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RULE NO. 424(b)(1)
REGISTRATION NO. 333-93199
PROSPECTUS
5,000,000 Shares
[LOGO OF ASIAINFO]
COMMON STOCK
AsiaInfo Holdings, Inc. is offering 5,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares.
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We have been approved to list our shares of common stock to be quoted on the Nasdaq National Market under the symbol “ASIA.”
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Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.
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PRICE $24.00 A SHARE
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Underwriting
Price to Discounts Proceeds to
Public and Commissions AsiaInfo
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Per Share……………….. $24.00 $1.68 $22.32
Total…………………… $120,000,000 $8,400,000 $111,600,000
AsiaInfo Holdings, Inc. has granted the underwriters the right to purchase up to an additional 750,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on March 7, 2000.
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MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
March 2, 2000
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TABLE OF CONTENTS
Page
—-
Prospectus Summary……………… 4
Risk Factors…………………… 9
Special Note Regarding Forward-
Looking Statements…………….. 18
Use of Proceeds………………… 19
Dividend Policy………………… 19
Capitalization…………………. 20
Dilution………………………. 21
Selected Consolidated Financial
Data…………………………. 22
Management’s Discussion and Analysis
of Financial Condition and Results
of Operations…………………. 24
Page
—-
Business……………………….. 34
Management……………………… 49
Certain Transactions…………….. 55
Principal Stockholders…………… 57
Description of Capital Stock……… 59
Shares Eligible for Future Sale…… 61
Taxation……………………….. 63
Underwriters……………………. 65
Legal Matters…………………… 69
Experts………………………… 69
Enforceability of Civil Liabilities.. 70
Additional Filing and Company
Information……………………. 71
Index to Financial Statements…….. F-1
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our shares of common stock.
For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
Until March 27, 2000 (25 days after commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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“AsiaInfo” is a registered trademark of AsiaInfo Holdings, Inc. AsiaInfo and designs are pending trademarks of AsiaInfo Holdings, Inc. All other brand names or trademarks appearing in this prospectus are property of their respective holders.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed information regarding our company and the shares of the common stock being sold in this offering and our historical financial statements and notes thereto included elsewhere in this prospectus.
AsiaInfo Holdings, Inc.
Our Business
We are a leading provider of Internet-related, information technology professional services and software products in the People’s Republic of China. We offer total network solutions and proprietary software to meet our customers’ Internet and telecommunications infrastructure and operating needs. Our customers are leading telecommunications service providers, Internet service providers and Internet content providers in China, including the China Telecom system, which comprises the Directorate General of Telecommunications, a state owned enterprise, provincial post and telecommunication administrations and city and county telecommunications bureaus, and China United Telecommunications Corporation, or China Unicom, the two largest Chinese telecommunications and Internet service providers, as well as China Mobile Communications Corporation, or China Mobile, the largest wireless telephony service provider in China.
We provide network solutions for large Internet and telecommunications projects. We deliver Internet infrastructure solutions such as backbone and access networks, operations support solutions using our proprietary and third party software, service applications such as Internet protocol telephony, commonly known as IP telephony, and virtual private networks, and network performance and security solutions. In response to customer preferences in China, we often offer services in the context of total solutions, which include systems integration and customization of our proprietary and third party software.
With an early entry into the market, we are now a leading provider of network solutions for large Internet and telecommunications companies in China. Our Chinese, western-trained senior management and technical personnel have a proven track record of delivering high performance, cost effective solutions for the specific needs of these companies. We designed and built ChinaNET, China’s first commercial and largest national Internet backbone, the physical network of cables and computers which carries Internet traffic. We are in the process of designing and building UniNET, China’s second-largest national commercial Internet backbone, for China Unicom and CNCNET, China’s third national commercial Internet backbone for China Netcom Corporation, or China Netcom. We have also built numerous provincial Internet backbones, including GuangdongNET, the first and largest provincial commercial Internet backbone in China.
We develop and sell carrier class, meaning high performance, highly fault tolerant, software products tailored for the specific needs of the China market. These products include real time, highly scalable customer management and billing software and carrier-scale messaging software for Internet service providers, Internet content providers and wireless telephony service providers. We have historically sold our software products as part of our network solutions projects, but we are increasingly marketing these products on a stand-alone basis. Our software can support up to millions of users and is designed with open architecture to facilitate customization.
We have the largest user base for customer management and billing software among large Internet service providers in China, having sold software licenses to our customers for approximately 1.8 million end users as of December 31, 1999. AsiaInfo Mail Center (“AIMC”), the latest version of our messaging software, was launched in April 1999 and within eight months has been licensed by our customers for over 9 million of their end users. As of December 31, 1999, we had sold licenses for our wireless telephony customer management and billing software to our customers for over 7 million end users.
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Our Market Opportunity
The Internet market in China has been growing rapidly due primarily to increased access to telecommunications services and declining personal computer prices. International Data Corp. (“IDC”) estimates that China will have 3.8 million users at the end of 1999 and forecasts that China’s Internet population will grow at a compound rate of 54% per year to 33 million users in 2004.
Chinese telecommunications carriers have made significant investments in Internet and telecommunications infrastructures using advanced technologies. The Internet and telecommunications markets in China have become increasingly competitive as the Chinese government has taken measures to deregulate the telecommunications industry and introduce competition. China’s expected entry into the World Trade Organization (the “WTO”) is expected to stimulate spending on the Internet and telecommunications infrastructures, particularly broadband networks. Increased demand for Internet services and competition have also prompted service providers to offer varying, customer-tailored service plans and focus on customer care and support. We believe that the combined effects of increased deregulation and industry competition, coupled with a growing demand for Internet services and multimedia applications, have created opportunities for us in the following areas:
. high value Internet-related information technology services in an increasingly complex network environment;
. real-time, scalable customer management and billing software that meets the specific requirements of Chinese service providers; and
. broadband network and convergent communications solutions including unified messaging software, which integrates email, voicemail and fax functions.
Our Strategy
Our strategy is to be the leading China-based, world-class provider of Internet-related, information technology professional services and software products to enable our customers to build, maintain, operate and continuously improve their Internet and communications infrastructures. Key aspects of this strategy are to:
. Maintain our leading position in providing Internet and telecommunications infrastructure solutions in China
. Focus on high value information technology professional services
. Significantly grow our software business to maximize opportunities in the Internet software market in China
. Develop broadband and convergent communications solutions
. Leverage our large customer base to generate recurring revenues
. Develop outsourcing solutions
. Attract and retain highly qualified personnel
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Our Competitive Strengths
We believe that we are well positioned to meet our customers’ Internet infrastructure and software applications needs in China. The key factors which contribute to our strong competitive position are:
. Internet infrastructure technology leadership in China
. Combined international and China expertise
. Established customer relationships
. Real time, scalable and adaptable proprietary software
. Total solutions approach
Corporate Information
We started our business in Texas through a predecessor company in 1993 and are now incorporated in Delaware. In 1995, we moved our base of operations from Dallas, Texas to Beijing, China to capitalize on emerging opportunities in the rapidly developing Internet market in China. Today, almost all our operations and employees are based in China. While we source hardware for our customers through our U.S. holding company, AsiaInfo Holdings, Inc., we conduct the bulk of our business through our two wholly-owned operating subsidiaries, each of which is a Chinese company. Our executive offices are located at Ligong Science & Technology Tower, 4th Floor, 11 Baishiqiao Road, Haidian District, Beijing 100081, China, and our telephone number is (8610) 6846-7058.
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THE OFFERING
Common stock offered………………………….. 5,000,000 shares
Common stock to be outstanding after this offering.. 37,484,297 shares
Use of proceeds………………………………. We intend to use the
estimated net proceeds of
approximately $109.8
million from this
offering for working
capital, expansion of
sales and marketing
activities, software
product development,
acquisitions and general
corporate purposes. See
“Use of Proceeds.”
Nasdaq National Market Symbol………………….. “ASIA”
The total number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 1999 and 6,952,153 shares of common stock issuable upon the automatic conversion of all outstanding shares of our convertible preferred stock upon the completion of this offering, but excludes
. options granted under our stock option plans to purchase 8,891,811 shares of common stock at a weighted average exercise price of $2.99 per share outstanding as of December 31, 1999,
. 1,821,300 shares of common stock available for issuance upon the exercise of future grants under our stock option plans and
. 40,000 shares of common stock issuable upon the exercise of warrants to purchase shares of common stock at an exercise price of $0.01 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data. You should read this information together with our consolidated financial statements, the notes to those statements beginning on page F-1 of this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”The summary consolidated balance sheet data and summary consolidated statements of operations data in the table below as of and for the years ended December 31, 1996, 1997, 1998 and 1999 have been derived from our audited consolidated financial statements. The summary consolidated statement of operations data for the year ended December 31, 1995 and the summary consolidated balance sheet data as of the same date are derived from our unaudited consolidated financial statements, which have been prepared on the same basis as our audited consolidated financial statements and contain normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such unaudited periods. Historical results are not necessarily indicative of the results to be expected in the future.
Years Ended December 31,
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1995 1996 1997 1998 1999
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(Amounts in thousands of U.S. dollars except share and per share data)
Consolidated Statements
of Operations Data:
Revenues:
Network Solutions…… $ 1,799 $ 14,781 $ 36,509 $ 41,964 $ 53,786
Software License……. — 762 775 2,258 6,494
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Total revenues……… 1,799 15,543 37,284 44,222 60,280
Gross profit………… 546 6,445 7,728 12,033 18,317
Operating income
(loss)…………….. (598) 2,186 (713) 681 (4,964)
Net income (loss)……. (578) 1,670 (382) 1,536 (4,946)
Net income (loss) per
share:
Basic……………… $ (0.05) $ 0.12 $ (0.03) $ 0.11 $ (0.34)
Fully diluted(/1/)….. $ (0.05) $ 0.10 $ (0.03) $ 0.05 $ (0.34)
Shares used in
computation:
Basic……………… 12,273,628 13,530,000 13,530,000 13,616,412 14,630,145
Fully diluted(/1/)….. 12,273,628 15,999,133 13,530,000 31,765,534 14,630,145
As of December 31, As of December 31, 1999
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1995 1996 1997 1998 Actual As Adjusted(/2/)
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(Amount in thousands of U.S. dollars)
Consolidated Balance
Sheet Data:
Cash and cash
equivalents………… $1,732 $2,221 $24,066 $ 9,749 $25,404 $135,606
Total current assets…. 3,747 8,325 36,131 42,805 64,772 174,572
Total assets………… 3,787 9,227 37,085 45,359 71,427 181,227
Total liabilities
(excluding minority
interest)………….. 4,089 6,429 20,008 26,048 31,639 31,639
Total stockholders’
equity (deficit)……. (567) 1,333 16,179 19,247 39,788 149,588
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(1) In 1997 and 1999, the diluted net loss per share computation excludes shares of common stock issuable under stock option plans, upon the exercise of warrants and upon the automatic conversion of our convertible preferred stock which, if included, would have an antidilutive effect on the net loss reported in these periods. See note 11 of Notes to Consolidated Financial Statements for a detailed explanation of the determination of the shares used in computing basic and diluted net income (loss) per share.
(2) Consolidated balance sheet data, as adjusted, reflect (a) the sale of 5,000,000 shares of common stock offered by AsiaInfo hereby at an initial public offering price of $24.00 per share and after deducting the underwriting discount and estimated offering expenses, and (b) the conversion of all outstanding shares of our convertible preferred stock into 6,952,153 shares of common stock as of the closing of this offering.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.
Risks Relating to AsiaInfo
The growth of our business is dependent on government budgetary policy, particularly the allocation of funds, to sustain the growth of the telecommunications industry and the Internet in China.
Virtually all our large customers are directly or indirectly owned or controlled by the Chinese government. Accordingly, their business strategies and capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the State Planning Commission. As a result, the growth of our business is heavily dependent on government policies for telecommunications and Internet infrastructure.
Despite the high priority currently accorded by the government to the development of telecommunications industry and Internet infrastructure and a high level of funding allocated by the government to these sectors in 1999, we believe that our customers’ capital spending for Internet infrastructure was lower in 1999 than 1998 due to a variety of factors, particularly the current restructuring of the telecommunications industry. While there is a possibility that the unspent funds will be carried forward to 2000, we cannot make any conclusions or predictions at this time regarding government funding plans for the telecommunications industry and the Internet. Furthermore, we can give no assurance as to the government’s budget policies in future years. Insufficient government allocation of funds to sustain the growth of the telecommunications industry and the Internet in China could reduce the demand for our products and services and thus have a material adverse effect on our ability to maintain the current level of revenue and grow our business.
Laws and regulations applicable to the Internet in China remain unsettled and could have a material adverse effect on Internet’s growth and thereby have material adverse effect on our business.
Growth of the Internet in China could be materially adversely affected by governmental regulation of the industry. Due to the increasing popularity and use of the Internet and other online services, it is possible that regulations may be adopted with respect to the Internet or other services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. Although we are engaged in Internet infrastructure development and Internet-related software business, the adoption of additional laws or regulations may slow the growth of the Internet or other services, which could in turn lead to reduced Internet traffic, decrease the demand for our network solutions and Internet-related software products and increase our cost of doing business.
The Ministry of Information Industries is currently reviewing its telecommunications regulations, particularly as they relate to Internet content. While we are not aware of any existing or proposed regulations that have a significant direct adverse effect on our business, a restrictive regulatory policy regarding the Chinese Internet industry would have a material direct adverse effect on us by retarding the industry’s growth in China.
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Our customer base is highly concentrated and the loss of one or more of our customers could cause our business to suffer significantly.
We have derived and believe that we will continue to derive a significant portion of our revenues from a limited number of large customers, such as the China Telecom system and China Unicom. Although various provincial and local entities of the China Telecom system are separate legal entities and generally make purchasing decisions independent of the Directorate General of Telecommunications, or DGT, their business decisions may nonetheless be affected by the DGT. Entities of the China Telecom system accounted for almost all of our revenues in 1997 and 1998. At December 31, 1999, entities of the China Telecom system and China Unicom accounted for approximately 87% of our backlog. In the future, we expect to derive an increasing portion of our revenues from China Unicom, China Mobile and China Netcom. The loss of the China Telecom system, whose provincial and local entities have historically accounted for a major portion of our business, or cancellation or deferral of any large contract by any of our large customers would have a material adverse effect on our revenues, and consequently our profits. See “Business– Customers.”
The long and variable sales cycles for our products and services can cause our revenues and operating results to vary significantly from period to period and may adversely affect the trading price of our common stock.
Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. A customer’s decision to purchase our services and products involves a significant commitment of its resources and an extended evaluation. As a result, our sales cycle tends to be lengthy. We spend considerable time and expense educating and providing information to prospective customers about features and applications of our services and products. Because our major customers operate large and complex networks, they usually expand their networks in large increments on a sporadic basis. The combination of these factors can cause our revenues and results of operations to vary significantly and unexpectedly. Other factors that may affect us include the following:
. fluctuation in demand for our products and services as a result of budgetary cycles of our large customers, particularly state-owned enterprises;
. the reduction, delay, interruption or termination of one or more significant infrastructure projects; and
. our ability to introduce, develop and deliver new software products that meet customer requirements in a timely manner.
A large part of the contract amount of a network solutions project usually relates to hardware procurement. Since we recognize most of the revenues relating to hardware plus a portion of contract services revenues at the time of hardware delivery, the timing of hardware delivery can cause our quarterly revenues to fluctuate significantly.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon. It is likely that our operating results in some periods may be below the expectations of public market analysts and investors. In this event, the price of our common stock will probably decline, perhaps significantly more in percentage terms than the decline in operating results.
Our working capital requirements may increase significantly.
We typically purchase hardware for our customers as part of our turnkey total solutions services. We generally require our customers to pay 90% of the invoice value of the hardware upon delivery. We place orders for hardware only against a back-to-back order from customers and seek favorable payment terms from hardware vendors. This policy has historically minimized our working capital requirements. However, for certain large and
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strategically important projects, we have agreed to payment of less than 90% of the invoice value of the hardware upon delivery in order to maintain competitiveness. Wider adoption of less favorable payment terms or delays in hardware deliveries would require us to increase our working capital needs.
Our working capital requirements may also increase significantly in order to fund more rapid expansion and acquisitions, to develop new or enhanced services or products, to respond to competitive pressure to compete successfully for larger projects involving higher levels of hardware purchases or otherwise if our business grows more rapidly than we currently predict. An increase in our working capital needs may require that we raise additional funding following this offering sooner than we presently expect.
We have sustained losses in prior years and may incur slower earnings growth, earnings declines or net losses in the future.
Although we made a net profit in 1996 and 1998, we have sustained losses in prior years and in 1999. There are no assurances that we can regain or sustain profitability or avoid net losses in the future. We expect to increase our operating expenses as our business grows. For example, we intend to more than double our software research and development budget and significantly increase software related headcount over the next year. The level of these expenses will be largely based on anticipated organizational growth and revenue trends and a high percentage will be fixed. As a result, any delays in expanding sales volume and generating revenue could result in substantial operating losses. Any such developments could cause the market price of shares of our common stock to decline.
Management’s ability to implement adequate control systems will be critical to successfully manage our future growth.
We have been expanding our operations rapidly, both in size and scope, in recent years. Our growth places a significant strain on our management systems and resources. Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We will need to continue to improve our financial, managerial and operational controls and reporting systems, and to expand, train and manage our work force. We may not be able to implement adequate control systems in an efficient and timely manner.
We face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of our existing key skilled personnel and our ability to hire additional skilled employees.
Competition for highly skilled software design, engineering and sales and marketing personnel is intense in China. Failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth. Competition for skilled personnel comes primarily from a wide range of foreign companies active in China, many of which have substantially greater resources than us. Limitations on our ability to hire and train sufficient number of personnel at all levels would limit our ability to undertake projects in the future and could cause us to lose market share. We may need to increase the levels of our employee compensation more rapidly than in the past in order to remain competitive. These additional costs could reduce our profitability and cause losses.
Since our business has been evolving, our historical financial information may not be an appropriate basis on which to evaluate us or our prospects.
We moved our operations from Texas to China in 1995, began generating substantial network solutions revenue in 1996 and selling software products in 1996. We expect our business to continue to evolve as the Internet and telecommunications markets in China change and expand. In particular, we are currently investing substantial personnel and financial resources in expanding our software business, which we expect to account for a significantly greater portion of our operating expenses and revenues than in the past. As a result, our historical financial data may not provide a meaningful basis upon which investors may evaluate us and our prospects. You should consider
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the risks and difficulties encountered by companies like ours in a new and rapidly evolving market. Our ability to sell products and the level of success, if any, we achieve depends, among other things, on the level of demand for Internet-related, professional IT services and software products in China, which are rapidly evolving.
We extend warranties to our network solutions customers that expose us to potential liabilities.
We customarily provide our customers with one to three year warranties, under which we agree to maintain the installed systems at no additional cost to our customers. The maintenance services cover both hardware and our proprietary and third party software products. Although we seek to arrange back-to-back warranties with hardware and software vendors, we have the primary responsibility to maintain the installed hardware and software. Our contracts do not have disclaimers or limitations on liability for special, consequential and incidental damages nor do we cap the amounts recoverable for damages. In addition, we do not currently maintain any insurance policy with respect to our exposure to warranty claims. Although to date we have not incurred any liability for special, consequential or incidental damages, failure of our installed projects to operate properly could give rise to substantial claims against us that in turn could materially and adversely affect us, particularly because our customers are primarily large telecommunication service providers.
We sell our large systems integration projects on a fixed-price, fixed-time basis which exposes us to risks associated with cost overruns and delays.
We sell substantially all our systems integration projects on a fixed- price, fixed-time basis. Failure to complete a fixed-price, fixed-time project within budget and the required time frame would expose us to cost overruns and penalties that could have a material adverse effect on our business, operating results and financial condition. In contracts with our customers, we typically agree to pay late completion fines up to 5% of the total contract value. In large scale Internet infrastructure projects, there are many factors beyond our control which could cause delays or cost overruns. In this event, we would be exposed to cost overruns and liable for late completion fines. A part of our network solutions business is installing Internet network hardware. If we are unable to obtain access to such equipment in a timely manner or on acceptable commercial terms, our business, particularly our relationships with our customers, may be materially and adversely affected.
We may become less competitive if we are unable to develop or acquire new products or enhancements to our software products that are marketable on a timely and cost-effective basis.
We continually develop new services and proprietary software products. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of these products or services or any products or services that we may plan to introduce in the future. Moreover, we cannot be sure that any of these products and services will achieve widespread market acceptance or generate incremental revenue.
Our proprietary rights may be inadequately protected and there is a risk of weak law enforcement.
Our success and ability to compete depend substantially upon our intellectual property rights, which we protect through a combination of copyright, trade secret law and trademark law. We have filed trademark applications with the United States Trademark Office and the Trademark Bureau of the State Administration of Industry and Commerce in China. We have also been granted copyrights by the State Copyright Bureau in China with respect to Internet-related software products although we have not applied for copyright protection elsewhere (including the United States). Despite these precautions, the legal regime protecting intellectual property rights in China is weak. Since the Chinese legal system in general and the intellectual property regime in particular is relatively weak, it is often difficult to enforce intellectual property rights in China. In addition, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited, and the global nature of the Internet makes it virtually impossible to control the ultimate destination of our products.
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We do not own any patents and have not filed any patent applications, as we do not believe that the benefits of patent protection outweigh the costs of filing and updating patents for our software products. We enter into confidentiality agreements with our employees and consultants, and control access to and distribution of our documentation and other licensed information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our licensed services or technology without authorization, or to develop similar technology independently. Policing unauthorized use of our licensed technology is difficult and there can be no assurance that the steps taken by us will prevent misappropriation or infringement of our proprietary technology. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of our resources.
We are exposed to certain business and litigation risks with respect to technology rights held by third parties.
We currently and intend to increasingly license technology from third parties. As we introduce services that require new technology, we will probably need to license additional third party technology. We cannot provide assurance that these technology licenses will be available to us on commercially reasonable terms, if at all. Our inability to obtain any of these licenses could delay or compromise our ability to introduce new services. In addition, we may or may allegedly breach the technology rights of others and incur legal expenses and damages, which, in the aggregate, could be substantial.
Year 2000 issues present technological risks which could expose us to liabilities and cause disruption to our software or installed systems and hurt sales of our software products.
Year 2000 problems occur when computer systems and hardware and software products cannot distinguish 21st century dates from 20th century dates. This may result in software failures or the creation of erroneous results. In our network solution business, we integrate hardware from third party vendors and sell software products from third party licensors as well as our proprietary software products. Our proprietary software products sold on a stand-alone basis interact directly and indirectly with a number of other hardware and software systems. Despite investigation and testing by us, the systems installed by us and our proprietary software may contain errors or defects associated with Year 2000 date functions. We may not be able to identify all Year 2000 failures in hardware and software products supplied by third party vendors or in our proprietary software products because not all failures are within the scope of these tests.
Any errors or defects relating to Year 2000 date functions that affect the operation of our software could result in:
. delay or loss of revenue;
. cancellation of customer contracts;
. diversion of development resources;
. damage to our reputation;
. increased service and warranty costs; and
. litigation costs.
In addition, we use multiple software systems for our internal business purposes, including accounting, human resources, email, engineering development and testing tools, customer service and support, professional services and sales tracking applications. Any Year 2000 failures in our internal system could cause business disruption and hurt our reputation.
While we have experienced no Year 2000 failures or errors to date since Year 2000 failures can be associated with any dates throughout year 2000, we expect our Year 2000 risks to continue through the end of 2000.
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Investors may not be able to enforce judgments by United States courts against us.
AsiaInfo is incorporated in the State of Delaware. However, a majority of AsiaInfo’s directors, executive officers and shareholders live outside the United States, principally in Beijing, China and Hong Kong. Also, all or most of our assets are located outside the United States. As a result, you may not be able to:
. effect service of process upon us or these persons within the United States, or
. enforce against us or these persons in United States courts judgments obtained in United States courts, including judgments relating to the federal securities laws of the United States.
We do not intend to pay and may be restricted from paying dividends on our common stock.
We have never declared or paid any dividends on our capital stock and we do not intend to declare any dividends. We currently intend to retain future earnings to fund growth. Furthermore, if we decide to pay dividends, foreign exchange and other regulations in China may restrict our ability to distribute retained earnings from China or convert these payments from Renminbi into foreign currencies. In addition, loan agreements and contractual arrangements we enter into in the future may also restrict our ability to pay dividends.
The fact that our business is conducted in both U.S. Dollars and Renminbi may subject us to currency exchange rate risk due to fluctuations in the exchange rate between these two currencies.
Substantially all of our revenues, expenses and liabilities are denominated in either U.S. dollars or Renminbi. As a result, we are subject to the effects of exchange rate fluctuations between these currencies. The contracts we enter into with our customers provide for price adjustments reflecting foreign exchange fluctuations; however, we cannot guarantee that future contracts will contain such provisions. As a result of the unitary exchange rate system introduced in China on January 1, 1994, the official bank exchange rate for conversion of Renminbi to U.S. dollars experienced a devaluation of approximately 50%. Since we report our financial results in U.S. dollars, any future devaluation of the Renminbi against the U.S. dollar may have an adverse effect upon our reported net income.
Risks Relating to the Industry
The markets in which we sell our services and products are highly competitive and we may not be able to compete effectively.
The information technology services market for Internet infrastructure in China is new and rapidly changing. Our competitors in the market mainly include domestic systems integrators such as Suntek and Aotian. Although we are a leading player in this market, there are many large multinational companies with substantial, existing information technology operations in other markets in China, such as IBM and Hewlett-Packard, that have significantly greater financial, technological, marketing and human resources. Should they decide to enter the information technology services market for Internet infrastructure, this could hurt our profitability and erode our market share.
In the customer management and billing market, we compete with both international and local software providers. In the online billing segment, we compete primarily with Portal Software Inc. (“Portal”) and Suntek, and in the wireless billing segment, we compete with more than ten local competitors. The messaging software sector is highly competitive. Our principal competitors in this sector are Software.com and Netease. Currently, due in part to a stringent approval system for providers of wireless billing software in China and competitive pricing offered by domestic companies, some multinational information technology companies have been deterred from entering this market. In view of the gradual deregulation of the Chinese telecommunications industry and China’s pending entry into the WTO, we anticipate the entrance of new competitors into the customer management and billing software market.
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Our competitors, some of whom have greater financial, technical and human resources than us, may be able to respond more quickly to new and emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of new products or services. It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share. Increased competition could result in lower personnel utilization rates, billing rate reductions, fewer customer engagements, reduced gross margins and loss of market share, any one of which could materially and adversely affect our profits and overall financial condition. See “Business– Competition.”
Political, Economic and Regulatory Risks
Political and economic policies of the Chinese government could affect our industry in general and our competitive position in particular.
Since the establishment of the People’s Republic of China in 1949, the Communist Party has been the governing political party in China. The highest bodies of leadership are the Politburo, the Central Committee and the National Party Congress. The State Council, which is the highest institution of government administration, reports to the National People’s Congress and has under its supervision various commissions, agencies and ministries, including The Ministry of Information Industries, the telecommunications regulatory body of the Chinese government.
Since the late 1970s, the Chinese government has been reforming the Chinese economic system. Although we believe that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on the economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised. Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the Internet and the telecommunications industry in China. Such developments could reduce, perhaps significantly, the demand for our products and services. There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business. Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular.
The failure of China to gain entry into the WTO could negatively impact the Chinese economy and our growth.
Failure by China to join the WTO as expected could slow down China’s economic growth and could result in lower than forecasted spending in the telecommunications sector in China, which in turn could adversely affect the demand for our products and services from our large customers.
Uncertainties with respect to the Chinese legal system could adversely affect us.
Our subsidiaries are wholly foreign owned enterprises, which are enterprises incorporated in China and wholly-owned by foreign investors. They are subject to laws and regulations applicable to foreign investment in China in general and laws applicable to wholly foreign owned enterprises in particular. The legislation and regulations over the past 20 years have significantly enhanced the protections afforded to various forms of foreign investment in China. However, since the Chinese legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit remedies available to us.
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Fluctuations in exchange rates could adversely affect the value of our shares.
Substantially all our revenues and expenses relating to hardware sales are denominated in U.S. dollars, and substantially all our revenues and expenses relating to the service component of our network solutions business and software business are denominated in Renminbi. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our shares will be affected by the foreign exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while the shares will be traded in U.S. dollars. Furthermore, a decline in the value of the Renminbi could reduce the U.S. dollar value of earnings from and our investment in our subsidiaries in China.
Risks Relating to the Shares
There has been no public market for the common stock prior to this offering and therefore the price may fall below the public offering price.
Prior to this initial public offering, there was no public market for any class of our capital stock, including the shares of the common stock being offered. The initial public offering price for our shares will be determined by negotiations between AsiaInfo and our underwriters. This price may not be indicative of the price at which our shares will trade following the offering. The market price of the common stock could fall below the initial public offering price. See “Underwriters.”
In addition, we cannot guarantee that an active trading market for our shares of the common stock will develop or, if it does develop, that it will be sustained following the completion of the offering.
High technology and emerging market shares have historically experienced extreme volatility and may subject you to losses.
The trading price of our shares may be subject to significant market volatility due to:
. investor perceptions of us and investments relating to China and Asia;
. developments in the Internet and telecommunications industries;
. variations in our operating results from period to period due to project timing; and
. announcements of new products or services by us or by our competitors.
In addition, the high technology sector of the stock market frequently experiences extreme price and volume fluctuations, which have particularly affected the market prices of many Internet and computer software companies and which have often been unrelated to the operating performance of these companies.
Future sales of shares by our company or existing shareholders could cause the market price of our common stock to fall.
If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants in the public market following this offering, the market price of our common stock could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon completion of this offering, we will have outstanding 38,110,817 shares of common stock, based upon 26,158,664 shares outstanding as of February 29, 2000 and 6,952,153 shares of common stock issuable upon the automatic conversion of all outstanding shares of our convertible preferred stock upon the completion of this offering and the 5,000,000 Shares sold in this offering, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants after January 31, 2000. Of these 38,110,817 shares, the 5,000,000 shares sold in this offering will be
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freely tradable. This leaves 33,110,817 shares eligible for sale in the public market beginning 180 days after the date of this prospectus subject in each case to restrictions on these sales. For a discussion of the lock-up provisions on our securityholders, see “Shares Eligible for Future Sale” and “Underwriters.”
A small number of shareholders will control us after this offering.
After the offering, our seven largest shareholders, Warburg-Pincus Ventures, ChinaVest Group, Fidelity International and Intel Pacific, Inc., and their affiliates, as well as Edward Tian, one of our directors, James Ding, our Chief Executive Officer, and Louis Lau, our Chairman, in the aggregate, will control approximately 81% of our voting stock. As a result, these shareholders will be able to control all matters requiring shareholder approval, including election of directors and approval of significant corporate transactions, such as a sale of our assets and the terms of future equity financings. The combined voting power of our large shareholders could have the effect of delaying or preventing a change in control of AsiaInfo.
We have substantial discretion as to how to use the proceeds from this offering and may apply the proceeds to uses that do not increase our profits or market value.
Our management has broad discretion as to how to spend the proceeds from this offering and may spend these proceeds in ways with which our stockholders may not agree. We cannot predict that investment of the proceeds will yield a favorable or any return. See “Use of Proceeds.”
We are subject to anti-takeover provisions which could prevent a change of control of AsiaInfo and prevent you from realizing a premium on your investment.
After this offering, the board of directors will have the authority to issue up to an additional 2,000,000 shares of preferred stock. Further, without any further vote or action on the part of the stockholders, the board of directors will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if it is ever issued, may have preference over and harm the rights of the holders of common stock. Although the issuance of this preferred stock will provide us with flexibility in connection with possible acquisitions and other corporate purposes, this issuance may make it more difficult for a third party to acquire a majority of our outstanding voting stock.
AsiaInfo currently has authorized the size of its board to be not less than three nor more than nine directors. The terms of the office of the seven- member board of directors have been divided into three classes: Class I, whose term will expire at the annual meeting of the stockholders to be held in 2000; Class II, whose term will expire at the annual meeting of stockholders to be held in 2001; and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of AsiaInfo.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date when the person became an interested stockholder unless, subject to exceptions, the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a “business transaction” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. See “Description of Capital Stock.”
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, all of which are subject to risks and uncertainties. Forward-looking statements contain information concerning our possible or assumed business success or future results of operations. Forward-looking statements include, but are not limited to, statements as to our expectations regarding:
. our future revenue opportunities;
. the future growth of our customer base;
. our future expense levels, including research and development, sales and marketing and general and administrative expenses and amortization of goodwill and other intangibles;
. our future capital needs;
. the effect of the Year 2000 issues;
. our use of net proceeds; and
. future financial pronouncements.
When we use words such as “believe,” “expect,” “anticipate” or similar words, we are making forward-looking statements.
You should also be aware that the telecommunications industry and Internet studies and reports that we refer to in this prospectus also make forward- looking statements concerning, among other things, the future growth of the telecommunications industry, Internet usage and Internet applications for commercial and consumer purposes globally and in China. These industry studies and reports base their forward-looking statements on a number of different factors and assumptions, all of which are beyond our control, including the following:
. a decrease in personal computer costs and growth in the installed base of personal computers in China;
. a decline in Internet access costs;
. the number and types of devices that are able to access the Internet will increase, allowing greater accessibility to the Internet;
. the Chinese government will continue to gradually deregulate the telecommunications sector and large state-owned telecommunications companies and Internet service providers will maintain present levels of or increase their investments; and
. increasing investment in broadband network solutions and convergent communications, which combine voice, data, video and Internet services using IP technology.
These industry studies and reports are also based on other assumptions, including assumptions that are specifically identified in the reports. All of these assumptions are subject to a high degree of uncertainty. One or more of these assumptions may turn out to be incorrect. Accordingly, actual developments in the China market may differ materially from the projections contained in these industry studies and reports. The telecommunications industry and Internet-related markets in China may not grow at the rates projected by these studies and reports.
An investment in our securities involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth in “Risk Factors” and elsewhere in this prospectus.
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USE OF PROCEEDS
We will receive net proceeds of approximately $109.8 million from the sale of shares of common stock offered by us, at an initial public offering price of $24.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds of this offering primarily to:
. fund increased working capital requirements for our Internet infrastructure and systems integration projects;
. expand our software development efforts, including the addition of personnel;
. fund capital expenditures, including further development of our technology and systems; and
. facilitate possible acquisitions of and investments in related businesses.
To the extent not so applied, we will use the remaining net proceeds for general corporate purposes.
Pending these uses, the net proceeds will be invested in short-term, investment grade securities. We do not currently have any agreements with respect to any acquisitions, investments or similar transactions.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We do not intend to pay dividends on our shares of common stock. We intend to retain all future earnings, if any, for use in our business. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as the board of directors may deem relevant. Any dividends we declare will be paid in U.S. dollars.
As a holding company, our primary source of cash for the payment of dividends are distributions, if any, from our wholly-owned subsidiaries. Our wholly-owned subsidiaries were established in China and are able to make distributions of profits to us only if they satisfy certain conditions under Chinese law, including the satisfaction of tax liabilities, recovery of losses from previous years and mandatory contributions to statutory reserves. In addition, loan agreements and contractual arrangements we enter into in the future may also restrict our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our cash, short-term debt and total capitalization as of December 31, 1999:
. on an actual basis; and
. as adjusted to reflect (a) the conversion of all of our outstanding shares of convertible preferred stock into 6,952,153 shares of common stock upon the closing of this offering; and (b) the application of the net proceeds from the sale of 5,000,000 shares of common stock offered in this offering at an initial public offering price of $24.00 per share, after deducting an assumed underwriting discount and estimated expenses.
This table has been prepared on a basis consistent with our principal accounting policies as set out in our audited consolidated financial statements as of and for the year ended December 31, 1999 included elsewhere in this prospectus. You should read this table in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this prospectus.
As of December
31, 1999
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As
Actual Adjusted(/1/)
——- ————-
(Amounts in thousands
of U.S. dollars)
Cash and cash equivalents ………………………… $25,404 $135,606
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Short-term debt………………………………….. $ 9,699 $ 9,699
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Stockholders’ equity:
Convertible preferred