot exercise the
granted options. Our Chinese counsel has further indicated that the share
option plans may need to be amended in the future in order to comply with any
modifications to Chinese laws.
We have already filed a copy of each share option plan with the China
Securities Regulatory Commission. Also, it is a term of each share option plan
that exercise of an option granted thereunder is subject to approval from the
China Securities Regulatory Commission for the issue of additional H shares,
and the grantee being permitted to purchase and hold the H shares in his
personal capacity.
As of the date of this prospectus, we have granted options to subscribe for
an aggregate of 3,953,450 H shares at an exercise price equal to the global
offering price under the pre-global offering share option plan. All of these
options may be exercised within 10 years from the date of grant. Of the 131
grantees, 123 were full-time employees, including 3 directors and 2
supervisors, and 8 were non-employees, including 1 supervisor. We have not
granted or agreed to grant any other options under either share option plan.
Immediately following the global offering, our directors and supervisors
will have interests in our share capital as grantees under our pre-global
offering share option plan. The interests which are required to be disclosed
under Hong Kong laws, and all grants in excess of 100,000 H shares are as
follows:
<TABLE>
<CAPTION>
Total number
Name and address of grantee of H Shares
--------------------------- ------------
<S> <C>
Qi Mingqiu 150,000
Room 2404, Building 3
Dinghuidong Li, Haidian District
Beijing, China
Yu Weixing 80,000
Room 702, 215 Huizhongli
Ya Yun Cun, Chaoyang District
Beijing, China
Ning Xianfu 80,000
27 Wanshou Road, Haidian District
Beijing, China
Xue Baoming 60,000
Room 401, Jia 65 Fuxing Road
Haidian District
Beijing, China
Liu Jinping 60,000
Room 302, Section 1, Building 13
Guoying Garden
Beijing, China
</TABLE>
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<TABLE>
<CAPTION>
Total number
Name and address of grantee of H shares
--------------------------- ------------
<S> <C>
Wang Xianlao 60,000
4A, Building 29, Ji Da Yuan Lin Garden
Zhuhai, China
Wu Weiren 60,000
Room 301, Jia 65 Fuxing Road
Haidian District
Beijing, China
Zhang Minqing 40,600
Room 301, Section 2, Building 6
Qi Xian Cun, Beiwa Road
Haidian District
Beijing, China
Song Baoyin 60,000
Room 302, Jia 65 Fuxing Road
Haidian District
Beijing, China
Zhang Jie 50,000
Room 1703, East Tower
5 Wanshou Lu Xijie
Beijing, China
Chen Jihua 80,000
East Wing, 9th Floor
Beijing Capital Times Square
No. 88 West Chang An Avenue, 100031
Beijing, China
Wang Xia 50,000
East Wing, 9th Floor
Beijing Capital Times Square
No. 88 West Chang An Avenue, 100031
Beijing, China
Zhang Wenyi 150,000
Chairman of the Board of Directors of our parent
Room 301, Section 2, Building 6 Qi Xian Cun
Beiwa Road, Haidian District
Beijing, China
</TABLE>
Director and Supervisor Service Agreements. Each of our executive directors
and supervisors has entered into a service contract with us. The terms and
conditions of the service contracts are similar in all material aspects and
are briefly described as follows:-
. each service contract commenced on March 24, 2000 and is for a term of
three years;
. each service contract may be renewed with the consent of both parties;
and
. the annual fixed amount of remuneration payable to each executive
director and supervisor ranges from RMB400,000 (US$48,320) to RMB500,000
(US$60,400) and RMB120,000 (US$14,496) to RMB180,000 (US$21,744),
respectively, for the year 2000 and is subject to review at least once
every 12 months. The remuneration was determined by our board in
accordance with a resolution passed by our shareholders at a general
meeting.
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Our executive directors will also be entitled to the welfare benefits in
accordance with relevant Chinese laws and regulations. According to the
service contracts, each of our executive directors and supervisors may receive
a bonus with reference to our profitability upon approval of our shareholders
in general meeting.
The aggregate remuneration we paid in cash or in pension and retirement
benefits to our directors and supervisors for the year ended December 31, 1999
was approximately RMB644,000 (US$77,795) and RMB15,000 (US$1,812),
respectively. The aggregate remuneration we paid and benefits payable in cash
or in kind to our directors and supervisors for the year ending December 31,
2000 under the current arrangements in force at the date of this prospectus is
approximately RMB1,618,000 (US$195,454) and RMB85,000 (US$10,268),
respectively.
The annual remuneration and benefits in kind we paid to each executive
director and supervisor for the three years ended December 31, 1999 and the
five months ended May 31, 2000 are as follows:
<TABLE>
<CAPTION>
Five
Years ended December months
31, ended
----------------------- May
1997 1998 1999 31, 2000
------- ------- ------- --------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Director A..................................... 58 67 94 265
Director B..................................... 57 60 85 189
Director C..................................... 46 51 96 68
Supervisor D................................... 53 64 65 79
Supervisor E................................... -- -- 65 58
--- --- --- ---
214 242 405 659
=== === === ===
</TABLE>
All other directors and supervisors did not receive any remuneration or
benefit in kind during the three years ended December 31, 1999 and the five
months ended May 31, 2000 as they are not executives of the Company.
The annual remuneration and benefits in kind payable by us to each of the
executive directors for the year ending December 31, 2000 are estimated as
follows:
<TABLE>
<CAPTION>
RMB
---------
<S> <C>
Director A............................................................ 530,000
Director B............................................................ 427,000
Director C............................................................ 418,000
---------
Total............................................................... 1,375,000
=========
</TABLE>
We paid no directors' fee for either of the two years ended December 31,
1999. The aggregate of the directors' and supervisors' basic salaries, housing
allowances and other allowances and benefits we paid in cash or in kind for
the years ended December 31, 1998 and 1999 was RMB242,000 (US$29,234) and
RMB405,000 (US$48,924).
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<PAGE>
Audit Committee of the Board
We have established an audit committee with written terms of reference
based upon guidelines published by the Hong Kong Society of Accountants. The
audit committee has two members comprising our independent non-executive
directors, Hu Qiheng and Wang Tong. The primary duties of the audit committee
are to review our annual, half year and quarterly reports and accounts,
supervise our financial reporting process and internal control system and to
provide advice and comments thereon to the board of directors.
Staff
The following table shows the approximate number of employees we had at the
end of our last three years by the principal business function they performed:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Number % Number % Number %
<S> <C> <C> <C> <C> <C> <C>
Management and administrative........... 195 31.05 108 34.83 62 31.96
Engineers and technicians............... 214 34.08 101 32.58 69 35.5
Sales and Marketing..................... 219 34.87 101 32.59 63 32.54
Total.................................. 628 100 310 100 194 100
</TABLE>
Total remuneration of our employees includes wages, bonuses, commissions
and allowances. We paid our employees an aggregate of RMB6.2 million (US$0.8
million), RMB9.6 million (US$1.2 million) and RMB16.1 million (US$1.9 million)
and RMB14.0 million (US$1.7 million) in wages and bonuses in the years ended
December 31, 1997, 1998 and 1999 and the five months ended May 31, 2000,
respectively. The compensation of an employee is based on responsibility and
performance.
We make contributions for our employees' pensions and for the provision of
retirement benefits to our retirees. This is achieved through participation in
pension plans managed by the Beijing Haidian District Social Services Fund
Management Center. Under our pension arrangement, we pay a monthly
contribution equal to 19% of the average monthly wages of our employees in the
previous year. In 1999 and the first five months of 2000, total contributions
paid for our directors, supervisors and executive officers to the pension fund
was approximately RMB10,000 (US$1,208) and RMB20,000 (US$2,416), respectively.
In addition, each employee currently pays a percentage of his or her salary as
an additional contribution. Upon retirement, our employees are entitled to the
payment of pensions from the fund.
We make contributions equal to 6% per employee of the relevant city's
average monthly wages in the previous year and 10% of the average monthly
wages of our employees in the previous year to a health insurance program and
an employee housing fund, respectively. We do not have further liabilities
apart from making contributions to the housing fund. In 1999 and the first
five months of 2000, total contributions paid for our directors, supervisors
and executive officers to the health insurance program and housing fund was
approximately RMB19,000 (US$2,295) each. Currently, each employee currently
pays a percentage of his or her salary to these funds as an additional
contribution. Upon retirement, our employees are entitled to receive pension
payments from the fund.
In addition, we maintain staff quarters for qualified employees who are not
local residents of the region in which they are employed. We have not
transferred, nor do we plan to transfer our ownership of these quarters to our
employees. We have otherwise not provided any housing benefit scheme or
constructed any staff quarters for the benefit or our employees.
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<PAGE>
We also make contributions of 1% per employee of the relevant city's
average monthly wages in the previous year to a statutory unemployment
insurance fund and 14% of the current year's payroll as a statutory general
welfare set aside.
We have a policy that permanent members of our work force are employed
under employment contracts that specify the employee's position,
responsibilities, remuneration and grounds for termination. We have no labor
union and have not experienced any strikes or other labor disturbances and we
believe that our relations with our employees are good.
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PRINCIPAL SHAREHOLDERS
The following table provides information on the beneficial ownership of our
shares on a fully diluted basis as of the date of this prospectus, and as
adjusted to reflect the sale of the ADSs and H shares offered in the global
offering, by (1) each person known to us to own beneficially more than 5% of
our shares in issue immediately following completion of the global offering,
none of whom have different voting rights and (2) all of our directors,
supervisors and executive officers as a group. All of our and our parent's
shareholders are state-owned enterprises or institutions directly or
indirectly supervised by China's State Council. Accordingly, the Chinese
government indirectly controls 100% of our shares before the global offering.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After the
the Global Global
Offering Offering(1)
----------------- -----------------
Name of Substantial Shareholders Number % Number %
-------------------------------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C>
IRICO Group Corporation (2)(3).......... 238,989,200 96.22% 238,989,200 74.60%
Shanghai Hua Hong (Group) Company
Limited(3)............................. 183,874,200 74.03% 183.874,200 57.39%
Jitong Communications Co., Ltd.
(parent)(4)............................ 183,874,200 74.03% 183,874,200 57.39%
Cai Zhu Industrial General Corporation
of Zhuhai Special Economic Zone (5).... 55,115,000 22.19% 55,115,000 17.20%
All directors, supervisors and executive
officers as a group (14 persons)(6).... 830,600 * 830,600 *
</TABLE>
--------
Notes:--
* less than one percent
(1) Assumes that the over-allotment option is not exercised.
(2) IRICO Group Corporation is the beneficial owner of the 55,115,000 shares
held by Cai Zhu Industrial General Corporation of Zhuhai Special Economic
Zone, its wholly-owned subsidiary.
(3) Shanghai Hua Hong (Group) Company Limited has agreed to purchase 40% of
our parent's shares from IRICO Group Corporation. Completion of the sale
is subject to payment of the purchase price. Upon completion, Shanghai Hua
Hong (Group) Company Limited, by virtue of its 40% interest in our parent,
may be deemed to be the beneficial owner of the 183,874,200 shares held by
our parent. Likewise, by virtue of its 44.91% interest in our parent after
the transfer, IRICO Group Corporation may also be deemed to be the
beneficial owner of the 183,874,200 shares held by our parent.
(4) Shareholders of our parent are as follows:--
<TABLE>
<CAPTION>
IRICO Group Corporation ............................................ 44.91%
Shanghai Hua Hong (Group) Company Limited........................... 40.00%
<S> <C>
SDIC Electronics Company............................................ 9.59%
Beijing Economic Development and Investment Company................. 4.74%
Changzhou Guoguang Electronics Company.............................. 0.48%
Tianjin Communication and Broadcasting (Group) Company Limited...... 0.14%
The Seventh Electronics Research Institute of the Ministry of
Information Industry............................................... 0.14%
</TABLE>
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<PAGE>
(5) Cai Zhu Industrial General Corporation of Zhuhai Special Economic Zone is
a limited liability company incorporated under the Chinese company law and
is a wholly-owned subsidiary of IRICO Group Corporation.
(6) Consists of solely of options granted under the share option plan and pre-
global offering share option plan which will not become exercisable before
October 9, 2003, the third anniversary of the grant date.
Restrictions on significant shareholders
All of our shareholders immediately before the global offering are
promoters under Chinese law and therefore they are prohibited from
transferring any of our shares until March 24, 2003, three years after our
establishment. Additional restrictions are imposed in connection with the
arrangements for the Hong Kong offering as required by the Growth Enterprise
Market listing rules. Under these arrangements, each of our parent, Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone, IRICO Group
Corporation, and SDIC Electronics Company have undertaken to us, and the Hong
Kong underwriters that, for the period prescribed by the Growth Enterprise
Market listing rules, currently 24 months, until after dealings in our H
shares begin on the Growth Enterprise Market, it will not:
(1) pledge, charge, offer, sell, contract to sell, sell or grant any option or
right or warrant to purchase or otherwise transfer or dispose of any of
our shares or interests in our shares or other securities held by it that
are convertible into or exchangeable for, or that represent the right to
receive, our shares or any substantially similar securities;
(2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of shares
or other securities described in item (1);
(3) immediately inform us and Dresdner Kleinwort Benson of any pledges or
charges of any securities described in item (1) by it and the number of
shares or other securities so pledged or charged; or
(4) immediately inform us and Dresdner Kleinwort Benson of any indication
received by it, either verbal or written, from any pledgee or chargee of
any securities described in item (1) that were pledged or charged that the
shares or other securities will be disposed of;
in each case unless as part of the global offering or with the prior written
consent of Dresdner Kleinwort Benson (which consent may not be unreasonably
withheld or delayed) and in compliance with the requirements of the Growth
Enterprise Market listing rules. Because the Growth Enterprise Market has
announced that it is currently reviewing its rules covering these
arrangements, the restrictions above may be shortened so that they apply for
only six months instead of 24 months, subject to our controlling shareholder
maintaining at least a 30% interest in our registered share capital for an
additional six month period. Shanghai Hua Hong (Group) Company Limited has
given a similar undertaking for a period of only six months.
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<PAGE>
RELATED PARTY TRANSACTIONS
In order to conduct our business, we have entered into various agreements
with our parent and principal shareholders. These agreements are as follows:
Reorganization Agreement
Pursuant to a reorganization agreement among us, our parent, Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone and several
other promoters dated March 24, 2000, our parent transferred most of the
assets and liabilities held by our parent in its telecommunications business
to us in exchange for the issuance of domestic shares. Any assets, license,
approvals or contracts which could not be transferred to us, because of either
regulatory or contractual prohibitions, were maintained by our parent for our
benefit pursuant to a licensing agreement. Pursuant to the terms of the
reorganization, we have assumed most of the assets and liabilities related to
the telecommunications business transferred by our parent to us. Our parent
has provided an indemnity to us in respect of all claims and liabilities in
connection with the assets and liabilities transferred to us pursuant to the
reorganization, which were not otherwise disclosed and accounted for in the
financial statements of our parent as at September 30, 1999. In addition, our
parent has provided an indemnity to us in respect of any claims and losses
that we may suffer arising from our parent's fraud, negligence or misconduct,
if any, in the management or operation of the telecommunications business
prior to the date of our establishment.
Licensing Agreement
Pursuant to a licensing agreement dated March 24, 2000 between our parent
and us, and as part of the reorganization, our parent has agreed to authorize
us to conduct the telecommunications business which had been previously
conducted by our parent under various licenses and approvals granted by the
Ministry of Information Industry to our parent. The license granted to us
under this agreement will be for as long as our parent remains licensed by the
Ministry of Information Industry to engage in the telecommunications business.
Our parent has also agreed to lease international gateways on our behalf at
our instruction so that we can direct traffic through them to and from our
network. There is no consideration payable by us to our parent under the
licensing agreement except for reimbursement of lease expenses and other
reasonable expenses for the international gateways.
Non-competition Agreement
Pursuant to a non-competition agreement dated March 24, 2000 between our
parent and us, our parent has agreed not to compete or to form any Chinese
entity which may compete with us for any services, products or business
conducted or provided by us inside and outside China. Our parent has agreed to
indemnify us for any losses arising from any breach of this agreement.
Trademark Transfer Agreement
Pursuant to a trademark transfer agreement dated March 24, 2000 between our
parent and us, our parent has agreed to transfer its trademarks for GBnet and
its logo, among others, to us. Before the transfer is registered, our parent
will grant an exclusive right to us to use those trademarks. Under the
trademark transfer agreement, our parent will also grant us the free and
exclusive right to use its domain names, www.jitong.com, www.gb.com.cn and
www.chinagb.net until Chinese law permits their transfer to us, at which time
our parent will do so at no charge to us. There is no consideration payable by
us to our parent under the trademark transfer agreement.
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Trademark Licensing Agreement
Pursuant to a trademark licensing agreement dated March 24, 2000 between us
and our parent, we agreed, upon the completion of transfer of the trademarks
from our parent to us under the trademark transfer agreement discussed in the
previous paragraph, to license our parent and its affiliates to use the
trademarks free of charge on the products and services which are not in
competition with ours. Our parent or its affiliates are not permitted to
sublicense those trademarks without our written approval. The term will
commence on the date when the transfer of trademarks from parent to us is
registered and completed and will expire when our rights to use those
trademarks expire, or when our parent no longer holds any of our shares.
Consulting and Service Agreement
Pursuant to a Consulting and Service Agreement dated August 30, 2000,
between us and Ji Tong Bellsouth Communication & Information Engineering Co.,
Ltd., a 50% joint venture between our parent and BellSouth International (Asia
Pacific), Inc., Ji Tong BellSouth Communication & Information Engineering Co.,
Ltd. agreed to provide leased line access, Internet protocol telephony
consulting and Internet dial-up access to us in return for a commission based
on our revenues from resale of these services. The term commenced on August
30, 2000 and will expire on August 29, 2002. Based on the expected sales
volume under this agreement, it is expected that the annual commission fee we
will pay to Ji Tong Bellsouth Communication & Information Engineering Co.,
Ltd. will not exceed the higher of HK$1.0 million (US$0.1 million) or 0.03% of
our net tangible assets in any year in any financial year.
Internet Service Agreement
Pursuant to an Internet Service Agreement dated March 30, 1999 entered into
between our parent and IRICO Group Corporation, our parent agreed to provide
IRICO Group Corporation with Interent connection services and the right to use
some Interent addresses for a monthly charge of RMB5,500 (US$664). Effective
as of March 24, 2000, our Parent's rights and obligations under this agreement
were assigned to us under the reorganization agreement. On September 22, 2000,
we entered into a supplemental agreement with IRICO Group Corporation pursuant
to which we agreed to continue to provide these services to IRICO Group
Corporation. Based on the expected sales volume under this agreement, it is
expected that the annual service fee which IRICO Group Corporation will pay us
will not exceed the higher of HK$1.0 million (US$0.1 million) or 0.03% of our
net tangible assets in any year in any financial year.
Joint Investment Agreement
Pursuant to a joint investment agreement dated December 18, 1999 among
IRICO Display Device Co., Ltd., a 56.14% owned subsidiary of IRICO Group
Corporation, Hua Jian Electronics Co., Ltd., which is an independent third
party, and our parent, the three parties agreed to establish a limited
liability company with a term of 15 years to offer network information
services. The total investment will be RMB40.0 million (US$4.8 million). IRICO
Display Device Co., Ltd. and Hua Jian Electronics Co., Ltd. will,
respectively, contribute 70% and 20% of the investment in cash and would
invest the remaining 10% in the form of provision of Internet connection and
co-location services to the limited liability company. Pursuant to a share
transfer agreement dated March 24, 2000 between us and our parent, our parent
has agreed to transfer its interest in the joint venture to us, and we have
agreed to assume all of our parent's obligations under the joint investment
agreement.
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Equipment Purchase Agreement
Pursuant to an equipment purchase agreement dated March 23, 2000, between
our parent and Beijing Ji Kai Optical Telecommunication Network Co., Ltd., a
99% owned subsidiary of our parent, our parent agreed to purchase equipment
from the subsidiary at a total price of RMB620,000 (US$74,896). The agreement
took effect on March 23, 2000 and is being performed. Effective as of March
24, 2000, our parent's rights and obligations under the agreement were
assigned to us according to the reorganization agreement.
Mandate of Lending
Pursuant to a mandate of lending (relending) dated October 27, 1999 among
SDIC Electronics Co., China International Trust and Investment Corporation and
our parent, SDIC Electronics Co. will provide to our parent a loan with the
principal of RMB200.0 million (US$24.2 million) and a term of 10 years
(including a 2-year grace period) which will be used for the construction and
operation of the "Golden Bridge First Phase Works". Effective as of March 24,
2000, our parent's rights and obligations under this mandate and its
appendices were assigned to us according to the reorganization agreement.
Financial Guarantee
Our unsecured borrowings as of May 31, 2000, totaling RMB281.9 million
(US$34.1 million), were guaranteed, directly or indirectly, by IRICO Group
Corporation. Subsequent to May 31, 2000, an additional guaranteed amount of
RMB 150 million (US$18.1 million) was obtained in the form of a bank loan that
was funded by our parent. Our parent funded this amount with the proceeds of a
corresponding loan from China Construction Bank that was guaranteed by IRICO
Group Corporation.
Network Control Center Lease Agreement
Pursuant to a lease agreement dated March 24, 2000 entered into between us
and our parent, we have agreed to lease the premises occupied by our network
control center located at Electronic Science Mansion, Floor 28, 27 Wanshou
Road, Haidian District, Beijing from our parent for a monthly rent of
RMB120,000 (US$14,494). The leased premises comprise a total area of 1,000
sq.m. The term commenced on March 24, 2000 and will expire on March 24, 2003.
We can terminate the lease on three month's written notice. The monthly rental
was determined by both parties following negotiations on an arm's length basis
and on normal commercial terms, based on an open market value. We anticipate
that for each of the three financial years ending December 31, 2002, the
annual rent payable to our parent will not exceed RMB1,440,000 (US$173,970).
Office Center Lease Agreement
Pursuant to an office lease agreement dated March 24, 2000 between us and
our parent, we have agreed to lease our existing executive offices located at
Western Level 6, Section B, Zhongding Mansion, No. A18, West Street of North
Third Road, Haidian District, Beijing, from our parent for a monthly rent of
RMB130,251.60 (US$15,853). The executive offices occupy an area of 1,492 sq.m.
The term commenced on March 24, 2000 and will expire on March 24, 2003. We can
terminate the lease on three month's written notice. The monthly rental was
determined by both parties following negotiations on an arm's length basis and
on normal commercial terms, based on an open market value. We anticipate that
for each of the three years ending December 31, 2002, the annual rent payable
to our parent will not exceed RMB1,565,000 (US$189,071).
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<PAGE>
Equipment Lease Agreement
Pursuant to an equipment lease agreement dated February 25, 2000, as
amended, between our parent and China Jitong Communications Holding (HK)
Limited, a subsidiary of our parent, our parent agreed to lease items of
equipment from the subsidiary according to terms to be determined by separate
lease schedules. Pursuant to a lease schedule dated February 25, 2000, leased
equipment includes gateways, servers, other hardware and associated software.
Lease payments in the current lease schedule total US$70,610.22 monthly, and
this arrangement will expire on February 25, 2002. Our parent's rights and
obligations under this agreement were assigned to us according to the
reorganization agreement. We anticipate that for each of the three financial
years ending December 31, 2002, the annual lease payment made to China Jitong
Communications Holding (HK) Limited will not exceed RMB7,048,090 (US$850,000).
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<PAGE>
DESCRIPTION OF SHARE CAPITAL
The following is a summary of information relating to our capital stock,
based upon provisions of our articles of association, the Company Law of the
People's Republic of China (1993) and other selected laws and regulations
applicable to us. You and your advisors should refer to the text of the
articles of association and to the texts of applicable laws and regulations
for further information.
Prior to the consummation of the global offering, our total registered
capital is 248,377,800 domestic shares. Immediately after the global offering,
without giving effect to the exercise of the over-allotment options, our total
issued share capital will consist of 71,994,000 H shares and 248,377,800
domestic shares.
The global offering consists solely of an offering of H shares and ADSs
representing H shares. Thus, the following discussion primarily concerns H
shares and the rights of holders of H shares. The holders of ADSs will not be
treated as our shareholders and will be required to surrender their ADSs for
cancellation and withdrawal from the depositary facility in which the H shares
are held in order to exercise shareholder rights in respect of H shares. The
depositary will agree, so far as it is practicable, to vote or cause to be
voted the amount of H shares represented by ADSs in accordance with the
written instructions of the holders of the ADSs. See "Description of American
Depositary Shares."
Domestic shares and overseas-listed foreign invested H shares are both
ordinary shares in our share capital. Domestic shares are shares we issue to
domestic Chinese investors for subscription in Renminbi, while H shares are
shares we issue for subscription in other currencies to investors from Hong
Kong, Macau, Taiwan and outside of China.
Sources of Shareholders' Rights
China's legal system is based on written statutes and is a system in which
decided legal cases have little precedent value. China's legal system is
similar to civil law systems in this regard. In 1979, China began the process
of developing its legal system by undertaking to promulgate a comprehensive
system of laws. In December 1993, the Standing Committee of the 8th National
People's Congress adopted the Chinese company law. Although the Chinese
company law is expected to serve as the core of a body of regulatory measures,
which will impose a uniform standard of corporate behavior on companies and
their directors and shareholders, only a limited portion of this body of
regulatory measures has so far been promulgated.
Currently, the primary sources of shareholder rights are the articles of
association, the Chinese company law and the Growth Enterprise Market listing
rules, which, among other things, impose standards of conduct, fairness and
disclosure on us, our directors and our controlling shareholder. To facilitate
the offering and listing of shares of Chinese companies overseas, and to
regulate the behavior of companies whose shares are listed overseas, the State
Council Securities Committee and the State Commission for Restructuring the
Economic System issued the Mandatory Provisions for articles of association of
Companies Listing Overseas on August 27, 1994. These provisions have been
incorporated into our articles of association and any amendment to those
provisions will only become effective after approval by the companies approval
department of local government authorized by the State Economic and Trade
Commission and the China Securities Regulatory Commission.
In addition, upon the listing of and for so long as the H shares are listed
on the Growth Enterprise Market, we will be subject to those relevant
ordinance, rules and regulations applicable to companies listed on the Growth
Enterprise Market, including the Growth Enterprise Market listing rules, the
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Securities (Disclosure of Interests) Ordinance, the Securities (Insider
Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share
Repurchases.
Unless otherwise specified, all rights, obligations and protections
discussed below derive from our articles of association and/or the Chinese
company law.
Enforceability of Shareholders' Rights
There has not been any public disclosure in relation to the enforcement by
holders of H shares of their rights under constitutive documents of joint
stock limited companies or the Chinese company law or in the application or
interpretation of the Chinese or Hong Kong regulatory provisions applicable to
Chinese joint stock limited companies.
In most states of the United States, shareholders may sue a corporation
"derivatively". A derivative suit involves the commencement by a shareholder
of a corporate cause of action against persons who have allegedly wronged the
corporation, where the corporation itself has failed to enforce the claims
directly. This would include suits against corporate officers, directors, or
controlling shareholders. This type of action is brought based upon a primary
right of the corporation, but is asserted by a shareholder on behalf of the
corporation. Because the right to sue derivatively is not available under
Chinese law, our shareholders may have to rely on other means to enforce the
rights of shareholders, such as through administrative proceedings.
Our articles of association provide that all differences or claims
. between a holder of H shares and us;
. between a holder of H shares and any of our directors, supervisors or
other senior officers; or
. between a holder of H shares and a holder of domestic shares,
involving any right or obligation provided in the articles of association, the
Chinese company law or any other relevant law or administrative regulation
which concerns our affairs must, with some exceptions, be referred to
arbitration at either the China International Economic and Trade Arbitration
Commission in China or the Hong Kong International Arbitration Center. Our
articles of association also provide that the arbitration will be final and
conclusive. On June 21, 1999, an arrangement was made between Hong Kong and
China for the summary mutual enforcement of each other's arbitration awards in
a manner consistent with the United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards and pre-handover practice. This new
arrangement was approved by the Supreme Court of China and the Hong Kong
Legislative Council, and became effective on February 1, 2000. We have
provided an undertaking to the Securities and Exchange Commission that, when,
if ever, all applicable Chinese laws and regulations and, if our H shares are
still listed on the Growth Enterprise Market, all applicable rules of the
Growth Enterprise Market do not prohibit it, our board of directors will
propose an amendment to the articles of association which would permit
shareholders to adjudicate disputes arising between our shareholders, our
directors, supervisors or officers by means of judicial proceedings.
The holders of H shares will not be able to bring actions on the basis of
violations of the Growth Enterprise Market listing rules and must rely on the
Hong Kong Stock Exchange to enforce its rules. The Securities (Disclosure of
Interests) Ordinance establishes obligations in relation to disclosure of
shareholder interests in Hong Kong listed companies, the violation of which is
subject to prosecution
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by the Securities and Futures Commission of Hong Kong. The Securities (Insider
Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers and Share
Repurchases do not have the force of law and are only standards of commercial
conduct considered acceptable for takeover and merger transactions and share
repurchases in Hong Kong as established by the Securities and Futures
Commission and the securities and futures industry in Hong Kong.
We have appointed CT Corporation System 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 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, all of our
directors and officers and the experts named in this prospectus reside outside
the United States (principally in China) and substantially all of our assets
and of those persons are located outside the United States. Therefore, you may
not be able to effect service of process within the United States against any
of those persons. In addition, China does not have treaties providing for the
reciprocal recognition and enforcement of judgments of courts within the
United States or most other countries that are members of the Organization for
Economic Cooperation and Development. This means that administrative actions
brought by regulatory authorities such as the Securities and Exchange
Commission, and other actions which result in foreign court judgments could
only be enforced in China if the judgments or rulings do not violate the basic
principles of the law of China or the sovereignty, security and public
interest of the society of China, as determined by a People's Court of China
which has jurisdiction for recognition and enforcement of judgments. We have
been advised by our Chinese counsel, Jingtian & Gongcheng, that there is doubt
as to the enforceability in China of any actions to enforce judgments of
United States courts arising out of or based on the ownership of the H shares
or ADSs, including judgments arising out of or based on the civil liability
provisions of United States federal or state securities laws. See
"Enforceability of Civil Liabilities".
Restrictions on Transferability and the Share Register
All fully paid up H shares will be freely transferable in accordance with
the articles of association unless otherwise prescribed by law and/or
administrative regulations. Under current laws and regulations, H shares may
be traded only among investors who are not Chinese persons, and may not be
sold to Chinese investors. Consequences under Chinese law of a purported
transfer of H shares to Chinese investors are unclear.
As provided in our articles of association, we may refuse to register a
transfer of H shares without providing any reason unless:
. any relevant transfer fee and stamp duty is paid;
. the instrument of transfer is accompanied by the share certificates to
which it relates and any other evidence reasonably required by our board
to prove the transferor's right to make the transfer;
. there are no more than four joint holders as transferees; and
. the H shares are free from all liens.
We are required to keep a register of our shareholders which shall be
comprised of various parts, including one part which is to be maintained in
Hong Kong in relation to H shares to be listed on the Growth Enterprise
Market. Shareholders have the right to inspect and obtain a copy of the share
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register on payment of the cost. For a reasonable fee, shareholders may copy
any part of the share register, obtain background information regarding our
directors, supervisors, general manager and other senior officers, minutes of
shareholder general meetings and reports regarding our share capital and any
share repurchases in the prior year.
We have appointed HKSCC Registrars Limited to act as the registrar of our H
shares. This registrar maintains our register of holders of H shares at 2nd
Floor, Vicwood Plaza, 199 Des Voeux Road Central in Hong Kong and enters
transfers of shares in that register upon the presentation of the documents
described above.
Dividends
Our board of directors may propose dividend distributions at any time,
subject to the approval of the shareholders by way of an ordinary resolution.
The articles of association allow for distribution of dividends in the form of
cash or shares. A distribution of shares, however, must be approved by special
resolution of the shareholders. The articles of association allow for
distribution of dividends in the form of cash or shares.
Dividends may only be distributed, however, after allowance has been made
for:
. recovery of losses, if any;
. allocations to the statutory common reserve fund;
. allocations to the statutory public welfare fund; and
. allocations to a discretionary common reserve fund if approved by the
shareholders.
The minimum and maximum aggregate allocations to the statutory funds are
15% and 20%, respectively, of our net income determined in accordance with
Chinese accounting rules.
The articles of association require us to appoint on behalf of the holders
of H shares a receiving agent which is registered as a trust corporation under
the Trustee Ordinance of Hong Kong to receive dividends declared by us in
respect of the H shares on behalf of the holders of H share shareholders. The
articles of association require that cash dividends and other distributions in
respect of H shares be declared in Renminbi and paid by us in Hong Kong
dollars while cash dividends and other distributions of the domestic shares
shall be paid in Renminbi.
If we record no profit for the year, we may not normally distribute
dividends for the year.
Dividend payments may be subject to Chinese withholding tax. See
"Taxation--Chinese Taxation".
Voting Rights and Shareholders' Meetings
Our board of directors must convene a shareholders' annual general meeting
once every year within six months' from the end of the preceding financial
year. Our board must convene an extraordinary general meeting within two
months of the occurrence of any one of the following events:
. where the number of directors is less than six, the number stipulated in
the Chinese company law, two-thirds of the number specified in our
articles of association;
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. where our unrecovered losses reach one-third of the total amount of our
share capital;
. where shareholder(s) holding 10% or more of our issued and outstanding
voting shares request(s) in writing the convening of any extraordinary
general meeting; or
. whenever our board deems necessary or our board of supervisors so
request.
Meetings of a special class of shareholders must be called in specified
situations when the rights of the holders of that class of shares may be
modified or adversely affected, as discussed below. Resolutions proposed by
shareholder(s) holding 5% or more of the total number of voting shares shall
be included in the agenda for the relevant annual general meeting if they are
matters which fall within the scope of the functions and powers of
shareholders in general meeting.
All shareholders' meetings must be convened by our board by written notice
given to shareholders not less than 45 days before the meeting. Based on the
written replies received by us 20 days before a shareholders' meeting, we will
calculate the number of voting shares represented by shareholders who have
indicated that they intend to attend the meeting. We can convene the
shareholders' general meeting if the number of voting shares represented by
those shareholders is more than one-half of our total voting shares,
regardless of the number of shareholders who actually attend the meeting.
Otherwise, we shall, within five days, inform the shareholders again of the
motions to be considered and the date and venue of the meeting by way of
public announcement. After the announcement is made, the shareholders' meeting
may be convened. The accidental omission by us to give notice of a meeting to,
or the non-receipt of notice of a meeting by, a shareholder will not
invalidate the proceedings at that shareholders' meeting.
Shareholders at meetings have the power, among other things, to approve or
reject our profit distribution plans, an increase or decrease in share
capital, the issuance of debentures, our merger or liquidation and any
amendment to our articles of association. In general, holders of H shares and
domestic shares vote together as a single class at all meetings and on all
matters. However, the rights of a class of shareholders may not be modified or
abrogated, unless approved by both a special resolution of all shareholders at
a general shareholders' meeting and by a special resolution of shareholders of
that class of shares at a separate meeting. Our articles of association
enumerate, without limitation, the following amendments which would be deemed
to be a modification or abrogation of the rights of a class of shareholders:
. increasing or decreasing the number of shares of a class or of a class
having voting or equity rights or privileges equal or superior to that
class;
. removing or reducing rights to receive dividends in a particular
currency; or
. creating shares with voting or equity rights superior to shares of that
class.
For votes on any of these matters, or any other matter that would modify or
abrogate the rights of the domestic shares or H shares, the holders of
domestic shares and H shares are deemed to be separate classes and vote
separately. Our articles of association specifically provide that, if approved
by a special resolution of a shareholders' general meeting, the issue of up to
20% of the total number of domestic shares and H shares then in issue will not
be deemed a modification or abrogation of the rights of any class of shares.
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Each H share is entitled to one vote on all matters submitted to a vote of
our shareholders at all shareholders' meetings, except for meetings of a
special class of shareholders where only holders of shares of the affected
class are entitled to vote on the basis of one vote per share of the affected
class.
Shareholders are entitled to attend and vote at meeting either in person or
by proxy. Proxies must be in writing and deposited at our residence, or any
other place specified in the meeting notice, not less than 24 hours before the
time for holding the meeting at which the proxy proposes to vote or the time
appointed for the passing of the relevant resolution(s). When the instrument
appointing a proxy is executed by the shareholder's attorney-in-fact, the
proxy when deposited must be accompanied by a notarially certified copy of the
relevant power of attorney or other authority under which the proxy was
executed.
Except for those actions discussed below, which require supermajority
votes, or special resolutions, resolutions of the shareholders are passed by a
simple majority of the voting shares held by shareholders who are present in
person or by proxy. Special resolutions must be passed by more than two-thirds
of the voting rights represented held by shareholders who are present in
person or by proxy.
The following decisions must be adopted by special resolution:
. an increase or reduction of our share capital or the issue of shares of
any class, warrants and other similar securities;
. the issue of our debentures;
. our division, merger, dissolution and liquidation;
. amendments to our articles of association; and
. any other matters considered by the shareholders in a general meeting and
which they have resolved by way of an ordinary resolution to be a nature
which may have a significant impact on us and should be adopted by
special resolution.
All other actions taken by the shareholders, including the appointment and
removal of our directors and independent auditors and the declaration of
normal dividend payments or stock distributions, will be decided by an
ordinary resolution of the shareholders.
The listing agreement between us and the Growth Enterprise Market provides
that we must notify the Hong Kong Stock Exchange of any decision made in
regard to any proposed alteration of our articles of association and any
proposed request we make to a Chinese authority to waive or otherwise modify
the provision of several Chinese regulations.
Board of Directors
We have a nine member board of directors including a chairman and vice
chairman. Directors shall be elected by shareholders at a general meeting for
a three year term. Because the shares do not have cumulative voting rights, a
holder of a majority of our shares is able to elect all of the directors.
Directors are elected for a term of three years.
Our board of directors is accountable to the shareholders in general
meetings and exercises the following functions and powers:
(a) to be responsible for the convening of shareholders' meetings and
reporting on its work to the shareholders at shareholders'
meetings;
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(b) to implement the resolutions passed by the shareholders in general
meeting;
(c) to determine our business plans and investment proposals;
(d) to formulate our annual preliminary and final budgets;
(e) to formulate our profit distribution proposal and loss recovery
proposals;
(f) to formulate proposals for the increase or reduction of our
registered capital and the issuance of our debentures;
(g) to draw up plans for our merger, division or dissolution;
(h) to decide on our internal management structure;
(i) to appoint or remove our president and to appoint or remove the
vice president(s) and other senior officers (including the
financial controller), based on the recommendation of the general
manager, and to decide on their remuneration;
(j) to formulate our basic management system; and
(k) to formulate proposals for any amendment of our articles of
association.
Except for items (f), (g) and (k), which require the affirmative vote of more
than two than two-thirds of all of our directors, resolutions on any other
items may be approved by the affirmative vote of a simple majority of our
directors.
In addition to obligations imposed by laws, administrative regulations or
the listing rules of the stock exchanges on which our shares are listed, the
articles of association place on each of our directors, supervisors, general
manager and any other senior officers a duty to each shareholder, in the
exercise of our functions and powers entrusted to them:
. not to cause us to exceed the scope of business stipulated in our
business license;
. to act honestly in our best interests;
. not to expropriate our property in any way, including (without
limitation) usurpation of opportunities which may benefit us; and
. not to expropriate the individual rights of shareholders, including
(without limitation) rights to distributions and voting rights, save and
except according to a restructuring which has been submitted to the
shareholders for their approval in accordance with the articles of
association.
Our articles of association further place on each of our directors,
supervisors, general manager and other senior officers:
. a duty, in the exercise of their powers and discharge of their
obligations, to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances;
. a fiduciary obligation, in the discharge of his duties, not to place
himself or herself in a position where his or her interests may conflict
with his or her duty to us; and
. a duty not to cause a person or an organization related or connected to
him or her in specified relationships to do what they are prohibited from
doing.
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Subject to the stipulations of relevant laws and regulations, the
shareholders in a general meeting may be ordinary resolution remove any
director before the expiration of his term of office. A director, supervisor,
general manager or other senior officer may generally be relieved of liability
for a specific breach of his or her duties by the informed consent of
shareholders in a general meeting.
Board of Supervisors
The board of supervisors exists to supervise our directors and our senior
officers to prevent them from abusing their positions and powers or infringing
our rights and interests or those of our shareholders or employees. The board
of supervisors has no power over the decisions or actions of our directors or
officers except to compel them to correct any act harmful to our interests.
The board of supervisors is composed of three members appointed for a three
year term. It has the right to:
. attend meetings of our board of directors;
. examine our financial affairs;
. verify financial reports and other financial information which have been
prepared by the board and which are proposed to be presented at
shareholders' meetings;
. supervise our directors, general manager and other senior officers in
order see whether they violate any laws, regulations or the articles of
association in performing their duties;
. require our directors, general manager or other senior officers to
correct any act harmful to our interests;
. verify accounting reports, business reports, profit distribution plans
and other financial information proposed to be tabled at the
shareholders' general meeting;
. propose to convene extraordinary general meetings of shareholders;
. represent us in negotiations with directors or in initiating legal
proceedings against a director; and
. any other matters authorized by the shareholders' annual general meeting
and the articles of association.
One member of the board of supervisors shall be an employee representative
appointed by our employees. The remaining members shall be appointed by the
shareholders in a general meeting. We do not currently have any employee
representative appointed to our board of supervisors but have been advised by
our Chinese counsel that this has been approved by relevant government
authorities and our continued operation on this basis is permissible. The
board of supervisors must meet at least once a year. Decisions of the board of
supervisors must be made by a two-thirds vote. A member of the board of
supervisors may not be a director, the president, a vice president or the
financial controller. The term of office of each member of the board of
supervisors is three years, including the term of office of the chairman of
the board of supervisors, both of which terms of office are renewable upon re-
election and re-appointment. We will pay all reasonable expenses incurred by
the board of supervisors in appointing professional advisors, such as lawyers,
accountants or auditors.
Liquidation Rights
In the event of our liquidation, payment of debts out of our remaining
assets shall be made in the order of priority prescribed by applicable laws
and regulations. After payment of debts, we shall distribute the remaining
property to shareholders according to the class and proportion of their
shareholdings. For this purpose, the H shares will rank equally with the
domestic shares.
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Liability of Shareholders
Shareholders are not liable to make any further contributions to our share
capital other than as agreed by the subscriber of the relevant shares on
subscription. This provision means that holders of ADRs will also not be
liable to make further contributions to our share capital.
Duration
We are organized as a joint stock limited company of indefinite duration.
Increase in Share Capital
The articles of association require that approval by a resolution of the
shareholders be obtained prior to issuing new shares. New issues of shares
must also be approved by the relevant Chinese authorities.
Reduction of Share Capital and Purchase by Us of Our Shares
We may reduce our registered share capital only upon obtaining the approval
of the shareholders and, when applicable, relevant Chinese authorities. The
number of H shares, which may be purchased is subject to the Securities
(Insider Dealing) Ordinance and the Hong Kong Codes on Takeovers and Mergers
and Share Repurchases. Our ability to repurchase any of our shares is subject
to approval of our shareholders and the relevant Chinese authorities.
Restrictions on Large or Controlling Shareholders
Our articles of association provide that, in addition to any obligation
imposed by laws and administrative regulations or required by the listing
rules of the stock exchanges on which our H shares are listed, a controlling
shareholder shall not exercise his voting rights in a manner prejudicial to
the interests of the shareholders generally or of some part of the
shareholders:
. to relieve a director or supervisor from his or her duty to act honestly
in our best interest;
. to approve the expropriation by a director or supervisor (for his or her
own benefit or for the benefit of another person) of our assets in any
way, including, without limitation, opportunities which may benefit us;
or
. to approve the expropriation by a director or supervisor (for his or her
own benefit or for the benefit of another person) of the individual
rights of other shareholders, including, without limitation, rights to
distributions and voting rights (but not according to a restructuring of
our company which has been submitted for approval by the shareholders in
a general meeting in accordance with our articles of association).
A controlling shareholder, however, will not be precluded by our articles
of association or any laws and administrative regulations or the listing rules
of the stock exchanges on which our H shares are listed from voting on these
matters.
A controlling shareholder is defined by our articles of association as any
person who, acting alone or together with others:
. has the power to elect more than one-half of the board of directors;
. has the power to exercise, or to control the exercise of, 30% or more of
our voting rights;
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. holds 30% or more of our issued and outstanding shares; or
. has de facto control of us in any other way.
Minutes, Accounts and Annual Report
Our shareholders may inspect copies of the minutes of the shareholders'
general meetings during our business hours free of charge. Shareholders may
also request copies of these minutes from us, and we must deliver the same to
the relevant shareholder within seven days of receipt of the reasonable fees
we may require.
Our fiscal year is the calendar year ending December 31. In respect of each
fiscal year, we must send to holders of H shares, not less than 21 days before
the date of the shareholders' annual general meeting, the audited financial
statements, together with the auditor's report as required by the Growth
Enterprise Market listing rules, relating to that fiscal year. These and any
interim financial statements must be prepared in accordance with Chinese
accounting standards and, for so long as H shares are listed on the Growth
Enterprise Market, must also be prepared in accordance with or reconciled to
either Hong Kong accounting standards or international accounting standards.
The financial statements must be approved by an ordinary resolution of the
shareholders at the annual general meeting.
The Growth Enterprise Market listing rules also require us to prepare an
interim report covering the first six months of each fiscal year and quarterly
reports not later than 45 days after the end of the relevant period.
Independent auditors are appointed each year by the shareholders at the
annual meeting.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
The Bank of New York will execute and deliver the ADRs. ADRs are American
depositary receipts. Each ADR is a certificate evidencing a specific number of
American depositary shares, also referred to as ADSs. Each ADS will represent
4 H shares (or a right to receive 4 H shares) deposited with the Hong Kong
office of The Hongkong and Shanghai Banking Corporation Limited, as custodian
for The Bank of New York. Each ADS will also represent any other securities,
cash or other property which may be held by The Bank of New York under the
deposit agreement. The Bank of New York's office at which the ADRs will be
administered is located at 101 Barclay Street, New York, New York 10286. The
custodian's office is located at One Queen's Road Central, Hong Kong.
You may hold ADSs either directly (by having an ADR registered in your
name) or indirectly through your broker or other financial institution. If you
hold ADSs directly, you are an ADR holder. This description assumes you hold
your ADSs directly. If you hold the ADSs indirectly, you must rely on the
procedures of your broker or other financial institution to assert the rights
of ADR holders described in this section. You should consult with your broker
or financial institution to find out what those procedures are.
As an ADR holder, we will not treat you as one of our shareholders and you
will not have shareholder rights. Chinese law governs shareholder rights. The
Bank of New York will be the holder of the H shares underlying your ADSs. As a
holder of ADRs, you will have ADR holder rights. A deposit agreement among us,
The Bank of New York, you, as an ADR holder and all beneficial owners of the
ADRs sets out ADR holder rights as well as the rights and obligations of The
Bank of New York, as depositary. New York law governs the deposit agreement
and the ADRs.
The following is a summary of the material provisions of the deposit
agreement. For more complete information, you should read the entire deposit
agreement and the form of ADR. You can inspect copies of the deposit agreement
at the corporate trust office of the depositary, located at 101 Barclay
Street, New York, New York 10286 or at the Securities and Exchange
Commission's public reference facilities. See "Where You Can Find More
Information."
Share Dividends and Other Distributions
How will you receive dividends and other distributions on the ADSs?
The depositary has agreed to pay to you the cash dividends or other
distributions, that it or the custodian receives on the H shares or other
deposited securities, after deducting its fees and expenses. You will receive
these distributions in proportion to the number of H shares your ADSs
represent.
. Cash. The depositary will convert any cash dividend or other cash
distribution we pay on the H shares into U.S. dollars, if it can do so on a
reasonable basis and can transfer the U.S. dollars to the United States. If
that is not possible or if any approval from the Chinese government is
needed and cannot be obtained, the deposit agreement allows the depositary
to distribute foreign currency only to those ADR holders to whom it is
possible to do so. It will hold the foreign currency it cannot convert for
the account of the ADR holders who have not been paid. It will not invest
the foreign currency, and it will not be liable for any interest.
Before making a distribution, the depositary will deduct any withholding
taxes that must be paid under applicable law. See "Taxation".
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The depositary will distribute only whole U.S. dollars and cents and will
round fractional cents to the nearest whole cent. If the exchange rates
fluctuate during a time when the depositary cannot convert foreign currency
you may lose some or all of the value of the distribution.
. Shares. If we distribute H shares as a dividend or free distribution, the
depositary may distribute additional ADSs, in proportion to the number of
ADSs that represent the new H shares, if we furnish it promptly with
satisfactory evidence that it is legal to do so. The depositary will only
distribute whole ADSs. It will sell H shares which would require it to
issue a fractional ADS and distribute the net proceeds in the same way it
does with cash. If the depositary does not distribute additional ADSs, each
ADS will also represent a proportional amount of the new H shares.
. Rights to receive additional shares. If we offer holders of our securities
any rights to subscribe for additional H shares or any other rights, the
depositary may make these rights available to you. We must first instruct
the depositary to do so and furnish it with satisfactory evidence that it
is legal to do so. If we do not furnish this evidence and/or give these
instructions, and the depositary decides it is practical to sell the
rights, the depositary will sell the rights and distribute the proceeds in
the same way it does with cash. The depositary will allow rights that are
not distributed or sold to lapse. In that case, you will receive no value
for them.
If the depositary makes rights available to you, it will exercise the
rights and purchase the H shares on your behalf. The depositary will then
deposit the H shares and deliver ADSs to you. It will only exercise rights if
you pay it the exercise price and any other charges the rights require you to
pay.
United States securities laws may restrict the transfer and cancellation of
the ADSs represented by H shares purchased upon exercise of rights. For
example, you may not be able to trade the ADSs freely in the United States. In
this case, the depositary may execute and deliver the ADSs under a separate
restricted deposit agreement that will contain the same provisions as the
deposit agreement, except for changes needed to put the necessary restrictions
in place.
. Other Distributions. The depositary will send to you anything else it
receives on deposited securities by any means it thinks is legal, fair and
practical. If it cannot make the distribution in that way, the depositary
has a choice. It may decide to sell what we distributed and distribute the
net proceeds in the same way it does with cash, or, it may decide to hold
what we distributed, in which case ADSs will also represent the newly
distributed property.
The depositary is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADR holders. We have no
obligation to register ADRs, ADSs, H shares, rights or other securities under
the Securities Act. We also have no obligation to take any other action to
permit the distribution of ADRs, ADSs, H shares, rights or anything else to
ADR holders. This means that you may not receive the distributions we make on
our H shares, or any value for them, if it is illegal or impractical for us to
make them available to you.
Deposit, Withdrawal and Cancellation
How does the depositary deliver ADRs?
The depositary will deliver ADRs if you or your broker deposits H shares or
evidence of rights to receive H shares with the custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will register the appropriate number of
ADSs in the names you request and will deliver the ADRs at its corporate trust
office to the persons you request.
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<PAGE>
How do ADR holders cancel an ADR and obtain H shares?
You may turn in your ADRs at the depositary's office. Upon payment of its
fees and expenses and any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will deliver the H shares represented
by the ADSs to you or an account designated by you, and any other deposited
securities underlying the ADR to you or your order, at the office of the
custodian.
Alternatively, at your request, risk and expense, the depositary will
deliver the deposited securities at its corporate trust office if feasible.
Certificates for withdrawn deposited securities may contain a legend
restricting their transfer. We may require these legends for compliance with
applicable laws, including the securities laws of the United States.
Record Dates
The depositary will fix a record date which, if practicable, will be the
same date as the record date for the H shares or other deposited securities,
or if different, will be fixed as close thereto as practicable for the
determination of the ADR holders who will be entitled:
. to receive a dividend, distribution or rights; or
. to give instructions for the exercise of voting rights at a meeting of
holders of H shares or other deposited securities;
all subject to the provisions of the deposit agreement.
Voting Rights
How do you vote?
You may instruct the depositary to vote the H shares underlying the ADSs
evidenced by your ADRs, but only if we ask the depositary to ask for your
instructions. Otherwise, you will not be able to exercise your right to vote
unless you withdraw the H shares. However, you may not know about the meeting
far enough in advance to withdraw the H shares.
If we ask for your instructions, the depositary will notify you of the
upcoming vote and arrange to deliver our voting materials to you. The
materials will:
. describe the matters to be voted on; and
. explain how you may instruct the depositary to vote the H shares or other
deposited securities underlying your ADRs as you direct.
For instructions to be valid, the depositary must receive them on or before
the date specified. The depositary will try, as far as practical, subject to
Chinese law and the provisions of our articles of association, to vote or to
have its agents vote the H shares or other deposited securities as you
instruct. The depositary will only vote or attempt to vote as you instruct.
We cannot assure you that you will receive the voting materials in time to
ensure that you can instruct the depositary to vote your H shares. In
addition, the depositary and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to
vote, and there may be nothing you can do if your H shares are not voted as
you request.
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<PAGE>
Fees and Expenses
<TABLE>
<CAPTION>
ADR holders must pay: For:
--------------------- ----
<C> <S>
US$5.00 (or less) per 100 ADSs . Each issuance of an ADR, including as a
result of a distribution of shares or
rights or other property
. Each cancellation of an ADR, including if
the deposit agreement terminates
US$.02 (or less) per ADS . Any cash distributions to you
Registration or transfer fees . Transfer and registration of H shares on
the share register of our transfer agent
from your name to the name of the
depositary or its agent when you deposit
or withdraw H shares
Expenses of the depositary . Conversion of foreign currency to U.S.
dollars
. Cable, telex and facsimile transmission
expenses (if expressly provided in the
deposit agreement)
Taxes and other governmental . As necessary
charges the depositary or the
custodian have to pay on any
ADR or H share underlying an
ADR, for example, stock
transfer taxes, stamp duty or
withholding taxes
A fee equivalent to the fee . Distribution of securities distributed to
that would be payable upon holders of deposited securities which are
deposit of H shares for distributed by the depositary to ADR
issuance of ADSs holders
US$1.50 per ADR delivered . Registration of transfer of ADRs
Any charges payable by the . As incurred
depositary or its agents in
connection with servicing the
deposited securities
</TABLE>
Payment of Taxes
The depositary may deduct the amount of any taxes owed from any payments to
you. It may also sell deposited securities, by public or private sale, to pay
any taxes owed. You will remain liable if the proceeds of the sale are not
enough to pay the taxes. If the depositary sells deposited securities, it
will, if appropriate, reduce the number of ADRs to reflect the sale and pay to
you any proceeds, or send to you any property, remaining after it has paid the
taxes.
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Reclassifications, Recapitalizations and Mergers
<TABLE>
<CAPTION>
If we: Then:
------ -----
<C> <S>
. Change the nominal or par value The cash, H shares or other securities
of our H shares received by the depositary will become
deposited securities. Each ADS will
automatically represent its equal share of
the new deposited securities.
. Reclassify, split up or
consolidate any of the
deposited securities
. Distribute securities on the H The depositary may, and will if we ask it
shares that are not distributed to, distribute some or all of the cash, H
to you shares or other securities it received. It
may also issue new ADRs or ask you to
surrender your outstanding ADRs in exchange
for new ADRs identifying the new deposited
securities.
. Recapitalize, reorganize,
merge, liquidate, sell all or
substantially all of our
assets, or take any similar
action
</TABLE>
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the
ADRs without your consent for any reason. If the amendment adds or increases
fees or charges, except for taxes and other governmental charges or specified
expenses of the depositary, or prejudices a substantial right of ADR holders,
it will only become effective 30 days after the depositary notifies you of the
amendment. At the time an amendment becomes effective, you are considered, by
continuing to hold your ADRs, to agree to the amendment and to be bound by the
ADRs and the deposit agreement as amended.
How may the deposit agreement be terminated?
The depositary will terminate the deposit agreement if we ask it to do so.
The depositary may also terminate the deposit agreement if the depositary has
told us that it would like to resign and we have not appointed a new
depositary bank within 30 days. In both cases, the depositary must notify you
at lease 30 days before termination.
After termination, the depositary and its agents will be required to do
only the following under the deposit agreement and nothing else:
. advise you that the deposit agreement is terminated;
. collect distributions on the deposited securities; and
. deliver H shares and other deposited securities upon cancellation of
ADRs.
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<PAGE>
One year after termination, the depositary may sell any remaining deposited
securities by public or private sale. After that, the depositary will hold the
money it received on the sale, as well as any other cash it is holding under
the deposit agreement for the pro rata benefit of the ADR holders that have
not surrendered their ADRs. It will not invest the money and has no liability
for interest. The depositary's only obligations will be to account for the
money and other cash and to indemnify us for specified losses. After
termination, our only obligations will be to indemnify the depositary for
specified losses and to pay various amounts to the depositary.
Limitations on Obligations and Liability to ADR Holders
Limits on our obligations and the obligations of the depositary; Limits on
liability to holders of ADRs
The deposit agreement expressly limits our obligations and the obligations
of the depositary. It also limits our liability and the liability of the
depositary. We and the depositary:
. are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
. are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations under
the deposit agreement;
. are not liable if either of us exercises discretion permitted under the
deposit agreement;
. have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the deposit agreement on your behalf or on behalf
of any other party; and
. may rely upon any documents we believe in good faith to be genuine and to
have been signed or presented by the proper party.
In the deposit agreement, we agree to indemnify The Bank of New York for
acting as depositary, except for losses caused by The Bank of New York's own
negligence or bad faith, and The Bank of New York agrees to indemnify us for
losses resulting from its negligence or bad faith.
Requirements for Depositary Actions
Before the depositary will deliver an ADR, register a transfer of an ADR,
make a distribution on an ADR or permit withdrawal of H shares, the depositary
may require:
. payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any H shares or other deposited securities;
. satisfactory proof of the identity and genuineness of any signature or
other information it deems necessary; and
. compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of transfer
documents.
The depositary may refuse to deliver, transfer or register transfers of
ADRs generally when the transfer books of the depositary, our transfer books,
or our transfer agents are closed or at any time if the depositary or we think
it advisable to do so.
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<PAGE>
Your right to receive the H shares underlying the ADSs represented by your
ADRs
You have the right to cancel your ADRs and withdraw the underlying H shares
at any time except:
. when temporary delays arise because we or the depositary have closed our
transfer books, the transfer of H shares is blocked to permit voting at a
shareholders' meeting or we are paying a dividend on the H shares;
. when you or other ADR holders seeking to withdraw H shares owe money to
pay fees, taxes and similar charges; and
. when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of H shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
Pre-Release of ADRs
Subject to the provisions of the deposit agreement, the depositary may
issue ADRs before deposit of the underlying H shares. This is called a pre-
release of the ADRs. The depositary may also deliver H shares upon
cancellation of pre-released ADRs (even if the ADRs are cancelled before the
pre-release transaction has been closed out). A pre-release is closed out as
soon as the H shares underlying the ADSs are delivered to the depositary. The
depositary may receive ADRs instead of H shares to close out a pre-release.
The depositary may pre-release ADRs only under the following conditions:
. before or at the time of the pre-release, the person to whom the pre-
release is being made must represent to the depositary in writing that it
or its customer owns the H shares or ADRs to be deposited;
. the pre-release must be fully collateralized with cash or other
collateral that the depositary considers appropriate; and
. the depositary must be able to close out the pre-release on not more than
five business days' notice.
In addition, the depositary will limit the number of ADRs that may be
outstanding at any time as a result of pre-release although the depositary may
disregard the limit from time to time, if it thinks it is appropriate to do
so.
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<PAGE>
TAXATION
The following discussion describes the material United States federal
income and Chinese tax consequences of the ownership of H shares or ADSs by an
investor that purchases and holds them as capital assets. In addition, the
discussion is based in part upon the representations of the depositary and the
assumption that each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms.
The discussion does not address any aspects of United States taxation other
than federal income taxation, any aspects of Chinese taxation other than
income taxation, stamp taxation and capital taxation. Prospective investors
are urged to consult their tax advisors regarding the United States federal,
state and local and Chinese and other tax consequences of the subscription,
purchase, holding or disposal of H shares or ADSs.
In general, and taking into account the assumptions set forth herein, for
United States federal income and Chinese tax purposes, holders of ADSs
evidencing H shares will be treated as the owner of the H shares represented
by those ADSs, and exchanges of H shares for ADSs, and ADSs for H shares, will
not be subject to United States federal income or to Chinese tax.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
The discussion below is based on the Internal Revenue Code of 1986, as
amended, its legislative history, Treasury Regulations and published judicial
and administrative interpretations, all as in effect on the date hereof and
all of which are subject to change, possibly retroactively. The tax treatment
of a holder of H shares or ADSs may vary depending upon the holder's
particular situation. This discussion does not address all of the tax
consequences relating to the ownership of the H shares or ADSs, and does not
take into account holders subject to special rules including, but not limited
to, dealers in securities or currencies, financial institutions, tax-exempt
entities, banks, life insurance companies, traders in securities that elect to
mark-to-market their securities, persons that hold H shares or ADSs as a part
of a straddle or a hedging, or conversion transaction, persons liable for the
alternative minimum tax, persons that actually or constructively own 10% or
more of our voting stock, or persons whose "functional currency" is not the
U.S. dollar. In addition, the following discussion is limited to United States
holders who will hold the H shares or ADSs as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended.
A United States holder is a holder of H shares or ADSs that is an
individual who is a citizen or resident of the United States, a partnership,
corporation or other entity organized in or under the laws of the United
States or any political subsidivision thereof (unless, in the case of a
partnership, Treasury Regulations otherwise provide), an estate that is
subject to United States federal income taxation without regard to the source
of its income or a trust subject to the primary supervision of a United States
court and the control of one or more United States persons.
The discussion below does not address the effect of any state or local tax
law on a holder of the H shares or ADSs.
Ownership of an ADS will be considered to be ownership of the underlying H
shares represented by the ADS. A cancellation of an ADS in exchange for the
underlying H shares will not be a taxable event.
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<PAGE>
Distributions
The gross amount of a distribution (including a deemed or constructive
distribution and any Chinese tax withheld on a distribution) with respect to
the H shares or ADSs will be treated as a dividend taxable as ordinary income
on the date of receipt, to the extent of our current or accumulated earnings
and profits as determined for United States federal income tax purposes.
Distributions, if any, in excess of these current and accumulated earnings and
profits will first constitute a non-taxable return of capital to the extent
thereof, and then a capital gain realized on the disposition of the H shares
or ADSs. The portion of any distribution treated as a non-taxable return of
capital will reduce a holder's tax basis in the H shares or ADSs. Corporate
United States holders will not be eligible for the dividends received
deduction otherwise allowed for distributions to domestic corporations in
respect of distributions on the H shares or ADSs.
If a distribution is paid with respect to the H shares or ADSs in any
currency other than U.S. dollars, the amount of the distribution will be
translated into U.S. dollars at the spot rate on the date the distributions
are paid or deemed paid to a United States holder, regardless of whether the
distributions are in fact converted on that date. Any subsequent gain or loss
in respect of that non-US currency arising from exchange rate fluctuations
will be ordinary income or loss.
Capital Gains and Losses
A United States holder will generally recognize gain or loss on the sale or
other disposition of H shares or ADSs in an amount equal to the difference
between the amount realized on the sale or other disposition and the holder's
adjusted tax basis in the H shares or ADSs. This will result in a long-term or
short-term capital gain or loss, depending on whether the H shares or ADSs
have been held for more than one year. The deductibility of capital losses may
be subject to limitation.
Passive Foreign Investment Company Status
Based on our current and projected income, assets and activities, we do not
believe we will be classified as a passive foreign investment company for the
current or any succeeding taxable year. However, because the determination is
made annually on the basis of our income and assets, including goodwill, and
because the principles and methodology for applying the tests are not entirely
clear, there can be no assurance that we will not be a passive foreign
investment company in the current or subsequent taxable years.
If we were a passive foreign investment company in any taxable year, a
United States holder generally may be subject to additional taxes and interest
charges on some of the distributions we make and on any gain recognized on the
disposition of the H shares or ADSs.
United States Foreign Tax Credit Considerations
Subject to the limitations and conditions set forth in the Internal Revenue
Code of 1986, as amended, United States holders may elect to claim a credit
against their United States federal income tax liability for Chinese tax
withheld from dividends or currency or capital gains in respect of the H
shares or ADSs or with respect to the income tax imposed on these dividends or
capital gain. Dividends or capital gains generally will constitute "passive
income" or "financial services income" for purposes of the foreign tax credit
limitation. Dividends will generally constitute foreign source
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<PAGE>
income and capital gains and currency gains generally will constitute United
States source income. The rules relating to the determination of the foreign
tax credit are complex and prospective purchasers should consult their
personal tax advisors to determine whether and to what extent they would be
entitled to the credit.
CHINESE TAXATION
The following is a summary of those taxes, including withholding
provisions, to which United States security holders are subject under existing
Chinese laws and regulations. The summary is subject to changes in Chinese
law, including changes that could have retroactive effect. The summary does
not take into account or discuss the tax laws of any country other than China,
nor does it take into account the individual circumstances of a security
holder. This summary does not purport to be a complete technical analysis or
an examination of all potential tax effects under Chinese laws and
regulations.
Distributions--for an individual
The provisions of the Individual Income Tax Law of the People's Republic of
China, as amended pursuant to a decision passed by the fourth plenary session
of the Standing Committee of the Eighth National People's Congress on October
31, 1993, provide that income tax of 20% shall be withheld in accordance with
the law on dividend payments from Chinese companies received by an individual.
Accordingly, for a foreign individual not a resident of China, the receipt of
dividends from a Chinese company would normally be subject to a withholding
tax of 20% unless reduced by an applicable double-taxation treaty or domestic
Chinese tax regulations. However, on July 21, 1993, the State Tax Bureau (now
the State Administration of Taxation) issued a Notice Concerning the Taxation
of Gains on Transfer and Dividends from Shares (Equities) Received by Foreign
Investment Enterprises, Foreign Enterprises and Foreign Individuals, which
provides that dividends received from a Chinese company on shares listed on an
overseas stock exchange, such as H shares (including H shares represented by
ADSs), or on domestically-listed foreign invested shares (B shares), would not
for the time being be subject to Chinese withholding tax. The relevant tax
authority has thus far not collected withholding tax on dividend payments on
shares listed on an overseas stock exchange and B shares.
On May 13, 1994, the Ministry of Finance and the State Administration of
Taxation jointly issued a Notice on the Relevant Policies Concerning the
Individual Income Tax, which notice stipulated that a foreign individual
receiving dividends from a Chinese company with foreign investment interest
would temporarily not be subject to the individual income tax. The State
Administration of Taxation has also stated, in a circular addressed to the
State Commission for Economic System Reform, the State Securities Commission
and the China Securities Regulation Commission issued in July 1994, that the
earlier State Tax Bureau notice continues to be valid and effective. In the
event that these notices are withdrawn, a 20% tax may be withheld on dividends
in accordance with the Amendments and the Individual Income Tax Law of the
People's Republic of China, which withholding tax may be reduced pursuant to
an applicable income tax treaty.
Distributions--for an enterprise
According to the State Tax Bureau notice, a foreign enterprise without an
establishment in China receiving a dividend payment on shares listed on an
overseas stock exchange, such as H shares or ADSs, would temporarily not be
subject to withholding tax of 20% on the dividend payment.
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<PAGE>
Capital Gains
Although the Regulations for Implementation of Individual Income Tax Law of
the People's Republic of China, issued on January 29, 1994, stipulated that
gains realized on the sale of equity shares by an individual would be subject
to income tax at a rate of 20% and empowered the Ministry of Finance to draft
detailed tax rules on the mechanism of collecting the tax, the State Tax
Bureau notice provided that gains realized by holders (whether an individual
or an enterprise) of H shares, including H shares represented by ADSs, would
not for the time being be subject to income tax. Moreover, between June 1994
and December 1996, the Ministry of Finance and the State Administration of
Taxation issued several notices providing that individual income tax would not
be imposed on gains from the sale of shares for 1994, 1995 and 1996. This tax
exemption was subsequently extended indefinitely by the Ministry of Finance
and the State Administration of Taxation pursuant to their joint circular
Notice Concerning the Temporary Exemption from Income Tax on Gains Realized by
Individuals from Disposition of shares issued on March 30, 1998 and effective
retroactively from January 1, 1997. Therefore, gains realized on the sale of H
shares by an individual would not be subject to Chinese capital gains tax
unless both the State Tax Bureau notice and the indefinite tax exemption
granted by the Ministry of Finance and the State Administration of Taxation
are withdrawn.
Tax Treaties
Foreign enterprises with no permanent establishment in China and
individuals not resident in China who are resident in countries which have
entered into double-taxation treaties with China may be entitled to a
reduction of any withholding tax imposed on the payment of dividends received
from us (although dividend payments made by foreign investment enterprises to
them are temporarily exempt from Chinese withholding tax). China currently has
a double-taxation treaty with the United States.
The Agreement between the Government of the United States of America and
the Government of the People's Republic of China for the Avoidance of Double
Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income,
together with the related protocols, currently would limit the rate of Chinese
withholding tax upon dividends paid by us to a holder of our H shares or ADSs
who is a United States resident for purposes of the treaty and protocols to
10%, were China to impose a withholding tax. However, it is uncertain if the
treaty would exempt the capital gains of a holder of our H shares or ADSs who
is a United Stated resident arising from the sale or disposition of our H
shares or ADSs from Chinese tax, were China to impose capital gains tax.
Holders of H shares or ADSs who are United States residents are advised to
consult their tax advisors with respect to these matters.
Stamp Tax
Chinese stamp tax imposed on the transfer of shares of publicly traded
Chinese companies under the Share System Tax Regulations should not apply to
the acquisition or disposition of H shares or ADSs outside of China by foreign
enterprises with no permanent establishment in China and individuals not
resident in China because of the Provisional Regulations of the People's
Republic of China Concerning Stamp Tax effective on July 1, 1989, which
provide that Chinese stamp tax is imposed only on documents executed or
received within China or which will be used within China.
Estate or Gift Tax
China does not currently impose any estate or gift tax.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
, 2000 between us and the underwriters named below, we have agreed to sell
to the underwriters, for whom Kleinwort Benson Limited is acting as sole
global coordinator, and the underwriters have severally agreed to purchase,
the number of ADSs set forth opposite their names below:
<TABLE>
<CAPTION>
Number
of
Underwriter U.S. Selling Agent ADSs
----------- --------------------------------------- ------
<S> <C> <C>
Kleinwort Benson Limited........ Dresdner Kleinwort Benson North America
Lehman Brothers Inc.............
TOTAL:........................
</TABLE>
H shares may be delivered instead of ADSs at the option of purchasers of
the ADSs upon making a request to the underwriters.
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth in that agreement, to subscribe
or procure subscribers for all of the ADSs at the offer price if any of the
ADSs are purchased. In the event of a default by any underwriter, the
underwriting agreement provides that in some circumstances, purchase
commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
The underwriters propose to offer the ADSs in part directly to the public
at the public offering price set forth on the cover page of this prospectus,
and in part to securities dealers. After the initial public offering, the
public offering price may change.
We have granted to the underwriters an option exercisable for 30 days from
the date of this prospectus to purchase up to an aggregate of 2,699,750
additional ADSs, in the form of H shares or ADSs, solely to cover over-
allotments, if any, at the initial offering price. If the underwriters
exercise their over-allotment option, the underwriters have severally agreed,
subject to specified conditions, to purchase approximately the same percentage
of those shares that the number of ADSs to be purchased by each of them, as
set forth in the table above, bears to the total number of ADSs set forth in
that table.
The following table shows the per H share, per ADS and total underwriting
discounts and commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase 2,699,750 additional ADSs.
<TABLE>
<CAPTION>
Assuming no Assuming full
exercise of exercise of
the over- the over-
allotment option allotment option
---------------- ----------------
<S> <C> <C>
Per ADS....................................... US$ US$
Per H share................................... US$ US$
TOTAL:...................................... US$ US$
</TABLE>
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<PAGE>
The ADSs being offered by this prospectus are part of a global offering by
us. The global offering consists of the international offering and the Hong
Kong offering. The international offering is for 16,198,750 ADSs, representing
64,795,000 H shares, including a public offering in the United States. The
international offering also includes a placement of ADSs in Ontario, Canada.
The Hong Kong offering is an offer for subscription of 8,279,000 H shares to
the public in Hong Kong. We plan to commence the Hong Kong offering on
November 30, 2000 and close it on December 6, 2000. We expect to fix the price
for the ADSs and H shares offered in the global offering on or around December
7, 2000 and make final allocations among the international offering and the
Hong Kong offering on the same day. Trading of our ADSs is expected to
commence through the Nasdaq National Market on or around December 12, 2000 and
trading of our H shares is expected to commence on the Growth Enterprise
Market on or around December 13, 2000.
The global offering will be underwritten severally, but not jointly, by the
underwriters.
The underwriters may reallocate H shares from the international offering to
the Hong Kong offering in the event the Hong Kong offering is oversubscribed.
Unsold H shares may similarly be reallocated from the Hong Kong offering to
the international offering at the discretion of the underwriters.
Under an agreement among the underwriters, the underwriters have agreed,
among other matters, that North American affiliates of of the
underwriters, namely Dresdner Kleinwort Benson North America, and will
offer, sell or deliver, as agent of the relevant underwriter, H shares or
ADSs, directly or indirectly, only inside the United States, its territories
and possessions and the District of Columbia and Canada.
A portion of the H shares and ADSs being offered in the global offering are
being offered outside the United States. Offers and sales of H shares and ADSs
outside the United States are being made in transactions exempt from or not
subject to the registration requirements of the Securities Act and these
shares are not being registered under the Securities Act for the purpose of
sale outside the United States.
The obligations of the underwriters under the underwriting agreement are
subject to specified conditions, including:
. the approval of the listing application for the H shares on the Growth
Enterprise Market; and
. the quotation of the ADSs on the Nasdaq National Market becoming
effective prior to closing.
We have agreed with the underwriters not to:
. authorize the issue or sale of, or issue, offer, sell, contract to sell,
or grant any option to subscribe for or otherwise dispose of, directly or
indirectly, except as provided in the underwriting agreement, any of our
shares or any other securities of us or any other of our securities or
any other securities that are convertible into or exchangeable for or
carry rights to acquire any of our shares or any other of our securities
substantially similar to any of the foregoing shares or securities; or
. enter into any option, warrant or derivative transaction with respect to
any of the foregoing securities, or that represent the right to receive,
ADSs, H shares or any substantially similar securities
for a period of six months commencing on the date hereof.
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In connection with the global offering, the underwriters may purchase and
sell the ADSs and the H shares in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales in connection with the global offering. Short sales
involve the sale by the underwriters of a greater number of ADSs or H shares
than they are required to purchase from us in the global offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional ADSs or H shares from us in the global offering.
The underwriters may close out any covered short position by either exercising
their option to purchase additional ADSs and H shares or purchasing ADSs or
H shares in the open market. In determining the source of ADSs or H shares to
close out the covered short position, the underwriters will consider, among
other things, the prices of ADSs and H shares available for purchase in the
open market as compared to the prices at which they may purchase ADSs and H
shares through the overallotment option. "Naked" short sales are any sales in
excess of the underwriters' option to purchase additional ADSs or H shares
from us. The underwriters must close out any naked short position by
purchasing ADSs or H shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the ADSs and H shares in the open market
after pricing that could adversely affect investors who purchase in the global
offering. Stabilizing transactions consist of various bids for or purchases of
ADSs and H shares made by the underwriters in the open market prior to the
completion of the global offering for the purpose of preventing or retarding a
decline in the market prices of the ADSs and the H shares.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the
underwriting discount it received because the representatives of the
underwriters have repurchased ADSs or H shares sold by or for the account of
that underwriter in stabilizing or short covering transactions. Similar to
other purchase transactions, the underwriters' purchases to cover the
syndicate short sales may have the effect of raising or maintaining the market
price of the ADSs and H shares or preventing or retarding a decline in the
market price of our ADSs and H shares. As a result, the prices of the ADSs and
H shares may be higher that the prices that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
Each underwriter has represented and agreed that it has not offered or
sold, and has agreed not to offer or sell any ADSs or H shares, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of ADSs or H
shares in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which the offer is made. Each underwriter has also represented and agreed that
it will send to any dealer who purchases from it any ADSs or H shares a notice
stating in substance that, by purchasing the ADSs or H shares, the dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any of the ADSs or H shares in Canada or any
province or territory thereof and that any offer of ADSs or H shares in Canada
or to, or for the benefit of, any resident of Canada in contravention of the
securities laws of Canada or to any province or territory thereof will be made
only pursuant to an exemption from the requirement to file a prospectus in the
province of Canada in which the offer is made, and that the dealer will
deliver to any other dealer to whom it sells any of the ADSs or H shares a
notice to the foregoing effect.
Each underwriter has agreed that (1) it has not offered or sold, and will
not offer or sell, any ADSs or H shares 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
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purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, as
amended, or the U.K. Financial Services Act 1986, (2) it has complied and will
comply with all applicable provisions of that law with respect to anything
done by it in relation to the ADSs or H shares in, from or otherwise involving
the United Kingdom and (3) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document received by it in connection
with the issue of the ADSs or H shares, other than any document which consists
of or any part of a prospectus, supplementary prospectus or any other document
required or permitted to be published by listing rules under Part IV of the
U.K. Financial Services Act 1986, to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisement)(Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Each underwriter has acknowledged and agreed that the ADSs and H shares
have not been registered under the Securities and Exchange Law of Japan and
are not being offered or sold and may not be offered or sold, directly or
indirectly, in Japan or to or for the account of any resident of Japan, except
(1) pursuant to 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. As part of the global offering, the
underwriters may offer ADSs or H shares in Japan to a list of 49 offerees in
accordance with the above provision.
This prospectus has not been delivered for registration to the Registrar of
Companies in Hong Kong and, accordingly, must not be issued, circulated or
distributed in Hong Kong other than (1) to persons whose ordinary business it
is to buy or sell shares or debentures, whether as principal or agent, within
the meaning of the Hong Kong Companies Ordinance or (2) in circumstances which
do not constitute an offer to the public for the purposes of the ordinance.
Unless permitted by the securities laws of Hong Kong, no person may issue or
cause to be issued in Hong Kong this prospectus or any amendment or supplement
hereto or other invitation, advertisement or document relating to the ADSs or
H shares to anyone other than a person whose business involves the
acquisition, disposal or holding of securities, whether as principal or agent.
This prospectus has not been registered as a prospectus with the Registrar
of Companies in Singapore and the ADSs and H shares will be offered in
Singapore pursuant to an exemption invoked under Section 106C and Section 106D
of the Companies Act, Chapter 50 of Singapore and the ADSs and H shares may
not be offered or sold, nor may this prospectus or any other offering document
or material relating to the ADSs or H shares be circulated or distributed,
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 Singapore Companies Act, (2) to a sophisticated investor,
and in accordance with the conditions, specified in Section 106D of the
Singapore Companies Act or (3) otherwise pursuant to, and in accordance with
the conditions of, any other applicable provision of the Singapore Companies
Act.
Neither this prospectus nor any offering material relating to the ADSs or H
shares has been or will be submitted to the "Commission des Operations de
Bourse" for approval in France and the ADSs or H shares may not be offered or
sold and this prospectus or any offering material will not be distributed or
caused to be distributed, directly or indirectly, in France, except (1) with
the prior authorization of the French Ministry for Economy and Finance in
accordance with Articles 9 and 10 of the "Decret" of December 29, 1989
regulating financial relations between France and foreign countries and (2) to
qualified investors or to a restricted group of investors, consisting of
either a group
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of no more than 100 persons or a group of persons, other than qualified
investors, having professional or family links with our management, all as
defined in Articles 6 and 7 of Ordonnance N(degrees) 67-833 dated September
28, 1967 (as amended) and in Decret N(degrees) 98-880 dated October 1, 1998,
in each case acting for their own account.
The ADSs and H shares may not be offered, sold or delivered and this
prospectus may not be distributed in Italy except to "Professional Investors"
as defined by CONSOB, the local stock market regulator in Italy, in compliance
with the terms and procedures provided by Legislative Decree no. 58 of
February 24, 1998, or the Finance Law, or in any other circumstances where an
express exemption to comply with the solicitation restrictions provided by the
Finance Law or CONSOB Regulation no. 11971 of May 14, 1999, or the Issuers
Regulations, applies, including those provided for under Article 100 of the
Finance Law and Article 33 of the Issuers Regulations, and any such offer,
sale or delivery of the ADSs or H shares or distribution of copies of this
prospectus or any other document relating to the ADSs or H shares must be made
(1) by investment firms, banks or financial intermediaries authorized to carry
out such activities in Italy in accordance with the Finance Law, Legislative
Decree no. 385 of September 1, 1993, or the Banking Law, CONSOB Regulation no.
11522 of July 1, 1998 and any other applicable laws and regulations, (2) in
compliance with Article 129 of the Banking Law, as supplemented by Bank of
Italy's instructions, under which the issue or placement of securities in
Italy is subject to a prior notification, unless an exemption, depending,
among others on the amount of the issue or placement, applies; and (3) in
compliance with any other applicable notification requirement or limitation
which may, from time to time, be imposed by CONSOB or the Bank or Italy.
Neither this prospectus nor any offering material relating to the ADSs or H
shares has been or will be submitted to the "Commission Bancaire et
Financiere/Commissie voor het Bank en Financiewezen" for approval in Belgium,
and neither this prospectus nor any offering material relating to the ADSs or
H shares may be distributed or caused to be distributed, directly or
indirectly, in Belgium, except to (1) without restrictions, less than 51
potential investors, (2) "qualified investors," as defined by applicable
Belgian securities regulations and acting for their own account; or (3)
without restrictions, if the consideration to be paid by each investor amounts
to at least Euro 250,000.
No action has been or will be taken in any jurisdiction other than the
United States that would permit a public offering of the ADSs or the
possession, circulation or distribution of this prospectus in any jurisdiction
where action for that purpose is required. Accordingly, the ADSs may not be
offered or sold, directly or indirectly, and neither this prospectus nor any
other offering material or advertisements in connection with the ADSs may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of that country or jurisdiction.
The global coordinator has advised us that it does not expect sales to
accounts over which it exercises discretionary authority to exceed 5% of the
total number of ADSs offered by the underwriters.
Prior to the global offering, there has been no public market for the ADSs
or H shares. We have determined the initial public offering prices for the
ADSs and H shares in consultation with the global coordinator. Among the
factors considered in determining the initial public offering price, in
addition to prevailing market conditions, were:
. the demand for the ADSs and H shares in the global offering;
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. the desire to establish an orderly aftermarket in the ADSs and H shares;
. our historical performance;
. estimates of our business potential and earnings prospects;
. an assessment of our management; and
. the consideration of the above factors in relation to market valuation of
companies in related businesses.
We will apply to include ADSs for quotation on the Nasdaq National Market
under the symbol "CNJT". Application has also been made for the H shares to be
listed on the Growth Enterprise Market.
For a discussion of factors which may affect the trading market for the H
shares and ADSs, see "Risk Factors--Risks Relating to the Global Offering--
There has been no prior public market for our H shares or ADSs; the market
price of our H shares and ADSs following the global offering may be volatile"
and "Dilution".
It is expected that delivery of the ADSs and H shares will be made against
payment therefor on or about the date specified in the second to last
paragraph of the cover page, which will be the fourth business day following
the date of pricing of the H shares and ADSs. Under Rule 15c6-1 adopted by the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
trades in the secondary market generally are required to settle in three
business days, unless the parties to the trade expressly agree otherwise.
Accordingly, purchasers who wish to trade H shares or ADSs on the date of
pricing or the succeeding business days will be required to specify alternate
settlement arrangements to prevent a failed settlement because of the initial
settlement procedures.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.
We estimate that our total expenses for the global offering, excluding
underwriting discounts and commissions, will be approximately US$ .
We have agreed to indemnify the several underwriters against various
liabilities, including liabilities under the Securities Act. In addition, we
have agreed to reimburse some expenses of the underwriters incurred in
connection with the global offering.
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LEGAL MATTERS
The validity of the ADSs will be passed upon for us by Coudert Brothers,
U.S. counsel for us. Venantius Tan, a partner in Coudert Brothers, is our
joint company secretary. The validity of the H shares will be passed upon for
us by Jingtian & Gongcheng, Beijing. The validity of the ADSs will be passed
upon on behalf of the underwriters by Shearman & Sterling, U.S. counsel for
the underwriters. The validity of the H shares will be passed upon on behalf
of the underwriters by Simmons & Simmons, Hong Kong counsel for underwriters.
Various matters relating to the laws of China have been passed upon for the
underwriters by Jun He Law Offices, Beijing.
EXPERTS
The combined financial statements as of May 31, 2000 and December 31, 1999
and 1998 and for the five-month period ended May 31, 2000 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 that firm as experts in
auditing and accounting.
The statements included in this prospectus under the captions, "Risk
Factors -- Risks Relating to Jitong -- We do not have the communications
licenses and approvals that we need to operate, but instead rely on
sublicenses from our parent. Because these are contractual rights and not
directly granted by the Chinese government, they could be held invalid at a
later date, thereby preventing us from operating," "Regulation," the last
paragraph under "Business -- Licenses, Approvals and Agreements -- Licenses
and Approvals" and the last two paragraphs under "Management -- Compensation
of Directors, Supervisors and Executive Officers -- Pre-Global Offering Share
Option Plan" have been reviewed and confirmed by Jingtian & Gongcheng, our
Chinese counsel, as experts in those matters, and are included herein in
reliance upon Jingtian's review and confirmation.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a joint stock limited company incorporated in the People's Republic
of China. We have appointed CT Corporation System 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 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, all of our directors and officers and some of the experts named in
this prospectus reside outside the United States (principally in China) and
substantially all of our assets and their assets are located outside the
United States. Therefore, you may not be able to effect service of process
within the United States against them. In addition, China does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts within the United States or most other countries that are members of
the Organization for Economic Cooperation and Development so that
administrative actions brought by regulatory authorities such as the
Securities and Exchange Commission, and other actions that result in foreign
court judgments could (assuming the actions are not required by Chinese law
and our articles of association to be arbitrated) only be enforced in China if
the judgments or rulings do not violate the basic principles of the law of
China or the sovereignty, security and public interest of the society of
China, as determined by a People's Court of China, which has jurisdiction for
recognition and enforcement of judgments. We have been advised by our Chinese
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counsel, Jingtian & Gongcheng, that there is doubt as to the enforceability in
China of any actions to enforce judgments of United States courts arising out
of or based on the ownership of the H shares or ADSs, including judgments
arising out of or based on the civil liability provisions of United States
federal or state securities laws.
Although we have provided an undertaking to the Securities and Exchange
Commission that we will propose to amend our articles of association to allow
settlement of disputes by judicial proceedings when and if Chinese laws and
regulations and the rules of the Growth Enterprise Market permit, our articles
of association currently require that almost all disputes be referred to
arbitration conducted in Beijing or Hong Kong. On June 21, 1999, an
arrangement was made between Hong Kong and China for the summary mutual
enforcement of each other's arbitration awards in a manner consistent with the
United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards and pre-handover practice. This new arrangement was approved
by the Supreme Court of China and the Hong Kong Legislative Council, and
became effective on February 1, 2000. We are not aware of any action that has
been brought in China by any shareholder of a Chinese joint stock limited
company listed on any overseas stock exchange to enforce an arbitration award,
either before or after July 1, 1997. No assurance can be given as to the
outcome of any action brought in China to enforce an arbitral award granted to
any of our shareholders.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C. a registration statement on Form F-1 under the United States Securities
Act of 1933, as amended, with respect to the securities offered hereby. This
prospectus, which is a part of the registration statement, does not contain
all the information set forth in the registration statement, parts of which
(including the schedules and exhibits) are omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. You should
refer to the registration statement for further information.
Upon declaration by the Securities and Exchange Commission of the
effectiveness of the registration statement, we will become subject to the
periodic reporting requirements of the Securities Exchange Act of 1934
applicable to foreign private issuers. Under the Exchange Act, we will be
required to file reports, including annual reports on Form 20-F, and other
information with the Securities and Exchange Commission no later than six
months after the close of our fiscal year, which is December 31, and we will
submit other reports and information, including quarterly reports, under cover
of Form 6-K with the Securities and Exchange Commission. Copies of the
registration statement, its accompanying schedules and exhibits, as well as
the reports and other information filed by us with the Securities and Exchange
Commission may be inspected without charge and copied at prescribed rates by
the public at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and will also be available for inspection and copying
at the regional offices of the Securities and Exchange Commission located 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. The
public may obtain information regarding the Washington D.C. Public Reference
Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. As a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-
swing profit recovery provisions contained in Section 16 of the Exchange Act.
Application has been made for the ADSs to be quoted on the Nasdaq National
Market under the symbol "CNJT".
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We will furnish The Bank of New York, as the depositary for the ADSs, the
English version of our annual reports to shareholders. These annual reports
will include a description of operations and audited consolidated financial
statements prepared in conformity with international accounting standards,
together with a reconciliation to US GAAP of certain items in the financial
statements. We will also furnish the depositary with unaudited consolidated
financial statements for the first six months of each fiscal year. When the
depositary receives any reports from us, it will, at our request, promptly
mail them to all registered holders of ADSs.
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ADDITIONAL INFORMATION DISCLOSED IN THE HONG KONG OFFERING
In accordance with the Growth Enterprise Market listing rules, we have
prepared the following two-year historical and 24-month prospective
information and will be required in our semi-annual reports to compare our
actual performance with the business objectives set out below. We do not
otherwise intend to publish or update this information in future years.
ACTIVE BUSINESS PURSUITS
The following is a statement of our active business pursuits for the two
years ended December 31, 1999 and for the period from January 1, 2000 to the
date of this prospectus.
For the year ended December 31, 1998
Network
. As of December 31, 1998, we established our Internet protocol-based
network connecting 10 cities with bandwidth from 128Kbps to 2Mbps using
leased lines between cities. The cities were Beijing, Shanghai, Wuhan,
Guangzhou, Shenzhen, Dalian, Changchun, Shenyang, Qingdao and Chongqing.
. We completed construction of the Beijing network control center and
commenced centralized network management on the entire backbone network.
Services
. Commencement of Internet access and other Internet protocol-based data
communications services, nationwide satellite communications services and
value-added services including Internet global roaming service for
Internet access.
. As of December 31, 1998, we had over 11,490 dial-up Internet accounts and
over 260 leased line customers. We had 18 customers subscribed to our web
hosting services.
. Commencement of research and development on the application of frame
relay, virtual private network and Internet protocol telephony
technologies on our network.
For the year ended December 31, 1999
Network
. As of December 31, 1999, the backbone network was upgraded to be a
broadband network connecting five cities. The five cities were Beijing,
Shanghai, Wuhan, Guangzhou and Shenzhen.
. We employed network technologies including broadband Internet protocol
and asynchronous transfer mode.
. We expanded the Beijing network control center and constructed a backup
network control center in Shanghai.
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. We started to construct regional networks around each of the five
backbone network cities (Beijing, Shanghai, Wuhan, Guangzhou and
Shenzhen) and, as of December 31, 1999, the regional networks connected
34 cities. The new cities included Tianjin, Hangzhou, Nanjing, Xiamen,
Fuzhou, Chengdu, Kunming and Ningbo.
. In addition to leased lines from China Telecom, we started to lease fiber
optic lines from Heng Tong International Leasing Co., Ltd.
Services
. Commencement of Internet protocol telephony, frame relay data
communications and virtual private network services and other existing
data communications and value-added services.
. As of December 31, 1999, we had 31,510 dial-up Internet accounts, 540
leased line customers, and 55 customers who subscribed to our web hosting
services.
. Continued research and development on the application of frame relay and
Internet protocol telephony technologies on our network.
For the period from January 1, 2000 to the date of this prospectus
Network
. We explored the feasibility of expanding the capacity of the network
connecting the five backbone network cities from a bandwidth of 155Mbps
to 622Mbps.
. We employed network technologies including broadband Internet protocol,
asynchronous transfer mode and frame relay.
. As of July 31, 2000, we had established hubs and nodes in over 60 cities
in China. The new cities included Haikou, Zhengzhou, Foshan, Nanchang,
Xian, Guilin, Shantou and Zhuhai.
. We started to lease fiber optic lines from Zhong Tie Communications
Center.
Services
. Mobile phone users may directly access our Internet protocol telephony
service by dialing our connection number.
. In addition to the existing services, we started to conduct on-line sale
of Internet access cards and Internet protocol telephony cards.
. As of the date of this prospectus, we had over 70,000 dial-up Internet
accounts, over 780 leased line customers and over 410 customers
subscribed to our co-location and web hosting services.
Staff
. The total number of employees as of May 31, 2000 was approximately 1,000.
. As of the date of this prospectus, we employed approximately 325 sales
personnel and 330 engineers and technicians in total.
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BUSINESS OBJECTIVES
We have assessed the Chinese telecommunications industry and the market
potential and formulated the proposed strategies to achieve our business
objectives on the basis of past industry trends, anticipated future growth as
well as our past experience. We have made the following principal assumptions
in making this assessment and formulation. These bases and assumptions are
inherently subject to uncertainties and, in particular, the risk factors set
out in the section headed "Risk Factors" in this prospectus. Many of these
assumptions are untested and accordingly may be invalid. As such, our current
targets may not be achieved within the scheduled time limit or at all. We
strongly caution you to evaluate the forward-looking statements in this
section in light of these risks. Forward-looking statements can be identified
by the use of forward-looking terminology such as, but not limited to, "may,"
"will," "expect," "target," "anticipate," "estimate," "continue," "believe" or
other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial condition or state other
"forward-looking" information. When considering the forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus, including the assumptions identified below. The
failure of the assumptions noted in this section, the risk factors identified
elsewhere and other factors noted throughout this prospectus could cause our
actual actions or results to differ materially from those contained in this
section or any forward-looking statement.
The principal assumptions are as follows:--
(1) there will be no unanticipated or material changes in the existing
political, legal and economic conditions in China or other countries in
which we carry on or will carry on business;
(2) there will be no changes in the bases or rates of taxation in China
in which we operate or our subsidiaries are incorporated;
(3) there will be no unanticipated or material changes in the regulatory
environment in the Chinese telecommunications industry;
(4) we will be able to fund our operation and expansion by raising
additional funds after our cash and other available sources of funds
(including the estimated net proceeds from the global offering) are
exhausted, expected to occur by December 31, 2001;
(5) there will be no material increase in the nature, level and degree
of competition;
(6) there will be no changes in the terms of the licenses and approvals
we operate under;
(7) there will be no unanticipated changes in the technology and/or
telecommunication standards adopted by the telecommunications industry in
China;
(8) there will be no material change in the way tariff rates for our
services are set;
(9) there will be no changes in our senior management team or board of
directors or those of our parent; and
(10) there will be no disasters, natural, political or otherwise, which
would disrupt our business or operations or cause substantial loss, damage
or destruction to our property (both tangible and intangible) or
facilities.
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Our objective is to build an efficient and versatile broadband platform
with which to become the preferred provider of integrated communications
services to corporate and institutional customers in China by implementing the
strategies described under the heading "Business--Our Strategy" above. We
believe that we are well-positioned to capitalize on the opportunities that
arise from the convergence of voice and data networks and the increasing
demand for voice and data communications services in China. As we operate in
rapidly changing markets, we may need to amend our business plan in accordance
with changes in our operating environment.
Scheduled business objectives for the period from the date of this prospectus
to June 30, 2001
Network development
. We intend to continue to expand our branch office network in China. As of
July 31, 2000, we had established hubs and nodes in over 60 cities in
China. We target to have established hubs or nodes in up to 100 cities
and to be offering data communications and Internet protocol telephony
service in these cities by the end of 2000. The new cities targeted will
mainly include cities in the southern and eastern parts of China.
. As our business operations grow, we intend to continue to expand the
geographical coverage of our network and to increase the transmission
capacity of our network. This network expansion plan will involve
increasing the capacity of our synchronous digital hierarchy and dense
wavelength division multiplexing backbone from 155Mbps to 622Mbps and the
transmission capacity of our regional hubs.
. As of the date of this prospectus we had international gateway capacity
of 71Mbps in Beijing, Shanghai and Guangzhou. We plan to increase our
international gateway capacity by 90Mbps from Shanghai and Guangzhou to
the United States by the end of 2000.
. In order for our customers to achieve more stable and reliable
connections, we plan to build our own fiber loop network in Beijing. We
plan to begin construction by the end of 2000.
. We are testing wireless broadband access technology, commonly known as
Local Multipoint Distribution Service, in Qingdao and Dalian. We aim to
complete testing by the first quarter of 2001 and to launch this service
by the first half of 2001.
. To support the projected growth of our business, we plan to upgrade our
network control center, management information and billing system.
Services development
. Our service development strategy is to leverage on our network
configuration and the combination of transmission technology, which
includes Internet protocol, frame relay and asynchronous transfer mode.
We plan to conduct testing on unified messaging services.
. To complement the Internet protocol-based virtual private network
services we currently offer to corporate customers, we are preparing to
offer virtual private dial-up service. Virtual private dial-up network
will allow employees of our corporate customers to dial a local access
number while travelling within China to access the virtual private
network of the respective corporate customer. We plan to launch virtual
private dial-up network services in China by the first quarter of 2001.
. We currently offer basic web hosting and co-location services. We plan to
offer more advanced web hosting, on a sharing and dedicated basis, and
server co-location services by establishing Internet data centers in
Beijing, Shanghai and Guangzhou. The Internet data centers will each
feature broadband access, back-up electricity generation, advanced
security systems and a team
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of information technology personnel. For the first phase, we plan to
establish an Internet data center of 2,000 square metres in Beijing by the
first quarter of 2001.
. With the Internet data centers in place, we plan to offer other value-
added services such as web design.
Human resources development
. We plan to strengthen our direct sales force by recruiting additional
sales personnel with technical knowledge of the communications industry.
We will continue to review the compensation scheme for our sales force in
order to retain and attract quality sales personnel. We expect to
increase the number of our sales and marketing personnel to approximately
630 by the end of 2000.
. As our business continues to grow, we intend to continue to review our
organization and management structure to ensure that it is set-up in an
effective and efficient manner. In particular, we believe the quality of
our middle management team is critical to the implementation of our
business strategies. We plan to recruit more managerial staff to manage
different segments of our business operations and our branch offices.
. As we establish more branch offices throughout China, we plan to expand
our accounting department by hiring more staff and to upgrade our
accounting software. We also intend to continue to review and improve our
financial reporting procedures to ensure reliable financial information
is available for management in a timely manner.
Scheduled business objectives for the period from July 1, 2001 to December 31,
2001
Network development
. We intend that our network coverage will include hubs or nodes in a total
of 140 cities throughout China. The new cities will mainly include
medium-sized cities in the southern and eastern parts of China.
. We will continue to evaluate the level of economic development and the
level of demand for our services in the cities in which we plan to
establish a point of presence.
. We will continue to evaluate the utilization rate of our network and
consider gradually upgrading the transmission capacity of our backbone
and regional hubs, beginning from Beijing, Shanghai and Guangzhou.
. We will continue to monitor the utilization rate of our international
gateway capacity and consider expanding accordingly. Subject to the level
of lease costs, we may apply to the relevant authorities in China to
establish our own international gateways.
. We aim to complete construction of our own fiber loop network by the end
of 2001.
Services development
. We target to complete the testing of unified messaging and Internet
protocol-based conference calling and to launch these services in major
cities in China.
. We will evaluate market response to our virtual private dial-up network
service and consider introducing virtual private dial-up network services
to other major cities throughout China.
. We plan to establish an Internet data center in each of Shanghai and
Guangzhou. It is currently intended that each Internet data center in
Shanghai and Guangzhou will have a floor space of approximately 2,000
square meters. We also plan to establish an additional 12,000 square
meters of floor space in Beijing to be used as an Internet data center.
137
<PAGE>
. We plan to begin feasibility studies of other value-added services
through Internet data centers, in addition to basic services such as web
hosting and co-location services.
Human resources development
. We plan to continue to expand our sales and marketing team to focus on
direct marketing to corporate and institutional customers.
Scheduled business objectives for the period from January 1, 2002 to
December 31, 2002
Network development
. Subject to our evaluation of the target cities, we may continue to
increase the number of network hubs and nodes so they achieve coverage of
up to 180 cities throughout China. It is currently intended that new
cities will mainly include northern coastal cities and selected cities in
western China.
. We will continue to monitor the transmission quality of our network and
bandwidth demand and may consider upgrading the transmission capacity of
our backbone network gradually to the range of 622Mbps to 2.5Gbps.
. We will continue to evaluate the level of demand for our services and
invest in upgrading the transmission capacity of our regional hubs
accordingly.
. We will continue to monitor the utilization rate of our international
gateway capacity and consider expanding accordingly. Subject to the level
of lease costs, we may apply to the relevant authorities in China to
establish our own international gateways.
. We plan to further upgrade our network control center to ensure the high
quality of our services.
Services development
. We will evaluate customers' responses to our unified messaging, Internet
protocol-based conference calling services and consider offering these
services to other parts of China.
. We plan to continue to upgrade and expand our Internet data centers as we
believe the demand for high quality data transmission, storage,
applications and technical support in China will continue to grow
rapidly.
. We plan to establish additional floor space of 22,000 square meters,
5,000 square meters and 5,000 square meters in Beijing, Shanghai and
Guangzhou respectively to be used as Internet data centers.
. With the Internet data centers in place, we plan to offer value-added
services such as web design, application systems and information
technology services.
. We target to provide wireless broadband access service by the end of
2002.
Human resources development
. We plan to further increase the number of our sales and marketing
personnel to up to a total of 1,000.
. Based on our current expansion plan, we expect to increase the total
number of staff to approximately 2,700 by the end of 2002.
138
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Jitong Network Communications Company Limited and its Predecessor, Jitong
Communications Company Limited
Report of Independent Accountants......................................... F-2
Combined Statements of Income for each of the three years ended December
31, 1999 and five months ended May 31, 2000.............................. F-3
Combined Balance Sheets as of December 31, 1998 and 1999 and May 31,
2000..................................................................... F-4
Combined Statements of Cash Flows for each of the three years ended
December 31, 1999 and the five months ended May 31, 2000................. F-5
Combined Statements of Changes in Shareholders' Equity for each of the
three years ended December 31, 1999 and the five months ended May 31,
2000..................................................................... F-7
Notes to Combined Financial Statements.................................... F-8
Unaudited Pro Forma Combined Financial Information
Introduction to Unaudited Pro Forma Combined Financial Information........ F-41
Unaudited Pro Forma Combined Statement of Income for the year ended
December 31, 1999........................................................ F-45
Unaudited Pro Forma Combined Statement of Income for the five months ended
May 31, 2000............................................................. F-46
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Jitong Network Communications Company Limited:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of cash flows and of changes in shareholders'
equity (the "financial statements") present fairly, in all material respects,
the combined financial position of Jitong Network Communications Company
Limited at December 31, 1998 and 1999 and May 31, 2000, and the results of its
operations and its cash flows for each of the three years ended December 31,
1999 and five months ended May 31, 2000 in conformity with International
Accounting Standards. 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
financial statements in accordance with International Standards on Auditing
and 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 our audits provide a reasonable
basis for the opinion expressed above.
International Accounting Standards vary in certain significant respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of combined
net income for the year ended December 31, 1999 and five months ended May 31,
2000 and the determination of combined shareholders' equity at December 31,
1999 and May 31, 2000 to the extent summarized in Note 33 to the combined
financial statements.
PricewaterhouseCoopers
Hong Kong, August 22, 2000
F-2
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31, Five months ended May 31,
-------------------------------------------------- -------------------------------------
1997 1998 1999 1999 1999 2000 2000
Note ----------- ----------- ----------- ----------- ----------- ----------- -----------
RMB'000 RMB'000 RMB'000 US$'000 RMB'000 RMB'000 US$'000
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue
Data communication..... 13,360 44,961 89,133 10,768 32,463 46,424 5,609
IP telephony service... -- -- 102,862 12,427 -- 129,055 15,591
Other operating
revenue............... 4,928 4,211 2,397 290 489 932 113
----------- ----------- ----------- ----------- ----------- ----------- -----------
18,288 49,172 194,392 23,485 32,952 176,411 21,313
Operating expenses
Transmission costs..... (21,786) (41,146) (107,697) (13,011) (24,476) (97,212) (11,745)
Employee compensation
costs................. 5 (6,191) (9,583) (16,126) (1,948) (5,827) (13,973) (1,688)
Depreciation and
amortization.......... (13,125) (19,672) (38,792) (4,687) (12,858) (29,832) (3,604)
Agency fee and
commission............ (105) (578) (17,071) (2,062) (294) (21,183) (2,559)
Cost of IP cards and
dialers............... -- -- (7,577) (915) -- (1,771) (214)
Other operating
expenses.............. (25,810) (26,564) (54,234) (6,553) (14,829) (53,622) (6,478)
----------- ----------- ----------- ----------- ----------- ----------- -----------
(67,017) (97,543) (241,497) (29,176) (58,284) (217,593) (26,288)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations.... 7 (48,729) (48,371) (47,105) (5,691) (25,332) (41,182) (4,975)
Finance expenses, net... 8 (5,592) (7,904) (12,697) (1,534) (4,237) (8,058) (974)
Other
income/(expenses)...... 579 (563) (618) (75) (652) (539) (65)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss.......... (53,742) (56,838) (60,420) (7,300) (30,221) (49,779) (6,014)
Taxation................ 9(c) -- -- (2,958) (357) -- 668 81
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss for the year....... (53,742) (56,838) (63,378) (7,657) (30,221) (49,111) (5,933)
=========== =========== =========== =========== =========== =========== ===========
Loss per share.......... 10 RMB0.292 RMB0.309 RMB0.345 US$0.042 RMB0.164 RMB0.231 US$0.028
=========== =========== =========== =========== =========== =========== ===========
Number of shares........ 10 183,874,200 183,874,200 183,874,200 183,874,200 183,874,200 212,731,074 212,731,074
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------------------- ----------------
1998 1999 1999 2000 2000
Note -------- -------- ------- ------- -------
RMB'000 RMB'000 US$'000 RMB'000 US$'000
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash at bank and in hand.. 14 67,402 257,127 31,064 203,337 24,566
Accounts receivable, net
of provision............. 15 4,015 20,998 2,537 16,711 2,019
Other receivables,
deposits and
prepayments.............. 16 49,562 75,313 9,099 44,547 5,382
-------- -------- ------- ------- ------
Total current assets.... 120,979 353,438 42,700 264,595 31,967
Property, plant and
equipment, less accumulated
depreciation and
amortization............... 17 155,125 396,031 47,845 524,695 63,389
Construction in progress.... 18 4,903 3,080 372 -- --
Property use right.......... 19 15,705 15,347 1,854 -- --
Other investment............ 20 31,360 31,360 3,789 -- --
-------- -------- ------- ------- ------
Total assets............ 328,072 799,256 96,560 789,290 95,356
======== ======== ======= ======= ======
LIABILITIES AND SHAREHOLD-
ERS'
EQUITY
Current liabilities
Accounts payable, other
payables and accrued
charges.................. 21 36,602 92,442 11,168 118,761 14,348
Receipts in advance....... 801 82,365 9,950 65,040 7,858
Taxation.................. (146) 1,296 157 1,686 204
Amount due to a related
company.................. 22 30,000 30,000 3,624 -- --
Amount due to
shareholders............. 23 20,000 -- -- -- --
Current portion of long
term loan due to a
related company.......... 25 4,967 67,005 8,095 -- --
Current portion of long
term borrowings.......... 25 9,711 17,266 2,086 34,649 4,186
Current portion of other
long term liabilities.... 26 116,464 35,396 4,276 2,286 276
-------- -------- ------- ------- ------
Total current
liabilities............ 218,399 325,770 39,356 222,422 26,872
Amount due to shareholders.. 23 61,238 -- -- -- --
Amount due to JTC........... 24 -- -- -- 57,436 6,939
Long term loan due to a
related company............ 25 67,005 -- -- -- --
Long term borrowings........ 25 25,794 298,236 36,031 288,034 34,798
Other long term
liabilities................ 26 29,092 17,364 2,098 16,716 2,019
-------- -------- ------- ------- ------
Total liabilities....... 401,528 641,370 77,485 584,608 70,628
-------- -------- ------- ------- ------
Shareholders'
(deficit)/equity
Share capital............. 27 183,874 183,874 22,214 248,378 30,007
Additional paid-up
capital.................. 27 (61,194) 233,526 28,213 -- --
Common reserves........... 33 33 4 -- --
Public welfare fund....... 33 33 4 -- --
Accumulated losses........ (196,202) (259,580) (31,360) (43,696) (5,279)
-------- -------- ------- ------- ------
Total shareholders'
(deficit)/equity....... (73,456) 157,886 19,075 204,682 24,728
-------- -------- ------- ------- ------
Total liabilities and
shareholders'
equity ................ 328,072 799,256 96,560 789,290 95,356
======== ======== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five months ended May
Year ended December 31, 31,
----------------------------------- --------------------------
Note 1997 1998 1999 1999 1999 2000 2000
---- ------- ------- -------- ------- ------- -------- -------
RMB'000 RMB'000 RMB'000 US$'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Flow from Operating
Activities
Cash (used
for)/generated from
operations............. (a) (23,741) (3,277) 53,481 6,461 15,703 14,146 1,709
Interest income......... 9,314 3,620 2,891 349 931 1,061 128
Interest expenses....... (14,906) (11,524) (15,588) (1,883) (5,168) (9,119) (1,101)
PRC income tax
(paid)/refund.......... -- -- (2,961) (358) 144 1,076 130
------- ------- -------- ------- ------- -------- -------
Net cash (used
for)/provided by
operating activities.. (29,333) (11,181) 37,823 4,569 11,610 7,164 866
------- ------- -------- ------- ------- -------- -------
Investing Activities
Purchase of property,
plant and equipment and
addition to
construction in
progress............... (48,496) (30,680) (160,885) (19,437) (42,180) (117,047) (14,141)
Transfer of Non-core
Units to the immediate
holding company........ -- -- -- -- -- (2,226) (269)
------- ------- -------- ------- ------- -------- -------
Net cash used for
investing activities.. (48,496) (30,680) (160,885) (19,437) (42,180) (119,273) (14,410)
------- ------- -------- ------- ------- -------- -------
Financing Activities
Repayment of short term
bank loans............. (21,000) -- -- -- -- -- --
Proceeds from long term
borrowings............. -- 10,000 200,000 24,163 -- -- --
Proceeds from other long
term liabilities....... 19,424 13,137 6,874 830 -- -- --
Repayment of long term
borrowings............. (23,021) (9,703) (11,678) (1,411) -- (6,185) (747)
Repayment of other long
term liabilities....... -- -- (95,891) (11,585) -- -- --
Proceeds from amount due
to shareholders........ -- 63,838 -- -- 10,000 -- --
Contribution from
shareholders........... 43,840 -- 213,482 25,792 -- -- --
Proceed from issuance of
shares................. -- -- -- -- -- 64,504 7,793
------- ------- -------- ------- ------- -------- -------
Net cash provided by
financing activities.. 19,243 77,272 312,787 37,789 10,000 58,319 7,046
------- ------- -------- ------- ------- -------- -------
Increase/(Decrease) in
cash and cash
equivalents............ (58,586) 35,411 189,725 22,921 (20,570) (53,790) (6,498)
Cash and cash
equivalents at the
beginning of the year.. 90,577 31,991 67,402 8,143 67,402 257,127 31,064
------- ------- -------- ------- ------- -------- -------
Cash and cash
equivalents at the end
of the year............ 31,991 67,402 257,127 31,064 46,832 203,337 24,566
======= ======= ======== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(a) Reconciliation of operating loss to cash flow from operating activities
<TABLE>
<CAPTION>
Five months ended May
Year ended December 31, 31,
---------------------------------- -------------------------
Note 1997 1998 1999 1999 1999 2000 2000
---- ------- ------- ------- ------- ------- ------- -------
RMB'000 RMB'000 RMB'000 US$'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Loss.......... (53,742) (56,838) (60,420) (7,300) (30,221) (49,779) (6,014)
Adjustments for
Depreciation and
amortization.......... 13,125 19,672 38,792 4,687 12,858 29,832 3,604
Net interest expenses.. 5,592 7,904 12,697 1,534 4,237 8,058 974
Loss on disposal of
property, plant and
equipment............. -- 169 48 6 -- -- --
Provision for doubtful
debts................. -- 1,205 3,280 396 -- 13,671 1,652
Changes in working
capital
Accounts receivables
and other receivables
and prepayment........ 11,318 678 (46,014) (5,559) (8,704) (16,023) (1,936)
Accounts payables,
other payable and
receipt in advance.... (34) 23,933 105,098 12,697 37,533 28,387 3,429
------- ------- ------- ------ ------- ------- ------
Cash (used for)/
generated from
operations............ (23,741) (3,277) 53,481 6,461 15,703 14,146 1,709
======= ======= ======= ====== ======= ======= ======
</TABLE>
(b) Major non cash transactions
During the year ended December 31, 1999, approximately RMB81,238,000 (1998:
RMB nil; 1997: RMB nil) amount due to shareholders was capitalized as capital
contribution from shareholders.
During the year ended December 31, 1999, additions to property, plant and
equipment of RMB86,708,000 (1998: RMB nil; 1997: RMB nil) was paid by a banker
of the Company directly to the vendor without passing through the Company. The
Company recorded a loan payable to the banker of this amount.
During the five months ended May 31, 2000, additions to property, plant and
equipment of RMB1,379,000 (1999: RMB 47,401,000) was paid by a banker of the
Company directly to the vendor without passing through the Company. The
Company recorded a loan payable to the banker of this amount.
On March 24, 2000, the Company underwent a Restructuring (Note 1).
Following the Restructuring, certain assets, liabilities and interests
relating to the non-core business and operations, including subsidiaries and
investments in joint ventures conducting financing, property rental,
engineering and advertising businesses (collectively the "Non-core Units")
were retained by JTC at their net liability value at March 24, 2000. Details
of the assets and liabilities retained by JTC have been disclosed in Note 4.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Share paid in Common Public Accumulated
Note capital capital reserves welfare fund losses Total
---- ------- ---------- ------------ ------------ ----------- -------
(Note 12(a)
(Note 12(b)) (Note 12(c)) & (d))
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1,1997................. 183,874 (105,034) 33 33 (85,622) (6,716)
Loss for the year....... -- -- -- -- (53,742) (53,742)
Capital injection....... -- 43,840 -- -- -- 43,840
------- -------- --- --- -------- -------
Balance at December 31,
1997................... 183,874 (61,194) 33 33 (139,364) (16,618)
======= ======== === === ======== =======
Balance at January
1,1998................. 183,874 (61,194) 33 33 (139,364) (16,618)
Loss for the year....... -- -- -- -- (56,838) (56,838)
Capital injection....... -- -- -- -- -- --
------- -------- --- --- -------- -------
Balance at December 31,
1998................... 183,874 (61,194) 33 33 (196,202) (73,456)
======= ======== === === ======== =======
Balance at January
1,1999................. 183,874 (61,194) 33 33 (196,202) (73,456)
Loss for the year....... -- -- -- -- (63,378) (63,378)
Capital injection....... -- 294,720 -- -- -- 294,720
------- -------- --- --- -------- -------
Balance at December 31,
1999................... 183,874 233,526 33 33 (259,580) 157,886
======= ======== === === ======== =======
Balance at January 1,
2000................... 183,874 233,526 33 33 (259,580) 157,886
Loss for the period..... -- -- -- -- (49,111) (49,111)
Revaluation of property,
plant and equipment.... 17(b) -- 31,403 -- -- -- 31,403
Capitalization of
losses................. -- (264,929) (33) (33) 264,995 --
Issue of shares......... 64,504 -- -- -- -- 64,504
------- -------- --- --- -------- -------
Balance at May 31,
2000................... 248,378 -- -- -- (43,696) 204,682
======= ======== === === ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. RESTRUCTURING, ORGANISATION AND PRINCIPAL ACTIVITIES
Jitong Network Communications Company Limited ("Jitong Network") was
established in the People's Republic of China (the "PRC") on March 24, 2000,
as a joint stock company with limited liability, specifically to acquire the
operations and related assets and liabilities of the core telecommunication
business units from Jitong Communications Company Limited, the company's
predecessor ("JTC"), in anticipation of a listing on the Growth Enterprise
Market of the Stock Exchange of Hong Kong Limited (the "GEM") and the National
Market of National Automated Systems Dealership and Quotation (the "NASDAQ").
JTC itself was established in January 1994, under the approval of the State
Economic and Trade Commission of the PRC. Under the authority of the State
Economic Information Joint Conference, JTC constructed, owns and operates the
National Economic Information and Communication Network (the "Golden Bridge
Network" or "ChinaGBNet" or "ChinaGBN"). The Golden Bridge Network is one of
the five existing commercial network service providers in the PRC.
JTC currently holds seven major types of licences and approvals from the
relevant authorities: (i) IP telephony service licence; (ii) International
gateway approvals; (iii) VSAT licence; (iv) VSAT frequency band approvals; (v)
Domestic and international frame relay licences; (vi) Internet services
licence; and (vii) Microwave approvals and radio station licences. These
approvals and licences will expire within one year to five years. After the
Restructuring, JTC has granted Jitong Network a perpetual, exclusive, royalty-
free sub-licence to operate under the authority granted by the above licences
and approvals (including any renewals, expansions, or replacements), with the
exception of the international gateway approvals, the VSAT frequency band
approvals and the microwave approvals and radio station licenses (collectively
the "radio station licenses"), none of which can be sublicensed. However, the
Ministry of Information Industry has approved the joint application from
Jitong Network and JTC to amend all of JTC's radio station licenses so that
Jitong Network will become the licensee. Jitong Network have also applied for
separate radio station licenses to replace those held by JTC and to cover
additional satellite and microwave stations. All of these new licenses, if and
when approved, will be issued directly to Jitong Network. For the
international gateway approvals, which cannot be transferred or sublicensed,
JTC has agreed to lease international gateways on behalf of Jitong Network and
at Jitong Network's instruction.
JTC also owns certain intellectual properties, including the registered
trademarks of Jitong, GBNet, the logo of "Jitong" as well as the registered
rights to the domain names of www.jitong.com, www.gb.com.cn and
www.chinagb.net. Pursuant to the Restructuring Agreement, JTC has granted
Jitong Network the free and exclusive right to use these trademarks and domain
name until such rights can be transferred.
JTC employing the ChinaGBN, and operating through its National Network's
Operation Control Center and forty-five separate business units (collectively
the "Core Units"), carry out the following core activities in the PRC:--
(i) the provision of Internet connection and data communication services;
and
F-8
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(ii) the provision of domestic and international direct dialing services
using Internet protocol ("IP") technology (the "IP telephony
service").
Jitong Network has taken over the above operations from JTC after the
Restructuring.
Pursuant to a restructuring agreement between JTC and Jitong Network
effective as of March 24, 2000 (the "Restructuring"), Jitong Network acquired
the operations and most assets and liabilities of the Core Units in exchange
for the issue, fully paid, at par value, of 183,874,200 shares with a par
value of RMB1 per share to JTC. The consideration was based on an independent
appraisal of the underlying net assets of the Core Units. The following assets
and liabilities of the Core Units (collectively the "excluded assets and
liabilities") were excluded from the Restructuring transaction:--
(i) an office premise located at 6th Floor, West Wing, Zhongding Mansion,
A18 West Street of North Third Road, Hiadian District, Beijing which is
currently used as an office of JTC (the "Office");
(ii) an office premise located at 28th Floor Electric Science Mansion No.
27 Wanshou Road Beijing where the National Network's Operation Control
Center of Jitong Network and JTC (the "Control Room") is located;
(iii) certain loans obtained by JTC for the purpose of establishing and
supporting the Core Units (the "Non-specific loans"). These non-
specific loans are not secured by any of the operating assets held by
Jitong Network pursuant to the Restructuring;
(iv) the accrued interest payable on the balance of the Non-specific loans;
and
(v) amount payable to a satellite transmission provider for the satellite
transmission capacity rented by JTC during the three years ended
December 31, 1999 but not utilized.
Concurrently, on the same day, another 64,503,600 new shares of par value
RMB1 each were issued to five other shareholders, namely Cai Zhu Industrial
General Corporation of Zhuhai Special Economic Zone, SDIC Electronics Company,
Beijing Economic Development Investment Company, Tianjin Communication and
Broadcasting Company and The Seventh Electronics Industry Research Institute
of Ministry of Information Industry, at par for cash amounting to
RMB64,503,600.
Following the Restructuring, JTC retains certain assets, liabilities and
interests relating to its remaining business and operations, including
subsidiaries and investments in joint ventures conducting financing, property
rental, engineering and advertising businesses (collectively the "Non-core
Units"). These assets and liabilities, and related results of operations, are
included in these combined financial statements for the three years ended
December 31, 1999 and the period from January 1, 2000 to March 24, 2000.
2. BASIS OF PRESENTATION
The Restructuring has been accounted for as a restructuring of business
under common control in a manner similar to a pooling of interests on the
basis that the ultimate holding company continues to control Jitong Network
and JTC after the Restructuring, while it controlled JTC prior to the
Restructuring. Accordingly, JTC is considered as the predecessor of Jitong
Network and the
F-9
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
consolidated financial statements of JTC and its subsidiaries (hereinafter the
"Company") for periods prior to March 24, 2000, the date of the Restructuring,
are presented as the combined financial statements of Jitong Network.
After the Restructuring and upon its formation, Jitong Network operates as
a stand-alone entity. The combined results of the Company for the period from
March 24, 2000 to May 31, 2000 do not contain the trading and financial
positions of the operations retained by JTC. Net liabilities of RMB 59,173,000
were retained by JTC as the result of Restructuring. The Company recorded a
payable to JTC of RMB 59,173,000 in respect of the retention of these net
liabilities.
All significant intercompany transactions and balances have been
eliminated.
The combined financial information as of and for the five months ended May
31, 1999 is unaudited, but reflects all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
unaudited combined financial information.
In connection with the Restructuring, certain property, plant and equipment
of the Company as at March 24, 2000 has been revalued to reflect its then
current fair value. In consideration for the assets and liabilities taken over
from the Predecessor amounting to RMB183,874,200 after giving effect to the
revaluation of property, plant and equipment, the Company issued 183,874,200
domestic shares in form of State-owned shares, with a par value of RMB1.00
each, to JTC which became the Company's immediate holding company.
The combined financial statements have been prepared in accordance with
International Accounting Standards ("IAS"). The basis of accounting differs
from generally accepted accounting principles in the United States of America
("USGAAP") (see Note 33).
The financial information has been prepared in Renminbi ("RMB"), the
national currency of the PRC. Solely for the convenience of the reader, the
combined results, cash flows and financial positions for the year ended
December 31, 1999 and five months ended May 31, 2000, have been translated
into United States dollars at the noon buying rate in New York City on May 31,
2000 for capable transfers in Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York of US$1.00 = RMB8.2773. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate or at any other certain rate on December
31, 1999, May 31, 2000, or at any other date.
The preparation of financial statements in accordance with International
Accounting Standards requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of the
financial information set out in this report, which conform with International
Accounting Standards ("IAS"), are as follows:
(a) Revenue recognition
The Company generates its revenues from two primary sources namely data
communications and IP telephony services. Revenues are recorded at invoiced
value net of sales tax, discounts and returns,
F-10
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
if any, and are recognized when it is probable that the economic benefits will
accrue to the Company and when the revenues can be measured reliably on the
following bases:
(i) IP telephony service income is recognized only as and when distant
phone calls have been made by customers or when the prepaid credit
stored in the IP phone cards expires.
(ii) data communications network usage fees are based on the time customers
use the Company's network and are recognized as revenue when the
service is rendered;
(iii) data communications monthly subscription fees comprise fixed charges
and are recognized as revenue in the month during which the service
is rendered;
(iv) maintenance service income comprises fees for customer maintenance and
is recognized when maintenance services are rendered.
(b) Consolidation
Subsidiary undertakings, which are those companies in which the Company,
directly or indirectly, has an interest of more than one half of the voting
rights have been consolidated. Subsidiaries are consolidated from the date on
which effective control is transferred to the Company and are no longer
consolidated from the date of disposal. All intercompany transactions,
balances and unrealized surpluses and deficits on transactions between
companies have been eliminated.
(c) Foreign currencies
Foreign currency transactions during the year are accounted for at the
applicable rates of exchange ruling at the dates of the transactions as quoted
by the Peoples' Bank of China. Monetary assets and liabilities denominated in
foreign currencies are translated into Renminbi at the rates of exchange
ruling at the balance sheet date as quoted by the People's Bank of China
unless hedged by forward foreign exchange contracts, in which case the rates
specified in such forward contracts are used. Gains and losses resulting from
the settlement of such transactions and from translation of monetary assets
and liabilities denominated in foreign currencies are recognized in the
combined income statement. The Company did not enter into any hedge contracts
during any of the years/ periods presented.
(d) Financial instruments
Financial instruments carried on the balance sheet include cash and bank
balances, investments, receivables, accounts payable, leases and borrowings.
The particular recognition methods adopted are disclosed in the individual
accounting policy statements associated with each item. During the relevant
years/ periods, the Company did not use any derivative financial instruments.
(e) Research and development
Research and development expenditure is recognized as expense as incurred.
F-11
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(f) Investments
Investments in non-marketable equity securities are shown at cost and
provision is only made where in the opinion of the Directors, there is a
permanent diminution in value. Where there has been a permanent diminution in
value of an investment, it is recognized as an expense in the period in which
the diminution is identified.
For the purpose of the reconciliation of the Company's financial statements
to US GAAP, decreases which represent an other than temporary diminution in
value are charged to the income statement.
(g) Property use right
Property use right comprises the right to use a property for an agreed
period. The right is recorded at cost less accumulated amortization. Cost
represents the purchase price of the assets and other costs incurred to bring
the assets into the existing use. Amortization is calculated to write off
their costs on a straight-line basis over the lower of the useful life of the
asset or the period of the right.
(h) Property, plant and equipment
(i) Prior to March 24, 2000, property, plant and equipment were recorded at
cost less accumulated depreciation and amortization. Cost represents
the purchase price of the assets and other costs incurred to bring the
asset into existing use.
(1)Land use rights
Land use rights are recorded at cost less subsequent accumulated
amortization. Amortization is calculated to write off their cost on a
straight-line basis over the unexpired periods of the rights. The
principal annual rate used is 2%.
(2)Other property, plant and equipment are recorded at cost less
accumulated depreciation.
(ii) Effective March 24, 2000 property, plant and equipment held at that
date are stated at valuation. Depreciation and amortization is
calculated to write off their cost or fair value on a straight-line
basis over their expected useful lives to estimate residual values.
The annual depreciation and amortization charges are calculated as
follows:
<TABLE>
<CAPTION>
Expected Estimated
useful life residual value
------------- --------------
<S> <C> <C>
Buildings....................................... over 40 years 3%
Telecommunication equipment and software........ 5 to 7 years Nil to 3%
Motor vehicles.................................. 6 years 3%
Office equipment................................ 3 to 10 years 3%
Leasehold improvements.......................... 5 years Nil
</TABLE>
F-12
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(iii)Impairment of property, plant and equipment
The carrying amounts of property, plant and equipment are reviewed
regularly to assess whether their recoverable amounts have declined
below their carrying amounts. When such a decline has occurred, their
carrying amount is reduced to their recoverable amount by reference to
discounted future cash flows or market value.
For the purpose of the reconciliation of the Company's financial
statements to US GAAP, a long lived asset is considered impaired where
the estimated future non-discounted cash flows from use of the asset are
less than the carrying amount, as required by SFAS 121. Where an asset
is impaired it is written down to its fair value. Impairment charges are
recorded in the income statement.
(iv)Cost of maintaining property, plant and equipment
Major costs incurred in maintaining property, plant and equipment to
their normal working condition are charged to the profit and loss
account as incurred. Improvements are capitalized and depreciated over
their expected useful lives to the Company.
(i) Construction in progress
Construction in progress is stated at cost. Cost comprises direct costs of
construction as well as interest expense capitalized during the periods of
construction and installation. Capitalization of these costs ceases and the
construction in progress is transferred to property, plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided in respect of
construction in progress until it is completed and ready for its intended use.
(j) Assets held under leases
(i)Finance leases and hire purchase contracts
Leases of property, plant and equipment where the Company assumes
substantially all the benefits and risks of ownership are classified as
finance leases or hire purchase contracts.
Finance leases are capitalized at the estimated present value of the
underlying lease payments. Each lease payment is allocated between the
liability and finance charges so as to achieve a fixed interest charge
on the finance balance outstanding. The corresponding rental
obligations, net of finance charges, are included in other long-term
payables. The interest element of the finance charge is charged to the
income statement over the lease period using the interest method. The
property, plant and equipment acquired under finance leasing contracts
are depreciated over the useful life of the assets.
(ii)Operating leases
Leases of assets under which all the risks and benefits of ownership are
effectively retained by the lessor are classified as operating leases.
Payments made under operating leases are charged to the income statement
on a straight-line basis over the period of the lease.
F-13
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(k) Government grants
Government grants received are netted against the corresponding items in
the income statement, except for those amounts received for the purchase of
property, plant and equipment, which are recorded as deferred income and
amortized on a straight-line basis over the useful life of the related asset.
(l) Accounts receivable
Accounts receivables are carried at anticipated realizable value. An
estimate is made for doubtful receivables based on a review of all outstanding
amounts at the year end. Bad debts are written off during the years/ periods
in which they are identified.
(m) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and deposits held at call
with banks with maturities of three months or less from the time of purchase.
(n) Provisions
Provisions are recognized when the Company has a present legal or
constructive obligation as a result of past events, it is probable that an
outflow of resources embodying economic benefits will be required to settle
the obligation, and a reliable estimate of the amount of the obligation can be
made.
(o) Pension obligations
The Company is obligated to make contributions on behalf of its employees
to defined contribution pension plans managed by the local municipal
governments according to the relevant rules and regulations.
Payments to the Company's defined contribution pension plans are charged to
the income statement when incurred.
(p) Taxation
The Company provides for current taxation on the basis of the results for
the period as adjusted for items which are not assessable or deductible for
income tax purposes. Taxation is determined in accordance with the relevant
tax rules and regulations applicable in the jurisdictions where the Company
operates.
Deferred taxation is provided using the liability method. Under the
liability method, deferred taxation is recognized for all temporary
differences between the book and tax bases of assets and liabilities and on
losses available for carry forward against taxable profits in future periods.
A valuation allowance is provided against deferred tax assets which are not
expected to be realized in the foreseeable future.
F-14
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(q) Borrowing costs
Borrowing costs are expensed in the income statements in the period in
which they are incurred, except to the extent that such costs are capitalized
as being directly attributable to the acquisition or construction of an asset
which necessarily takes a substantial period of time to get ready for its
intended use.
(r) Receipts in advance
Receipts in advance represents cash received from sales of IP phone cards
in advance of services being rendered.
(s) Pre-operating and advertising expenses
Pre-operating and advertising expenses are recognized as expense as and
when incurred.
(t) New accounting developments
The International Accounting Standard Committee (the "IASC") has recently
issued IAS 22--Revised Business Combinations, IAS 36--Impairment of Assets,
IAS 37--Provisions, Contingent Liabilities and Contingent Assets and IAS 38--
Intangible Assets which are effective for financial statements covering
periods beginning on or after July 1, 1999, and IAS 39--Financial Instruments
and IAS 40--Investment Property which are effective for financial statements
covering periods beginning on or after January 1, 2001. The Company
implemented IAS 22, IAS 36, IAS 37 and IAS 38 on January 1, 2000. The
implementation of these standards had no impact on shareholders' equity at the
implementation date. Management considered the Company's combined results and
financial positions during the three years ended December 31, 1999 and the
five months ended May 31, 2000 would not have been materially affected by the
implementation of IAS 39 and IAS 40 as the Company does not have any financial
instrument or investment property.
4. EFFECT OF THE RESTRUCTURING
On March 24, 2000, the Company underwent a Restructuring (Note 1).
Following the Restructuring, certain assets, liabilities and interests
relating to the non-core business and operations, including subsidiaries and
investments in joint ventures conducting financing, property rental,
engineering and advertising businesses (collectively the "Non-core Units")
were retained by JTC at their net liability value at March 24, 2000. The
difference between the assets and liabilities of the Non-core Units and the
excluded assets and liabilities retained by JTC has been satisfied by a
liability due to JTC (see Note 24). No gain or loss on transfer has been
recorded. The results of operations and assets and liabilities of the non-core
units are included in the combined financial statements of the Company for the
three years ended December 31, 1999 and the period from January 1, 2000 to
March 24, 2000.
F-15
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
The assets and liabilities retained by JTC on March 24, 2000 are summarized
below:
<TABLE>
<CAPTION>
At March 24, 2000
-----------------
RMB'000
<S> <C>
Cash and cash equivalents.................................. 2,226
Other current assets....................................... 37,301
Properties, plant and equipment............................ 34,921
Property use right......................................... 15,257
Investments................................................ 31,360
--------
Total assets............................................... 121,065
Total liabilities.......................................... (180,238)
--------
Net liability.............................................. (59,173)
========
</TABLE>
5. EMPLOYEE COMPENSATION COSTS
<TABLE>
<CAPTION>
Five months ended
Year ended December 31, May 31,
----------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Salaries and wages............. 5,414 8,296 13,971 4,733 11,257
Staff welfare.................. 224 609 1,344 756 1,972
Pension costs--defined
contribution plan (Note 6).... 553 678 811 338 744
----- ----- ------ ----- ------
6,191 9,583 16,126 5,827 13,973
===== ===== ====== ===== ======
</TABLE>
6. RETIREMENT BENEFITS
The Company has participated in various defined contribution pension
schemes arranged by municipal governments (the "schemes") whereby the Company
is required to make monthly contributions to these plans at a rates of 10% to
25.5% (1999: 15% to 25%; 1998: 14% to 26%; 1997: 14% to 26%) of the aggregate
payroll of the relevant branches or a fixed amount of contribution as defined
by the relevant schemes subject to a cap. Employees contribute 3% to 8% (1999:
4% to 7%; 1998: 3% to 6%; 1997: 3% to 6%) of their aggregate payroll or a
fixed amount of contribution as defined by the relevant schemes.
F-16
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
7. LOSS FROM OPERATIONS
The loss from operations is stated after charging the following:
<TABLE>
<CAPTION>
Five months ended
Year ended December 31, May 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Provision for and write-off
of bad and doubtful debts
(see Note 15).............. -- 1,205 3,280 1,205 13,671
Depreciation and
amortization in respect of:
--owned assets.............. 12,418 18,786 37,267 12,002 23,623
--leased assets............. 707 707 707 295 5,927
------ ------ ------ ------ ------
13,125 19,493 37,974 12,297 29,550
Amortization of building use
right...................... -- 179 358 149 90
Operating lease and service
contract charges in respect
of:
--building.................. 2,862 3,781 5,677 1,845 4,226
--lines and
interconnections........... 1,253 2,345 13,558 1,874 21,580
--satellite transmission.... 14,338 19,484 17,625 4,324 9,464
--international gateway..... 6,195 19,317 48,143 12,345 31,792
Research and development
expenses................... -- -- 610 -- --
Research and development
expenses entitled to
government grant:
--Research and development
expenses in relation to
development of the
ChinaGBN................... 5,924 125 731 -- --
--Depreciation of property,
plant and equipment
purchased as funded by the
government grant (Note
26(d))..................... -- -- 460 192 192
--Less: Government grant
income recognized.......... (5,924) (125) (1,191) (192) (192)
------ ------ ------ ------ ------
-- -- -- -- --
</TABLE>
F-17
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
8. FINANCE EXPENSES
<TABLE>
<CAPTION>
Five months ended
Year ended December 31, May 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest on bank loans......... 1,943 -- 3,695 567 1,340
Interest on other loans (see
Note 26(a) and 26(b))......... 11,794 10,649 12,655 4,382 6,290
Interest on finance lease
obligations................... 1,169 875 526 219 1,515
Less: amounts capitalized as
property, plant and
equipment and construction
in progress................ -- -- (1,288) -- --
Interest income................ (9,314) (3,620) (2,891) (931) (1,087)
------ ------ ------ ----- ------
Net interest expense........... 5,592 7,904 12,697 4,237 8,058
====== ====== ====== ===== ======
</TABLE>
9. TAXATION
(a) In accordance with the relevant income tax laws applicable to high-
technology enterprises operating in the PRC, the applicable PRC income tax
rate is 15%. Income tax in respect of the profits of the Company's head
office was fully exempted for three years and halved for another three
years thereafter commencing from the first year of operation, being the
year ended December 31, 1994 ("tax preferential period"). 1999 was the
last year of the tax preferential period. The tax rate for the head office
and five other branches in the future will be 15%. All other branches and
subsidiaries will be subject to a tax rate of 33%.
(b) All business units of the Company are separate independent entities for
tax reporting and filing purposes. The applicable income tax rates of
these branches range from 15% to 33%.
(c) Analysis of the income tax (charge)/credit to the income statements is as
follows:
<TABLE>
<CAPTION>
Five months ended
Year ended December 31, May 31,
----------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current income tax
(charge)/credit............. -- -- (2,958) -- 668
Deferred tax................. -- -- -- -- --
--- --- ------ --- ---
-- -- (2,958) -- 668
=== === ====== === ===
</TABLE>
F-18
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(d) The tax on the Company's operating loss differs from the theoretical
amount that would arise using the basic tax rate in the PRC applicable to
the Company as follows:
<TABLE>
<CAPTION>
Five months ended
Year ended December 31, May 31,
------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ----------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating loss................. 53,742 56,838 60,420 30,221 49,779
Tax credit calculated at a tax
rate of 33%................... 17,735 18,756 19,939 9,973 16,427
Special deductions relating to
high-technology enterprises
operating in the PRC (Note 9
(a) and (b)).................. (9,528) (9,478) (10,051) (7,053) (7,364)
Expenses not deductible for tax
purpose....................... -- -- (1,618) -- --
Deferred tax benefit arising
from tax losses not
recognized.................... (8,207) (9,278) (11,228) (2,920) (8,395)
------ ------ ------- ------ ------
Tax (charge)/credit............ -- -- (2,958) -- 668
====== ====== ======= ====== ======
</TABLE>
(e) Deferred taxation
At December 31, 1999, there was no material unprovided deferred tax liability.
At May 31, 2000, the company has made full allowance against a potential
deferred tax asset amounting to RMB 47,604,000 attributable to tax losses
of approximately RMB 291 million, potentially available for carrying
forward, due to the uncertainty of realizing this asset. Prior to the
Restructuring, certain Core Units now comprising the Company had incurred
tax losses. As a result of the Restructuring, the recoverability of these
tax losses is uncertain pending regulatory approval of the ability of the
Company to utilize such losses in future periods. If these tax losses are
available for carry forward they have a life of five years and can be used
against income in the entities with losses carried forward, taxable at
rates of between 15% and 33%.
10. LOSS PER SHARE
Basic net loss per share for the years ended December 31, 1997, 1998 and
1999 has been computed by dividing net loss by 183,874,200 shares issued by
the Company to JTC and outstanding upon the establishment of the Company on
March 24, 2000 as if such shares had been outstanding for all relevant
periods.
F-19
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
On March 24, 2000, a further 64,503,600 shares were issued to five
investors at par for cash (see Note 1). Basic net loss per share for the five
months period ended May 31, 2000 has been computed by dividing net loss by
weighted average number of 212,731,074 (1999: 183,874,200) shares issued by
the Company to JTC and five other shareholders.
11. DIVIDENDS
No dividend has been paid or declared by the Company since its
incorporation.
12. RESTRICTIONS ON DISTRIBUTION OF PROFITS
(a) Pursuant to relevant PRC regulations and the articles of association of
the Company, profit after taxation shall be appropriated in the following
sequence:
(i) to make up accumulated losses;
(ii) transfer of 10% of the profit after tax to the statutory common
reserve. When the balance of the statutory common reserve reaches
50% of the paid-up share capital, such transfer need not be made.
(iii) transfer of 5% to 10% of the profit after tax to the statutory
public welfare fund.
(iv) transfer to the discretionary common reserve an amount approved by
the shareholders in general meetings.
(v) distribute dividends to shareholders.
The amounts of transfers to the statutory common reserve and statutory
public welfare fund shall be based on profit after tax in the statutory
accounts prepared in accordance with PRC accounting standards.
(b) Statutory common reserve and discretionary common reserve
According to relevant PRC regulations, statutory common reserve and
discretionary common reserve can be used to make up losses or to increase
share capital. Except for the reduction of losses incurred, any other usage
should not result in the statutory surplus reserve falling below 25% of the
registered capital.
(c)Statutory public welfare fund
According to relevant PRC regulations, the use of the statutory public
welfare fund is restricted to capital expenditure for employees' collective
welfare facilities. Staff welfare facilities are owned by the Company. The
statutory public welfare fund is not normally available for distribution to
shareholders except in liquidation.
F-20
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(d)Profit distribution
Pursuant to relevant PRC regulations and the articles of association of the
Company, profit distributable to shareholders shall be the lower of the
accumulated profit distributable to shareholders determined according to
PRC accounting standards as stated in the statutory accounts and the
accumulated profit distributable to shareholders adjusted according to
International Accounting Standards. In the PRC statutory accounts as at
December 31, 1998 and 1999 and the PRC management accounts for the five
months ended May 31, 2000, no profit is available to be carried forward for
distribution to shareholders.
13. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company had the following material
transactions with its related parties:
<TABLE>
<CAPTION>
Year ended December 31, Five months ended May 31,
----------------------- ----------------------------
1997 1998 1999 1999 2000
------- ------- ------- -------------- ------------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense payable
to a related company
(Note (b)).............. 6,141 5,866 5,613 2,339 1,340
Interest expense payable
to a previous joint
venture partner (Note
26(b)).................. 3,283 3,283 3,283 1,368 --
Interest payment to a
fellow subsidiary
(Note (c)).............. -- -- -- -- 185
Rental payment for office
premises to immediate
holding company
(Note(d))............... -- -- -- -- 501
</TABLE>
--------
(a) Pursuant to the Restructuring Agreement, JTC has granted the Company a
perpetual, exclusive, royalty-free sub-licence to operate under the
authority granted by the above licences and approvals (including any
renewals, expansions, or replacements) as prescribed in Note 1 above, with
the exception of the international gateways approvals, which cannot be
sublicensed. JTC has agreed to lease the international gateways on behalf
of the Company and at the Company's instruction. Since JTC itself was not
required to pay any costs in respect of the licence, no expense is
required to be recorded by the Company in respect of this arrangement with
its controlling shareholder.
(b) A loan from a related company, a cooperative joint venture of JTC, Beijing
Jitong Bell South Communications & Information Engineering Company
Limited, was obtained in 1995 for development of the ChinaGBN network. The
interest rate was fixed at 8% per annum with no fixed repayment terms. The
loan and related interest payable were retained by JTC as part of the
Restructuring at 24th March, 2000 (see also Note 25 and Note 26(a)).
F-21
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(c) On February 25, 2000, the Company and a fellow subsidiary China Jitong
Communications (HK) Limited ("JTHK") entered into a finance lease
agreement under which JTHK financed the Company to settle certain
liabilities arising from the purchase of telecommunication equipment
located outside the PRC. The financing arrangement is for a period of 2
years. Annual repayment is RMB7,032,778 payable on a monthly basis. The
amount disclosed represents the interest portion of the repayment during
the five months ended May 31, 2000 (see also Note 21(a)).
(d) Pursuant to the Restructuring Agreement and as set out in Note 1 above,
certain premises retained by JTC are currently occupied by the Company for
use in its operations. The Company and JTC have entered into two operating
lease agreements as follows:-
(i) a tenancy agreement under which the Company leases from JTC, commencing
from March 24, 2000, the Office for a period of 3 years. Annual rental
is at RMB1,563,020 payable on a monthly basis;
(ii) a tenancy agreement under which the Company leases from JTC,
commencing from March 24, 2000, the Control Room for a period of 3
years. Annual rental is at RMB1,440,000 payable on a monthly basis;
(e) During the five months ended May 31, 2000, the Company has purchased
certain telecommunication equipment from a fellow subsidiary Beijing Ji
Kai Optical Telecommunication Network Company Limited ("BJK") amounting to
RMB620,000.
14. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Cash at bank and in hand.......................... 67,402 257,127 203,337
====== ======= =======
</TABLE>
15. ACCOUNTS RECEIVABLE, LESS PROVISION FOR DOUBTFUL DEBTS
<TABLE>
<CAPTION>
At December 31, At May 31,
---------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Accounts receivable due from third parties.... 5,220 25,203 34,587
Less: Provision for doubtful debts............ (1,205) (4,205) (17,876)
------ ------ -------
4,015 20,998 16,711
====== ====== =======
</TABLE>
F-22
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
Movement of provision for doubtful debts
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
At beginning of the year.......................... -- 1,205 4,205
Provision for the year/period (note (a)).......... 1,205 3,280 13,671
Written-off....................................... -- (280) --
----- ----- ------
At end of the year/period......................... 1,205 4,205 17,876
===== ===== ======
</TABLE>
--------
(a) In the course of developing and expanding the Company's IP telephony
business, some sales and debt collecting agents have been appointed to
assist the Company's debt collection procedures. These agents are
entrusted to collect revenue from the customers on behalf of the Company
and they were entitled to agency fees which are based on the size of their
revenue collected.
The Company has experienced delay in submission of revenue from certain
sales and debt collecting agents during 1999 and the five months ended May
31, 2000. Specific provisions for doubtful debts have been made against
those balances to the extent that the management is uncertain of their
eventual recoverability.
16. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Advances to suppliers............................ 808 19,959 25,416
Prepaid expenses................................. 4,144 14,624 2,076
Other receivables................................ 44,610 40,730 17,055
------ ------ ------
49,562 75,313 44,547
====== ====== ======
</TABLE>
As part of the Restructuring, JTC retained part of the Company's other
receivables amounting to RMB37,301,000 as at March 24, 2000.
F-23
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
17. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Furniture,
Telecom- fixtures Leasehold
Year ended Land munication and office Motor improve-
December 31, 1998 use rights Buildings equipment equipment vehicles ments Total
----------------- ---------- --------- ---------- ---------- -------- --------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
At beginning of the
year................... -- 41,578 104,196 7,085 3,148 8,295 164,302
Additions............... -- 3,065 21,031 2,238 -- 897 27,231
Disposals............... -- -- (147) (24) -- -- (171)
------ ------- ------- ------ ----- ------ -------
At end of the year.... -- 44,643 125,080 9,299 3,148 9,192 191,362
====== ======= ======= ====== ===== ====== =======
Accumulated depreciation
At beginning of the
year................... -- 696 11,397 2,545 2,108 -- 16,746
Charge for the year..... -- 1,132 14,308 2,483 515 1,055 19,493
Disposals............... -- -- -- (2) -- -- (2)
------ ------- ------- ------ ----- ------ -------
At end of the year.... -- 1,828 25,705 5,026 2,623 1,055 36,237
====== ======= ======= ====== ===== ====== =======
Net book value
At end of the year.... -- 42,815 99,375 4,273 525 8,137 155,125
====== ======= ======= ====== ===== ====== =======
<CAPTION>
Furniture,
Telecom- fixtures Leasehold
Year ended Land munication and office Motor improve-
December 31, 1999 use rights Buildings equipment equipment vehicles ments Total
----------------- ---------- --------- ---------- ---------- -------- --------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
At beginning of the
year................... -- 44,643 125,080 9,299 3,148 9,192 191,362
Additions............... 7,399 1,562 263,928 3,007 606 2,886 279,388
Disposals............... -- -- (55) -- -- -- (55)
------ ------- ------- ------ ----- ------ -------
At end of the year.... 7,399 46,205 388,953 12,306 3,754 12,078 470,695
====== ======= ======= ====== ===== ====== =======
Accumulated depreciation
At beginning of the
year................... -- 1,828 25,705 5,026 2,623 1,055 36,237
Charge for the year..... 74 1,153 32,285 2,775 323 1,824 38,434
Disposals............... -- -- (7) -- -- -- (7)
------ ------- ------- ------ ----- ------ -------
At end of the year.... 74 2,981 57,983 7,801 2,946 2,879 74,664
====== ======= ======= ====== ===== ====== =======
Net book value
At end of the year.... 7,325 43,224 330,970 4,505 808 9,199 396,031
====== ======= ======= ====== ===== ====== =======
<CAPTION>
Furniture,
Telecom- fixtures Leasehold
Five months ended Land munication and office Motor improve-
May 31, 2000 use rights Buildings equipment equipment vehicles ments Total
----------------- ---------- --------- ---------- ---------- -------- --------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C> <C> <C>
Cost or valuation
At beginning of the
period................. 7,399 46,205 388,953 12,306 3,754 12,078 470,695
Additions............... -- 356 149,428 3,089 1,675 7,376 161,924
Revaluation............. 14,874 3 14,554 1,639 333 -- 31,403
Disposals............... -- (34,010) (6,934) (1,209) -- -- (42,153)
------ ------- ------- ------ ----- ------ -------
At end of the period.. 22,273 12,554 546,001 15,825 5,762 19,454 621,869
====== ======= ======= ====== ===== ====== =======
Accumulated depreciation
At beginning of the
period................. 74 2,981 57,983 7,801 2,946 2,879 74,664
Charge for the period... 149 527 26,736 866 222 1,242 29,742
Disposals............... -- (2,500) (3,999) (733) -- -- (7,232)
------ ------- ------- ------ ----- ------ -------
At end of the period.. 223 1,008 80,720 7,934 3,168 4,121 97,174
====== ======= ======= ====== ===== ====== =======
Net book value
At end of the period.. 22,050 11,546 465,281 7,891 2,594 15,333 524,695
====== ======= ======= ====== ===== ====== =======
</TABLE>
F-24
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
--------
(a) The net book value of property, plant and equipment in May 31, 2000
includes an amount of RMB62,737,000 (1999: RMB25,354,000; 1998:
RMB26,061,000) in respect of assets held under finance leases.
(b) As part of the Restructuring dated March 24, 2000 and as required by the
relevant PRC regulations, a valuation of the contributed property, plant
and equipment was carried out by Zhongfeng Assets Appraisal Office
("Zhongfeng"), a firm of independent valuers registered in the PRC. The
valuation was performed in order to determine the deemed cost of such
contributed net assets and establish amounts for share capital and capital
reserve as of September 30, 1999. The valuers determined that the value of
property, plant and equipment was RMB31,403,000 in excess of the carrying
value.
At May 31, 2000, in connection with the planned application for listing of
the Company's shares on the Hong Kong Stock Exchange, the Company engaged
Sallmanns (Far East) Limited ("Sallmanns"), independent valuers in Hong
Kong, to value the Company's property, plant and equipment as of May 31,
2000. This valuation indicated that the excess of the value of the property,
plant and equipment was not materially different from RMB31,403,000
determined by Zhengfeng. This revaluation surplus of RMB31,403,000 was
recognised in the Company's combined financial statements as of March 24,
2000, the date of the Restructuring.
(c) The effect of the revaluation is to increase future annual depreciation
and amortization of property, plant and equipment by RMB 2,454,000 for
future years. Had the property, plant and equipment of the Company been
stated at cost, the net book value of property, plant and equipment as of
May 31, 2000 would have been RMB 493,701,000.
(d) Disposals for the five months ended May 31, 2000 includes property, plant
and equipment of the non-core business retained by JTC upon the
Restructuring.
18. CONSTRUCTION IN PROGRESS
Telecommunication equipment
<TABLE>
<CAPTION>
At December 31, At May 31,
---------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
At beginning of the year....................... 1,454 4,903 3,080
Interest capitalized for the year/period....... -- 1,288 --
Additions...................................... 7,099 85,444 --
Transferred to property, plant and equipment... (3,650) (88,555) (3,080)
------ ------- ------
At end of the year............................. 4,903 3,080 --
====== ======= ======
</TABLE>
F-25
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
19. PROPERTY USE RIGHT
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Cost
At beginning of the year/period................... -- 15,884 15,884
Addition.......................................... 15,884 -- --
Disposal.......................................... -- -- (15,884)
------ ------ -------
At end of the year................................ 15,884 15,884 --
====== ====== =======
Accumulated amortization
At beginning of the year.......................... -- 179 537
Charge for the year/period........................ 179 358 90
Disposal.......................................... -- -- (627)
------ ------ -------
At end of the year................................ 179 537 --
====== ====== =======
Net book value.................................... 15,705 15,347 --
====== ====== =======
Property use right represents the cost of acquiring the occupancy right for
a half block of a commercial building in 1998 from a debtor of the Company
(the "Debtor").
In 1994, the Company entered into a financing arrangement with the Debtor
by which the Company advanced RMB20 million to the Debtor in anticipation of
receiving interest and the balance of the principal in 1998 (the "Repayment").
The Debtor, after repaying RMB4 million in principal and interest of
approximately RMB4 million, proved to be incapable of honoring the Repayment
in 1998.
Pursuant to a memorandum of understanding signed between the Company and
the Debtor in 1998, the Debtor surrendered its occupancy right of half of a
commercial building to the Company for 47 years in lieu of the Repayment (the
"building use right"). The valuation of the commercial building and the
building use right was certified by an independent registered valuer in the
PRC.
The cost of the right is amortized based on the term of 47 years.
This right was retained by JTC pursuant to the Restructuring and treated as
a disposal in these financial statements.
20. INVESTMENTS
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Investments at cost............................... 31,360 31,360 --
====== ====== =======
</TABLE>
F-26
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
These investments are in unquoted shares of a company incorporated and
operating in the PRC and were retained by JTC as a result of the Restructuring
and treated as a disposal in these financial statements.
21. ACCOUNTS PAYABLE, OTHER PAYABLES AND ACCRUED CHARGES
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Accounts payable and accruals................... 8,343 35,091 83,635
Amount due to a global clearing house agent and
previous joint venture partner (Note (a))...... -- 14,350 --
Deposits received............................... 3,233 4,523 3,600
Capital contribution payable (Note (b))......... 15,745 15,745 --
Retention payable on equipment purchased........ -- 15,622 24,666
Short term advances............................. 5,000 -- --
Staff welfare payable........................... 466 1,929 3,527
Others.......................................... 3,815 5,182 3,333
------ ------ -------
36,602 92,442 118,761
====== ====== =======
</TABLE>
--------
(a) In 1998, one of the global clearing house agents of the Company entered
into a joint venture agreement (the "JVA") with the Company to develop IP
telephony services in the PRC. Pursuant to the JVA, in 1999 the clearing
house agent purchased IP telephony equipment for the operation of the IP
telephony business.
According to the prevailing PRC laws, the JVA is not executable because
foreign investors are not allowed to control, invest, or operate
telecommunication business in the PRC. In February 2000, the global clearing
house agent decided to end the JVA and sold all the IP equipment to the
Company. Due to the nature of the arrangement, the IP equipment has been
treated as owned by the Company since 1999 and the amount paid in February
2000 recorded as a liability at 31 December 1999. The equipment has been
depreciated from the date it was received by the Company (see also Note
13(b)).
(b) In 1994 and 1996, the Company had entered into two joint venture
agreements with independent foreign investors to conduct engineering
businesses in the PRC. The capital contributions payable by the Company to
the joint ventures had been honored by the foreign investors on behalf of
the Company. These joint ventures had been managed and controlled by the
foreign investors. Following cessation of businesses of these two joint
ventures, the Company may be required to pay the foreign investors for the
capital contributions and full provisions were made accordingly in the
years ended December 31, 1994 and 1996.
As part of the Restructuring, JTC retained the full amount of the payable.
(c) As part of the Restructuring, JTC retained part of the Company's accounts
payables, accruals and other payables amounting to RMB37,252,000, as at
March 24, 2000.
F-27
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
22. AMOUNT DUE TO A RELATED COMPANY
The amount represents the unsettled balance due to a related company, a
cooperative joint venture of JTC, Beijing Jitong Bell South Communications &
Information Engineering Company Limited for purchase of a long term
investment. It is interest free, unsecured and repayable within one year.
As part of the Restructuring, JTC retained both the investment and the
balance due to the related company.
23. AMOUNT DUE TO SHAREHOLDERS
The balance included under current liabilities represented an interest free
advance made from a shareholder to the Company for working capital which was
subsequently capitalized in 1999.
Pursuant to the rules and regulations applicable to enterprises operating
in the PRC, capital contributions from shareholders are required to be
independently verified. The amount due to shareholders as at December 31, 1998
included under long term liabilities represented un-verified capital
contributions made from two shareholders to the Company which were
subsequently verified and transferred to capital in 1999.
The average balance outstanding during 2000 was nil (1999: RMB54,159,000;
1998: RMB40,619,000).
24. AMOUNT DUE TO JTC
The balance represents additional working capital contributed by JTC to the
Company, liabilities of the Company due to JTC arising from the transfer of
the Non-core Units to JTC (see Note 4), and the assumption of the net loss
incurred by the Company in the period from September 30, 1999, the date the
Company's assets were valued for purposes of the Restructuring, to March 24,
2000.
The balance is interest free, unsecured and is not repayable within one
year.
25. BORROWINGS
(a) Current portion of long term borrowings
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Bank loan....................................... -- 8,379 18,014
Loan from a non-banking financial institution... 3,000 6,000 --
Loan from a related company..................... 4,967 67,005 --
Obligation under finance lease from a fellow
subsidiary..................................... -- -- 6,546
Obligation under finance leases from third
parties........................................ 6,711 2,887 10,089
------ ------ ------
14,678 84,271 34,649
====== ====== ======
</TABLE>
F-28
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(b) Long term borrowings
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Bank loan....................................... -- 86,708 88,087
Loan from non-banking financial institutions.... 25,000 225,000 193,815
Loan from a related company..................... 71,972 67,005 --
Obligation under finance lease from a fellow
subsidiary..................................... -- -- 11,700
Obligation under finance lease from third
parties........................................ 10,505 3,794 29,081
------- ------- -------
107,477 382,507 322,683
Current portion of loan from a related company.. 4,967 67,005 --
Current portion of finance lease from a fellow
subsidiary..................................... -- -- 6,546
Current portion of other long term borrowings... 9,711 17,266 28,103
------- ------- -------
92,799 298,236 288,034
======= ======= =======
</TABLE>
The loan from a related company was received from a cooperative joint
venture of the Company.
As part of the Restructuring, Jitong retained RMB93,917,000 of the Company's
borrowings, comprising a loan from a non-banking financial institution of
RMB25,000,000, the loan from a related company of RMB67,005,000 and the
obligation under finance lease of RMB1,912,000, as at March 24, 2000.
At May 31, 2000, loan from a bank and a non-banking financial institution of
RMB281,902,000 were guaranteed by the ultimate holding company (1999:
RMB286,708,000). Finance lease obligations are effectively secured as the
rights to the leased assets revert to the lessor in the event of default.
The carrying amounts and fair value of long-term borrowings are as follows:
<TABLE>
<CAPTION>
At December 31,
1999 At May 31, 2000
---------------- ----------------
Carrying Fair Carrying Fair
amounts values amounts values
-------- ------- -------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Bank loan................................ 86,708 77,213 88,087 79,433
Loan from a non-banking financial
institution............................. 225,000 221,928 193,815 189,795
Loan from a related company.............. 67,005 67,005 -- --
Other loans--secured..................... 3,794 3,794 40,781 40,781
------- ------- ------- -------
382,507 369,940 322,683 310,009
======= ======= ======= =======
</TABLE>
F-29
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
The fair values are based on discounted cash flows using applicable
discount rates based upon the borrowing rates that the directors expect would
be available to the Company at the balance sheet date. The carrying amounts of
current portion of the long term borrowings and finance lease contracts
approximate their fair values.
Details of loan balances are analyzed as follows:
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Renminbi denominated
loans:
Loan from non-banking Fixed interest rate at -- 200,000 193,815
financial institution 5.68% per annum as of
for development of December 31, 1999 with
internet infrastructure maturity through 2009
and ChinaGBN network
Loans from non-banking Fixed interest rate at 25,000 25,000 --
financial institution 6.00% to 7.20% per annum
for development of as of December 31, 1999
internet infrastructure with maturity through
and ChinaGBN network 2002
US dollar denominated
loans:
Bank loan for the Fixed interest rate at -- 86,708 88,087
purchase of IP 3.35% per annum as of
telephony equipment December 31, 1999 with
maturity through 2009
Loan from a related Fixed interest rate at 71,972 67,005 --
company for development 8% per annum as of
of ChinaGBN network December 31, 1999 with
no fixed repayment terms
Finance lease
obligations............ 10,505 3,794 40,781
------- ------- -------
Total amount of long
term borrowings........ 107,477 382,507 322,683
Less: amount repayable
within one year for
loan from a related
company................ 4,967 67,005 --
amount repayable within
one year for other
loans.................. 9,711 17,266 34,649
------- ------- -------
Long term portion of
long term borrowings... 92,799 298,236 288,034
======= ======= =======
</TABLE>
F-30
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
Long-term borrowings are repayable in the following periods:
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Bank loans
--Within one year................................ -- 8,379 18,014
--In the second year............................. -- 12,367 9,110
--In the third year.............................. -- 10,000 10,000
--In the fourth year............................. -- 10,000 10,000
--In the fifth year.............................. -- 12,142 14,285
--Thereafter..................................... -- 33,820 26,678
------- ------- -------
-- 86,708 88,087
======= ======= =======
Other loans
--Within one year................................ 14,678 75,892 16,635
--In the second year............................. 72,892 4,907 15,400
--In the third year.............................. 4,907 40,000 27,561
--In the fourth year............................. 15,000 25,000 25,000
--In the fifth year.............................. -- 25,000 25,000
--Thereafter..................................... -- 125,000 125,000
------- ------- -------
107,477 295,799 234,596
======= ======= =======
Future minimum payments on finance lease are as follows:
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Within one year.................................. 7,988 3,077 18,745
In the second year............................... 2,679 952 16,497
In the third year................................ 598 -- 9,163
Thereafter....................................... -- -- --
------- ------- -------
Minimum lease payments........................... 11,265 4,029 44,405
Less: future finance charges on finance leases... 760 235 3,624
------- ------- -------
10,505 3,794 40,781
======= ======= =======
</TABLE>
F-31
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
26. OTHER LONG TERM LIABILITIES
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Interest payable on loan from a related company
for development of ChinaGBN network (Note(a))... 25,141 30,755 --
Financing arrangement with previous joint venture
partners (Note(b)).............................. 92,998 -- --
Amount due to a satellite transmission vendor
(Note(c))....................................... 19,478 16,890 16,434
Interest payable on loans from a non-banking
financial institution........................... 1,095 2,355 --
Deferred government grant (Note(d)).............. 3,951 2,760 2,568
Others........................................... 2,893 -- --
------- ------ ------
145,556 52,760 19,002
Less: amount repayable within one year........... 116,464 35,396 2,286
------- ------ ------
29,092 17,364 16,716
======= ====== ======
</TABLE>
The carrying amounts and fair value of long-term borrowings are as follows:
<TABLE>
<CAPTION>
At December 31,
1999 At May 31, 2000
---------------- ----------------
Carrying Fair Carrying Fair
amounts values amounts values
-------- ------- -------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Interest payable on loan from a related
company................................. 30,755 30,755 -- --
Amount due to a satellite transmission
vendor.................................. 16,890 13,084 16,434 12,307
Interest payable on loans from a non-
banking financial institution........... 2,355 2,355 -- --
Deferred government grant................ 2,760 2,406 2,568 2,113
------ ------ ------ ------
52,760 48,600 19,002 14,420
====== ====== ====== ======
</TABLE>
The fair values are based on discounted cash flows using applicable
discount rates based upon the borrowing rates that the directors expect would
be available to the Company at the balance sheet date. The carrying amounts of
current portion of the other long term liabilities approximate their fair
values.
F-32
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
Other long term liabilities are repayable in the following periods:
<TABLE>
<CAPTION>
At December 31, At May 31,
--------------- ----------
1998 1999 2000
------- ------- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C>
Within one year................................... 116,464 35,396 2,286
In the second year................................ 25,141 2,286 2,286
In the third year................................. -- 2,286 2,286
In the fourth year................................ -- 2,286 2,286
In the fifth year................................. -- 2,286 2,286
Thereafter........................................ 3,951 8,220 7,572
------- ------ ------
145,556 52,760 19,002
======= ====== ======
</TABLE>
--------
(a) This represents the balance of unpaid interest on a loan from a joint
venture partner of JTC. The payable is interest free and did not have any
fixed term for repayment. This loan, and the unpaid interest thereon, was
retained by JTC as part of the Restructuring.
(b) In 1996, JTC and two independent foreign investors had entered into a
cooperative joint venture agreement (the "JVA") to develop the Internet
business in the PRC based on the existing ChinaGBN. According to the JVA,
the foreign investors had injected US$10,000,000, equivalent to
RMB83,149,000 (the "Equity Principal"), into JTC in 1996.
According to the prevailing PRC laws, the JVA is not executable because
foreign investors are not allowed to control, invest, or operate
telecommunications business in the PRC. In 1999, JTC and the two foreign
investors revised the JVA and turned it into a financing arrangement. The
total repayment amount was fixed at RMB96,281,000 (the "Repayment"). The
difference between the Repayment and Equity Principal was treated as
interest on financing and charged to the combined results since 1996 (see
Note 13). The Repayment was fully settled in 1999.
(c) In 1999, JTC signed a debt repayment schedule ("Repayment Schedule") with
its satellite channel vendor to repay the outstanding amount due by JTC to
the satellite channel vendor as at March 31, 1999 through 120 monthly
installments without interest. At the same time it entered into an
agreement with this vendor to lease a satellite for a period of 120
months, the same as the interest free period. At December 31, 1998, the
amount was treated as payable within one year because the Repayment
Schedule had not been agreed.
(d) Pursuant to the approval from the Ministry of Electronics, a RMB10 million
government cash grant had been received by the Company in 1997 for
development of the ChinaGBN. The utilization of the fund is subject to
specific rules. The Company was obliged to submit annual returns to the
Ministry to confirm the utilization of the fund was for qualified
expenditures. 1999 was the last year of the review because the fund has
been fully utilized.
The balance represents deferred income on the government grants which had
been utilized to purchase certain telecommunication equipment. The amount
will be amortized on a straight-line
F-33
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
basis over the useful lives of the corresponding equipment and recognised
in the income statement. The amounts amortized for five months ended May
31, 1999 and 2000 were RMB192,000 and RMB192,000, respectively (1999:
RMB460,000 1998: NIL; 1997: NIL)
(e) As a result of the Restructuring, JTC retained RMB40,059,000 of the
Company's other long term liabilities at March 24, 2000, of which
RMB33,262,000 was the short term portion and RMB6,797,000 was the long
term portion.
27. SHARE CAPITAL
The Company has been incorporated on March 24, 2000 with a registered,
issued and fully paid, share capital of RMB248,377,800 with a par value of
RMB1.00 each. Among the shares issued, 183,874,200 shares were issued to JTC
in exchange for the operations and most assets and liabilities of the Core
Units in JTC. Concurrently, another 64,503,600 new shares of par value RMB1.00
each were issued to five other shareholders, namely Cai Zhu Industrial General
Corporation of Zhuhai Special Economic Zone, SDIC Electronics Company, Beijing
Economic Development Investment Company, Tianjin Communication and
Broadcasting Company and The Seventh Electronics Industry Research Institute
of Ministry of Information Industry, at par for cash amounting to
RMB64,503,600 ("share issuance for cash")
The share capital of the Company has been restated retroactively for the
three years ended December 31, 1999 for the shares issued to JTC, predecessor
of the Company, but it has not been restated for the share issuance for cash.
The additional paid-up capital represents the difference between the issued
share capital of the Company and the registered capital of JTC.
28. COMMITMENTS
(a) Capital commitments
Capital commitments outstanding at May 31, 2000 not provided for in the
accounts were as follows:
<TABLE>
<CAPTION>
2000
-------
RMB'000
<S> <C>
Commitments in respect of land and buildings
--authorized but not contracted for..................................... 136,475
--contracted but not provided for....................................... 32,027
-------
168,502
=======
</TABLE>
(b) Financial commitment
The Company has entered into an agreement with a fellow subsidiary, IRICO
Display Device Company Limited, and another independent third party to invest
in a new company with limited liability. The Company is obliged to invest RMB4
million for a 10% share of the registered capital, and corresponding equity
interest, in the new company.
F-34
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
(c) Operating lease and other commitments
As at May 31, 2000, the Company had commitments under non-cancelable
operating leases and service contracts for lines and interconnections to make
minimum payments as follows:
<TABLE>
<CAPTION>
Satellite International Lines &
Building channels gateway interconnections Total
-------- --------- ------------- ---------------- -------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C> <C>
Not later than one
year................... 22,357 17,507 51,295 54,837 145,996
In the second year...... 20,352 14,646 23,013 53,690 111,701
In the third year....... 15,375 14,646 14,223 53,545 97,789
In the fourth year...... 8,786 14,646 11,105 52,703 87,240
In the fifth year....... 3,073 14,646 5,117 54,907 77,743
Thereafter.............. 1,671 58,584 1,220 362,798 424,273
------ ------- ------- ------- -------
71,614 134,675 105,973 632,480 944,742
====== ======= ======= ======= =======
</TABLE>
The majority of the operating leases of the Company do not contain renewal
options.
29. FINANCIAL INSTRUMENTS
(a) Credit risks
The carrying amounts of financial assets included in the combined balance
sheets represent the Company's maximum exposure to credit risk in relation to
these assets.
The Company has no significant concentrations of credit risk. Cash is
placed with state-owned banks.
(b) Fair values
The carrying amounts of the following financial assets and financial
liabilities approximate their fair values: cash, accounts receivables and
payables, other receivables and payables, and current portions of long term
borrowings, other long term liabilities and lease obligations.
The estimated fair values of long term borrowing and other long term
liabilities are disclosed in Note 25(b) and Note 26 respectively.
30. CONCENTRATION OF RISK
The Company conducts its principal operations in China and accordingly is
subject to special considerations and significant risks not typically
associated with investments in equity securities of the United States of
America and Western European companies. These include risks associated with,
among others, the political, economic and legal environment, influence of the
Ministry of Information Industry over several aspects of the telecommunication
operations, and competition in the industry.
F-35
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
31. CONTINGENT LIABILITIES
Insurance
Currently, the Company does not carry insurance coverage for its property,
facilities and equipment in respect of its operation. In addition, the Company
does not carry any third-party liability insurance against claims relating to
personal injury, property damages or business interruption insurance since
such insurance coverage is not customary in China. While the effect of under-
insurance cannot be reasonably estimated at present, management believes it
could have a material impact on the future operating results or financial
position of the Company.
32. SEGMENT INFORMATION
The Company is primarily engaged in data communications and IP telephony
service businesses. The data communications segment is engaged in the
provision of Internet connection and data transmission services; and the IP
telephony service segment is engaged in the provision of domestic and
international direct dialing services using IP technology. Administration and
infrastructure expenses incurred to support these businesses are not allocated
to either segment. Results of these segments comprise revenues less directly
attributable expenses, which comprise mainly transmission costs, employee
compensation costs, depreciation and amortization , agency fee and commission,
and cost of IP cards and dialers.
All assets and operations of the Company are located in the PRC, which is
considered as one geographic location in an economic environment with similar
risks and returns.
The accounting policies of the operating segments are the same as those
described in Section 3--Summary of Principal Accounting Policies. There are no
significant intersegment sales and purchases.
Operating segment information for the years ended December 31, 1997, 1998
and 1999 are presented as below:
<TABLE>
<CAPTION>
Data IP telephony
Year ended December 31, 1997 communications services Others Total
---------------------------- -------------- ------------ ------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue................. 13,360 -- 4,928 18,288
Segment results................... (26,496) -- (344) (26,840)
Unallocated expenses.............. (21,889)
-------
Loss from operations.............. (48,729)
Finance expenses, net............. (5,592)
Other income/ (expense)........... 619 -- (40) 579
-------
Operating loss.................... (53,472)
Taxation.......................... --
-------
Loss for the year................. (53,472)
=======
Depreciation and amortization *... 10,567 -- 1,088 11,655
</TABLE>
F-36
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31, Data IP telephony
1998 communications services Others Total
----------------------- -------------- ------------ ------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue....... 44,961 -- 4,211 49,172
Segment results......... (24,181) -- (689) (24,870)
Unallocated expenses.... (23,501)
-------
Loss from operations.... (48,371)
Finance expenses, net... (7,904)
Other income/
(expense).............. 208 -- (771) (563)
-------
Operating loss.......... (56,838)
Taxation................ --
-------
Loss for the year....... (56,838)
=======
Depreciation and
amortization *......... 16,370 -- 1,276 17,646
<CAPTION>
Year ended December 31, Data IP telephony
1999 communications services Others Total
----------------------- -------------- ------------ ------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue....... 89,133 102,862 2,397 194,392
Segment results......... (9,266) 17,686 (2,742) 5,678
Unallocated expenses.... (52,783)
-------
Loss from operations.... (47,105)
Finance expenses, net... (12,697)
Other income/
(expense).............. 833 -- (1,451) (618)
-------
Operating loss.......... (60,420)
Taxation................ (2,958)
-------
Loss for the year....... (63,378)
=======
Depreciation and
amortization *......... 24,539 7,267 1,505 33,311
<CAPTION>
Five months ended May Data IP telephony
31, 1999 communications services Others Total
--------------------- -------------- ------------ ------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue....... 32,463 -- 489 32,952
Segment results......... (15,511) -- 13 (15,498)
Unallocated expenses.... (9,834)
-------
Loss from operations.... (25,332)
Finance expenses, net... (4,237)
Other income/
(expense).............. (631) (21) (652)
-------
Operating loss.......... (30,221)
Taxation................ --
-------
Loss for the year....... (30,221)
=======
Depreciation and
amortization *......... 10,440 -- 774 11,214
</TABLE>
F-37
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Data IP telephony
Five months ended May 31, 2000 communications services Others Total
------------------------------ -------------- ------------ ------- -------
RMB'000 RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue................. 46,424 129,055 932 176,411
Segment results................... (24,341) 25,911 214 1,784
Unallocated expenses.............. (42,966)
-------
Loss from operations.............. (41,182)
Finance expenses, net............. (8,058)
Other income/ (expense)........... (265) -- (274) (539)
-------
Operating loss.................... (49,779)
Taxation.......................... 668
-------
Loss for the year................. (49,111)
=======
Depreciation and amortization *... 19,581 7,432 474 27,487
</TABLE>
--------
The Company's property, plant and equipment for the core business is used in
the business of both Data communications and IP telephony services segments.
These assets are not segregated in the financial information provided to the
chief decision maker and, accordingly, no financial information is presented
in respect of assets or capital expenditures of the Company's business
segments.
* Certain depreciation and amortization charges on the property, plant and
equipment used for support and administrative functions of the business have
been included under the category of unallocated expenses, amounting to
RMB1,470,000, RMB2,025,000, RMB5,481,000, RMB1,644,000 and RMB2,345,000 for
the years ended December 31, 1997, 1998, 1999 and five months ended May 31,
1999 and 2000 respectively. Following the start of IP telephony services in
June 1999, depreciation and amortization charges on the property, plant and
equipment used directly for the core operation in each reporting branch have
been allocated to the two segments based on the amount of cash sales
recorded in that branch.
33. SIGNIFICANT DIFFERENCES BETWEEN IAS AND US GAAP
The combined financial statements have been prepared in accordance with
IAS, which differs in certain material respects from US GAAP. Such differences
involve methods for measuring the amounts shown in the financial statements,
as well as additional disclosures required by US GAAP.
F-38
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
Effect on net loss of significant differences between IAS and US GAAP is as
follows:
<TABLE>
<CAPTION>
Five months ended
May 31, 2000
-----------------
RMB'000
<S> <C>
Net loss under IAS............................................ 49,111
US GAAP adjustments
--reversal of depreciation on revaluation of property, plant
and equipment.............................................. (409)
--------
Net loss under US GAAP........................................ 48,702
========
Basic and diluted net loss per share (Note 10)................ RMB0.229
========
Effect on shareholders' equity of significant differences between IAS and
US GAAP is as follows:
<CAPTION>
At
May 31, 2000
-----------------
RMB'000
<S> <C>
Shareholders' equity under IAS................................ 204,682
US GAAP adjustments
--reversal of revaluation surplus of property, plant and
equipment.................................................. (30,994)
--------
Shareholders' equity under US GAAP............................ 173,688
========
</TABLE>
In preparing the summary of differences between IAS and US GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the estimates of revenue and expenses. Accounting estimates
have been employed in these financial statements to determine reported
amounts, including realisability, useful lives of tangible and intangible
assets, income taxes and other areas. Actual results could differ from those
estimates.
A summary of the principal differences and additional disclosures
applicable to the Company is set out below:
Recognition of revenue
The Company charges customers accessing its networks a one-time set-up fee
which it recognizes in full as revenue when billed. For purposes of the
reconciliation of the Company's financial statements to US GAAP the effect of
deferring these revenues and recognizing the income over the estimated life of
the customers is not material and no adjustment is made.
Revaluation of property, plant and equipment
As described in Note 17(b), property, plant and equipment transferred to
the Company by JTC as part of the Restructuring on March 24, 2000 was
appraised as of September 30, 1999, as required by the relevant PRC
regulations, by a firm of independent valuers registered in the PRC, Zhongfeng
F-39
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(Continued)
Assets Appraisal Office. The property, plant and equipment was appraised as of
May 31, 2000 by Sallmanns. This appraisal indicated the value of the Company's
property, plant and equipment had not changed materially since September 30,
1999. Accordingly no adjustment was made to the valuation surplus at May 31,
2000. The revaluation surplus on the property, plant and equipment items
transferred in excess of their prior carrying values has been reflected in the
combined financial statements of the Company for the five months ended May 31,
2000 as the Restructuring took place on March 24, 2000. Depreciation charge on
the revaluation surplus has been included in the combined financial statements
of the Company.
For the purpose of reconciling to the US GAAP financial data, the effect of
the revaluation and the related depreciation charges are reversed. The company
has made full allowance against a potential deferred tax asset of RMB4,649,000
attributable to the reversal of revaluation of property, plant and equipment
of RMB31,403,000 due to the uncertainty of realizing this asset.
Recent US accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), which establishes a new model for
accounting for derivative and hedging activities and supersedes and amends a
number of existing standards. FAS 133 as modified by FAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133" is effective for fiscal years beginning after June
15, 2000. Upon initial application, all derivatives are required to be
recognised in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be reassessed and documented as required by the provisions of FAS 133.
Management considered the Company's combined results and financial positions
during the three years ended December 31, 1999 and the five months ended May
31, 2000 would not have been materially affected by the implementation of this
standard as the Company has not entered into any derivative instruments.
34. IMMEDIATE HOLDING COMPANY AND ULTIMATE HOLDING COMPANY
The directors of the Company consider Jitong Communications Company Limited
and IRICO Group Company, established in the PRC, as being the Company's
immediate and ultimate holding company respectively.
F-40
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Combined Financial Information
1. Jitong Network Communications Company Limited ("Jitong Network") was
established in the People's Republic of China (the "PRC") on March 24,
2000, as a joint stock company with limited liability, specifically to
acquire certain businesses and related assets and liabilities from Jitong
Communications Company Limited ("JTC") in anticipation of a listing on the
Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (the
"GEM") and the National Market of National Automated Systems Dealership and
Quotation (the "NASDAQ").
2. Pursuant to a restructuring agreement between JTC and Jitong Network
effective as of March 24, 2000 (the "Restructuring"), Jitong Network issued
fully paid, at par value, 183,874,200 shares with a par value of RMB1 per
share to JTC to acquire the operations and most assets and liabilities in
relation to (i) the provision of Internet connection and data communication
services (the "Data Communications"); and (ii) the provision of domestic
and international direct dialing services using Internet protocol ("IP")
technology (the "IP telephony service").
3. Concurrently, on the same day, a further 64,503,600 new shares of par value
RMB1 each were issued to five other shareholders, including Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone, SDIC
Electronics Company, Beijing Economic Development Investment Company,
Tianjin Communication and Broadcasting Company and The Seventh Electronics
Industry Research Institute of Ministry of Information Industry, at par for
cash (the "share issuance for working capital").
4. The assets, liabilities and interests transferred by JTC to Jitong Network
include (i) National Network's Operation Control Center, and (ii) forty-
five separate business units (collectively the "Core Units"). JTC retains
certain assets, liabilities and interests relating to its remaining
business and operations, including subsidiaries and investments in joint
ventures doing property rental, engineering and advertising businesses,
which are not directly related to Jitong Network's operations (collectively
the "Non-core Units").
5. Certain assets and liabilities of the Core Units are also retained by JTC
(the "excluded net assets"). The major assets and liabilities currently
held by the Core Units but retained by JTC include:-
(i) office premises located at East Wing, 6th Floor, West Wing, Zhongding
Mansion, A18 West Street of North Third Road, Haidian District, Beijing
which is currently used as an office of JTC (the "Office");
(ii) office premises located at 28th Floor Electric Science Mansion No. 27
Wanshou Road Beijing where the National Network's Operation Control
Center of Jitong Network and JTC (the "Control Room") is located;
(iii) the unutilized element of certain loans obtained by JTC for the
purpose of establishing the Core Units (the "Non-specific loans").
Some of these loans have been used to support the businesses which
are retained by JTC and not injected into Jitong Network, and they
are not secured by any of the operating assets held by Jitong
Network;
F-41
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA FINANCIAL INFORMATION--(Continued)
(iv) the accrued interest payable on the balance of the Non-specific loans;
and
(v) accounts payable to a satellite transmission provider for the satellite
transmission capacity rented by JTC during the three years ended
December 31, 1999 but not utilized.
6. The property, plant and equipment, referred to in Note 5(i) and 5(ii)
above, retained by JTC are currently occupied by Jitong Network for use in
its operations. Accordingly, Jitong Network and JTC have entered into two
operating lease agreements (the "post-restructuring operating lease
agreements") as follows:-
(i) a tenancy agreement under which Jitong Network leases from JTC
commencing from March 24, 2000, the Office for a period of 3 years.
Annual rental is at RMB 1,563,020 payable on a monthly basis;
(ii) a tenancy agreement under which Jitong Network leases from JTC
commencing from March 24, 2000 the Control Room for a period of 3
years. Annual rental is at RMB1,440,000 payable on a monthly basis;
Jitong Network operates pursuant to certain sub-licences and agreements
contained in the Restructuring Agreement with JTC and pursuant to the
approval from the Ministry of Information Industry (the "MII"). These
arrangements permit Jitong Network to continue the core operations acquired
from JTC under JTC's communications licences and approvals from the MII.
JTC currently holds, and Jitong Network operates under, seven major types
of licences and approvals from the relevant authorities: (i) IP telephony
service licence; (ii) International gateway approvals; (iii) VSAT licence;
(iv) VSAT frequency band approvals; (v) Domestic and international frame
relay licences; (vi) Internet services licence; and (vii) Microwave
approvals and radio station licences. These approvals and licences will
expire within one year to five years.
Pursuant to the Restructuring Agreement, JTC has granted Jitong Network a
perpetual, exclusive, royalty-free sub-licence to operate under the
authority granted by the above licences and approvals (including any
renewals, expansions, or replacements), with the exception of the
international gateway approvals, the VSAT frequency band approvals and the
microwave approvals and radio station licenses (collectively the "radio
station licenses"), none of which can be sublicensed. However, the Ministry
of Information Industry has approved the joint application from Jitong
Network and JTC to amend all of JTC's radio station licenses so that Jitong
Network will become the licensee. Jitong Network have also applied for
separate radio station licenses to replace those held by JTC and to cover
additional satellite and microwave stations. All of these new licenses, if
and when approved, will be issued directly to Jitong Network. For the
international gateway approvals, which cannot be transferred or
sublicensed, JTC has agreed to lease international gateways on behalf of
Jitong Network and at Jitong Network's instruction.
JTC also owns certain intellectual properties, including the registered
trademarks of Jitong, GBNet, the logo of "Jitong" as well as the registered
rights to the domain names of www.jitong.com, www.gb.com.cn and
www.chinagb.net. Pursuant to the Restructuring Agreement, JTC has granted
Jitong Network the free and exclusive right to use these trademarks and
domain name until such rights can be transferred.
7. After the Restructuring and upon the formation, Jitong Network operates as
a stand-alone entity. The resulting changes are summarized in the notes to
the unaudited pro forma financial information.
F-42
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA FINANCIAL INFORMATION--(Continued)
8. The unaudited pro forma combined results are prepared based on the
historical consolidated results of Jitong Network's predecessor, JTC (see
the basis of presentation as described in section 2 to the combined
financial statements) after giving effects to pro forma adjustments
described in the accompanying notes thereto. The pro forma combined results
for the year ended December 31, 1999 and five months ended May 31, 2000
presents adjustments as if the formation and the Restructuring had occurred
at January 1, 1999 without taking into account the share issuance for
working capital. The pro forma combined balance sheet as of December 31,
1999 presents adjustments as if the formation and the Restructuring had
occurred on December 31, 1999 without taking into account the share
issuance for working capital (see note 3 above).
No unaudited pro forma combined balance sheet is prepared because the
Company was incorporated on March 24, 2000. The combined balance sheet
presented on F-4 only reflects the financial position of the Company.
9. The unaudited pro forma combined financial information does not purport to
represent what the results of operations of Jitong Network would actually
have been or would be if the events described above had in fact occurred on
the dates assumed or to project the results of operation or financial
position of Jitong Network for any future date or period. The unaudited pro
forma combined financial information should be read in conjunction with the
historical combined financial statements including the notes thereto, the
management's discussion and analysis, and other financial information
included elsewhere in this Prospectus.
Notes--Description of Pro Forma Adjustments
A description of the Pro Forma Adjustments is as follows:
(a) To adjust operating revenue as if the Restructuring had been effective on
January 1, 1999 and the other operating revenue earned by the Non-core
Units had not been included in the financial statements of the Company
throughout the year ended December 31, 1999 and five months ended May 31,
2000.
(b) To give effect to the employee compensation costs estimated to be incurred
by the Non-core Units of JTC. The costs are calculated based on the
historical cost of employee compensation of employees of the head office
of the Company. As specific identification was not practical, the costs
have been attributed based on the ratio of number of employees staying in
the Non-core Units versus the number of employees being transferred to the
Company.
(c) To adjust depreciation and amortization charges as if the Restructuring
had been effective on January 1, 1999 and the property plant and equipment
together with the property use right retained by JTC and its subsidiaries
had not been included in the financial statements of the Company
throughout the year ended December 31, 1999 and five months ended May 31,
2000.
(d) To adjust operating expenses as if
(1) the post-restructuring operating lease agreements on buildings with JTC
had been in effect throughout the year ended December 31, 1999;
(2) the Company had not incurred any expenses in relation to the Non-core
Units throughout the year ended December 31, 1999 and five months ended
May 31, 2000.
F-43
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA FINANCIAL INFORMATION--(Continued)
The pro forma adjustments are to reflect
(1) the rental expenses of the respective properties to Jitong Network by
JTC for the year ended December 31, 1999 and five months ended May 31,
2000. The historical depreciation charges are included in the
adjustment described in Note 5(h) above. The rental expenses are
calculated in accordance with the new operating lease agreements
entered into between Jitong Network and JTC effective from March 24,
2000.
(2) Operating expenses incurred by the Non-core Units based on the
historical financial data.
<TABLE>
<CAPTION>
Five months
Year ended ended
Lease December 31, May 31,
term 1999 2000
----- ------------ -----------
RMB'000 RMB'000
<S> <C> <C> <C>
Control Room.............................. 3 1,440 360
Office.................................... 3 1,563 391
----- -----
Total adjustment to operating expenses.... 3,003 751
Less: Operating expenses incurred by the
Non-core Units of JTC.................... 2,377 1,542
----- -----
Net adjustment............................ 626 (791)
===== =====
</TABLE>
(e) Reverse the interest expense related to the RMB68,917,000 borrowings
assumed by JTC on March 31, 1999 as if the debt assumption took place on
January 1, 1999. For the year ended December 31, 1999 and five months
ended May 31, 2000, the reversals of interest expense were RMB8,739,000
and RMB4,023,000.
(f) Reverse the net other expenses arising from the operation of the Non-core
Units of the Company.
(g) The Company has incurred tax losses and has not recognised deferred tax
amounting to RMB47,604,000. The deferred tax benefit arising from these
tax losses has been fully provided for in the combined financial
statements. The net tax charge in respect of the pro forma adjustments to
the combined results of Jitong Network has been offset by a reduction of
the provision against the deferred tax asset.
(h) The pro forma basic net loss per share for the year ended December 31,
1999 has been computed by dividing pro forma net loss by 183,874,200
shares issued by the Company to JTC and outstanding upon the establishment
of the Company on March 24, 2000 as if such shares had been outstanding
for all relevant periods.
On March 24, 2000, a further 64,503,600 shares were issued to five
investors at par for cash (see Note 3 to the "Introduction to Unaudited Pro
Forma Combined Financial Information"). Basic net loss per share for the
five months period ended May 31, 2000 has been computed by dividing net
loss by weighted average number of 212,731,074 (1999: 183,874,200) shares
issued by the Company to JTC and five other shareholders.
F-44
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Pro-forma
Statement Statement
of income of income
for the for the
year ended year ended
December Pro Forma December
31, 1999 Adjustments Note 31, 1999
---------- ----------- ---- ----------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue
Data communications................ 89,133 89,133
IP telephony services.............. 102,862 102,862
Other revenue...................... 2,397 (2,397) (a) --
---------- ------ ----------
194,392 (2,397) 191,995
Operating expenses
Transmission costs................. (107,697) -- (107,697)
Employee compensation costs........ (16,126) 395 (b) (15,731)
Depreciation and amortization...... (38,792) 2,367 (c) (36,425)
Agency fee and commission.......... (17,071) -- (17,071)
Cost of IP cards and dialers....... (7,577) -- (7,577)
Other operating expenses........... (54,234) (626) (d) (54,860)
---------- ------ ----------
(241,497) 2,136 (239,361)
---------- ------ ----------
Loss from operation.................. (47,105) (261) (47,366)
Finance expenses, net................ (12,697) 8,739 (e) (3,958)
Other income/(expenses).............. (618) 1,451 (f) 833
---------- ------ ----------
Operating loss....................... (60,420) 9,929 (50,491)
Taxation ............................ (2,958) -- (g) (2,958)
---------- ------ ----------
Loss for the year.................... (63,378) 9,929 (53,449)
========== ====== ==========
Basic and diluted loss per share..... RMB0.345
==========
Pro forma basic and diluted loss per
share............................... (h) RMB0.291
==========
</TABLE>
F-45
<PAGE>
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
AND ITS PREDECESSOR, JITONG COMMUNICATIONS COMPANY LIMITED
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Pro-forma
Statement Statement
of income of income
for the for the
year year
ended May Pro Forma ended May
31, 2000 Adjustments Note 31, 2000
--------- ----------- ---- ---------
RMB'000 RMB'000 RMB'000
<S> <C> <C> <C> <C>
Operating revenue
Data communications.................. 46,424 46,424
IP telephony services................ 129,055 129,055
Other revenue........................ 932 (932) (a) --
--------- ----- ---------
176,411 (932) 175,479
Operating expenses
Transmission costs................... (97,212) -- (97,212)
Employee compensation costs.......... (13,973) 299 (b) (13,674)
Depreciation and amortization........ (29,832) 583 (c) (29,249)
Agency fee and commission............ (21,183) -- (21,183)
Cost of IP cards and dialers......... (1,771) -- (1,771)
Other operating expenses............. (53,622) 791 (d) (52,831)
--------- ----- ---------
(217,593) 1,673 (215,920)
--------- ----- ---------
Loss from operation.................... (41,182) 741 (40,441)
Finance expenses, net.................. (8,058) 4,023 (e) (4,035)
Other income/(expenses)................ (539) 274 (f) (265)
--------- ----- ---------
Operating loss......................... (49,779) 5,038 (44,741)
Taxation .............................. 668 -- (g) 668
--------- ----- ---------
Loss for the year...................... (49,111) 5,038 (44,073)
========= ===== =========
Basic and diluted loss per share....... RMB0.231
=========
Pro forma basic and diluted loss per
share................................. (h) RMB0.207
=========
</TABLE>
F-46
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
16,198,750 American depositary shares representing 64,795,000 H shares
[LOGO OF JITONG NETWORK COMMUNICATIONS COMPANY LIMITED]
JITONG NETWORK COMMUNICATIONS COMPANY LIMITED
------------------------
PROSPECTUS November , 2000
------------------------
Dresdner Kleinwort Benson Lehman Brothers
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The other expenses attributable to the global offering are as follows:
<TABLE>
<S> <C>
SEC registration fee......................................... US$37,826.68
NASD filing fee.............................................. US$ 30,500
Growth Enterprise Market listing fees........................ US$
Blue Sky fees and expenses................................... US$
Printing and engraving expenses.............................. US$
Legal fees and expenses...................................... US$
Accounting fees and expenses................................. US$
Appraisal fees............................................... US$
Miscellaneous................................................ US$
------------
Total...................................................... US$
============
</TABLE>
Item 14. Indemnification of Directors and Officers
The articles of association of the registrant provide that a director,
supervisor, general manager and any other senior officer of the registrant may
be relieved of liability for specific breaches of his duty by the informed
consent of shareholders in a general meeting. The articles of association also
provide, however, that a controlling shareholder of the registrant shall not
exercise its voting rights in a manner prejudicial to the interests of the
shareholders generally or of some of the shareholders of the registrant (i) to
relieve a director or supervisor of his duty to act honestly in the best
interests of the registrant, (ii) to approve the expropriation by a director
or supervisor, for his own benefit or for the benefit of another person, in
any guise of the registrant's assets, including without limitation,
opportunities which are advantageous to the registrant, or (iii) to approve
the expropriation by a director or supervisor, for his own benefit or for the
benefit of another person, of the individual rights of other shareholders,
including without limitation, rights to distributions and voting rights.
No contractual or other arrangements currently exist under which any
controlling person, director or officer of the registrant is insured or
indemnified in any manner against liability which such person may incur in
such person's capacity as such.
Item 15. Recent Sales of Unregistered Securities
Except with respect to shares issued pursuant to the corporate
reorganization described under "Our Corporate Structure" and options for
3,953,450 H shares granted under the pre-global offering share option plan
described under "Management--Compensation of Directors, Supervisors and
Executive Officers--Pre-Global Offering Share Option Plan", no securities of
the registrant were issued or sold by the registrant within the past three
years. All securities sold by the registrant during this period were sold
outside the United States to foreign persons and were therefore not subject to
Section 5 of the Securities Act. There were no underwriters employed in
connection with any of those transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Reorganization Agreement dated March 24, 2000 among the registrant,
Jitong Communications Co., Ltd., Cai Zhu Industrial General Corporation
of Zhuhai Special Economic Zone and certain other promoters.*
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
2.2 Licensing Agreement dated March 24, 2000 between the registrant and
Jitong Communications Co., Ltd.*
2.3 Non-competition Agreement dated March 24, 2000 between the registrant
and Jitong Communications Co., Ltd.*
2.4 Trademark Transfer Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.5 Trademark Licensing Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.6 Operations Centre and Zhongding Building Lease Agreements dated March
24, 2000 between the registrant and Jitong Communications Co., Ltd.*
3.1 Articles of Association of the registrant.*
4.1 Articles of Association of the registrant (filed as exhibit 3.1).*
4.2 Form of H share certificate.*
4.3 Form of Deposit Agreement.*
5.1 Opinion of Jingtian & Gongcheng.*
10.1 Form of Hong Kong Underwriting Agreement.*
10.2 Employee Share Option Scheme of the registrant.*
10.3 Pre-IPO Share Option Scheme of the registrant.*
10.4 Full-time Transponder Service Agreement For Data Service Delivery (in
English) dated June 26, 1995 between PanAmSat Corporation and Jitong
Communications Co., Ltd. (assigned to the registrant as of March 24,
2000).*
10.5 Agreement of Relending for the Use of Israel Government Loans by Jitong
Communications Co., Ltd. for the Construction of Golden Bridge First
Phase Works dated July 27, 1998 between the Business Department of
China Construction Bank and Jitong Communications Co., Ltd. (assigned
to the registrant as of March 24, 2000).*
10.6 AT&T Global Clearinghouse Service Agreement (in English) dated November
6, 1998 between AT&T EasyLink Services Asia Pacific Ltd. and Jitong
Communications Co., Ltd. (assigned to the registrant as of March 24,
2000).*
10.7 Agreement for the Lease of Xinnuo No.1 Satellite Transponder dated
February 5, 1999 between Xinnuo Satellite Communications Co., Ltd. and
Jitong Communications Co., Ltd. (assigned to the registrant as of March
24, 2000).*
10.8 First Amendment to Full-time Transponder Service Agreement For Data
Service Delivery (in English) dated April 1, 1999 between PanAmSat
International Systems, Inc. (successor in interest to PanAmSat
Corporation) and Jitong Communications Co., Ltd. (assigned to the
registrant as of March 24, 2000).*
10.9 Agreement for the Lease of Railway Communication Fibers dated February
25, 2000 between Zhongtie Communications Center and Jitong
Communications Co., Ltd. (assigned to the registrant as of March 24,
2000).*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10 Contract for the Lease by Sections of Railway Communication Fibers
(the Jing-Guang Line, Jing-Hu Line and Hu-Guang Line) dated February
25, 2000 between Zhongtie Communications Center and Jitong
Communications Co., Ltd. (assigned to the registrant as of March 24,
2000).*
10.11 Mandate of Lending (Relending) dated October 27, 1999 among SDIC
Electronics Co., China International Trust and Investment Corporation
and Jitong Communications Co., Ltd. (assigned to the registrant as of
March 24, 2000).*
10.12 Contract dated November 3, 1999 between Hengtong International Leasing
Co., Ltd. and Jitong Communications Co., Ltd. (assigned to the
registrant as of March 24, 2000).*
21.1 Subsidiaries of the registrant.*
23.1 Consent of Jingtian & Gongcheng (included in exhibit 5.1).
23.2 Consent of auditors.*
99.1 Form of Sponsor's Agreement.*
</TABLE>
--------
* To be filed by amendment to this registration statement.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the provisions referenced in Item 14 of this registration
statement, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant 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 hereunder, 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 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.
The registrant undertakes that, at such time, if any, as all applicable
laws and regulations of the People's Republic of China and (unless the
registrant's shares are no longer listed thereon) all applicable regulations
of the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited
shall not prohibit, the registrant's board of directors shall propose an
amendment to the registrant's articles of association to permit shareholders
to adjudicate disputes arising between the registrant's shareholders,
directors, supervisors or officers by means of judicial proceedings.
II-3
<PAGE>
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 the form
of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Beijing, People's Republic of China, on November 3,
2000.
Jitong Network Communications
Company Limited
/s/ Qi Mingqiu
By:__________________________________
Qi Mingqiu
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Qi Mingqiu his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, and in any and all capacities, to sign any and all
amendments to this registration statement, and to file the same with all
exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as each such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Qi Mingqiu Chairman of the Board of November 3, 2000
______________________________________ Directors
Qi Mingqiu
/s/ Chen Jihua Chief Financial Officer November 3, 2000
______________________________________
Chen Jihua
/s/ Wang Jianhui Principal Accounting September 20, 2000
______________________________________ Officer
Wang Jianhui
/s/ Xue Baoming Director November 3, 2000
______________________________________
Xue Baoming
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Liu Jinping Director November 3, 2000
______________________________________
Liu Jinping
Director November 3, 2000
______________________________________
Wang Xianlao
/s/ Wu Weiren Director November 3, 2000
______________________________________
Wu Weiren
/s/ Yu Weixing Director November 3, 2000
______________________________________
Yu Weixing
/s/ Ning Xianfu Director November 3, 2000
______________________________________
Ning Xianfu
/s/ Hu Qiheng Independent Director November 3, 2000
______________________________________
Hu Qiheng
/s/ Wang Tong Independent Director November 3, 2000
______________________________________
</TABLE> Wang Tong
II-6
<PAGE>
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below on November 3, 2000 by the undersigned as the
duly authorized representative of Jitong Network Communications Company
Limited in the United States.
PUGLISI & ASSOCIATES
/s/ Donald J. Puglisi
_____________________________________
Donald J. Puglisi
Managing Director
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibits No.
-------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
2.1 Reorganization Agreement dated March 24, 2000 among the
registrant, Jitong Communications Co., Ltd., Cai Zhu
Industrial General Corporation of Zhuhai Special Economic Zone
and certain other promoters.*
2.2 Licensing Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.3 Non-competition Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.4 Trademark Transfer Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.5 Trademark Licensing Agreement dated March 24, 2000 between the
registrant and Jitong Communications Co., Ltd.*
2.6 Operations Centre and Zhongding Building Lease Agreements
dated March 24, 2000 between the registrant and Jitong
Communications Co., Ltd.*
3.1 Articles of Association of the registrant.*
4.1 Articles of Association of the registrant (filed as exhibit
3.1).*
4.2 Form of H share certificate.*
4.3 Form of Deposit Agreement.*
5.1 Opinion of Jingtian & Gongcheng.*
10.1 Form of Hong Kong Underwriting Agreement.*
10.2 Employee Share Option Scheme of the registrant.*
10.3 Pre-IPO Share Option Scheme of the registrant.*
10.4 Full-time Transponder Service Agreement For Data Service
Delivery (in English) dated June 26, 1995 between PanAmSat
Corporation and Jitong Communications Co., Ltd. (assigned to
the registrant as of March 24, 2000).*
10.5 Agreement of Relending for the Use of Israel Government Loans
by Jitong Communications Co., Ltd. for the Construction of
Golden Bridge First Phase Works dated July 27, 1998 between
the Business Department of China Construction Bank and Jitong
Communications Co., Ltd. (assigned to the registrant as of
March 24, 2000).*
10.6 AT&T Global Clearinghouse Service Agreement (in English) dated
November 6, 1998 between AT&T EasyLink Services Asia Pacific
Ltd. and Jitong Communications Co., Ltd. (assigned to the
registrant as of March 24, 2000).*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
Exhibits No.
-------- ----
<C> <S> <C>
10.7 Agreement for the Lease of Xinnuo No.1 Satellite Transponder
dated February 5, 1999 between Xinnuo Satellite Communications
Co., Ltd. and Jitong Communications Co., Ltd. (assigned to the
registrant as of March 24, 2000).*
10.8 First Amendment to Full-time Transponder Service Agreement For
Data Service Delivery (in English) dated April 1, 1999 between
PanAmSat International Systems, Inc. (successor in interest to
PanAmSat Corporation) and Jitong Communications Co., Ltd.
(assigned to the registrant as of March 24, 2000).*
10.9 Agreement for the Lease of Railway Communication Fibers dated
February 25, 2000 between Zhongtie Communications Center and
Jitong Communications Co., Ltd. (assigned to the registrant as
of March 24, 2000).*
10.10 Contract for the Lease by Sections of Railway Communication
Fibers (the Jing-Guang Line, Jing-Hu Line and Hu-Guang Line)
dated February 25, 2000 between Zhongtie Communications Center
and Jitong Communications Co., Ltd. (assigned to the
registrant as of March 24, 2000).*
10.11 Mandate of Lending (Relending) dated October 27, 1999 among
SDIC Electronics Co., China International Trust and Investment
Corporation and Jitong Communications Co., Ltd. (assigned to
the registrant as of March 24, 2000).*
10.12 Contract dated November 3, 1999 between Hengtong International
Leasing Co., Ltd. and Jitong Communications Co., Ltd.
(assigned to the registrant as of March 24, 2000).*
21.1 Subsidiaries of the registrant.*
23.1 Consent of Jingtian & Gongcheng (included in exhibit 5.1).
23.3 Consent of auditors.*
99.1 Form of Sponsor's Agreement.*
</TABLE>
--------
* To be filed by amendment to this registration statement.
